TMI Blog1997 (4) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... s " the 1961 Act "), read with article 133 of the Constitution of India, are directed against the judgment of the said High Court (see [1977] 108 ITR 895), dated March 1, 1976, in Tax Cases Nos. 160 of 1969 and 239 of 1971 (References Nos. 52 of 1969 and 100 of 1971). Tax Case No. 160 of 1969 related to the assessment year 1958-59, wherein two questions were referred by the Income-tax Appellate Tribunal (hereinafter referred to as " the Tribunal ") for the opinion of the High Court. Tax Case No. 239 of 1971 related to the assessment years 1958-59 to 1962-63, wherein the Tribunal referred six questions for the opinion of the High Court. By the impugned judgment both the questions in T. C. No. 160 of 1969 and all the questions, except question No. 3, in T. C. No. 239 of 1971 were answered by the High Court against the Revenue and in favour of the assessee. Question No. 3 in T. C. No. 239 of 1971 was answered in favour of the Revenue and against the assessee. Civil Appeals Nos. 139 to 142 of 1980 have been filed by the Revenue in respect of the questions that have been answered against the Revenue and Civil Appeals Nos. 7, to 11 of 1980 have been filed by the assessee in respect of qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Simpson and General Finance Company (Private) Ltd. carrying on the business of financing by way of hire purchase transactions to outsiders and by way of loans and advances to the companies of this group. As on July 1, 1956, a sum of Rs. 1,85,16,000 was due to Simpson and General Finance Company (Private) Ltd. from the assessee-company. Under section 295 of the Companies Act, 1956, which came into force on April 1, 1956, no company could, without obtaining the previous approval of the Central Government in that behalf, directly or indirectly, make any loan to a company, which is its holding company. In sub-section (3) of section 295 it was provided that where any loan made by a lending company and outstanding at the commencement of the Companies Act, 1956, could not have been made without the previous approval of the Central Government if that section had then been in force, then the lending company had to, within six months from the commencement of the Act or such further time not exceeding six months as the Central Government might grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made. The liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any Law Administration for the transfer of the aforesaid shares was pure and simple on an ad hoc basis and meant to serve the limited purpose of approval to be given under section 372 of the Companies Act, 1956, and that the price at which the sales took place could not, therefore, be taken to represent the fair market value of the shares. He took the break-up value as on January 1, 1954, for the purpose of computation of capital gains and revised the sale prices and arrived at Rs. 6,95,082 as the net capital gains. Even according to his computation there were certain capital losses which were adjusted as against the capital gains determined by him. In the case of S. R. V. S. (Private) Ltd., the Income-tax Officer took the break-up value as on January 1, 1954, at Rs. 36,35,350 and their sale value at Rs. 21,88,395 resulting in the capital loss of Rs. 14,46,955. The assessee-company appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the said appeal was pending, the Commissioner of Income-tax proceeded under section 33B of the 1922 Act as he was of the view that the order of the Income-tax Officer was erroneous and prejudicial to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first occasion when the matter came up before the Tribunal, it remanded the case to the Appellate Assistant Commissioner and called for a specific finding whether the sales under consideration were effected with the object of avoidance of tax or reduction of liability to tax and also wanted the full value of the consideration to be worked out, in case the first proviso to section 12B(2) of the 1922 Act was held to be applicable. The Appellate Assistant Commissioner observed that there was ample evidence to show that the sale of shares was a forced one and that the assessee-company had no option but to comply with the statutory provisions and that the evidence produced clearly established the assessee-company's contention that the sale was not motivated by any desire to avoid capital gains tax and that the Revenue had not proved by any conclusive evidence that the motive underlying the transaction was the avoidance or reduction of the liability to capital gains tax. He worked out the figures in accordance with the rules framed under the Wealth-tax Act and found that the prices fixed by the Company Law Administration were not very much different from the figures worked out by hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner. After referring to the finding recorded by the Appellate Assistant Commissioner, which was accepted by the Tribunal, that the object of the transaction was not to avoid or reduce such liability to capital gains tax, that the sale was a forced sale since the assessee-company had no option and that the prices had been fixed by the Company Law Administration, the High Court held that the first proviso to section 12B(2) cannot be attracted to the present case. The High Court did not accept the contention urged on behalf of the Revenue that the sale price had been fixed by the Company Law Administration on ad hoc basis and, in this context, it has observed that the letter dated May 18, 1957 (annexure--G.VII. A to the remand report of the Appellate Assistant Commissioner), clearly shows that the Company Law Administration worked out the figures in consultation with the Central Board of Revenue and when the assessee-company sold the shares at those prices, it could not be validly contended that the assessee-company transferred the shares at certain prices with the object of avoidance or reduction of liability to capital gains. On that view, the High Court answered the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of standing guarantee to Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in 1962-63 assessment after taking into account the amounts received from the liquidators during the years 1959-60 to 1962-63 ? (5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the receipts of Rs. 1,41,000, Rs. 2,29,627, Rs. 1,10,500 and Rs. 4,381 from the liquidators of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation), from the assessments for 1959-60, 1960-61, 1961-62 and 1962-63, respectively ? (6) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that an amount of Rs.4,23,256 representing the real loss sustained by the assessee on account of standing guarantee of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in the assessment for 1962-63 ?" There was a company by name Sembiam Saw Mills (Private) Ltd. (for short, " SSM "), which was originally a subsidiary of Addison and Company (Private) Ltd. On and from February 1, 1954, the assessee-company purchased all the shares of SSM from Addison and Company (Private) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antee loss had not been allowed as a deduction in 1958-59, the Appellate Assistant Commissioner held that the subsequent recoveries could not be included in the total income in the later years. The assessee-company as well as the Revenue preferred appeals against the said order of the Appellate Assistant Commissioner before the Tribunal. The Tribunal held that the assessee-company had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. But since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, it was held that the balance of Rs. 