TMI Blog2004 (4) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------- It was observed by the Revenue authorities that M/s International Power Semi Conductors Ltd. was incorporated on 14-4-1975 and it was engaged in the business of manufacture of various types of semiconductor devices and it was a 100 per cent export oriented unit. This company was taken over by the appellant by acquiring 61 per cent stake in it on 19-9-1979. The said company was facing severe financial crisis and in order to enable it to tide over the financial crisis, the appellant company advanced interest free unsecured loan to the extent of Rs. 21,88,243 in the year 1979-80. The said amount was appearing in the balance sheet of the appellant as an asset in the form of Loans and Advances, whereas in the books of the International Power Semi Conductors Ltd. the said amount was appearing as a liability in the form of unsecured loans. The company, viz. Siltronics (India) Ltd, was incorporated on 1-5-1980 and the appellant company was one of its promoters. The Appellant company held 24.5 per cent of the shares of the said company. The appellant used to provide funds to the said company as and when required. As on 31-3-1990, advances made by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce sheet as 'Loans Advances' throughout the years. In support he has also invited our attention on clauses 7,22,23,36 etc. of the memorandum of the appellant company. He has referred that the assessee company through the clauses of memorandum was entitled to lend money, securities and other properties for the purpose of the business of the company. The assessee company through clause 23 was also entitled to carry on another business if profitable. The company as per clause 22 was entitled to lend money with or without security upon such terms and conditions as thought fit and in the interest of the company. The said M/s. IPS being a subsidiary of the appellant company, therefore, the appellant company was actively involved in the management as well as other matter. M/s. IPS remained in crisis due to losses. Due to Heavy losses M/s. IPS was not in a position to pay the dues to its Bankers. One of the Bank namely Bank of India filed a winding up petition and the said subsidiary company was ordered for winding up by the Court. The assets and liabilities were taken over by 'The Liquidator'. The other company, i.e., M/s. Siltronics (India) Ltd. (SIL), was promoted by the appellant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the financial crisis, therefore, the appellant company has decided to write off the said advance as authorised and resolved by the Board of Directors. Copy of such resolution is placed on record along with the letters of authorization though which the appellant company has advanced the aforesaid amount to the said subsidiary company. With these background of facts we have carefully perused the citation of Vassanji Sons Co. (P.) Ltd's case, wherein also finance was provided to a company in which the assessee was substantially interested. It was held that the debt must be regarded as directly springing from its business activity. It was also opined by the Hon'ble Court that the connection could not be considered to be too remote for tie purpose of allowance as trade debt. A principle was laid down that the test and the approach to be applied in this case must be that of a businessman. We have also examined the facts of Gillanders Arbuthnot Co. Ltd.'s case wherein the Hon'ble Calcutta High Court has observed that the subsidiaries were controlled by the assessee company and even if the amount could not be treated as a bad debt in the sense that it was not an advance in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was not under obligation to do so but the decision of advancing money would be held to be a normal business decision. In the case of Turner Morrison Co. Ltd. money was advanced to subsidiary company and that subsidiary company wound up and the recovery of the advance was impossible. Since in that case the assessee had no chance of recovery of the amount in question from the subsidiary, therefore, it was held that amount would be treated as bad debt entitled to deduction from the income for the relevant year. The circumstances and facts of the instant appeal being identical, therefore, the precedents cited can be relied upon. Respectfully following the decisions of the Hon'ble Courts the ground raised by the assessee is hereby allowed. 7. In the result, the appeal of the assessee is partly allowed. Per Shri V.D. Wakharkar, Accountant Member 8. I have gone through the order proposed by my learned brother. 9. In regard to the disallowance of Rs. 6,57,606 u/r. 6D of the Income-tax Rules, 1962, ground No. 1 was not pressed by the assessee and is proposed to be dismissed. I agree with the order of my learned brother on this ground. 10. As regards ground Nos. 3 and 4 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarly a capital loss in the assessee's case and could not be regarded as expenditure incurred for earning business profit. In fact, if the proposition put forth by the assessee is accepted, the loss incurred by, say company 'A' can be set off against profit of company 'B' merely by company 'B' advancing monies to company 'A' and then writing off the amounts as irrecoverable. Such a proposition is totally contrary to the scheme of the Income-tax Act which under section 72 did not permit for the assessment year under appeal even set off of loss carried forward by the assessee from one business against the profit of another business, if the original business in which loss was incurred was discontinued. This position in law changed only after amendment made by the Finance Act, 1999 with effect from 1-4-2000. What the assessee had done in the present case is to apply its profits to make advances to two Companies in which it had some interest. It is a case of application of income and not a case of expenditure incurred for earning income. 12. The relevant aspects of the issue involved are brought out in paragraphs 9 to 13 of the order of the learned CIT(A) which read as under: "9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount in question, the Assessing Officer initiated proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars. 12. During the course of the proceedings before me, I asked the A.R. to state whether the said claim had been made under section 36(1)(vii) of the Act. He replied in the negative. He clarified by saying that the appellant's claim was made under section 28 of the Act. As it is, section 28 of the Act deals with the types of income which are assessable under the head Profits and Gains of Business or Profession. According to section 29 of the Act, income assessable under section 28 shall be computed in accordance with the provisions of sections 30 to 43D. Therefore, I think the claim of the appellant has to be considered under section 37(1) of the Act and not under section 28, as claimed for the purposes of section 37(1) of the Act, it is to be ascertained whether the expenditure in question was laid out or expended wholly or exclusively for the purposes of the appellant's business. As has been stated above, the appellant is engaged in the business of manufacturing grinding wheels, silicon carbide and refractories. The appellant did not carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts are totally different. The appellant company is a manufacturer and it had advanced loans to the said two companies which was not for the purposes of the appellant's business. Therefore, if the amount so advanced is lost, then it would not constitute trading loss. In view of this position, the claim as made at Rs. 25,07,833 deserves to be rejected and it is rejected accordingly. However, before parting with this issue, I would like to contradict two findings of facts recorded; by the Assessing Officer which are unsubstantiated, i.e., firstly, the Assessing Officer was not correct in saying that the amounts in question had been given as debt in the normal course of the appellant's business. Secondly, the loans in question had not been advanced, in connection with acquiring any sources of income as pointed out by the Assessing Officer. It is not clear as to on what basis the Assessing Officer had given these two findings of facts. In fact, the A.R. quite frankly admitted during the course of the proceedings before me that there was no justification for the Assessing Officer to record these two findings. He further pointed out that if one had to depend on these two facts, then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40.00 lakhs. It was submitted that the assessee did provide funds to the said company to the extent of Rs. 3,19,590 to meet the financial crisis. 