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2016 (8) TMI 562 - BOMBAY HIGH COURT

2016 (8) TMI 562 - BOMBAY HIGH COURT - TMI - Loss on sale of actionable claim - whether was a business loss allowable as a deduction in the accounting period ending 31.12.1977? - Held that:- The submission of Assessee that the amount of ₹ 103 lakhs were advanced to M/s. Varun Shipping Company Ltd., was onaccount of business expediency so as to ensure that the State Bank of India does not adopt proceedings to enforce the guarantee given by the Respondent-Assessee for the loan granted to M/s .....

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rning more than the investment made. The advance of ₹ 103 lakhs is not with the above objective/intention. In any case, it is very clear from the Assessment Order that the interest to the extent to which the Respondent-Assessee had waived, on the advance of ₹ 103 lakhs to M/s. Varun Shipping Company Ltd., was treated as business income and not as income from other sources. In the above view, the amount of ₹ 103 lakhs advanced to M/s. Varun Shipping Company Ltd., cannot be consi .....

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ipping Company Ltd., is to be considered as a business loss and not as a loss on investment. - Income Tax Reference No. 896 of 1998 - Dated:- 9-8-2016 - M. S. Sanklecha And A. K. Menon, JJ. Mr. Suresh Kumar with Ms. Samiksha Kanani, for the Applicant Mr. Nitesh Joshi with Mr. B. D. Damodar i/b. Kanga & Co., for the Respondent JUDGMENT ( Per M. S. Sanklecha, J. ) This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act), by the Income Tax Appellate Tribunal (Tribunal), seeks o .....

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in the context of the following facts as set out in the statement of case dated 30th June, 1986 : (15) As already stated, while considering the question as to whether the interest income constituted real income of the assessee, the right of the assessee to recover a sum of ₹ 103 lakhs from Varun, was sold by the assessee as an actionable claim to M/s. Pearl Thread Mills Ltd., for ₹ 45 akhs and the balance of ₹ 57,84,590/was written off by the assessee as a bad debt. The assesse .....

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ready set out at length of the circumstances under which the loans made to Varun and we have already held that the amount were advanced not by way of investment but purely in an attempt to prevent the State Bank Proceeding against the assessee, as a guarantor. In our view, the guaranteering by the assessee of the loan by the State Bank to Varun was only as part of the business activity of the assessee. The advancing of the loans to avoid filing suit by the State Bank against assessee was only an .....

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ner (Appeals) was not, therefore, justified in holding that the loss of the assessee was not a business loss. (16) In view of the above finding, the alternative contention of the assessee that, in case the loss is held to be a loss of investment, should be allowed as short term capital loss, does not arise for consideration. Further, this aspect will arise for consideration only in the subsequent assessment year because the actual assignment of the actionable came took place only during the acco .....

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the name of himself and/or his nominee that actually the assignment was in favour of Pearl Thread Mills Ltd., who was not a part to the agreement dated 27.10.1977 and that the actual transaction was completed only by executing the assignment deed dated 30.3.1978 after approving draft of the assignment deed 9.3.1978. The Commissioner (Appeals), therefore, held that on 27.10.1977, there was only an understanding between the shareholders and the directors to sell the debt and that the actual sale t .....

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lance amount of ₹ 57,84,590/. A reading of the agreement will show that there were no prospects of realizing any amount from Varun and that the assignment of the actionable claim for ₹ 45 lakhs was only to reduce the loss of the assessee. It is, therefore, clear that the balance amount had become a loss and the directors and the shareholders had treated the same as such. In light of what has been stated earlier, they were also justified in doing so. The assessee had actually written .....

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khs. The assessee is, therefore, entitled to claim the loss during the accounting period ending on 31.12.1977. 4. The question as framed for our opinion consists of two sub-questions. Therefore, for the convenience of consideration, we consider the two sub-questions separately as under: (i) The first is Whether the loss on sale of actionable claim was a business loss allowable as a deduction to compute its profits and gains from business? and (ii) Second - if the answer to (i) is in the affirmat .....

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unt of ₹ 103 lakhs which were advanced to M/s. Varun Shipping Company Ltd., was in the nature of investment; and (ii) The amounts were advanced to M/s. Varun Shipping Company Ltd., when it was making a loss and in such a case, no prudent businessman would advance a loan to a company which is suffering losses. (b) Per contra, Mr. Joshi, learned Counsel appearing for the Respondent-Assessee submits as under: (i) The amount of ₹ 103 lakhs were advanced in M/s. Varun Shipping Company Ltd .....

