Unless & until gift is connected with profession/avocation, it cannot be taxed

Unless and until gift is connected with profession or avocation, it cannot be taxed

In the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the assessee, a religions head, the personal gift cannot be termed as income taxable under the Act

[2010] 6 taxmann.com 87 (Mad.)

HIGH COURT OF MADRAS

CIT v. Gopala Naicker Bangaru TAX CASE APPEAL NO. 308 OF 2009 JULY 21, 2010

FACTS

As per the profile submitted by the Respondent/Assessee, he was born on 3-3-1941 at Melmaruvathur Village, Kanchipuram District and during his childhood, Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted him to build a temple and use it to alleviate the sufferings of humanity. The devotees are believing that the Assessee is believed to be an Avatar and incarnation of Goddess Adiparasakthi. The Assessee's Oracles and Miracles attract millions of devotees from all over the world who come to Melmaruvathur to seek his blessings. The devotees calling him as `Amma' and he is rendering tireless serves to the mankind irrespective of caste, creed, colour, religion, economic status and integrity.

The devotees of the Assessee come and make their offerings for contribution voluntarily to him at the time of his birthday and the same has been accounted as capital receipts and receipts have also been issued. Thus, the Assessee is performing religious practice for the benefit of mankind.

According to the Revenue, the Assessee filed his Return of Income for the assessment year 2004-05 declaring taxable income of Rs.5,23,680/- and the same was accepted under section 143(1) of the Income-tax Act. On scrutiny of the Balance-sheet, it has been revealed that an amount of Rs.1,75,70,347/- was received as gifts during that year and was shown as capital receipts.

The Assessing Officer during the course of assessment, treated the gifts as having nexus to his profession as a religious head and hence, brought the entire income within the net of tax and vide assessment order dated 5-11-2007 under section 143(3) r/w section 147 of the Income-tax Act, 1961 and credited the above said gift as professional income and held that the Assessee is liable to pay a sum of Rs.75,56,439/- as Income-tax. It is also indicated in the said order that penalty proceedings under Section 271(1)(c) are being initiated separately.

HELD

The Respondent/Assessee as a religious head, is not involving himself in any profession or avocation and also not performing any religious rituals/poojas for his devotees for some consideration or other. In fact the Respondent/Assessee is doing charitable work and spiritualization and made his devotees to follow the same for the benefit of mankind.

The devotees out of natural love and affection and veneration used to assemble in large numbers on the birthdays of the Assessee and voluntarily made gift, and at any stretch of imagination it cannot be said that the amount received by the Respondent by way of gift would amount to vocation or profession. It is not the case of the department that the devotees were compelled to make gift on the occasion of the birthday of the Respondent/Assessee. The facts of the present case would disclose that the amount/gift received by the Respondent/Assessee cannot said to have any direct nexus with any of his activities as a religious person/Head.

The Commissioner of Income-tax(Appeals) as well as the Income-tax Appellate Tribunal held that simply because the Respondent/Assessee practicing ritualism while leading normal family life, cannot said to be carrying on any profession or vocation and that no link has been established between the receipt received on the occasion of the birthday and so called vocation carried on by the Assessee.

The decisions reported in 171 ITR 447 (Mad.), Commissioner of Income-tax vs. Mr.Balamuralikrishnan, 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, 231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal, the facts of which have been discussed in detail by this Court in the earlier paragraphs, are squarely applicable to the facts of this case, for the reason that the gifts made by the followers are voluntary in nature which are neither income nor capital in the hands of the Assessee. It has been further held in those decisions that unless and until the gift is connected with the profession or avocation, it cannot be taxed and in the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the Assessee, the personal gift cannot be termed as income taxable under the Act. It is pertinent to point out at this juncture, in the Respondent / Assessee's own case in Assessment year 1988-89, the Department has accepted the position that gifts received by him on birthdays and other occasions were not taxable. In the decision reported in 193 ITR 321 (SC) Radhasoami Satsang vs. Commissioner of Income-Tax, it has been held that -

"Where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent years."

Since, there is no change in facts and law in the present case, the reasons assigned by the Income-tax Appellate Tribunal are correct and this Court finds no infirmity or error apparent on the face of record in the impugned order.

________JUDGMENT__________

M.SATHYANARAYANAN, J

The Revenue has preferred this Appeal under Section 260-A of the Income-tax Act, 1961 challenging the vires of the order dated 17.10.2008 passed by the Income-tax Appellate Tribunal `C' Bench, Chennai, made in I.T.A 588/Mds./2005.

2. This appeal was admitted on the following substantial questions of law:-

1. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the gifts received on Assessee's birthday of Rs.1,75,70,347/- as Capital Receipt and having no nexus with his profession as vocation of religious practice is valid?

2. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in saying that the reopening under Section 147 of the Income-tax Act, on mere surmise, even though the assessment was reopened within 4 years with valid reasons from the end of the assessment year and hence no proviso to Section 147 will apply to the facts of this case?:

3. The facts leading to the filing of this appeal are as follows:-

As per the profile submitted by the Respondent/Assessee, he was born on 03.03.1941 at Melmaruvathur Village, Kanchipuram District and during his childhood, Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted him to build a temple and use it to alleviate the sufferings of humanity. The devotees are believing that the Assessee is believed to be an Avatar and incarnation of Goddess Adiparasakthi. The Assessee's Oracles and Miracles attract millions of devotees from all over the world who come to Mel Maruvathur to seek his blessings. The devotees calling him as `Amma' and he is rendering tireless serves to the mankind irrespective of caste, creed, colour, religion, economic status and integrity.

