· To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year
[2010] 6 taxmann.com 86 (Hyd. - ITAT)
ITAT, HYDERABAD BENCH `B', HYDERABAD
VST Industries Ltd.
v.
ACIT
ITA No. 691/Hyd/2005
July 23, 2010
FACTS
Brief facts of the case are that it was noticed by the Assessing Officer that the assessee company made investment in a subsidiary company acquiring 39.90 lakhs shares. The assessee-company held 99.75 per cent of the shares issued by the subsidiary company and hence was holding controlling interest thereon. The assessee-company sold the subsidiary company to M/s GGCL for a consideration of Rs.15.50 crores. An agreement was entered into to this effect on 23-11-1999. The assessee-company also passed a board resolution, wherein the modalities of the transfer were discussed. The details of the resolution are noted by the Assessing Officer at page 11 of his order. It was also noticed by the Assessing Officer that an annexure was attached to the agreement wherein the balance sheet as on 1-12-1999 was reconstructed. The proposed balance sheet is extracted at page 12 of the assessment order. The Assessing Officer noticed that the assessee-company entered into a supplementary agreement on 24-12-1999 making a minor variation in the proposed balance sheet. The Assessing Officer held that the assessee-company entered into a "package deal" to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The Assessing Officer held that the assessee-company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The Assessing Officer observed that the assessee-company sold the shares for a consideration of Rs.15.50 crores and incurred a loss. The Assessing Officer considered the issue whether the loss is to be computed as a capital loss or loss assessable u/s 45 of the Act. The Assessing Officer held that the assessee-company passed a resolution on 27-5-1999 wherein it was noted that the amount of Rs.38.46 crores owed by the subsidiary company is treated as not payable. The resolution is extracted at page13 of the assessment order. The Assessing Officer held that in the process of reconstructing the balance sheet as on 31-3-1999 and transferring the subsidiary company the assessee company chose to forego the amount due to them from VST NPL. The Assessing Officer observed that the loss incurred by the assessee in the process of sale of the transaction is nothing but loss of capital invested in the subsidiary company. The Assessing Officer rejected the assessee's contention that the long-term capital loss is incurred in the course of the transaction. On appeal, the CIT(A) held that the transfer of subsidiary company effected by assessee the capital gains required to be computed as per special provisions viz., sec.50Bof the Act. Accordingly, he directed the Assessing Officer to compute the capital gain u/s 50B of the Act. He rejected the claim of the assessee regarding the allowance of the amount computed at Rs.13.96 crores as capital loss. According to the CIT(A), the impugned transaction is nothing but a slump sale and capital gain is required to be computed u/s 50B of the Act. Against this disallowance, the assessee is in appeal before us.
HELD
To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year, should have been taken into account in computing the income of the assessee for the accounting year or should represent money lent in ordinary course of its business of banking or money lending. The amount should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time. The assessee can claim debt as bad debt, in respect of debt which would have come into the balance sheet as a trading debt. The debt means something more than a mere advance. It means something which is related to business of the assessee. The amount is given as a trading debt since inception and the character of such amount is not changed by any act of the assessee or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges or springs from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowances as bad debt, there should be relation between the debtor and creditor from the date of lending the money till the date of write-off of debt as bad debt. The debt arising out of investment activity which is in the capital field cannot be allowed as bad debt as revenue deduction. To claim bad debt the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee's business as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There is neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to advance loan to the subsidiary company. Hence, the amount that had to be lost or incurred on account of subsidiary company cannot be claimed as bad debt when it became irrecoverable. In order to be deductible as a business loss, it must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of failure of the subsidiary company to repay the same, that itself cannot be the reason of debt as bad debt. In order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Losses allowable if it sprang directly and was incidental to business of the assessee, loss which assessee had incurred was not in its own business and it cannot be deducted in respect of the business of the assessee from its profits. The amount incurred by the assessee which is not in the ordinary course of business cannot be allowed as a deduction. Further, a debt can be incident to business only if it arises out of transaction, which was necessary in furtherance of the business and was within the range of business activity of assessee. Everything associated or connected with the business cannot be said incidental thereto. Not merely should there be a close proximity to the business, as such, but it should also be an integral and essential part of the carrying on the business of the assessee. We should see whether the transaction is necessary part of the normal course of business and also is closely interlinked with the assessee's business as incidental to carrying on the business of the assessee. The mere object in the memorandum of association of the company is not conclusive as to the real nature of a transaction and that nature not only has to be deduced from the memorandum but also for the circumstances in which the transaction took place. If the amount was incurred for ensuring any investment which is very source of its business and that advance is not incidental to the trading activity of the assessee, the same is not allowable as deduction. The advance in the field of investment for the purpose of securing source of income and not for the purpose of earning income does not qualify for deduction as bad debt. In order to entitle for deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue. In the present case, debt claimed as bad debt is not a trading debt emerging from the trading activity of the assessee. The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt. The assessee-company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt. Accordingly, money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same.
