GULF OIL CORPORATION LTD. vs. THE ASST. COMMISSIONER OF INCOME-TAX

The brief facts are that the assessee was engaged in the manufacture and supply of explosives and detonators' Since a majority of the coalhelds were situated in the State of west Bengal and as there was substantial demand for explosives for coal- mining operations, the Government of West Bengal expressed its 2 intention to establish an explosives company. In order to safeguard and retain its existing business interests in the state of west Bengal, without shutting down its operations therein, tJee assessee entered into negotiations with the Government of West Bengal arrd pursuant thereto, the assessee became a co_promoter of a new company proposed to be incorporated in west Bengal with the assistance of the West Bengal Industrial Development Corporation Limited. Further, a joint venture company was incorporated under the name and style of Eastern Explosives and Chemicals Limited (EECL). The assessee subscribed a sum of Rs.96 lakhs towards tJle share capita_l of EECL, representing 4g%o of its equity. As EECL required funds from time to time, the assessee has also advanced additional amounts to the company to sustain its operation and arso to protect its own existing business interests in the State of West Bengal.

Thus, apart from the advances made from 31.03.1997, the assessee had also invested Rs.96 lakhs as share capital in EECL towards 42o/o eqtiLy share. subsequentry, EECL became defunct and was referred to the BIFR, during the course of assessment proceedings, the Assessing officer disallowed the claim of the assessee in respect of the advalces made by the assessee from a time to time for conducting of operations of EECL and also the sumofRs.g6lakhsinvestedtoward.ssharecapital.Thesaid assessment order was challenged before the Commissioner of lncome Tax (Appeals) (for short 'CIT(A)) and the said appeal was dismissed by afhrming the assessment order' Assailing the same' an appea-l was filed before the learned ITAT, and on appreciation' the learned ITAT remitted matter to the Assessing officer lo- examine all materials on record and pass a fresh order' Pursuant thereto, the Assessing Ofhcer conducted a detailed enquiry' however once-again disa'llowed the sum of Rs'96 lakhs and also other amounts advanced by the assessee-company to EECL, from time to time. The assessee carried tl"e matter in appeal once again before the CIT(A), which was dismissed by afhrming the order of the Assessing Offtcer. 4 Aggrieved thereby, the assessee approached the learned ITAT- and the learned ITAT, on appreciation of material on record in respect of the advances made by the assessee-company to EECL' partly allowed the appeal, however, upheld the disallowalce of Rs.g6 lakhs invested towards the share capital of EECL. Assailing the said disallowance by the learned ITAT, the present appeal has been preferred before this Hon'ble Court.

The learned counsel appearing for the appellant/ assessee would submit that the sum of Rs.96 lakhs was invested by the appellant towards the share capital of EECL and the EECL became defunct and was referred to the BIFR, pursuant to which the appellant written off the said amount in its books of account. It is contended by the counsel that, once the investment became irrecoverable, the loss assumed the character of capital loss, and therefore the Assessing Officer erred in holding that the amount could not be treated as capital expenditure. 8' It is further contended that the Tribunal grossly erred in holding that, since the shares were not held as stock_in_trade, ".ll/lwther--on the facts and. circumstances of the case, th.e appellant is entitled to d.eduction "y "ri* of Rs.96 lakhs subscribed as share capitat tn e'eCf rahich taas *:tt:? off betng irreauerable, either qs A,r"ir."", lr", u/s.28/29 of the Income Tax Act or as business eryenditure u/ s.37 of the Income Tax Act uthile amputing its income for assessmen t gear 1997_9g?" Heard Sri y. Ratnakar, Iearned counsel 5 6

Placing reliance on the aforesaid judgment, the learned counsel for the appellant would contend that once EECL was referred to the BIFR and its winding up became inevitable, the shares held by the appelant became worthless, and the ross arising there from could only be treated as capital revenue, and the learned counser contended that the Assessing oflicer as well as the CIT(A) and the learned ITAT, erred in holding that such loss could be considered only in the year in which the compaay was actually wound up and the shareholders, rights are extinguished.

