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Facts
The assessee company, Siddhayu Aayurvedic Research Foundation Pvt. Ltd., claimed a deduction for a write-off of a loan amounting to Rs. 8,91,78,685/- advanced to its Indonesian subsidiary. This loan was advanced to facilitate the subsidiary's coal mining operations, which was intended for captive supply to the assessee's power generation business. The subsidiary's operations were unsuccessful, and the loan became irrecoverable.
Held
The Tribunal held that the write-off of the loan, which was advanced for commercial expediency and in the course of business to secure a supply of coal for the assessee's power generation, is an allowable business expenditure. The Tribunal found that the AO and DRP misunderstood the facts and that the loan was not a capital outgo but a business expenditure. It emphasized that the purpose was to safeguard the assessee's business interests.
Key Issues
Whether the write-off of a loan advanced to a subsidiary for business purposes, which became irrecoverable due to fraud and non-viability, is an allowable business expenditure under Section 37(1) of the Income Tax Act, 1961.
Sections Cited
37(1), 28
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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of Ld. CIT (DRP-2), Mumbai dated 25.02.2022passed u/s. 144C (5) and the AO’s order passed u/s. 143(3) r.w.s. 144C (13) of the Income Tax Act vide dated: 29.03.2022(in short ‘the Act’) for A.Y. 2017-18. The assessee has raised the following grounds of appeal:-
Based on the facts and circumstances of the case, Siddhayu Aayurvedic Research Foundation Pvt Ltd, (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order dated 29 March 2022 passed by Additional/ Joint/Deputy/ Assistant Commissioner of Income Tax/ Income-tax Officer, National Faceless Assessment Centre, Delhi ('AO') in pursuance of the directions issued by Dispute Resolution Panel - I ('DRP'), Mumbai on the following grounds:
On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP has: General 1. erred in assessing total income of the Appellant at INR 11,35,61,343/- as against returned income of INR 2,37,09,958/-; Disallowance of write off of loan of INR 8, 91, 78,685/- advanced to step-down subsidiary in Indonesia
2. Erred in holding that write off of loan advanced to step-down subsidiary in Indonesia is not allowable as revenue expenditure on the ground that the loan is not given for Appellant's business purpose;
3. Erred in holding that the write off of such loan advanced to step-down subsidiary in Indonesia is not an allowable loss even as per section 28 of the Income-tax Act, 1961; 4 should have appreciated that such loss was incurred purely from commercial reason, which was in overall business interest of the Appellant and therefore, allowable expense under section 37(1) or allowable business loss under section 28 of the Act; Transfer pricing adjustment of INR 6, 72,600/- on account of corporate guarantee charges 5.Erred in making transfer pricing adjustment @ 0.5% on account of alleged corporate guarantee provided without appreciating that there was no corporate guarantee which was provided by Appellant to its AE; 6. without prejudice to above, erred in making transfer pricing adjustment on account of alleged corporate guarantee, without giving credit of charges recovered from its AE, wherein such credit was given in original TP order but not given in final order post Hon'ble DRP directions (without any such directions from Hon'ble DRP);without prejudice to above, erred in making transfer pricing adjustment on account of alleged corporate guarantee for Siddhayu Aayurvedic Research Foundation Pvt. Ltd. the entire year, without appreciating that such guarantee was provided only for part of the year; Levy of interest under section 234B of the Act 8. Erred in levying interest of INR 1, 28, 26, 58,684/- under section 234B of the Act: Initiation of penalty proceedings under section 270A of the Act 9. erred in initiating penalty proceedings under section 270A of the Act; Initiation of penalty proceedings under section 271AA of the Act 10. Erred in initiating penalty on account of non-reporting of investment in Form 3CEB under section 271AA of the Act. The above grounds of appeal are mutually exclusive and without prejudice to one another. The Appellant craves leave to add/alter/amend/ delete/withdraw any or all of the grounds at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law.