ORDER
Per Chandra Poojari, Accountant Member:
This appeal by the assessee is directed against the order of the CIT(A) IV, Hyderabad dt.24-3-2005 for assessment year 2000-01.
2. The first ground raised by the assessee is that the CIT(A) erred in confirming the disallowance of the claim of the assessee, as long term capital loss of Rs.13,96,22,585, arising out of the sale of shares held by it in VST-NPL to M/s Global Green Company Ltd. (GGCL for short) and instead directing that the loss is to be computed u/s 50B of the Income tax Act, 1961 (the Act), as slump sale.
3. Brief facts of the case are that it was noticed by the assessing officer that the assessee company made investment in a subsidiary company acquiring 39.90 lakhs shares. The assessee company held 99.75 per cent of the shares issued by the subsidiary company and hence was holding controlling interest thereon. The assessee company sold the subsidiary company to M/s GGCL for a consideration of Rs.15.50 crores. An agreement was entered into to this effect on 23-11-1999. The assessee company also passed a board resolution, wherein the modalities of the transfer were discussed. The details of the resolution are noted by the assessing officer at page 11 of his order. It was also noticed by the assessing officer that an annexure was attached to the agreement wherein the balance sheet as on 1-12- 1999 was reconstructed. The proposed balance sheet is extracted at page 12 of the assessment order. The assessing officer noticed that the assessee company entered into a supplementary agreement on 24-12- 1999 making a minor variation in the proposed balance sheet. The assessing officer held that the assessee company entered into a "package deal" to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The assessing officer held that the assessee company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The assessing officer observed that the assessee company sold the shares for a consideration of Rs.15.50 crores and incurred a loss. The assessing officer considered the issue whether the loss is to be computed as a capital loss or loss assessable u/s 45 of the Act. The assessing officer held that the assessee company passed a resolution on 27-5-1999 wherein it was noted that the amount of Rs.38.46 crores owed by the subsidiary company is treated as not payable. The resolution is extracted at page13 of the assessment order. The assessing officer held that in the process of reconstructing the balance sheet as on 31-3-1999 and transferring the subsidiary company the assessee company chose to forego the amount due to them from VST NPL. The assessing officer observed that the loss incurred by the assessee in the process of sale of the transaction is nothing but loss of capital invested in the subsidiary company. The assessing officer rejected the assessee's contention that the long-term capital loss is incurred in the course of the transaction. On appeal, the CIT(A) held that the transfer of subsidiary company effected by assessee the capital gains required to be computed as per special provisions viz., sec.50Bof the Act. Accordingly, he directed the assessing officer to compute the capital gain u/s 50B of the Act. He rejected the claim of the assessee regarding the allowance of the amount computed at Rs.13.96 crores as capital loss. According to the CIT(A), the impugned transaction is nothing but a slump sale and capital gain is required to be computed u/s 50B of the Act. Against this disallowance, the assessee is in appeal before us.
4. The learned counsel for the assessee submitted that there is no sale of undertaking as enumerated in sec.50B of the Act. There is no slump sale either. The intention of the assessee is to just sell all shares of NPL. The assessee held the shares in NPL which were sold to M/s GGCL vide agreement dt.23-11-1999 and 24-12-1999. The transaction constitutes a transfer u/s 2(47) of the Act and the consequent profit or loss has to be computed under the provisions of sec. 45 of the Act. The assessing officer's contention that the same is a capital receipt is totally incorrect and is not based upon any provisions of the Act. The loss arising out of this transaction is governed by the provisions of sec.45 of the Act and it is a capital loss to be allowed. The learned counsel for the assessee with due respect to the lower authorities, submitted that the lower authorities totally misunderstood the facts of the case. According to him, the intention of the parties is to be seen and in the present case, the intention is only to sell the shares and there is no meaning in calling the same as "package deal" by the lower authorities. He drew our attention to the impugned agreement of sale entered into between the parties on 23-11-1999 and also drew our attention to the supplement agreement dt.24-12-1999 and submitted that the agreement itself shows that the assessee shall transfer and convey the legal title of the purchased shares of the company as on the date of transfer and whereupon the purchaser shall pay the total consideration of Rs.15.50 crores to the seller in consideration of such transfer of shares in the manner described in the agreement. He submitted that by no stretch of imagination it can be called as transfer of the undertaking or slump sale and disallow the claim of the assessee as capital loss.