Per contra, the learned Senior Standing Counsel appearing for the respondent/Revenue supported the impugned orders and contended that the learned ITAT as well as the CIT(A) and the Assessing officer are justifred in disa,owing the craim of Rs.96 lakhs as capital expenditure. In support of this contention, reliance was placed on the judgment of the Honble Supreme Court in Principal Commlssioner of Income Tax a. I{hgati Realtors hrt. Ltd.z wherein the assessee_company, engaged in ttre manufacture of sugar, had advanced amounts to cane growers towards supply of sugarcane and due to drought conditions, the c€rne growers could not repay the amounts advanced ald tl.e 2 (20221 741 taxmanlcom 46I /

By placing reliance on the above principle, the learned Senior Standing Counsel contended that the loss claimed by the appellant falls within the ambit of revenue loss and not capital loss.

The only question that falls for consideration of this court is the sum of Rs.96 lakhs invested/subscribed by the appellant/assessee as share capitat in its subsidiary company i.e., EECL and subsequently written off as Arevocable, is permissible as a deduction, either as a business loss under sections 2a/2g of the Act or as arl expenditure under Section 37 of the Act, for the assessment year L99Z -98. 16. Evidenfly, appellant was the promoter of EECL and had invested Rs.96 lakhs towards its share capital and that the said o ITIA No. 17 t /20 OZ , dt.22.tt -2024

Having regard to the facts and circumstances of the case, and at the cost of repetition, it is necessary to reiterate that the sum of Rs.96 lakhs invested by the appellant/assessee in its subsidiary company, EECL, was made in the course of and for the purpose of its business, with the object of earning business returns. EECL therea-fter incurred continuous losses and wa.s referred to the BIFR, and was on the verge of winding up. In these circumstances, the entire investment made by the appellant towards the share capital of EECL had become wholly worthless and redundant.

Even assuming that the shares of the EECL were held by the appellant/assessee as stock-in-trade, since the said company subsequently went into losses and become commercially defunct, which rendered the investment incapable of yielding any beneht, thus, it is nothing but a revenue loss and the said zrmount has to be allowed under the head of 'losses' in view of Sections 2a/29 of the IT Act. Therefore, we are unable to agree with the findings of 10 the learned ITAT, for the reason that the materiar on record crearly establishes that the investment in EECL had become worthless during the relevant assessed year itself.

Reliance placed by the learned counsel for petitioner on the judgment of the High Court of Himachal pradesh in the case of H.P. Mineral and Industrial Deuelopment Cotporation Ltd,,s case(supra), is well-founded. In the said case, it was categoricaly held that where shares become worthless, the loss has to be treated as trading loss and the mere fact the shares were not sold is of no signilicance since in fact the shares could not have been sold and become worthless.

On the other hand, the relialce placed by the learned Senior Standing Counsel on the decision of the Hon,,le Supreme Court in the case of Kgathi Realtors, case (supra) and the judgment of a Division Bench of this Court in M.Vinagakb case (supra), are distinguishable on facts, as the said cases rerated to investments in the nature of fixed deposits or capital investments, respectively, and whereas, in the present case, ttre investment was primarily connected with the business of the appellant and was intended to yield business returns.

In view of the above hndings, we are of the considered view that the sum of Rs.96 lakhs invested by the appellant/assessee in its subsidiary company, EECL, which had gone into losses and had been referred to the BIFR, constitutes an allowable business loss in the relevant assessment year. The substantial question of law is accordingly answered in favour of the appellant/assessee and against the respondent/ revenue.

Accordingly, the appeal is a-llowed and the impugned order of ttre learned ITAT in ITA No.649lHyd l2OlO (AY-1997-98) dt.29.O2.2012 aTong with the orders of the CIT(A) are hereby set aside. Consequently, the impugned assessment order is hereby quashed. No order as to costs. As a sequel, miscellaneous petitions pending, if any, shall stand closed. K.SHYLESHI JOINT REGISTRAR //// ECTION OFFICER t. The lncome Tax Appellate Tribunal, erabad Bench 'A' Hyderabad. z The Commissioner of lncome Tax (Appeals)-ll, Hyderabad' g. The Assistant Commissioner of lncome Tax, Circle-2(3), Hyderabad

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