4. The devotees of the Assessee come and make their offerings for contribution voluntarily to him at the time of his birthday and the same has been accounted as capital receipts and receipts have also been issued. Thus, the Assessee is performing religious practice for the benefit of mankind.

5. According to the Revenue, the Assessee filed his Return of Income for the assessment year 2004-2005 declaring taxable income of Rs.5,23,680/- and the same was accepted under Section 143(1) of the Income-tax Act. On scrutiny of the Balance-sheet, it has been revealed that an amount of Rs.1,75,70,347/- was received as gifts during that year and was shown as capital receipts.

6. The Assessing Officer during the course of assessment, treated the gifts as having nexus to his profession as a religious head and hence, brought the entire income within the net of tax and vide assessment order dated 5.11.2007 under Section 143(3) r/w Section 147 of the Income-tax Act, 1961 and credited the above said gift as professional income and held that the Assessee is liable to pay a sum of Rs.75,56,439/- as Income-tax. It is also indicated in the said order that penalty proceedings under Section 271(1)(c) are being initiated separately.

7. The Assessee/Respondent herein aggrieved by the Assessment Order passed by the Assistant Commissioner of Income-tax Circle I, Tambaram, Chennai-45, has preferred appeal before the Commissioner of Income-tax (Appeals), Chennai in I.T.A No.97/07-08. The Commissioner of Income-tax (Appeals) vide order dated 9.1.2008, has set aside the order passed by the Assistant Commissioner of Income-tax Circle-I, on the ground that the amounts received by the Assessee are gifts and they are not consideration for profession/vocation. The Commissioner of Income-tax (Appeals) has also considered the decision reported in 231 ITR page 632 (Mad.) Commissioner of Income Tax vs. Sri.Vanamamalai Ramanuja Jeer Swamigal for arriving at such a finding and allowed the appeal filed by the Assessee.

8. The Department/Revenue aggrieved by the order passed by the Commissioner of Income Tax (Appeals), had preferred further appeal before the Income Tax Appellate Tribunal `C' Bench, Chennai in I.T.A.No.588/Mds./2005 for the assessment year 2004-2005.

9. The appellate Tribunal after taking into consideration the rival submissions and considering the various decisions cited before him, vide order dated 17.10.2008, has dismissed the appeal on the ground that that the gifts received by the Assessee, have no direct nexus with any of his activities and it is squarely covered by the decision cited supra (231 ITR page 632). The Revenue aggrieved by the order of dismissal of the appeal passed by the Income Tax Appellate Tribunal `C' Bench, Chennai, had preferred this appeal.

10. Mr.J.Nareshkumar, learned Senior Standing Counsel appearing for the Income Tax Department/appellant, has submitted that but for the fact the Assessee is a religious leader, and that his profile also states that he is performing Oracles , the devotees would not have made gifts to him.

11. It is further submitted by the learned senior standing counsel appearing for the appellant that the Assessee is admittedly living with his family and keeping the amount in his bank account and it was also shown in his Wealth Tax Returns filed for the Assessment year 2005-2006. It is the further submission of the learned senior standing counsel appearing for the appellant, the Assessee has not offered any proper explanation as to why gifts/donations received from his devotees were deposited in his individual bank account and even though two charitable trusts are run by him, the Assessee has not deposited the donations in the accounts of the trust. Therefore, the learned senior standing counsel appearing for the appellant would submit that in the absence of any supporting material produced by the Assessee that it is a capital receipt, the Assessing Officer on a careful consideration of the materials available on record, has rightly arrived at a finding that it is liable to be taxed and consequently levied tax on the said income with liberty to proceed under Section 271(1)(c) by way of penalty proceedings. It is the further submission of the learned senior standing counsel appearing for the Department that the Commissioner of Income Tax (Appeals) as well as the Tribunal had failed to take into consideration the said vital aspects and by placing reliance upon the decisions which are not applicable to the facts of the case, had upheld the claim of the Assessee and therefore, the impugned order passed by the Tribunal confirming the order passed by the Commissioner of Income Tax (Appeals) is liable to be set aside.

12. Learned senior standing counsel appearing for the appellant in order to buttress his submissions, has placed reliance upon the following decisions:-

i. 35 ITR 48 (SC) - Krishna Menno (P) vs. Commissioner of Income-tax

ii. 34 ITR 92 (Bombay) Govindlalji Ranchhodalalji (Maharaj Shri) vs. Commissioner of Income-tax

iii. 156 ITR 412 (SC) George Thomas (K.) (Dr.) vs. Commissioner of Income-tax

iv. 176 ITR 78 (Kerala) Father Epharam vs. Commissioner of Income-tax

v. Unreported Judgment dated 16.12.2008 in W.P.Nos.15527 to 15537 of 2003

13. In 35 ITR 48 (SC) - Krishna Menon (P) vs. Commissioner of Income-tax, the Assessee after his retirement as a Superintendent of Police, spending his time in studying Vedanta Philosophy and expounding the same to such persons. He soon gathered a number of disciples. One of the disciples had transferred the entire balance outstanding in his account to the credit of the Assessee and the said amount was the subject matter of assessment. The Income-tax Officer had assessed the said income as a taxable income and the Assessee preferred an appeal before the Assistant Commissioner who dismissed the appeal. The Assessee's appeal to Appellate Tribunal has also ended in dismissal and hence further appeal was preferred before the High Court of Bombay which has also ended in dismissal. The Assessee filed appeal before the Hon'ble Supreme Court of India. The Hon'ble Supreme Court on the facts, found that the Assessee was teaching his disciples Vedanta, without any motive or intention of making profit out of such activity and that teaching of Vedanta by the Assessee can properly be called the carrying on of a vocation by him. The Supreme Court held that the importing of the teaching was the cause causans of the making of the gift and that the payments with which were income arising from the vocation of the appellant as a teacher of Vedanta, no question of exemption under Section 4(3)(vii) of the Act arises. The Supreme Court citing the said reasons has dismissed the appeal filed by the Assessee.