5. On the other hand, the learned Departmental Representative submitted that this impugned transaction is nothing but transfer of the undertaking as a whole, as enumerated in the provisions of sec.50B of the Act and it is not only transfer of shares but also transfer of the undertaking itself. By entering into the agreement dt.23-11-1999, the assessee transferred all the assets and liabilities of the subsidiary company (VST NPL) to GGCL. It is nothing but a "package deal". The purchaser is not only intended to purchase only the shares but also the undertaking as a whole for which purpose it had entered into an agreement. If the purchaser wanted to purchase the shares alone or to purchase clear company, what is the necessity of this agreement ? She drew support from the judgement in the case of CIT v.Shri B.C.Srinivasa Setty 128 ITR 294 (SC) and submitted that assets transferred cannot be construed as a capital asset within the contemplation of sec.45 and it falls u/s 50B of the I.T.Act. Further, she submitted that there is no material on record to show that there is item wise valuation. It is a clear case of slump sale and sec.50B of the Act is clearly applicable to the facts of the present case on hand. Alternatively, she submitted that if the provisions of sec.50B are not applicable and then the computation provisions fail, the assessee cannot compute capital loss. She drew our attention to the various parties (1 to 9) involved in the impugned agreement. She submitted that what is the necessity of involving various parties to the agreement when it is just sale of shares. Further, she submitted that as per the agreement, the principal seller undertakes that all outstanding liabilities of the company and taxes including without limitation income tax, penalties, interest, charges, dues and levies of whatsoever nature leviabale and all claims, charges, penalties, interest etc., levied on the company on account of claims by customers or on account of quality of the company's products, pertaining to the period prior to the date of transfer, such claims arising before or after such date, shall be borne by the Principal Seller and the Principal Seller undertakes to indemnify the company as well the purchaser in this regard. The principal seller shall bear, pay, discharge and settle all liabilities disclosed or undisclosed, taxes, interest, charges, dues, levies or any claims towards the dividends on the cumulative preference shares or any other liability of whatsoever nature levied on the company for the period prior to the date of transfer, which has come to the knowledge of the purchaser after the date of transfer, including any retrospective orders and the principal seller undertakes to indemnify the company as well as the purchaser in this regard. She drew our attention to clauses III and IV of the agreement dt.23-11-1999, available in the paper book at page Nos. 28 to 57, wherein it was stated as follows.
i) The obligations of the sellers to complete the sale of the purchased shares under this agreement shall be subject to the satisfaction of or compliance with, at or before the date of transfer, each of the following conditions precedent, any one or more of which maybe waived by the purchaser in its sole discretion.
ii) Board Resolutions: That the sellers and/or the company as the case may be, have passed the requisite board resolutions in respect of the following:
a). Detailing the scheme of entries to arrive at the balance of assets and liabilities as reflected in the proposed or projected balance sheet of the company as annexed hereto as Annexure III.
b) Waiver of all liabilities of the company towards the Principal Seller.
c) Waiver of interest on advances due to the principal seller by the company.
iii) Valuation- The principal seller shall have provided to the purchaser a valuation report of the fixed assets of the company, conducted and prepared by an independent valuer.
iv) Transfer of other assets: The principal seller shall have transferred and conveyed or shall have caused to convey and transfer in the name of the company, all the computers and the car which are being used by the company.
v)Fixed assets and Inventory: as on the closing date, the company shall be in possession of such of the fixed assets and the inventory of raw materials, work-in-progress and finished goods, stores and spares, processing and packing materials, as specified in the list of fixed assets and inventory as reflected in the balance sheet of the company as aat the closing date and also as per the schedule of investment in fixed assets.
vi) Payment towards liability: The principal seller shall have made all payments due towards the liability to the Bank of Bahrain and Kuwait and to other creditors of the company secured and unsecured, and shall have obtained discharge letters from such creditors and further shall have filed the relevant documents with the Registrar of Companies in this regard, within a week from the date of transfer.
vii) Transfer of current assets: The company shall have transferred to the principal seller the cash and bank balances, sundry debtors and other current assets except deposits with the Government authorities.
