MR.SANTOSH S LAD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(3), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the order of CIT(A) dated 19.12.2017 for the assessment year 2013-14. The first ground for our consideration is as follows:-

Mr. Santosh S. Lad, Bangalore Page 2 of 9 incidental to business carried on by the appellant under the facts and in the circumstances of the appellant's case.”

“The assessee, in his profit and loss account, claimed an expense in the nature of “Investment in companies written off” amounting to Rs.5,55,20,973/-. The assessee vide letter dated 14.7.2015, was asked to explain why this expense be allowed. The assessee vide letter dated- 11.08.2015, replied that- "Mr Santosh S Lad is the promoter and the majority share holder of M/s. Lad's Technologies Private Limited literally holding 9999 of equity of the company. The company was incorporated 27th July, 2009 with objects of develop computer software, render computer consultancy service & develop and market other related products connected information technology industry. The entire funding for the day to day activities of company was done by Mr. Sallt0S11 S. Lad as the company has miniscule revenue from its operations. In order to sustain the business Mr Santosh S Lad advanced monies from time to time to meet the expenses of the company. The said advance were in the ,nature of investment and was to be converted share capital at the appropriate time by increasing the authorized capital of the company as the company could not generate any revenue from its operations the investment made by Mr. Santosh S. Lad became bad and the Board of Directors of the company decided to%- write off a portion of the advance given by Mr Santosh S Lad as its income which was with the knowledge and consent of the Mr. Santosh S. Lad being the principal share holder . The amount of Rs3,00,00,000/- written off by the company has been taken as its income which is discernible from its Profit & Loss Account and Balance Sheet for the year ended 31s1 March 2013. As the investment made was treated as irrecoverable in the books of the company and consequently treated as its income, the investment made by Mr. Santosh S. Lad in the said company is treated as loss in Ins books of account.

Mr. Santosh S Lad is the promoter and the majority share holder of M/s. Connect Films Media Private limited literally holding 74.4796 of equity of the company. The company was incorporated

Page 3 of 9 25th January 2008 with objects of to engage in the business of providing services like online entertainment related to MUSIC and film, Internet service provider website development, web page designing and hosting, web advertisement. The entire binding for the day to day activities of company was done by Mr: Santosh S Lad as the revenue from its operations was substantially lower than the amounts incurred to run the business of the company. In order to sustain the business Mr. Santosh S. Lad advanced monies from time to time to meet the expenses of the company. The said advance were in the nature of investment and was were to be converted share capital at the appropriate time by increasing the authorized capital of the company as the company revenue derived from its operations is far below the expenses incurred to sustain the business. The investment made by Mr. Santosh S. Lad became bad and the Board of Directors of the company decided to write off a portion of the advance given by Mr. Santosh S. Lad as its income which was with the knowledge and consent Mr Santosh S. Lad being the majority share holder. The amount of Rs.2,50,00,000/- write off by the company has been taken as its income which is discernible from its Profit & Loss Account and Balance Sheet for the year ended 31sr March 2013. As the investment made was treated as irrecoverable in the books of the company and consequently treated as its income, t1 investment made by Mr. Santosh S Lad in the said company is treated as loss in his books of account.."

2.1. Thereafter, the AO observed that advance made to M/s. Lad Technologies Pvt. Ltd. & M/s. Connect Films Media Pvt. Ltd. is not for the purpose of carrying out any business of the assessee and it is not a trade advance. More so, the assessee is not in the money lending business so as to claim the write off advances as trading loss. Further, he observed that advance made to these two companies were just advance to have to meet their expenses in the field of capital outlay and it is an investment in the hands of the assessee not being a trading advances which cannot be claimed as business loss. Further, he observed that the assessee is not in money lending business and advance to these two companies were not made in the course of money lending business. It has not charged any interest on the advances arising out of these investments. It was not considered while computing the total income of the assessee in any years. In other words, he mean that the assessee not complied with the provisions of section 36(1)(vii) r.w.s. 36(2) of the Act, so as to claim it as bad debts. Against this assessee went in appeal before Ld. CIT(A), who has confirmed the order of AO. Now once again, assessee is in appeal before us.

2.2. Ld. A.R. submitted that the Learned Assessing Officer has erred in disallowing a sum of Rs. 5,55,20,973/- which represents a legitimate write off of investment in companies which has become irrecoverable along with the interest paid on loans taken which were used to make investment in the said companies the details on which were sufficiently disclosed in the return of income filed by the assessee for the assessment year 2014-15. Ld. A.R. further stated that the Assessing Officer has erred in not considering the submissions of the assessee vide letters dated 11/08/2015 and 10/03/2016. The assessee had submitted, in his earlier submissions, the evidence with respect of writing off of investments namely the Board Resolutions of respective companies and the financial statements from which is it evident that the loans provided by the assessee were written off in the accounts of the Companies as revenue after communicating with the assessee their inability to repay the loans advanced by the assessee. The copies of the audited financial statements of both the companies namely M/s Lad's Technologies Private Limited and M/s Connect Films Media Private Limited are placed on record in paper book along with the intimations received from the said companies regarding their inability repay the amount advanced. Ld. A.R. submitted that from the financial statements it is clearly discernible, as per Schedule 15, an amount of Rs.3,00,00,000/- in the case of M/s Lad's Technologies Private Limited and per Schedule 17, an amount of Rs. 2,50,00,000/- in the case of M/s. Connectfilms Media Pvt. Ltd., has been written back and offered as income which is a fact that is incontrovertible.