14. In 34 ITR 92 (Bombay) Govindlalji Ranchhodalalji (Maharaj Shri) vs. Commissioner of Income-tax, the Assessee is a direct descendant of Shri Vallabhacharyaji who founded the faith known as `Vallabh Sampradaya' Maharaj Shri is not a sanyasi and he has married and has children. He is succeeded by his sons who inherit and divide the properties. The Assessee keeps an idol of Lord Krishna in his house and the offerings are made to the Assessee. The authorities below held that the Assessee therein was carrying on a vocation and the Assessee aggrieved by the same, preferred an appeal to the High Court of Bombay. The Bombay High Court held that even practice of religion can become a vocation and more so, when it brings in a steady income. Therefore, the Bombay High Court upheld the claim of the Department that the Assessee was rightly assessed to tax as income.

15. In 156 ITR 412 (SC) George Thomas (K.) (Dr.) vs. Commissioner of Income-tax, the Assessee was a lecturer in a college and he associated himself wit the Indian Gospel Masson in the USA, which collected money for its working abroad through the Indian Christian Crusade. On returning to India, the Assessee was propagating the ideals of the Indian Christian Crusade and was engaging in a movement for the spread of religion etc., and he also started publishing a daily newspaper. The income of the Assessee was subjected to tax and challenge made by the Assessee before the authorities below had ended in futile before the High Court of Kerala also. Hence, the Assessee preferred an appeal before the Hon'ble Supreme Court of India.

16. The Hon'ble Supreme Court of India in the decision held that there was a link between the activities of the appellant and the payments received by him and the link was close enough and that the appellant got receipts on account of carrying on of his vocation and they were not casual and non-incurring receipts. The Hon'ble Supreme Court of India citing the said reasons, has upheld the case of the Department that the incomes were taxable.

17. In 176 ITR 78 (Kerala) Father Epharam vs. Commissioner of Income-tax, the Assessee was a Priest in a Monastery and he received substantial foreign remittances and the surplus amount that remained after distribution to various other Priests for performing the mass, was treated as the income of the Assessee and was taxed. The Assessee challenged the imposition of tax, and lost before the authorities and hence he preferred further appeal to High Court of Kerala. The High Court of Kerala held that there was a close and intimate link between the occupation or avocation of the Assessee and the payments received by him and based on the said reason, dismissed the appeal filed by the Assessee.

18. Similar view was taken in the unreported judgment dated 16.12.2008 made in W.P.Nos.15527 to 15537 of 2003.

19. The learned senior standing counsel appearing for the appellant/Department by placing strong reliance on the above cited decisions would submit that but for the fact the Assessee/Respondent herein is a religious leader, he would not have received gifts and hence there is a close and intimate link between the activities/avocation of the Assessee and the payments received by him and therefore, it was rightly taxed by the Assessing Officer and it was erroneously reversed by the Commissioner of Income-tax (Appeals) and the Appellate Tribunal and hence the learned standing counsel appearing for the appellant praying for the setting aside of the order passed by the Tribunal and to confirm the order passed by the Assessing Officer.

20. Per contra Mr.V.Ramachandran, learned senior counsel appearing for M/s.P.Sivagnanam and A.S.Balaji, learned counsel appearing for the Respondent / Assessee would submit that the Commissioner of Income-tax (Appeals) as well as the Appellate Tribunal had rendered a clear and categorical finding that there was no nexus between the receipt of the birthday gifts and the exercise of any profession or vocation by the Assessee and that the gifts were voluntarily made by the devotees on account of personal esteem and veneration and therefore, the said finding cannot be disturbed. It is further submitted by the learned senior standing counsel appearing for the appellant that the assessee's own case in Assessment year 1988-89, the Department has accepted his case after due enquiry and that the gifts received by the Respondent herein on birthdays and other occasions were not taxable. The learned senior counsel appearing for the Respondent in support of his submissions, though relied upon number of decisions, it will be useful to refer to the following decisions:-

1. 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishna.

2.160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras.

3.231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal.

In all the said decisions the judgment of the Hon'ble Supreme Court of India reported in 35 ITR 48 Krishna Menon vs. Commissioner of Income-tax has been referred.

21. 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishnan, the Assessee is a Musician by profession and he claimed a sum of Rs.30,000/- given to him by his fans in appreciation of his completing 30 years of service rendered to Carnatic Music as exempted from tax. The Income Tax Officer treated the said income as professional income and levied tax. The Assessee preferred appeal and the Appellate Authority held that the said payment was received by way of a testimonial or personal gift and not taxable and the said view was also upheld by the Tribunal and hence the Department taken up the matter for further appeal before this Court. A Division Bench of this Court by placing reliance upon 35 ITR page 48 (SC) (Krishna Menon's case), 114 ITR page 253 (Mad) S. A. Ramakrishnan vs. CIT and other decisions, has held that though the Assessee is an artist by profession, there is no direct nexus between this payment and his vocation though it may not be denied that there is an indirect connection between the two. The payment received by the Assessee from his fans, was expression of their good will and hence the said amount cannot be said to have been paid to him by way of remuneration for those services Citing the said reasons, this Court in the said decision, has upheld the claim of the Assessee and dismissed the appeal preferred by the Income-tax Department.