6. Further, she submitted that from the above clauses, it is clear that the intention of the parties to the agreement, is to transfer the entire undertaking to the purchaser as a whole and not sale of shares alone and thus the provisions of sec.50B are applicable.
7. We have heard both the parties and perused the material on record. First of all it is to be seen what a "slump sale" is all about. Sec.2(42C) of the I.T.Act, which is applicable from 1-4-2000, defines "slump sale" to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration, without values being assigned to the assets and liabilities of such a sale. In other words, if an undertaking is transferred as a going concern with all its assets and liabilities, without valuations having been assigned to individual assets of such a transaction is to be regarded as a "slump sale." As per Explanation 1 to sec. 2(42C) of the Act, "undertaking" shall have the meaning assigned to it in Explanation 1 to sec. 2(19AA) of the Act. Explanation 1 to sec. (19AA) says that Explanation 1 to sec.(19AA)
"undertaking" shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting as business activity. From this, it is clear where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale. In the light of the above, we have carefully gone through the material on record and we have carefully gone through the agreement entered into by the parties on 23-11-1999, which is placed on record. By this agreement, though the assessee transferred and conveyed the legal title of the shares to the purchaser for a consideration of Rs.15.50 crores by transfer of the shares to GGCL, actually the assessee transferred the entire undertaking i.e. subsidiary company i.e. VST NPL to GGCL. On the transfer of shares, all outstanding liabilities of the transferred company and taxes including without limitation income tax, as stated in clauses III and IV of the impugned agreement dated 23.11.1999, it is not only transfer of shares but transfer of the entire undertaking to GGCL. On consideration of various stipulations and provisions stated therein the agreement, it is clear that the intention of the parties was to sell the subsidiary company i.e., VST NPL to GGCL and purchaser's intention is to purchase the VST NPL for a consolidated price, which is nothing but slump purchase price. The terms of agreement are very specific and clear and there is no need for importing any other meaning. The assets and liabilities of VST NPL were sold together as a group by the agreement cited supra and this sale squarely fell in line with the idea of a slump sale as provided in the provisions of sec.50B of the Act. Further, assessee sold the entire undertaking with all its assets and liabilities together with al licences, permits, approvals, registration, contracts, employees and other contingent liabilities also for a slump price. This kind of sale falls under the purview of sec.50B. In our opinion, the provisions of sec.50B are applicable and we are of the opinion that the direction given by the CIT(A) to compute the capital gain as per Sec.50B is in accordance with law and calls for no interference from us. The same is confirmed. 8. The second ground of appeal is with regard to disallowance of the claim of the assessee of bad debts/deduction u/s 37(1) in respect of amounts not recoverable from the subsidiary company i.e VST NPL and written off in the books of accounts of the assessee consists of money advanced to the subsidiary company at Rs. 17,88,50,501, salary, Secondment charges and other expenses incurred by the assessee on behalf of the subsidiary company at Rs.2,84,85,440 and money receivable towards sale of agronomy and marketing rights at Rs.6,50,00,000 aggregating to Rs.27,23,35,941.