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head 'profit and gains of business' would conclude the issue in favour of the Assessee. Such treatment by itself establishes that the Revenue had accepted the amount of ₹ 103 lakhs advanced were not in the nature of investment but a part of Respondent-Assessee's business activity. Consequently, any loss on account of nonrecovery of the amount advanced to M/s. Varun Shipping Company Ltd., has been treated as a business loss and allowed by the impugned order of the Tribunal; (c) .....

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red as an investment. It is a settled position in law that even a single/ solitary transaction could by itself be classified as a business transaction (see G. Venkataswami Naidu & Co., v/s. CIT 35 ITR 594 and CIT v/s. Sutlej Cotton Mills 100 ITR 706); (d) The other contention on behalf of the Revenue is that no prudent businessman would advance a loan to a company making a loss. This is not acceptable for the reason that the manner in which an Assessee carries out its business is entirely fo .....

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to ensure that the State Bank of India does not adopt proceedings to enforce the guarantee given by the Respondent-Assessee for the loan granted to M/s. Varun Shipping Company Ltd.,. This, we find is a possible course of action adopted by a business. Further, we find that the investment of the Respondent-Assessee in M/s. Varun Shipping Company Ltd., is reflected in its contribution to the share capital of M/s. Varun Shipping Company Ltd.,. This contribution can be considered to be an investment .....

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s business income and not as income from other sources. In the above view, the amount of ₹ 103 lakhs advanced to M/s. Varun Shipping Company Ltd., cannot be considered to be an investment in the present facts but appropriately a loan in the course of carrying on of business. Consequently, any loss on account of nonrecovery of ₹ 103 lakhs or any part thereof, would necessarily be a business loss in computing the profits and gains from business; (f) Therefore, the first subpart of the .....

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ionable claim was transferred by the Respondent-Assessee to M/s. Pearl Threads Ltd., for ₹ 45 lakhs by a deed of Assignment / Transfer on 30th March, 1978. This resulted in loss of ₹ 58 lakhs. This writing off of business loss, according to Mr. Suresh Kumar, can only take place on execution of the deed of sale/assignment of actionable claim under Section 130 of the Transfer of Property Act, 1882. The sale/ assignment of actionable claim admittedly took place on 30th March, 1977. Ther .....

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377; 45 lakhs either in his own name or in the name of his nominee. This resulted in a loss of ₹ 58 lakhs. This loss of ₹ 58 lakhs was allowed for the accounting period 31st December, 1977 relating to the Assessment Year 1978-79. This according to him was permissible as Applicant was following a mercantile system of accounting. The Tribunal allowed the same on the above basis. In the above view, it is contended by him that the question of law as framed does not arise from the order o .....

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l. It was the case of the Revenue before the Tribunal that the sale of actionable claim only takes place when the deed of transfer is executed and not prior thereto. Consequently, the loss on sale actionable claim can only take place on the date of execution of the deed of transfer i.e. 30th March, 1978 i.e. next Assessment Year. This was an issue which did arise before the Tribunal, as it was urged on behalf of the Revenue. However, the Tribunal did not deal with the issue as urged and held tha .....

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ee that this part of the question viz loss on sale of actionable claim is academic in the present facts and need not be answered. We find that the impugned order of the Tribunal has proceeded on the basis that the amount of ₹ 58 lakhs has been written off as loss in the year ending of 31st December, 1977 i.e. the previous year relating to Assessment Year 1978-79. This loss was claimed in its Profit & Loss Account and Balance Sheet for the year ending 31st December, 1977. Therefore, we .....

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a consideration of ₹ 45 lakhs. This resulted in the Respondent-Assessee being able to quantify the loss at ₹ 58 lakhs on account of the actionable claim of ₹ 103 lakhs being the amounts advanced to M/s. Varun Shipping Company Ltd. In these circumstances, the aforesaid subquestion as framed need not be answered, as it would be academic in the context of the order of the Tribunal, allowing loss of ₹ 58 lakhs on the basis of the arrangement dated 27th October, 1977 as reflec .....

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sly a permissible deduction under the Income tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 195253 or in the assessment year corresponding to the .....

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