22. In 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, the Assessee was an active member of a political party and held various offices. A committee consisting of the party men of that party had collected donations from the members of the party, businessmen and public and also arranged a drama for the purpose of donating a purse and the same was donated to the Assessee. The Income-tax Officer held that a sum of Rs.51,000/- out of the amount given to the Assessee by his admirers, would constitute income received by the Assessee in the course of his vocation as a politician and therefore, it was taxable. The Assessee was successful before the authorities below and hence the Revenue preferred the said appeal before this Court. A Division Bench of this Court after taking into consideration the factual aspects and the decisions cited before it, held that the presentation of Rs.51,000/- to the Assessee amounted to windfalls or gift for his personal qualities, though his profession or vocation as a politician. This Court further held that no materials placed before the lower authorities by the Revenue that the presentation of Rs.51,000/- to the Assessee will amount to a receipt arising from the exercise of a profession or vocation or occupation and therefore, for the said reasons, the appeal preferred by the Revenue was dismissed.

23. In 231 ITR 632 Commissioner Income-tax vs. Shri Vanamamalai Ramanuja Jeer Swamigal, the Assessee namely Shri Vanamamalai Ramanuja Jeer Swamigal, Nanguneri, Tirunelveli District, received amounts by way of Kanikkai and Sambhavanai amounting to a sum of Rs.12,156/-. The question arose was whether the said amount was assessable as income-tax under the Income-tax Act, for the assessment year 1974-75. The Tribunal held that the said presentation was out of personal regard, personal esteem and veneration for Swamigal and did not constitute income from the exercise of any profession or vocation and that there was no evidence to show that Swamiji had been exercising any profession or vocation. The Revenue preferred appeal before this Court and it was contended that any amount brought by his followers would amount to income assessable to tax under the Income-tax Act. A Division Bench of this Court in the said decision, has taken into consideration the Krishna Menon s case reported in 35 ITR 48 (SC) and other decisions, held that Kanikkai and Sambhavanai were paid by the devotees to the Jeer Swamigal out of personal regard, esteem and veneration and that the Swamigal is not exercising any profession or avocation and the voluntary offerings made by the devotees are not on account of any profession or vocation. This Court for the said reasons, has held that the said offerings will not be considered as income under the Income-tax Act and therefore, dismissed the appeal preferred by the Revenue.

24. Learned senior counsel appearing for the Respondent/Assessee would submit that the decision reported in 231 ITR 632 (Mad.) is squarely applicable to the facts of the case and further that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal had upheld the case of the Respondent by rendering concurrent findings. It is further submitted that no substantial questions of law arose for consideration in this appeal and hence prayed for dismissal of this appeal.

25. This Court has carefully considered the submissions made by the learned senior standing counsel appearing for the appellant and the learned senior counsel appearing for the Respondent and also the decisions relied on by the respective counsel.

26. The Religion is a matter of faith stemming from the depth of the heart and mind and is a belief which binds the spiritual nature of men to super natural being. Devotion is a consecration and denotes an act of worship. Faith, in the strict sense constitutes firm reliance on the truth of religious doctrines in every system of religion and religion, faith or devotion is not easily interchangeable. Religion has reference to one s views of his relations to his Creator, and to the obligations they impose of reverence for his being and character, and of obedience to his will.

27. The profile of the Respondent/Assessee would indicate that Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted to build a temple and use it to alleviate the sufferings of humanity and accordingly the Respondent / Assessee has built a temple which is also known as `Sakthi Peedam'. The devotees on important occasions, used to throng the temple and as per the practice prevails in the temple, the devotees irrespective of their gender, can perform poojas and Abishegams to the presiding deity namely Goddess Parasakthi. The above said practice of devotees performing Abishegams and poojas to the presiding deity is not prevalent in the State and therefore out of love and affection and veneration, they used to assemble in great numbers on the eve of the birthday of the Respondent/Assessee and offer gifts.

28. It is to be pointed out at this juncture that the Respondent/Assessee as a religious head, is not involving himself in any profession or avocation and also not performing any religious rituals/poojas for his devotees for some consideration or other. In fact the Respondent/Assessee is doing charitable work and spiritualization and made his devotees to follow the same for the benefit of man kind.

29. The devotees out of natural love and affection and veneration used to assemble in large numbers on the birthdays of the Assessee and voluntarily made gift, and at any stretch of imagination it cannot be said that the amount received by the Respondent by way of gift would amount to vocation or profession. It is not the case of the department that the devotees were compelled to make gift on the occasion of the birthday of the Respondent/Assessee. The facts of the present case would disclose that the amount/gift received by the Respondent/Assessee cannot said to have any direct nexus with any of his activities as a religious person/Head.

30. The Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal held that simply because the Respondent/Assessee practicing ritualism while leading normal family life, cannot said to be carrying on any profession or vocation and that no link has been established between the receipt received on the occasion of the birthday and so called vocation carried on by the Assessee.

31. The decisions relied on by the learned senior standing counsel appearing for the appellant/Department have no application to the facts of the present case as in those cases, Courts held that the activities of the concerned Assessees would amount to vocation and object of which, is to make a profit and also amount to revenue receipt.

32. The decisions reported in 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishnan, 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, 231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal, the facts of which have been discussed in detail by this Court in the earlier paragraphs, are squarely applicable to the facts of this case, for the reason that the gifts made by the followers are voluntary in nature which are neither income nor capital in the hands of the Assessee. It has been further held in those decisions that unless and until the gift is connected with the profession or avocation, it cannot be taxed and in the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the Assessee, the personal gift cannot be termed as income taxable under the Act. It is pertinent to point out at this juncture, in the Respondent / Assessee's own case in Assessment year 1988-89, the Department has accepted the position that gifts received by him on birthdays and other occasions were not taxable. In the decision reported in 193 ITR 321 (SC) Radhasoami Satsang vs. Commissioner of Income-Tax, it has been held that -

"Where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent years."