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. At the instance of the Revenue, the Tribunal referred the aforementioned questions Nos. 4, 5 and 6 for the opinion of the High Court. The High Court, while dealing with said questions, has observed that the real point in issue was whether the guarantee that was executed in favour of the bank in respect of the loan to SSM, the subsidiary of the assessee-company, was done in the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g certain common services to its subsidiaries by having (1) a finance committee ; (2) a liaison office in Delhi ; (3) an export promotion department and (4) an internal audit department. The expenditure on account of maintenance of the liaison office in Delhi and the departments of export promotion and internal audit was borne by the assessee-company and was recovered from the subsidiaries. The finance committee was working in an advisory capacity to the various subsidiary companies to help them to carry on their business more efficiently. All purchase requisitions for the purchase of capital equipment beyond Rs. 500 of each purchase and Rs. 2,500 with reference to purchase of raw materials were submitted to the finance committee for their approval. The purpose of such control was to judiciously use the funds of the company to the best advantage of each company. Various data were gathered before such sanction was accorded or refused. Technical matters or other matters of management were also referred to the members of the finance committee who were experienced in their respective fields. The finance committee went through the financial position of each company daily. The directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and held that the excess remuneration over and above what was admissible under section, 198 of the Companies Act, which was not borne by the respective companies, could not be allowed as deduction under section 10(2)(xv) of the 1922 Act and section 37 of the 1961 Act as expenditure wholly and exclusively incurred for the purpose of the business of the assessee-company. It was also stressed that the resolution of the board of directors of the assessee-company was passed on April 4, 1959, after the previous years relevant to the assessment years 1958-59 and 1959-60. On appeal, the Appellate Assistant Commissioner took the same view. The matter was remanded by the Tribunal to the Appellate Assistant Commissioner for consideration and submission of the report on the points mentioned in the order of remand. The Appellate Assistant Commissioner after taking further evidence submitted his report wherein he reported that deduction may be allowed in respect of remuneration paid to persons who were directors of the assessee-company and were members of the finance committee, but such deduction could not be allowed in respect of remuneration paid by the assessee-company in respect of perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese tests, the High Court has held that the purpose of the payment in the present case was only to take out the subsidiary from an inconvenient situation in which it found itself as a result of statutory change restricting the remuneration payable to its director and that the expenditure had not been incurred wholly and exclusively for the business of the assessee-company and it could not be allowed as deduction. The alternative claim put forward on behalf of the assessee-company that at any rate the expenditure incurred by the assessee-company in remunerating its own directors who were also members of the finance committee should be allowed as deduction as there is a nexus between the expenditure and the business of the assessee-company in rendering services to its subsidiaries, was not accepted by the High Court for the reason that the resolution passed by the assessee-company does not say that the expenditure was incurred for the purpose of remunerating its own directors, in so far as they rendered services to it as members of the finance committee. The High Court has observed that the resolution treated the directors, whether they be the members of the finance committee or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned test laid down in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC), was qualified in these terms : " In our view, the test adopted by this court in Travancore Titanium's case [1966] 60 ITR 277 that ' to be a permissible 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 ' needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. " The High Court, in our opinion, has rightly proceeded on the basis that there must be a nexus between expenditure and business of the assessee. Shri T. A. Ramachandran, learned senior counsel appearing for the assessee-company, has submitted that the said test is satisfied in the present case since the purpose of the payment of remuneration to the directors of the subsidiary companies was to enable these companies to ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 10(2)(xv) of the 1922 Act. The Bombay High Court upheld the claim of the assessee for such a deduction on the view that from the point of view of commercial principles, what the assessee had done was something, which had as its object increasing the profits of the managed company and thereby increasing its own shares on commission and, therefore, the deduction claimed by the assessee was wholly and exclusively for the purposes of its business and was an allowable deduction under section 10(2)(xv) of the 1922 Act. While dealing with the contention urged on behalf of the Revenue that the payment had been made not to the employees of the assessee but to the employees of a managed company---a different entity altogether--the High Court has observed : " Here again if it can be shown that there was a very important nexus between the assessee-company and the managed company which necessitated the assessee-company making the payment to the employees of the managed company, then again it would be possible for the assessee-company to satisfy us that the expenditure was one which fell within the ambit of section 10(2)(xv). Now, it cannot be seriously disputed that the bonus was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result of the remuneration, the profits of the managed company and the share of the commission of the assessee increased and, therefore, the excess amount paid by the assessee to its managing director was expended wholly and exclusively for the purpose of its business and was an allowable deduction under section 10(2)(xv) of the 1922 Act. Reliance was placed on the decision in Tata Sons Ltd.'s case [1950] 18 ITR 460 (Bom). This was also a case where the profits of the assessee in the form of managing agency commission were directly linked to the profit of the managed company, which is not the position in the present case. The alternative claim by the assessee-company for deduction in respect of the expenditure incurred by the assessee-company in respect of amounts paid to its own directors, who were also the members of the finance committee has been rightly rejected by the High Court in view of the resolution passed by the assessee-company wherein the directors, whether they be the members of the finance committee or not, have been treated as a class and with reference to all of them the assessee-company incurred the expenditure, only because they could not be remunerated to tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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