The brief facts of the case are that the assessee has filed its return of income for A.Y. 2017-18 on 17.10.2017 declaring gross total income at Rs. 2,37,09,958/-. The assessee company is engaged in the business of manufacturing of Aayurvedic Medicines, herbal cosmetic products and electricity generation. The assessee is also engaged in trading of Aayurvedic medicines, Bitumen and other products. These facts are not under challenge and duly recorded by the assessing officer in his order while defining the business model of the assessee.
The case of the assessee was selected for complete scrutiny u/s. 143(2) of the Act and appropriate notices were issued to the assessee. The case of the assessee was selected on the following issues as under:
i. Squared up loans; iii. Custom duty paid; iv. Income from house property; v. Capital Gain/Loss from house property and vi. International transaction(s)
Since the case of the assessee was selected with “Specific Risk Parameter” a reference was made to the Transfer Pricing Officer (TPO) also, who in turn proposed an adjustment of Rs. 13, 60,000/- in his order passed u/s. 92CA of the Act. Ultimately, the assessment of the assessee was concluded by making addition of Rs. 6, 72,000/- based on TPO report read with Ld. DRP’s direction and Rs. 8,91,78,685/- being amount of loan given to subsidiary at Indonesia involved in the business of coal mining written off. The assessee being aggrieved with the directions of Ld. DRP read with the assessment order preferred the present appeal before us.
We have gone through the draft assessment order of the AO passed u/s. 144C of the Act, Order of the TPO passed u/s. 92CA of the Act, Order/directions of the Ld. DRP passed u/s. 144C (5) of the Act and final assessment order passed by the AO u/s. 143(3) r.w.s. 144C (13) of the Act. Here question before us is whether this written off of loan given to subsidiary at Indonesia is an allowable expense or not u/s. 37 of the Act. For sake of clarity and ready reference we are reproducing herein below the provisions of section 37 of the Act as under:
Section - 37, Income-tax Act, 1961 - FA, 2023 General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation 1.]—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub- section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] [Explanation 3.—for the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee which is an offence or which is prohibited by law" under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee,—
(i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or (ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or (iii) To compound an offence under any law for the time being in force, in India or outside India.] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] Siddhayu Aayurvedic Research Foundation Pvt. Ltd. With a bare reading of section 37 of the Act it is crystal clear that expenses not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee or the expenses falling u/s. 37(2B) of the Act can only be disallowed. In the matter before us we need to examine the claim of the assessee under the aegis of section 37 of the Act with various conditions embodied in it and to examine the same a close analysis of the facts of the matter as recorded by the authorities below has to be discussed. It is observed that nowhere it is alleged by the authorities below that the expense claimed by the assessee is personal in nature, non-genuine or capital in nature. There is no question raised by the authorities below that there is any illegal expense or diversion of income or suppression of income by the assessee or there is no question of identity or quantification of the same. The only issue to be examined is whether the same is wholly and exclusively for the purposes of business of the assessee. The issue as discussed by the authorities below is reproduced as under:
6.1.1During F.Y. 2006-07, the assessee entered into coal mining business in Indonesia through JV and also provided loan to this JV to repay its debt. The other partners/ managers of the assessee fraudulently took control of coal mining business and hence the JV business of the assessee did not take off. The assessee ultimately sold its entire stake to a 3rd party in the year 2017 for US $ 5000 and also assigned its outstanding loan to the 3rd party for US $ 12,000 and thus claimed the entire outstanding loan as business loss. The assessee claimed an amount of Rs.8, 91, 78,685/- i.e. loan advanced to subsidiary in Indonesia as revenue expense. Observation of Bench: The fact that the assessee company belongs to the Baidyanath Group of Companies and main Baidyanath Group Company owned Thermal power plant also as stated by the Ld. AR during the hearing of the case and on this fact there Siddhayu Aayurvedic Research Foundation Pvt. Ltd. was no rebuttal by the Ld. DR. In today’s business scenario as a matter of business strategy backward/forward integration of the business entity itself or through its group companies is a common phenomenon. The fact that the assessee entered into the business of coal mining in the year 2006-07 and also provided loans to repay its debt is on record and there is no challenge to this fact by the revenue also. By various means the assessee tried to sustain the venture/business and ultimately, after almost 10 years, planned to quit the same as the same is found to be commercially non-viable. Here it make sense that one of the main group company is in electricity production through thermal power plant and another group company is developing the coal mining business for ensuring captive supply of the same to group generation company.