Since, there is no change in facts and law in the present case, the reasons assigned by the Income Tax Appellate Tribunal are correct and this Court finds no infirmity or error apparent on the face of record in the impugned order.

33. This Court after taking into consideration the factual as well as the legal aspects is of the considered opinion that the substantial questions of law raised by the Revenue are to be answered in negative against them. Therefore, the appeal is dismissed confirming the order dated 17.10.2008, passed by the Income-tax Appellate Tribunal `C' Bench, Chennai in I.T.A.No.588/Mds/2005. In the circumstances, there will be no order as to costs.

Human body treated like a factory in IT assessment?

By T N Pandey

Section 28 of the Income-Tax Act, 1961, taxes income from business or profession after deduction of expenses, as provided in Section 29. These expenses, among others, include expenses on current repairs, insurance and depreciation. Plant has been defined in Section 43(1) in an inclusive way, where there is no mention of 'human body'.

Shanti Bhushan case:

This issue has recently been considered by theDelhi High Court in Shanti Bhushan versusCIT (2011) 199 Taxman 280 (Del). The assessee, an eminent lawyer, incurred expenditure on his heart surgery and claimed such expenditure in his income-tax assessment under Section 31 of the Act as akin to repairs of plant. For 1983-84, he declared professional income of 2,14,050 after claiming deduction of 1,74,000 incurred as expenditure on coronary heart surgery . The surgery considerably improved his health and earning capacity. His income rose from 3.50 lakh in the year of surgery to 106 lakh five years later.

Shanti Bhushan lost his claim up toIncome-Tax Appellate Tribunal (ITAT). TheITAT rejected the claim by a peculiar reasoning saying that a man cannot stop or regulate the functioning of his heart or use it at will to suit his purpose. Since the functioning of heart is involuntary, it cannot be said to have been 'used' for a specific purpose or activity, except to live and to be alive. Therefore, a professional cannot claim that he uses his heart for the purpose of profession. In the case of the assessee, he sharpens his professional skills not by using his heart but by using his brain.

The reasoning given by the ITAT is far-fetched. If the heart stops functioning, the brain will become dead automatically. Good health and life have to go together and, hence, the whole human body is a plant and cannot be dissected into parts such as brain and heart. To make the brain work, keeping the heart in a healthy condition is imperative and only a novice can say that heart is not like a tool in the plant and machinery of human body.

There is apparently a contradiction in the ITAT reasoning. It tantamounts to saying that only the engine in a car is functional - not other parts - and, hence, depreciation should be allowed only on the value of the engine - not on the value of the entire car. In CIT versus Sibbal Cold Storage (1996) 135 Taxation 576 (MP), it has been said that both operative and supportive structures constitute 'plant', and 'plant' includes within its ambit building in which machines are installed. On this analogy, the brain cannot function unless it is in a sound body.

Delhi High Court decision:

The high court has decided the appeal against Shanti Bhushan. The grounds are:

- General well-being of the heart and its functionality cannot be equated with using heart for engaging in trade and professional activity as expenses on repairs and renewals under Section 31 of the I-T Act.

- Section 31 can be invoked when value of plant and machinery is reflected as an asset in the account books; only then can claim for repairs be made.

- The claim is not admissible under Section 37(1) of the Act as it cannot be said to have been incurred wholly and exclusively for the purpose of the Act.

The high court has argued that if the heart was an asset, then it should have been listed as such in the list of assets (properties) of the appellant. This does not weaken the claim of the appellant because there are assets like self-generated goodwill, patents, etc, which are not in the balance-sheet but become liable to capital gain tax when sold. The tax liability under the Act does not depend on accounting entries is an accepted principle in the income-tax law.

Webster defines the word 'plant' as 'the fixtures and tools necessary to carry on any trade (as also profession) or business'. It is 'the machinery, apparatus or fixtures by which business is carried on'. In Scientific Engineering House (P) Ltd versus CIT, AIR 1986 (SC) 338, the observations of the court are that 'plant' will include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to an apparatus, which is used for mechanical operations or processes or is employed in mechanical or industrial business.

Apparently, it is hard to say that a human body is not plant in the case of businessmen and professionals. It is the basis for earning income and, hence, incurring of expenses in keeping it fit and in working condition is primarily for business or profession. The third ground (supra) given by the high court is equally not convincing. The tremendous rise in income of Shanti Bhushan clearly establishes that the amount was spent wholly and exclusively for the purpose of his profession.

It is time that rigid distinction between personal and business expenses is avoided. This does not imply that all personal expenses be deductible without looking at the nexus of expenses in earning incomes. Each issue has to be decided against the background of facts. Recently, the ITAT, in the case of DCIT versusSalman Khan (2011) 130 ITD 81 (Mum), has decided that the expenses incurred by actor Salman Khan in criminal proceedings arising out of hunting and killing a black deer had nothing to do with his professional activity as an actor and, hence, the expenditure was in the nature of personal expenditure - not deductible against his professional income for income-tax computation. No exception can be taken to such decisions. But not in cases like that of Shanti Bhushan.

Once the concept that human body is a plant is accepted, other expenses such as insurance, costs of body part replacement, depreciation, etc, too will become deductible.

(The author is former chairman ofthe Central Board of Direct Taxes)

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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.

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Interesting case of Bollywood actress.

