TMI Blog1976 (3) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... ch this company came into existence. It held shares in several companies, such as Simpson and Company Ltd., Addison Company Private Ltd., George Oakes (Private) Ltd., Addison Paints and Chemicals Private Ltd., India Pistons Private Ltd., etc. Out of the issued capital of 7,50,000 shares of Rs. 10 each in Simpson Company Ltd., the assessee held at the material time 7,06,933 ordinary shares. Simpson Company Ltd. had a subsidiary by name 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. Till the Companies Act, 1956, came into force on April 1, 1956, there was no legal difficulty in Simpson and General Finance Company (Private) Ltd. in carrying on its financing activity in the manner done by it. As on 1st July, 1956, a sum of Rs. 1,85,16,000 was due to it from the assessee-company. Section 295 of the Companies Act, 1956, provided, inter alia, that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g are the relevant figures : ---------------------------------------------------------------------------------------------------------------------------------------------------- SALE VALUE VALUE SALE VALUE PROPOSED BY SALE VALUE AS PER NAME OF COMPANY PROPOSED BY COMPANY LAW FIXED WEALTH- THE ASSESSEE DEPARTMENT BY I.T.O. TAX RULES ---------------------------------------------------------------------------------------------------------------------------------------------------- 1. Addison Co. 150 140 168.75 143.10 Pvt. Ltd. 2. George Oakes Ltd. 15 12 13.29 12 3. Addison Paints 10 10 10 10 Chemicals Ltd. 4. Indian Pistons Ltd. 14.75 14.75 15.03 14.75 5. Wheel and Rim Company of India Ltd. 9.50 7.50 9.658 8.21 6. Amco Batteries Ltd. 100 100 100 100 --------------------------------------------------------------------------------------------------------------------------------------------------- The shares in the companies mentioned above were transferred by the assessee-company with effect from 30th June, 1957, at the prices fixed by the Company Law Administration to Messrs. Simpson General Finance Company (Private) Ltd., in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of 1956. He considered that the price at which the sales took place could not, therefore, be taken to represent the fair market value of the shares. In his view, there was a reduction of the liability to capital gains. He took the break-up value as on 1st January, 1954, for the purpose of computation of capital gains and revised the sale prices as shown in the table. In this process he 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. he took the break-up value as on 1st January, 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. There were sales of certain other shares also in which the capital gains or loss arose but they need not be gone into for our purpose. The assessee appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the appeal was pend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellate Tribunal contending that the sale value fixed by the Company Law Administration represented the correct value of the shares, that the transactions were without any motive to avoid capital gain, that they had been necessitated by the various provisions of the Companies Act which prohibited inter-company loans and that the method adopted by the Income-tax Officer, viz., the secondary valuation, was proper. The Tribunal was of the view that, in putting through these transactions, the company had no idea of avoiding or reducing its liability to capital gains, that it did not fix the sale price of its own accord and that it transferred the shares at the prices fixed by the Company Law Administration. Though S.R.V.S. (Private) Ltd. was a transport company, as it held a substantial portion of its funds in Simpson Company, the method adopted by the Income-tax Officer of secondary valuation was held to be proper and confirmed by text books and a chartered accountant whose report was in evidence. The Tribunal, therefore, allowed the appeal against the order of the Commissioner of Income-tax revising the assessment. The Appellate Assistant Commissioner took up the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard. Against the proceedings under section 33B of the Act, the following two questions have been referred in T.C. No. 160 of 1969 : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the basis of valuation adopted by the Income-tax Officer for the shares in Messrs. Sri Rama Vilas Service (Private). Ltd. as on January 1, 1954 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to section 12B(2) has no application in regard to the sale of shares to M/s. Simpson Company Ltd. ? " Out of the order of the Tribunal in the appeal against the Appellate Assistant Commissioner's order for 1958-59, the following two questions have been referred in T.C. No. 239 of 1971 : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to section 12B(2) has no application in regard to the sale of various shares by the assessee-company to M/s. Simpson Co. Ltd. through M/s. Simpson General Finance Co. (Private) Ltd. and that the assessee was entitled to a capital loss of Rs. 9,47,541 in the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any view, indirectly connected. It cannot be denied that there is a connection between the assessee and its subsidiary. The subsidiary of a subsidiary is also, at any rate, indirectly connected with the assessee. Therefore, the first requisite contemplated by the proviso is satisfied here. The next point is to see whether the sale was effected with the object of avoidance or reduction of the liability of the assessee under that section. The Supreme Court has pointed out in I.C.I (India) Private Ltd. v. Commissioner of Income-tax [1972] 83 ITR 710 (SC), that the question whether the object of the assessee in transferring assets was to avoid or reduce his liability to tax on capital gains by making the transfer, did not involve the application of any legal principles to the facts established by the evidence. The intention with which the particular transfer was made and the object which was to be achieved by such transfer was, it was held, essentially a question of fact, the conclusion relating to which was to be arrived at on consideration of the relevant material. The Supreme Court was dealing with the corresponding provisions of the Income-tax Act of 1961. The principles laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of valuation in the view that we have taken as regards the second question, it would not survive