TMI Blog2014 (9) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company identified tourism and related business having great potential for earning revenue - it started its separate line of business - Specialised staff, having expertise in running/operating well reputed hotels like Taj and other resorts in the country, was recruited - Important places of tourists’ attraction were identified for putting up resorts - the subsidiary company was incorporated in July 1994 - The amount lent by the assessee to the subsidiary company was spent towards production cost - The subsidiary company has not done any business right from the date of incorporation and is also not intending to do any business or commercial activity - a request was made to strike the name of UB Resorts Limited under Section 560 of the Companies Act - Such a request has been accepted by the Assistant Registrar of Companies. When the assessee is in the business of manufacture and sale of beer and liquor, if they have lent money to a sister concern, may be a subsidiary, for the purpose of setting up a new line of business, it cannot be said that the money lent by them to the subsidiary company as an assistance could be characterized as an expenditure laid down and expende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Registrar of Companies to strike off the name of M/s.U.B.Resorts Ltd. under Section 560 of the Companies Act, 1956 for the reasons that the subsidiary Company could not do any business or commercial activity as laid down in the memorandum of association and that the same had become defunct. M/s.U.B.Resorts Ltd. was a wholly owned subsidiary of the assessee. Till the financial year 1997-98, all the expenditure incurred on the executives of the subsidiary Company were absorbed by the assessee as the employees were on the rolls of the assessee Company. It was only later that the expenditure incurred for the year 1999-2000 and 2000-01 aggregating to ₹ 1.28 crores were debited to M/s.U.B.Resorts Ltd. Since no business was carried on by M/s.U.B.Resorts Ltd., the amounts owed by M/s.U.B.Resorts Ltd. were written off during the year ended 31.3.2001 by the assessee. The object behind the expansion by the incorporation of M/s. U.B. Resorts Ltd. was mainly the expansion of the business in tourism. The main purpose of the said subsidiary was to put up resorts at important tourist destinations and since the date of incorporation, expenses like employee cost and other establishment cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal. 4. The Commissioner of Income Tax (Appeals), on re- examination of the entire material on record and after taking note of the various judgments of Courts, was of the view that the impugned expenditure related to the setting up of an altogether new business pertaining to tourism like putting up resorts, etc. It is separate and distinct from the existing business of manufacture and sale of liquor and beer. The impugned expenditure cannot be considered as a business loss. The impugned expenditure cannot be allowed as a revenue expenditure. It cannot be treated as a business loss since loss, if any, will be a loss on capital account and therefore, the order passed by the Assessing Authority was upheld and the appeal came to be dismissed. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. 5. The Tribunal was of the view that the impugned amount was spent towards the project cost. The subsidiary company has not done any business right from the date of incorporation and is also not intending to do any business or commercial activity as laid down in the main objects of its Memorandum of Association. The company has become defunct. Therefore, a req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name and style UB Resorts Limited . There is a direct nexus between the business of the assessee and the business of the subsidiary company. The business of the subsidiary if it had been carried on would have helped and expanded the business of the assessee. Therefore, any expenditure laid out or expended fully or exclusively in the business of subsidiary has to be allowed in computing the income chargeable under the profits and gains of business or profession of the assessee. In fact the case is covered by the judgment of the Apex Court in the case of S.A. BUILDERS LIMITED .VS. COMMISSIONER OF INCOME TAX (APPEALS) AND ANOTHER (2007) 288 ITR 1(SC) The Tribunal did not notice this judgment though it was cited before them. Therefore, the impugned orders require to be set aside and the impugned expenditure has to be allowed. 8. Per contra, the learned counsel appearing for the revenue supporting the impugned orders contended that the expenditure which was incurred for expansion of business has no nexus with the business carried on by the assessee. It cannot be allowed deduction in the hands of the assessee. Secondly, he contended that the subsidiary company was established in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible deduction, there must be a direct and intimate connection between the expenditure and the business i.e. between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. The Apex Court in the case of Commissioner of Income Tax .vs. Malayalam Plantations Limited (1964) 53 ITR 140(SC) explaining the meaning of the word for the purpose of business has held as under:- The expression for the purpose of business is wider in scope than the expression for the purpose of earning profits . Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commerce or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However, wide the meaning of the expression may be its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that:- What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Once it is established that there was nexus between the expenditure and the purpose of the business (which need not be necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. Then they have cautioned the Courts from being carried away by and has observed as under:- We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial for earning revenue. Accordingly it started its separate line of business. Specialised staff, having expertise in running/operating well reputed hotels like Taj and other resorts in the country, was recruited. Important places of tourists attraction were identified for putting up resorts. Subsequently, due to advice received from experts, the company thought it fit not to increase its area of activities. This was done so that the appellant company may not suffer further losses. Therefore, this subsidiary company was incorporated in July 1994. The amount lent by the assessee to the subsidiary company was spent towards production cost. The subsidiary company has not done any business right from the date of incorporation and is also not intending to do any business or commercial activity as laid down in the main objects of its memorandum of association. The company has become defunct. Therefore, a request was made to strike the name of UB Resorts Limited under Section 560 of the Companies Act. Such a request has been accepted by the Assistant Registrar of Companies. These facts are not in dispute. Therefore, when the assessee is in the business of manufacture and sale of beer and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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