MUMBAI: Bollywood actress Rani Mukerji believes in numerology when it comes to accepting or making payments. The amounts paid or received are mostly divisible by three, a reply by her accountant to the income tax showed.

This reply is part of the documents filed by the actor in the Bombay high court. Rani has challenged Income Tax Appellate Tribunal's addition of nine lakh rupees to her income received for her 2001 film Bas Itna Sa Khwaab Hain. HC on July 1 admitted Rani's appeal and will decide if the addition is based on presumptions.

A diary found by the income tax during a search at her residence on September 26, 2000 show two entries of Rs 9 lakhs and Rs 1 lakh for her role in the Anil Kapoor starrer `Nayak'. When the assessing officer sought an explanation, her accountant said, ``Family of Rani Mukerji believes in numerology. This must have been seen from the record that most of the payments and receipts are always divisible by 3. Thus, they accept amounts in 3, 6, 9, 12, 15, 21, 36 etc and also make payments in the same manner.''

Rani entered into contract with Surya Movies for Rs 51 lakhs for ``Nayak''. On June 7, 2000 she received a signing amount of Rs 10 lakhs. ``But as they believe in numerology they received Rs 9 lakhs and Rs 1 lakh on the same day and therefore two separate entries in the diary." The department also seized cash and jewellery during the searches. The AO held that "theory of numerology is an afterthought" and showed examples where Rani has received payments such as Rs 95000/- for ``Hello Brother' and Rs 1,51,000/- for Hadd Kar Di Aapne. The assessing officer made an addition of Rs 10 lakhs to her income received for Nayak. But the commissioner whom she appealed rejected the department plea and the tribunal also agreed with the commissioner.

In the Bas Itna Sa Khwaab Hain movie starring Abhishek Bachchan, Rani had shown Rs 27 lakh as remuneration received. The diary showed that she asked Rs 48 lakhs as remuneration and received contract amount of Rs 36 lakhs. Assessing Officer questioned why the amount was not changed in the diary if there was a reduction and added Rs 21 lakhs to her income. Commissioner of Income Tax (Appeals) in June 23, 2008 also confirmed addition of Rs 21 lakhs.

Rani's appeal before ITAT said Rose Movies Combine on May 18, 2001 had sought to reduce the remuneration to Rs 27 lakhs due to a crisis in the film industry. But ITAT's order stated there is no date mentioned in the letter and reply requesting for reduction of remuneration and `` the same has been accepted, seems totally unnatural as films stars are known to haggle for money to the last pie." It observed that when her father was so meticulous in maintaining the amounts as well as the dates ``there is no explanation why the amount of Rs 36 lakhs was not changed to Rs 27 lakhs.

ITAT added nine lakh rupees to her income but did not agree an addition of 21 lakhs. ITAT in its January 7, 2010 order said it does not agree that the remuneration should be Rs 48 lakhs because the figure of Rs 36 lakhs itself is noted in the diary against contract amount and the agreement is also of Rs 36 lakhs. Rani has challenged this in the HC.

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Legal error apparent on record can be rectified.

Legal error apparent on record can be corrected by the AO in exercise of his power under s 154, as held byDelHC in Mitsubishi Corporation v CIT & Anr — In favour of: The revenue; ITA Nos 486–488 of 2008........

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Bundle of cases

[2011] 12 taxman112 (BOM.)

FT : Where foreign trade policy has not used expression 'net foreign exchange earning' either while defining conditions of eligibility or conditions of entitlement for Served From India Scheme (SFIS), benefits of SFIS could not be restricted by policy circular with reference to concept of net foreign exchange earning and any action to that effect would involve an amendment of policy and, hence, ultra vires ***********************

[2011] 12 taxman111 (PUNJ. & HAR.)

IT : Where assessee had filed return in response to notice under section 148, it would be presumed that there was valid service of notice

***********************

[2011] 12 taxman110 (DELHI)

CL : A mere money decree passed by a Court of law does not entitle an unsecured creditor to be treated as a secured creditor

[2011] 12 taxman109 (CHENNAI - ITAT)

IT : Carrying on of singular activity of business against other charitable objectives stated in trust deed is not sufficient to claim status of a charitable institution

***********************

[2011] 12 taxman108 (DELHI)

IT : Merely because assessee has not claimed refund in return form itself, it cannot be said that assessee is not entitled to refund ***********************

[2011] 12 taxman107 (SC)

FERA : Finding in an adjudication proceeding is not binding in proceeding for criminal prosecution; in case it is found on merit that there is no contravention of provisions of Act in adjudication proceeding, trial of person concerned shall be in abuse of process of Court ***********************

[2011] 12 taxman106 (SC)

CL : Benefit of section 47 of Persons with Disabilities (Equal Opportunities, Protection of Rights and full Participation) Act not available to private employers, whether individuals, partnerships, proprietary concerns or companies (other than Government companies) ***********************

[2011] 12 taxman112 (BOM.)

FT : Where foreign trade policy has not used expression 'net foreign exchange earning' either while defining conditions of eligibility or conditions of entitlement for Served From India Scheme (SFIS), benefits of SFIS could not be restricted by policy circular with reference to concept of net foreign exchange earning and any action to that effect would involve an amendment of policy and, hence, ultra vires

[2011] 12 taxman111 (PUNJ. & HAR.)