for consideration. The question of valuation would be material only if the proviso applied. However, having heard arguments on it, we would indicate our answer to that question also. The point is whether in valuing the shares of S.R.V.S. (Private) Ltd., the shares held by it in Simpson Company should be taken at the book figure or in accordance with the break-up value determined with reference to the balance-sheet of Simpson and Company Ltd. In Business Mergers and Take-over Bid, by Ronald W. Moon, fourth edition, at page 69, it is stated as follows : " Shares and securities which are quoted will be valued at the middle price if held for permanent investment, or at lower price if included with the current assets. Unquoted stocks or shares, when the amount involved is material, must be the subject of a secondary valuation by methods similar to those used for the main valuation." The expression " secondary valuation " mentioned above is the valuation of the shares held in another company by the break-up value method and not necessarily by the figures shown in the shareholding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking 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. It was stated that the purpose of such control was to judiciously use the funds of the company, much of it borrowed, to the best advantage of each company. Various data were gathered before such sanction was accorded or refused. Likewise, technical matters or other matters of management were 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, containing the cash forecast, profit forecast and other figures for comparison and advice. There were four directors of the assessee by name Austin, Kumar, Lund and Watts. Except Watts the rest of them were members of the finance committee. There were others who were neither directors of the assessee nor members of the finance committee. All the said persons entered into service agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was argued that though the services were rendered by them to the other companies, they should be deemed to have rendered them to the assessee in view of the nexus between the holding company and its subsidiaries. The Income-tax Officer was not prepared to accept this submission. He held that the excess remuneration, over and above what was admissible under section 198 of the Companies Act, and was not borne by the respective companies, could not be allowed as deduction under section 10(2)(xv) of the Act of 1922 as expenditure wholly and exclusively incurred for the purpose of business of the assessee. In his view it was only with a view to overcome certain legal requirements that such an expenditure had been borne by the assessee. He noticed that the sanction of the board of directors was after the relevant accounting year for the assessment year 1958-59. The resolution was passed on 23rd April, 1959, after the previous years for the assessment years 1958-59 and 1959-60. Certain decisions were relied on before him in support of the claim for allowance. He did not consider that those decisions would apply to the facts of the present case. The result was the disallowance of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g company and stood in the same position as an individual who had acquired and held investments. The Special Commissioners accepted the submission. Rowlatt J. did not agree with the conclusion and observed at page 655 as follows : " Now I am bound to say I think that, even in the darkest days of my error as to the necessity of an active carrying on of business, I should have held that this company carried on business, because the whole of its existence seems to be directed to the fact that it should have shares in other companies as to which it should busy itself in the most active way and occupy itself as an alert and astute shareholder looking after its holding in those companies, and the companies themselves ; and that was its activity and it pursued it zealously, so I should always have held that this company was carrying on business. " The learned counsel for the department, however, submitted that this decision would not hold good in India in view of a decision of the Supreme Court in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax [1966] 59 ITR 547 (SC). That was a case in which the question was whether, in the case of an investment company its dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court has referred to the decision in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax [1966] 59 ITR 547 (SC) and has also gone into the question as to whether there could be any business of holding of investments. At page 383 the Supreme Court observed as follows : " We cannot say that the legislature did not know its own mind when it used that expression in section 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression ' business ' is a well-known expression in income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765 (SC) ' some real, substantial and systematic or organised course of activity or conduct with a set purpose '. This is also the meaning given to that expression in the earlier decisions of the High Courts and the judicial Committee. We must, therefore, proceed on the basis that the legislature was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the expenditure that has been incurred was wholly and exclusively laid out for the purpose of the assessee's business. The assessee's business is the holding of investments. If the assessee had incurred any expenditure in respect of its business, it would certainly be allowable as deduction. The question as to whether any expenditure that has been incurred was wholly and exclusively laid out for the purpose of the assessee's business is sometimes treated as a question of fact. See Commissioner of Income-tax v. Chandulal Keshavlal Co. [1960] 38 ITR 601 (SC) and Commissioner of Income-tax v. Indian Mica Supply Company (P.) Ltd. [1970] 77 ITR 20 (SC). A contrary view has, however, been taken in other decisions. See, for example, Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax [1967] 63 ITR 57 (SC), Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. [1968] 68 ITR 200 (SC) and Bengal Enamel Works Ltd. v. Commissioner of Income-tax [1970] 77 ITR 119 (SC). The predominant trend of authorities is in favour of the view that it is not a pure question of fact. In Indian Aluminium Co. Ltd. v. Commissioner of Income-tax [1972] 84 ITR 735 (SC) the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47 as follows : " ......... 