2.3. On the other hand, Ld. D.R. relied on the order of lower authorities.

2.4. We have heard the rival submissions, perused the materials available on record and also gone through the case laws cited by the Ld. A.R. in the case of Ace Designers Vs. ACIT (275 Taxmann 138 dated 9.9.2020), wherein it was held that “Where assessee-company made investment in its wholly owned subsidiary outside India for business purpose i.e. for enhancement of its business activity in global market, however, said subsidiary could not perform upto company’s expectations and same was wound up, loss arising from investment made in subsidiary was to be allowed as business loss of assessee.”

2.5. In that case, the amount invested by Ace International Inc. was allowed as “business loss” on account that amount was invested for the enhancement of business activity of the assessee in global market, which primarily related to business exigencies of the assessee and it was wholly owned subsidiary of assessee company, which had suffered loss, therefore, the assessee treated the amount as business loss. The investment was made for the purpose of expansion of business activity of the assessee not with a view to creating “capital asset” in the form of holding shares. However, in the present case, the facts shows that the assessee made investment for these two companies namely M/s. Lad Technologies Pvt. Ltd. & M/s. Connect Films Media Pvt. Ltd. and written off the claim as business loss. In the present case, the present assessee Mr. Santosh S. Lad not in the business that was carried on by two companies are carrying on. In other words, Mr. Santosh S. Lad earning income from share of profit from partnership firm and others and not engaged in the similar business of these two companies are carrying on. Being so, it cannot be said that the assessee made investment for the enhancement of his business activity in global market, which primarily related to the assessee’s business. Further, in the present case, investment made in these two companies were made with a view to creating capital asset in the form of holding shares. Being so, the judgement relied by Ld. Counsel for the assessee supports the case of revenue rather than assessee’s case.

2.6 We also find that in the case of CIT(A) Vs. United Breweries Ltd., 321 ITR 546 wherein, Hon’ble Karnataka judicial high court held as follows:-

“Even on the accepted legal principles, a 'debt' is an expression well-known in legal parlance and is an amount which is a legal obligation which if not discharged will give rise to a claim in favour of the creditor. An amount which is said to be simply advanced for helping a business associate definitely cannot constitute a debt when the assessee had not placed any material to indicate that the business associate or any associate of the subsidiary of the assessee had a legal obligation for repayment of the amount. The amount advanced is more towards the issue of shares in future if a company is to be brought into existence and in the hope of getting shares allotted in the company. An expenditure incurred for securing shares per se is a 'capital expenditure' and never 'revenue expenditure' and therefore the amount never qualifies for deduction either under s. 36 or S.

2.7. The other contention of the assessee’s counsel is that the assessee namely M/s. Lad Technologies Pvt. Ltd. & M/s. Connect Films Media Pvt. Ltd. were offered this amount by written back this amount to P&L account in the respective assessment years and the write off in the hands of those assessees has been suffered taxes. Hence, the write off cannot be added in the hands of assessee. This argument of assessee is totally misconceived. We have to see how the investment has been treated in the hands of assessee not in the hands of recipient of the advances. In the hands of assessee, this advance amount of Rs.5,55,20,973/- has been treated as a capital investment and it is not in trading asset in nature, so as to claim the written off as business expenditure. In the hands of the present assessee, it is an investment, if the same has to be considered as a capital loss not as a trading loss or business loss so as to claim the same as business expenditure. In our opinion, the assessee has not satisfied the condition laid down in section 36(1)(vii) r.w.s. 36(2) of the Act. As per section 36(2) of the Act, deduction shall not be allowed unless such debt or part there of has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business or banking or money lending which is carried on by the assessee. Being so, in our opinion, the assessee cannot claim the written off investment in the field of capital as bad debt or business expenditure. Accordingly, we find no merit in this argument of the assessee’s counsel and the same is rejected and this ground of appeal of assessee is dismissed.

3. Next ground for our consideration is with regard to disallowance of Rs.18,58,444/- being the interest paid on borrowing, which were used to make the investment on which income was offered and consequently the same ought to have been allowed under the facts and circumstances of the case. The assessee under head “income from other sources” has claimed expenses in the nature of interest on borrowings amounting to Rs.40,66,247/-. The interest income earned offered to tax at Rs.22,07,803/-. Assessee vide letter dated 14.7.2015 was asked by the AO that how this expenditure could be allowed u/s 57 of the Act. The assessee submitted that borrowed funds are mostly utilized to put money in savings in the form of fixed deposits on which interest is earned and offered to tax. However, the assessee was not able to substantiate further how much of borrowed amounts were put into savings, how much is the proportionate interest on the borrowed funds. Since the assessee failed to substantiate the claim, the interest expenditure claim u/s 57 of the Act was restricted to rs.22,07,803/- and balance amount of Rs.18,58,444/- was added to the income of the assessee. Against this assessee is in appeal before us.

3.1. We have heard the rival submissions and perused the materials available on record. In the present case, the assessee earned interest income of Rs.22,07,803/-. The claim of assessee is that the assessee has incurred an expenditure in the form of interest paid at Rs.40,66,247/-. The AO allowed the interest expenditure to the extent of interest income earned by the assessee at Rs.22,07,803/-. The contention of the assessee is that assessee has actually incurred an interest expenditure of Rs.40,676,247/- for which the assessee not given any details, so as to enable the lower authorities to examine the claim of the assessee even the allowability of interest expenditure of Rs.22,07,803/- to earn the same amount of income is very exorbitant. Since the department is not in appeal before us on this issue, we are not commenting anything on this. However, in our opinion, the AO is very liberal in allowing the interest expenditure of Rs.22,07,803/- to earn interest income of Rs.22,07,803/-. Hence, we do not find any merit in the claim of the assessee on this issue and the same is rejected. This ground of the assessee is dismissed.

Mr. Santosh S. Lad, Bangalore Page 9 of 9