4. Both the aforesaid companies went into liquidation. The total amount of Rs. 25,07,833 due to these companies was written off in the books of account. The assessee did make claim under section 28 of the Income-tax Act, 1961 (hereinafter called the Act), on the ground that this was a bona fide business loss, which had to be allowed as deduction in computation of assessee's income from business. Admittedly, the amount was not claimed as bad debt under section 36(1)(vii) read with section 36(2) of the Act. 5. The Assessing Officer disallowed the claim on the ground that the advances in question were made for non-business purposes. CIT(A) held that the provision of section 37(1) needs to be applied to ascertain as to whether the expenditure in question was laid out or expended wholly and exclusively for the purposed of business. It was noted that the assessee was not in money lending business. It was engaged in the business of manufacturing grinding wheels, refractories, etc. On this factual backdrop, the advances could not be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o interest was charged on the advance. The only object of advancing the money was to provide finance for a company in which the assessee company was substantially interested. As such, the amount written off could not be allowed as a deduction. On appeal, both the AAC and ITAT agreed with the findings of the Assessing Officer. On a reference, the Hon'ble Bombay High Court has held that in view of the circumstances iii which the assessee had purchased the shares of NI Ltd. and the fact that the assessee had never traded in the shares, the Tribunal rightly concluded that there was nothing to show that the shares had been acquired by the assessee with a view to trading in them, and, therefore, the assessee was not entitled to deduction; and in this case the Court was entitled to pay regard to the economic realities which existed behind the legal facade. The assessee company, under its Memorandum, was entitled to undertake managing agency business. It undertook that business but not directly and wholly but acting in concert with two other parties and through the device of a limited company, viz., VHDA Ltd. There was no reason why the moneys lent by the assessee company to NI Ltd. the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Arbuthnot Co. Ltd., the assessee advanced loans to subsidiaries. The subsidiaries were controlled and managed by the assessee. Due to the weak financial position of the subsidiary, its share capital was taken over. The amount due from the subsidiary was written, off and claimed as bad debt. The claim of the assessee was allowed under section 36(2) of the Act. In the present case the assessee did not claim the amount as bad debt. In the case of Ramchandar Shivnarayan, the loss by theft was held to be a business loss. It is true that me list of expenditure enumerated under the statute is not exhaustive. As such, depending upon the circumstances and having regard to the business proximity, the Courts have allowed the expenditure not listed in the section. The facts of the present case are different. In the case of Indore Malwa United Mills Ltd., it was held that the money borrowed by the managing agents which had become irrecoverable was a trading loss deductible in computing the profits of the managed company in the assessment year, it was a loss incidental to the company's business. The fact that the managing agents brought into the company's till larger amounts than what the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be expenditure incurred in carrying on the business of the assessee company of holding its investments. The assessee company could hold its investments and earn its dividends without incurring this expenditure. Since the subsidiary companies were not obliged to distribute by way of dividends the entire profits earned on account of their managerial remuneration paid by the assessee company and the assessee company was only entitled to dividend from the subsidiary company as and when declared, it could not be said that there was a direct and immediate connection between the expenditure incurred and the business of the assessee company. In Indequip Ltd. v. CIT [1993] 202 ITR 417 (Bom.), it was held that when a claim is made for deduction for which there is no specific provision in law, whether it is admissible or not will depend on whether, having regard to the Accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which the deduction is claimed must be one that springs directly from the carrying oft of the business, and not any loss sustained by the assessee even if it has some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the colour of another. We are reminded of Heraclitus who said 'you never go down in the same river twice. What, the great philosopher has said about time and flux can relate to law as well. It is trite that a ruling of superior Court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of available circumstances and myriad developments. 11. Because as a general rule the principle of res judicata is not applicable to decisions of income-tax authorities, an assessment for a particular year is final and conclusive between the parties only in relation to that year. The decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. The Apex Court in the case of M.M Ipoh v. CIT [1968] 67 ITR 106, 118 has held that the finding on question of fact may be good and cogent evidence in subsequent years, when the same question falls to be determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, the loss was also occasioned in the capital field. Having regard to the facts and after considering the precedents available on the point, I am inclined to concur with the decision of the learned Accountant Member on this issue. 15. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority. Per Mukul Shrawat, Judicial Member. - As there was a difference of opinion between the Accountant Member and Judicial Member, who heard this appeal originally, following question was referred under section 255(4) of the Act to the Hon'ble President for nominating a Third Member to resolve the controversy: "Whether on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833 being advances made to two other companies, in computation of profits of business?" 2. The learned Vice-President, Shri M.K. Chaturvedi, sitting, as the Third Member vide his order dated 28th April, 2004, has concurred with the view taken by the Accountant Member. In accordance with the majority view, we hold that the assessee is not entitled to deduction of Rs. 25,07,833 being advances made to two other companies, which were written off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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