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. " (Underlined by us). The two tests laid down are that the expenditure must be incurred by the assessee in his capacity as a trader and that it must be incidental to the carrying on of his business. There must be a nexus between the expenditure and the business of the assessee. If there was such a nexus, the fact that the said expenditure would benefit a third party also would not be material. The learned counsel for the assessee laid great emphasis on the decision in Tata Sons Ltd. v. Commissioner of Income-tax [1950] 18 ITR 460 (Bom). In that case, the assessee was the managing agent of a company. The managed company decided to pay a special bonus for the calendar year 1942, not exceeding Rs. 1,20,000 to certain of its officers. The resolution by the board of directors mentioned that, as in the earlier year, the managing agents had decided to bear half of the sum. In accordance with the terms of that resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ience and high training and that he was responsible for the progress of the managed company. It was held that the expenditure claimed by the assessee was allowable as a deduction. At page 797 it was observed as follows--See [1968] 69 ITR 782 (Guj) : " In the instant case, the assessee-company has paid the extra remuneration to its own managing director with the object of seeing to it that the affairs of the managed company are properly looked after in the same manner as before and thus the profits of the managed company are increased and its own share of the commission is thereby increased." The decision in Tata Sons Ltd. v. Commissioner of Income-tax [1950] 18 ITR 460 (Bom) was followed. This is also a case of a managing agency and as we have already pointed out, in discussing the decision in Tata Sons Ltd.'s case [1950] 18 ITR 460 (Bom), the business of the managing agent is integrally connected with the business of the managed company. The managing agent being a limited company it had necessarily to render its services through the human agency of the managing director whom it thought fit to remunerate in the manner done. The fact that previously he was directly remunerated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w remunerated by the assessee. There was no change in the rendering of services. Merely because the law had changed and the managed company was not in a position to pay the same remuneration because of the restrictive statutory provision, it does not mean that what was prior to 1956 Act expenditure of the subsidiary could, after it, become the expenditure of the assessee. It was argued that, but for this expenditure, the services of the respective directors would not have been available. There is some reference to this aspect in the resolution passed by the assessee-company. Even on the basis that the services of the respective directors would not have been available, it does not, in our opinion, follow that the assessee was obliged to take over the expenditure as part of, or incidental to, its own business. The entities, viz., the assessee and the subsidiary companies, are independent for all relevant purposes. Though it was argued before the Tribunal that the assessee-company was carrying on its own business through the agency of the subsidiaries, the learned counsel did not put forward such a contention before us. The income of the assessee could only consist of the dividends fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of a subsidiary company. See Odhams Press Ltd. v. Cook [1941] 9 ITR (Supp) 92 (HL) and Marshall Richards Machine Co. Ltd. v. Jewitt (H. M. Inspector of Taxes [1956] 36 TC 511 (Ch D). In the last mentioned case a British company incurred certain expenditure towards the operating expenses of its American subsidiary. There was a finding that the payment was for the purpose of enabling the American subsidiary to meet its obligations and continue in existence. It was held that the payment was not laid out in any sense to advance the trade of the parent company. Though the motive was to advance the trade of the parent company still it was held that it was not the purpose of the payment. Applying the same ratio, the purpose in the present case is only to bale out the subsidiary from an inconvenient situation in which it found itself as a result of the statutory change restricting the remuneration payable to its directors. The expenditure has not been incurred wholly and exclusively for the assessee's business and cannot, therefore, be allowed as deduction. During the course of the arguments there was some discussion as to whether this claim would not come within the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to its subsidiaries. The resolution passed by the assessee 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 resolution of the company treated the directors, whether they be the members of the finance committee or not, as a class. With reference to all of them the assessee incurred the expenditure, only because they could not be remunerated to that extent by the subsidiary companies. The fact that they were directors of the assessee and that they were members of the finance committee had not been taken into account in taking over the remuneration payable to them. In these circumstances, we do not find it possible to accept the assessee's alternative contention either. The result is that the third question has to be answered in the negative and against the assessee. We now take up for consideration the last three questions in T. C. No. 239 of 1971. There was a company by name Sembiam Saw Mills (Private) Ltd., which was originally a subsidiary of Addison Co. Ltd. On and from February 1, 1954, the assessee-company purchased all the shares of Sembiam S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the question of the receipts in the respective years from the liquidator. As the guarantee 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 as well as the department preferred appeals against the said orders of the Appellate Assistant Commissioner. The Tribunal held that the assessee had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. As the assessee 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. It is on these facts that the following questions have been referred : " (4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the loss sustained by the assessee on account of standing guarantee to Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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