6.1.2 The AO has held that the loan given to related company cannot be treated as business loss if the loan becomes bad, for the reason that any loan given is capital outgo and bad loan can be considered as an allowable expense only if the assessee company is in the business of banking or money lending. Observation of Bench: Here what the AO is discussing pertains to the condition necessary for claiming the expenses u/s. 36(1) (vii) and 36(2) of the Act. Whereas, the assessee is claiming the same u/s. 37(1) of the Act. Here we found that the facts of the case were misunderstood by the authorities below and findings in this para are a clear reflection of their misconception/ confusion about the facts of the matter. These days entering/venturing into other core areas of economy is quite common and rather the assessee entered the same in the financial year 2006-07 and faced a long gestation period to get the same matured, so after such a long period of investment, efforts and gestation the question of the revenue that the same is not the part of the assessee’s business is ruled out. The assessing officer is duty bound to update him with the present business scenario going on, while framing an assessment order. These days every big corporate house is entering into the power sector as the same is the most essential cash commodity and with a growth in economy demand is also robust. Rather, to be relevant in present scenario Entrepreneurs has to think about their vertical diversification as the traditional business and business model may not be that relevant in growing competition.
6.1.3The relevant part of the order of the AO is extract below for convenience: 9…The assessee has claimed that the losses allowable under section 37 of the IT act as it was advanced for business expediency. The claim the assessee does was passed the test of allowability under section 37 of the IT act. To define, the 'business expediency ‘the assessee has relied upon the judgement of tax court in the case of S. A. Builder versus. C.I.T. 288 ITR 001. However, the issue involved in the present case is entirely different from the issue involved in the above case. In the case of S.A. builder, the issue of contention was allowability of interest under section 36 (1) (iii) of the IT act w.r.t. advance given to a related company for business expediency. However, in the current case, issue is whether a loan given to a related company can be treated as business loss if the loan becomes bad. I am afraid it is not so. The law is very clear that any loan given to anybody is a capital outgo. The assessee has not claimed that the money was advanced for any business transaction or the related company was going to provide coal or any other services to the assessee against this advance. On the contrary, the assessee itself has claimed that it had advanced loan to the related company to repay its obligations. So, the loan was not at all connected to the business of the assessee but to the business of JV Company in Indonesia. The unrecovered loan is neither a bad debts nor a business loss as it does fulfil eligibility of any. It is only an unsecured loan. For being a bad debt, 80 should be a proper trading that, however, in the present case it is only unsecured loan. The assessing over conducted ant business with the JV Company. Secondly, the debts should have been doubted through profit and loss account but in this case it is a capital loan only. Thirdly, it act is something which makes a profit unrecovered. However, recovery of loan is not going to increase profits of the assessee.
Observation of Bench: The above observation of the AO is self-contradictory as on the one hand, the AO is agreed with the ration laid down by the Hon’ble Apex Court in the case of S. A. Builder versus. C.I.T. 288 ITR 001 (Wherein interest paid on loan given to the subsidiary is allowed) on the other hand in case the loan itself became irrecoverable, the same is not allowable as business expenditure. Once it is established that funds in the form of loan provided to subsidiary is out of business expediency how is it possible that interest is in the nature of business expense but in case of bad debt, the principle amount is not allowable u/s. 37(1) of the Act.