9. With regard to the above ground, the learned counsel for the assessee submitted that VST had diversified into the business of Natural Products like Paprika, Oleoresin etc. in 1992 considering enormous export potential of agri-products and also to take advantage of it strengths in working together with the farmer community. Initially, VST was mainly involved in trading of agri-products like Gherkins and Paprika in the export market. Subsequently, VST promoted a 100% subsidiary named VST Agrotech Ltd. which was subsequently renamed as VST Natural Products Limited (NPL) a 100% export oriented unit for carrying on the business of processing value added horticultural products. These horticulture products included Gherkins–both in bulk and bottled form, Dehydrated products, spices – power, Oleoresins etc. He submitted that this constitutes all together a new line of business in which the company did not have prior experience and was mainly dependent on the highly demanding export market as there was no ready market in India for such products and the "Made in India" product not easily acceptable to the foreign buyer and had to go through stringent process of product acceptance. For the above and various other reasons the business of NPL did not succeed and the amounts financed to NPL by the Company could not be recovered due to its mounting losses. The company as a matter of prudence had, in the financial year 1998-99 relevant to the ay 1999-2000, provided Rs.53 crores towards loss from NPL covering the aggregate of investments, fixed assets and monies advanced but unrecoverable. Such loss was taken as a disallowance in computation of total income as the amounts were mere provisions and not actually written off in the books. In the financial year 1999-2000 (AY 2000-01), the monies due from NPL were actually written off in the books and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22-Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year i.e. FY 1998-99) under the head `contingencies – subsidiary' were fully adjusted. The advances made to NPL from time to tie in order to help them to meet their cash flow requirements. It is submitted that these payments have to be made by the assessee as at that time NPL could not raise funds from either conventional sources or the financial market and since as a parent company it is our responsibility to ensure the commitments of the subsidiary also. The assessee was hopeful at that time that the business of NPL could be revived and the amounts advanced could be recovered. However, in spite of their best efforts, due to various factors the business of NPL could not get revived and no part of the amount advanced as above could be recovered by it. Hence, it has written off the above amount of Rs.17,88,50,501 as irrecoverable and claimed the same as deduction in computing the business income. In this regard, it is submitted that any money advanced during the course of business and not recovered also constitute business expenditure. The above amounts were spent by the assessee out of business obligation as a parent company and were required by the principles of business expediency. It is also submitted that the amounts were revenue in nature and have not resulted in any asset or right or any other benefit of enduring nature. It is therefore submitted that the same is allowable as a business deduction u/s 37(1) of the Act. NPL was formed by the assessee company as a separate company in order to carry on the business of manufacture and sale of agro based products. The above said company was formed as a 100% subsidiary since the diversified new business requires independent focus separately from the main business of sale of cigarette of the parent company. The project of NPL was being implemented with a technology obtained from foreign companies. Even the work of supervision of the project implementation was being done by a US company. The project was initially estimated at Rs.29 crores and to be completed over a period of about one year. However, the project was delayed due to various reasons both technical and financial with the result that the project implementation go delayed much beyond the estimated tie resulting in cost escalation. The project ultimately had to be shelved off after the cost touched Rs.73 crores. During the period when the project was getting delayed, VST had to face a peculiar situation of requiring to finance much higher amounts than initially anticipated. Otherwise, even the existing amounts advanced would have been lost. The payments were due to be made to a large number of suppliers and creditors apart from foreign companies and hence VST had no option other than somehow making the payments. Because of the project delays and the doubts associated with the project, no financial institutions were coming forward to lend money to the project, NPL with difficulty managed to get only about Rs.7 crores as long term funding from banks and institutions, during the period when the project was getting delayed and the balance of finances were provided by VST in the form of advances. It is also submitted that VST being the parent company had a responsibility to fund and pay the creditors of the subsidiary. Otherwise not only NPL's creditors would have been affected but also the credibility and financial rating of VST itself would have been affected. During the above period, the financial markets were also undergoing serious downturn and depression and therefore NPL could not raise any moneys from public or through the financial market. Also, since the project had not reached a break-even point, the management did not deem it fit to go for a public issue though this was very much in the plans. In view of the above, it is submitted that the combination of the above factors has necessitated in VST making the advances to NPL,which are therefore clearly in the nature of advances made in the course of carrying on the business, made with commercial necessity and business expediency and hence is allowable as a deduction u/s 37(1) of the Act. In the light of the bad financial position of NPL coupled with mounting ongoing cash losses and non-recoverability of the amounts, no purpose would have been served by taking up legal action against the debtor-company. Therefore, the company has written off these amounts as bad debts. Moreover, bad debt is a description of a debt, which cannot reasonably be expected to be realized. There is no acid test to ascertain whether a debt had become bad and doubtful and if so, at what point of time it became bad. These are questions of fact and based on circumstances in which the assessee is doing his business. Further, it is upto the asessee to deicide whether the debt is bad or not. If the financial position of the debtor is such that it would be futile to make attempts to recover the amount, the assessee would be justified in writing-off the debt. Further, what is required is an honest judgement on the part of the assessee at the time when he made the write-off in the light of the events upto that stage and not in the light of later happenings. In fact, this has been recognized by the statute also by amendment to sec.36(vii) where under mere write-off of debt is sufficient and there is no requirement to establish that the debt has become bad. Therefore, the requisite condition under the Act is to writeoff of the debt, which was complied with. The above would be evident from the scheme of entries passed in the books of accounts that have been reproduced hereunder
9.1. The company has actually written off the debts as bad in the books by squaring off the Provision A/c and the Party A/c and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22 – Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year ( i.e FY 1998-99) under the head `contingencies – subsidiary' were fully adjusted, meaning written off).