IT : Where assessee had filed return in response to notice under section 148, it would be presumed that there was valid service of notice

[2011] 12 taxman110 (DELHI)

CL : A mere money decree passed by a Court of law does not entitle an unsecured creditor to be treated as a secured creditor

[2011] 12 taxman109 (CHENNAI - ITAT)

IT : Carrying on of singular activity of business against other charitable objectives stated in trust deed is not sufficient to claim status of a charitable institution

[2011] 12 taxman108 (DELHI)

IT : Merely because assessee has not claimed refund in return form itself, it cannot be said that assessee is not entitled to refund

[2011] 12 taxman107 (SC)

FERA : Finding in an adjudication proceeding is not binding in proceeding for criminal prosecution; in case it is found on merit that there is no contravention of provisions of Act in adjudication proceeding, trial of person concerned shall be in abuse of process of Court

[2011] 12 taxman106 (SC)

CL : Benefit of section 47 of Persons with Disabilities (Equal Opportunities, Protection of Rights and full Participation) Act not available to private employers, whether individuals, partnerships, proprietary concerns or companies (other than Government companies)

2011-TIOL-408-HC-DEL-IT

CIT, New Delhi Vs Shri Prem Gandhi (Dated: May 5, 2011)

Income tax - Sections 132(1), 143(2) - Whether, in view of retrospective amendment in Sec 132(1), the Tribunal order stating that Addl Director has no powers to issue warrant for authorisation of search, does not survive - Whether assessee can be allowed to raise a fresh ground of no-service of notice u/s 143(2) before the Tribunal as this issue was argued before the CIT(A). - Revenue's appeal disposed of : DELHI HIGH COURT

2011-TIOL-409-ITAT-MUM + it story

Chiranjeev Lal Khanna Vs ITO, Mumbai (Dated: April 23, 2011)

Income tax - Sections 2(47), 50C, 54, 54EC - Whether grant of redevelopment rights on a property amounts to transfer of property, and thus, gives rise to capital gains, liable to tax - Whether provisions of Sec 50C are invokable in such a case. - Assessee's appeal partly allowed : MUMBAI ITAT;

2011-TIOL-408-ITAT-VIZAG

M/s Susi Sea Foods Pvt Ltd Vs ACIT, Visakhapatnam (Dated: May 9, 2011)

Income tax – Sections 70, 79, 115JA, 220(2) – Whether AO cannot apply sections 70 to 79 of the Income tax Act while computing the amount deductible under clause (iii) for the purpose of book profit as it nowhere prescribes the manner of set off or modalities of carry forward and set off of loss to be followed for book purposes, even though there is no method of computation of brought forward losses and unabsorbed depreciation and its set off is given under the Companies Act. - Assessee's appeal allowed: VISAKHAPATNAM ITAT;

2011-TIOL-407-ITAT-MUM

HCC-L&T Purulia Joint Venture Vs JCIT, Mumbai (Dated: June 24, 2011)

Income tax – Sections 40(a)(ia), 194C – Whether the assessee, a sub contractor, is required to deduct tax at source for the payment made by it to its sub contractor though as per Explanation 1 for the purpose of sub-section (2) of Sec 194C the expression `contractor' shall include a contractor who is carrying out any work in pursuance of a contract between the contractor and the Government of a foreign state or foreign enterprise or any association or body established outside India but does not include within its fold a sub-contractor carrying out any work in pursuance of a sub-contract with a sub subcontractor and the amendment made by the Finance Act 2 of 2009 to cover such payment made by the resident sub-contractor to its sub contractor is applicable w.e.f. 1/10/2009 and cannot be applied to the A.Ys. prior to the said amendment.- Assessee's appeal partly allowed : MUMBAI ITAT;

2011-TIOL-406-ITAT-MUM

JCIT, Mumbai Vs M/s Videocon Industries Ltd (Dated: May 20, 2011)

Income Tax - Section 36(1)(vii) - Whether loss of investment is allowable as business loss - Whether for claiming an amount as bad debt conditions specified in section 36(2)(i) are required to be fulfilled - Whether a capital loss emerging out of previous years can be treated as bad debt - Whether capital loss which accrues as a result of long term investment can be treated as bad debt merely because the benefit of indexation was not taken at the time of computing capital loss. - Revenue's appeal allowed with cost of 5000/-: MUMBAI ITAT;

2011-TIOL-405-ITAT-MUM

Addl.CIT, Mumbai Vs Tribhovandas Bhimji Zaveri (Dated: June 24, 2011)

Income tax – Sections 22, 37, 80IB – Whether, merely because Mumbai office is also involved in the business, the Hyderabad Unit cannot claim Sec 80IB benefits for manufacture of jewellery through various karigars spread across various locations - Whether the assessee is entitled to foreign travelling expenses incurred on the managing partners and their family members – Whether while determining the annual value u/s 22, the municipal valuation should be taken as yardstick for determining the annual value where the actual rent received is less than the municipal valuation. - Assessee's appeal partly allowed : MUMBAI ITAT;

2011-TIOL-404-ITAT-MUM

DCIT, Mumbai Vs M/s Kaizen Commercial Pvt Ltd (Dated: June 10, 2011)

Income Tax - Section 28(iv) - Whether merely because a telecom Company has got licence and has bright future, it can be presumed that contemporaneous value of share, irrespective of it's negative net worth on the day when it got licence, is on higher side and hence any addition in the hands of share holder on presumptive basis is tenable - Whether in the absence of any business relations, any addition can be made in the hands of assessee u/s 28(iv). - Appeal of the revenue is dismissed. : MUMBAI ITAT;

2011-TIOL-403-ITAT-DEL

ACIT, New Delhi Vs Parablic Drugs Ltd (Dated: June 17, 2011)