9.2. It is submitted that the amount written off satisfies the requirements of sec.36((1)(vii) and hence are eligible to be allowed as bad debt. Therefore, it is requested to allow the amount of Rs.14,09,13,424 as bad debt.
9.3. In respect of item Non-recovery of monies from NPL on Sale of Agronomy & Marketing Rights considered as income in earlier years written off as irrecoverable and claimed u/s 36(1)(vi)/37(1) – Rs.6,50,00,000- it is submitted that the company had spent considerable time and effort in developing the infrastructure and the know-how both on agricultural and marketing aspects of the business including Agronomy for developing suitable varieties of Spices and vegetables that were required by NPL to carry on their business operations. All such expertise and rights were sold as Agronomy and marketing rights to NPL in the previous year relevant to the assessment year 1997-98 for a consideration of Rs.6.50 crores. The resultant capital gains was offered by the assessee to tax in the ay 1997-98, however no part of the above consideration for sale of agronomy and marketing rights could be recovered by the assessee from NPL due to their adverse business circumstances. Therefore, the amount under consideration was written off as not recoverable, during the previous year relevant to the ay 2000-01. It is submitted that the above amount satisfies the requirements of sec. 36(1)(vii) and hence allowable as a bad debt. Further, the amount being non recovery of a business debt, incurred during the course of business and not being a capital expenditure in nature is also allowable as a deduction u/s 37(1) of the Act. It is further submitted that in respect of the above three deductions, the assessee company has genuinely incurred losses and has not been able to recover the advances made on the sale of proceeds in respect of sale of goods and services which constitutes a business loss. Therefore, they are allowable as a deduction while computing income for the business. Therefore, it is requested to kindly allow the deduction as claimed by the assessee in its return of income. The assessing officer held that the entire exercise of writing off of amounts due from NPL had been carried out in the light of agreement entered into by the assessee company with M/s GGCL vide agreement dt.23-11-99 for sale of shares in NPL. The assessing officer therefore concluded that in such circumstances, the amounts due to the assessee company from VST NPL cannot be bifurcated and considered independently, but should be treated as a capital loss incurred in the package deal for which the assessee company received a consideration of Rs.15.50 crores from M/s GGCL. The assessing officer therefore disallowed the claim of the assessee for deduction of the amounts written off either u/s 36(1)(vii) or u/s 37(1) and concluded that such capital loss is not allowable as a deduction. He relied on the following judgements:
i)Turner Morrison & Co.,Ltd., v. CIT 245 ITR 724 (Kol) wherein it was held that the assessee advanced the money to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by Government of India and the entire amount went to the secured creditor. As a result, there was no chance of recovery of the amount from the subsidiary. It was immaterial whether the bad debt was shown after the close of the accounting year or during the accounting year itself. Bad debt was allowable as a deduction in computing the income even if the bad debt came into existence because of the expenditure incurred for advancing money to a subsidiary company of the assessee company. Since the assessee had no chance of recovering the amount, the amount in question from the subsidiary, the amount could be treated as a bad debt entitled to deduction from the income of the relevant assessment year. ii) CIT v. Amalgamation Pvt. Ltd. 226 ITR 188 (SC) wherein it was held that the assessee company had incurred the loss in carrying on is own business which included furnishing guarantees to debts borrowed by its subsidiary companies. The assessee company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators, which was received in the relevant previous year 1962-63 and it was allowable in that year. iii) ITC Ltd. v. JCIT 95 TTJ 1017 (Kol), wherein it was held that expenses incurred by assessee company on restructuring the business of a group company (by merger with another company) with a view to protect its brand name associated with that company and its goodwill, was expenditure laid out wholly and exclusively for the purpose of assessee's business and is, therefore, allowable as deduction. iv) DCIT v. Oman International Bank SAOG 100 ITD 285 (SB) (Mum), wherein it was held that after amendment of sec.36(1)(vii) with effect from 1-4-1989, once the assessee written off the debt as bad debt there is no obligation on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of allowance under sec.36(1)(vii).
10. On the other hand, the learned Departmental Representative submitted that the above amount written off is not in revenue field. It is not a trade advance. The assessee is not in money lending business. It is a capital advance. The question of diminution of goodwill of the assessee or the credibility of the assessee has nothing to do with the allowing of the bad debt. Loss of capital asset cannot be allowed as bad debt under the provisions of sec. 36(2). She submitted that the claim of bad debts for an amount of Rs.6,50,00,000 being money receivable towards sale of agronomy and marketing rights, is not covered u/s 36(2)(i) and the contention of the authorised representative of the assessee that to allow a deduction as bad debt, it requires only that debt should have `been taken into account in computing the income of the assessee' and not in the computation of capital gain in an earlier year, the bad debt is to be allowed as a deduction u/s 36(1). She submitted that this argument of the assessee's counsel is devoid of any merit since as per Chapter IV of the Income tax Act, which deals with the computation of income, is divided into five parts, each part dealing exclusively with only one head of income and forming independent codes as far as each separate head of income is concerned. There is no scope of importing provisions of one head of income into another head while computing the income under another head under this Chapter. This compartmentalization of heads is done away with only under Chapter VI which provides for aggregation and set off of the various heads of income. The reference to the "computation of income" under sec.36(2) must, therefore, be read in the context in which it has been used. A harmonious construction of the provisions of the Act can only lead to the conclusion that income or loss other than profits and gains of business cannot be imported into computation of deduction u/s 36(1)(vii) read with sec.36(2)(i). If the interpretation given by the assessee were to be adopted, it would lead to a situation of discrimination in favour of a class of assessee having income under the head, profit and gains. Since there is no provision comparable to sec.36(1)(vii) under any head other than profits and gains, an assessee having income from the head other than profits and gains can never be in a position to claim such bad debts. This confer unfair advantage on assessees engaged in business and profession. This cannot be the intention of the Act. Further, she relied on the order of the Tribunal in the case of D.C.M. Ltd.,v. DCIT, 123 TTJ 114 (Del) for the proposition that when the assessee is not in the business of advancing the loan, the money advanced to its subsidiary is not in line with the normal business activities of the assessee. Therefore, the loan given to subsidiaries is not connected to the business of the assessee. Thus, the amount of loan given to a subsidiary cannot be termed as money advanced during the course of normal business activity of assessee and thereafter when there was no recovery and loss of that amount, is nothing but loss of capital and the claim of the assessee of that amount as a deduction cannot be business loss u/s 28 read with sec. 37. Further, she relied upon the judgement of the Bombay High Court in the case of Salem Mangnesite Pvt.Ltd. v. CIT 180 Taxman 545 (Bom) for the proposition that the assessee which is solely in the business of mining, had lent certain amount to its wholly owned subsidiary company for construction of a jetty, subsequently, subsidiary company suffered a loss and was not in a position to repay the said loan. Therefore, assessee accepted a small amount in full and final settlement of said loan and wrote off the remaining amount. It claimed deduction of that amount written off on ground that it was loss incidental to its business. The said loan amount granted to subsidiary company did not spring directly from the business of assessee company and not incidental to its business activity. The amount written off cannot be allowed as deduction u/s 28 of the Act.