Income tax – Sections 35(2AB), 35(1)(i), 37(1), 115JB – Whether when assessee gives wrong treatment to R & D expenditure in its books as capital expenditure and competent authorities also deny it benefits of Sec 35(2AB) on this basis, even then assessee's claim of deduction by treating it as revenue expenditure in P&L Accounts is allowable - Whether the amount is deductible u/s 37(1) or 35(1)(i) as the nature of expenditure does not change due to the treatment of the same in the books of account.- Revenue's appeal partly allowed : DELHI ITAT;

2011-TIOL-402-ITAT-DEL

ITO, New Delhi Vs M/s Vijay Bharat Roadlines Pvt Ltd (Dated: June 23, 2011)

Income tax – Sections 40(a)(ia), 194C, Rule 46A – Whether the payments made to lorry/truck owners who merely placed the vehicles at the disposal of the assessee and never involved themselves in the work to be carried out by the assessee, would not attract provisions of section 194C and hence no disallowance can be made u/s 40(a)(ia). - Revenue's appeal dismissed : DELHI ITAT;

2011-TIOL-401-ITAT-INDORE

ACIT, Sagar Vs M/s Vijay Traders (Dated: May 31, 2011)

Income tax – Section 153A, 153C, 143(2) – Whether when the assessment is made u/s 153C without recording proper satisfaction, such assessment is bad in law – Whether where no notice is issued u/s 143(2) after filing of return, assessment made is bad in law.- Revenue's appeal dismissed : INDORE ITAT;

[2011] 12 taxman35 (MUM. - ITAT)

IT : Notional profit arising on account of revaluation of forward foreign exchange contracts on last day of accounting period has to be treated as income of assessee

*****************

[2011] 12 taxman34 (CHENNAI - ITAT)

IT : Technical proprietary information and pre-qualification rights obtained by assessee cannot be treated as goodwill and assessee is entitled to depreciation on these two items of intangible assets

[2011] 12 taxman33 (MUM. - ITAT)

IT : In absence of any evidence showing that expenditure incurred by assessee-company on training of its director, who was son of major shareholder of company, abroad was for purpose of its business, said expenditure could not be allowed as business expenditure under section 37(1)

*****************

[2011] 12 taxman32 (AHD. - ITAT)

IT : Once the depreciation allowable under section 32(1) cannot be allowed or partly allowed, the unabsorbed portion of such depreciation automatically becomes the depreciation of the subsequent year

*****************

[2011] 12 taxman31 (DELHI - ITAT)

IT/ILT : Expression 'shall' has been employed in this rule 10B(4), which make it abundantly clear that current year data of an uncontrolled transaction is to be used for purpose of comparability, while examining international transactions with associate enterprises

*****************

[2011] 12 taxman30 (CAL.)

IT : By Explanation (i) of section 194H commission, which is receivable in future, is within sweep of that section

*****************

[2011] 12 taxman29 (MUM. - ITAT)

IT : Assessee-company having become public company by virtue of section 3(iv)(c) of Companies Act, provisions of section 79 would not apply to it

****************

[2011] 12 taxman28 (AHD. - ITAT)

IT : While making adjustments in arm's length price, if other income of assessee is excluded from net profit declared by it, other income of comparable companies should also be excluded from their net profit

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Money advanced to subsidiary company cannot be allowed as deduction either u/s 3

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

· 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.

SCOPE OF "PROVISO'

A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section and is required to be read into the Section to give the Section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the Section as a whole. [(Allied Motors, 1997 -TMI - 5575 – (SUPREME Court)].

The law with regard to provisos is well-settled and well-understood. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule. [Shah Bhojraj Kuverji Oil Mills & Ginning Factory v. Subhash Chandra Jograj Sinha, AIR 1961 (SC) 1596].

Any clause (say, in an agreement or statute) which begins with the words `provided that' is called `proviso'. The provisios are generally not used but are resorted to provide conditions on riders to the main provisions. The proviso qualifies the generality of the main section or clause by inserting an exception and take out as it was, from the main clause, a part of it which, but for the proviso would fall within the main clause. It is a foreign text to the main text of the clause or section. Its function is to carve out an exception or exclusion to the main provision which otherwise would have been in the main section. It is important that a proviso must be construed harmoniously with the main statute so as to give effect to legislative objective. It should not render itself otiose or in effective or to render substantive provision, redundant (Sales Tax Commissioner v. B.G. Patel AIR 1995 SC 865. Supreme Court in Balachanara Anantrao Rakvi v. Ramchandra Tukaram (2001) 8 SCC 616 held that the correct way to understand a proviso would be to read it in the context of main provision and not in isolation.

A proviso must be limited to subject matter of the main clause and should be, prima facie, read and considered in relation to the principal matter of clause to which it is a proviso. It is not a separate or independent clause and it cannot be divorced from the main clause.

A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction. [Dwarka Prasad v. Dwarka Das Saraf 1976 (1) SCR 277: 1976 (1) SCC 128: AIR 1975 SC 1758: 1975 (1) All LR 516].

The provisos are often added not as exceptions or qualifications to the main enactment but as saving clauses, in which cases they will not be construed as controlled by the section. [Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subhash Chandra Yograj Sinha AIR 1961 SC 159: 64 Bom LR 407].

Ordinarily proviso is an exception to the main provision but in exceptional cases a proviso can be a substantive provision itself. [Ishveralal Thakorelal Almaula v. Motibhai Nagibhai 1966 (1) SCR 367: AIR 1966 SC 459: 68 Bom LR 645: 1966 Mah LJ 1049; Commissioner of Commercial Taxes, Board of Revenue, Madras v. Ramkishan Shrikishan Jhaver 1968 (1) SCR 148: AIR 1968 SC 59: 1968 Mad LW (Cri.) 25.

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By: Dr. Sanjiv Agarwal

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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.

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