11. We have heard both the parties and perused the material on record. To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year, should have been taken into account in computing the income of the assessee for the accounting year or should represent money lent in ordinary course of its business of banking or money lending. The amount should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time. The assessee can claim debt as bad debt, in respect of debt which would have come into the balance sheet as a trading debt. The debt means something more than a mere advance. It means something which is related to business of the assessee. The amount is given as a trading debt since inception and the character of such amount is not changed by any act of the assessee or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges or springs from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowances as bad debt, there should be relation between the debtor and creditor from the date of lending the money till the date of write-off of debt as bad debt. The debt arising out of investment activity which is in the capital field cannot be allowed as bad debt as revenue deduction. To claim bad debt the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee's business as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There is neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to advance loan to the subsidiary company. Hence, the amount that had to be lost or incurred on account of subsidiary company cannot be claimed as bad debt when it became irrecoverable. In order to be deductible as a business loss, it must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of failure of the subsidiary company to repay the same, that itself cannot be the reason of debt as bad debt. In order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Losses allowable if it sprang directly and was incidental to business of the assessee, loss which assessee had incurred was not in its own business and it cannot be deducted in respect of the business of the assessee from its profits. The amount incurred by the assessee which is not in the ordinary course of business cannot be allowed as a deduction. Further, a debt can be incident to business only if it arises out of transaction, which was necessary in furtherance of the business and was within the range of business activity of assessee. Everything associated or connected with the business cannot be said incidental thereto. Not merely should there be a close proximity to the business, as such, but it should also be an integral ad essential part of the carrying on the business of the assessee. We should see whether the transaction is necessary part of the normal course of business and also is closely interlinked with the assessee's business as incidental to carrying on the business of the assessee. The mere object in the memorandum of association of the company is not conclusive as to the real nature of a transaction and that nature not only has to be deduced from the memorandum but also fro the circumstances in which the transaction took place. If the amount was incurred for ensuring any investment which is very source of its business and that advance is not incidental to the trading activity of the assessee, the same is not allowable as deduction. The advance in the field of investment for the purpose of securing source of income and not for the purpose of earning income does not qualify for deduction as bad debt. In order to entitle for deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue. In the present case, debt claimed as bad debt is not a trading debt emerging from the trading activity of the assessee. The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt. The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt. Accordingly, money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same. The Hon'ble Supreme Court in the case of A.V. Thomas & Company Ltd. Vs. CIT (48 ITR 67) (SC) it was held that when the assessee is neither a banker nor a money lender, the advance made by assessee to a private company to purchase a share could not be said to be incidental to the trading activity of the assessee. In the case of B.D. Bharucha Vs. CIT (1967) 65 ITR 403 (SC) it was held that if an advance made in the ordinary course of business of the assessee as a part of the business activity that debt emerges from that activity can be allowed as a bad debt and treated as a revenue loss. If the amount was incurred for ensuring any investment which is very source of his business and that advance is not incidental to the trading activity of the assessee. The advance in the field of investment made for the purpose of securing source of income and not for the purpose of earning income is not entitled for any deduction. In other words, the source of income is not synonymous to the income. In order to entitle deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue loss. In the present case, debt claimed as bad debt is not a trading debt emerged from the trading activity of the assessee. The debt arises out of investment activities of the assessee and that is in the capital field, not on account of revenue, cannot be allowed as a bad debt. Reliance also placed on the judgement of Supreme Court in the case of Aluminium Company Ltd. Vs. CIT (1971) (79 ITR 514) (SC), CIT Vs. Abdullabhai Abdulkadar (1961) (41 ITR 545 ) (SC). In view of these judgements of the Supreme Court, we have not considered the various judgements cited by the assessee's counsel. 12. Regarding write off of the secondment charges and other expenses, this amount is advanced to the subsidiary company for making expenses like salary and secondment charges, expenses incurred on behalf of the subsidiary company and other expenses. These amounts are advanced to subsidiary company for the purpose of incurring the business expenses of the subsidiary companies and the consideration for the sale of the subsidiary company is worked out after considering the amount receivables. Hence it is presumed that the amounts due were already considered while arriving at the sale price of the subsidiary company represents an advance made to the subsidiary company and not an expenditure. Therefore the amount cannot be allowed u/s 36(2) or 37(1) as discussed in earlier para.
13. Regarding irrecoverable amount spent on agronomy and marketing rights, the assessee claimed to have incurred these expenditure in developing certain varieties of spices and vegetables for exports on behalf of subsidiary company. It is stated that expenditure is also incurred for developing infrastructure and know how. The expenditure incurred is valued at Rs.6.50 crores as relatable to Agronomy and marketing rights. This amount is claimed as recoverable from the subsidiary company. The assessee company computed long term capital gain considering this amount of Rs.6.50 crores as the sale consideration receivable on the transfer of agronomy and marketing rights. Since the subsidiary company is sold, this amount which is not realizable, is claimed as expenditure. The assessee company is making a claim u/s 37(1) as expenditure or u/s 36(2) as a bad debt. This expenditure cannot be allowable under this provision where this expenditure is not an expenditure incurred for the purpose of assessee's own business and also this is loss of capital and cannot be allowed as a bad debt as discussed in earlier paras. Accordingly, these grounds of the appeal are dismissed.
14. In the result, appeal of the assessee is dismissed. The order was pronounced in the open Court on: 23.7.2010.