6.2 Assessee's Submissions 6.2.1 The assessee has submitted that the assessee company is engaged in the business of manufacturing and trading in pharmaceuticals and other products. During the Financial Year 2005-06, it diversified its business by entering into power sector and its promoters through their group entities decided to venture into thermal power plant generation along with renewable power generation too and hence decided to make investment in Indonesia. It is stated that the primary motive of venturing into Indonesia was to scout for additional "high grade" coal reserves to power the thermal plant that was proposed to be set up in India. Accordingly, during the F.Y. 2006-07, the assessee expanded overseas and acquired a controlling 55% equity stake in a coal mine located at Muara Bungo, Sumatra held by a company PT Bumi Bara Perkasa ('PT BBP') through a foreign JV called PT Equity Commodities (PEC'), the balance 45% shares were held by two individuals, Mr. Rajiv Behal (who was then a non-resident Indian) and Mr. Vinay Hariani (an Indonesian resident). It is stated that PEC is a start-up company formed for coal trading and consultancy. 6.2.2 The assessee has further stated that as per the Indonesia mining laws, the conduct of mineral exploration, development and production is regulated by: • The Kuasa Pertambangan (KP); which is mining authorization can be owned only by Indonesian nationals or Indonesian owned companies. Thus, a Foreign Investment company cannot hold KP.
• The Contract of Work (CoW'); can be entered into only by an Indonesian company that can be only partly owned by non-residents/ foreign companies. The CoW covers virtually all minerals except coal and petroleum and addresses all stages of operation and • The Coal Contract of Work ('CCoW') can be entered into by an Indonesian company that is at least partly foreign owned, or by an Indonesian wholly owned company. The CCoW applies exclusively to coal operations. 6.2.3With the above background, the assessee has stated that, PT BBP holds a valid license required to extract coal from a coal mine located in Muaro Bungo, Jambi Province, Sumatra, Indonesia (Target Company'), accordingly, the assessee made an arrangement for acquisition of PT BBP through a nominee company PT Dharam Mineral Jaya (PT DMJ') (Nominee Company'). To set up the above structure, PEC advanced loan to a nominee company 'PT DMJ' and Mr. Akhirudin, proposed by Mr Vinay Hariani, to enable the nominee company to acquire 99% stake in 'PT BBP'. The amount of loan extended by PEC was USD 7.7 million at 7% rate of interest per annum where PEC had the right to recall the entire loan within 30 days of written notice to the shareholders of Nominee Company. Thereafter, primarily on the credit worthiness of the promoters of Siddhayu Aayurvedic supported by corporate guarantees of three Baidyanath Group companies coupled with collateral security, Bank of India-Singapore Branch, sanctioned credit facilities to PEC for a sum of USD 10.90 million for acquisition and working capital/ trade finance purposes of the aforesaid coal block. However, PEC took on a very aggressive repayment schedule of merely two and a half years within which it had to develop the mine, operate it and return the entire credit facility along with due interest to the lender. However, the cash flows generated by PEC were found to be inadequate to meet the high monthly debt requirements of bank loan, the assessee therefore, entered into an agreement with PEC to provide interest free loan to PEC to the extent of INR 8, 99, 55,565/- from the Financial year 2007-2015 for meeting its funding requirements i.e. to facilitate the PEC's liability to honour its repayment liabilities against the loan availed by it from Bank of India, Singapore Branch. However, immediately after the term loan was squared off by the PEC, the shareholders and Indonesian citizens of Nominee Company PT DMJ, namely Mr. Akhirudin and Mr. Haloman Wahyudi Pasaribu denied every claim of PEC over the assets and profits of PT BBP and PT DMJ. 6.2.4The assessee has contended that as the operations of PEC were not satisfactory and was estimated to be not viable even in the immediate future and also the fact that investment made were not fetching returns and due to the fraud conducted, Siddhayu Aayurvedic decided to exit from the Joint Venture company and liquidate the entire financial commitment and accordingly, to disinvest their holding in PEC, the assessee entered into a share purchase agreement to sell the shares of PEC to an Indonesian party viz. PT Prema KencanaMitra Sejahtera at USD 5,000 and also assigned the outstanding loan to aforesaid Indonesian party for USD 12,000. Pursuant to which, the net outstanding loan of US $ 20, 12,173/- (INR8, 91, 78,685/-) was written off in the books of accounts of Siddhayu Aayurvedic on27.03.2017 and treated as business / trading loss. 6.2.5 Based on the above arguments, the assesse has contended that the no disallowance shall be made on account of write off loan of INR 8, 91, 78,685/-advanced to subsidiary in Indonesia as the same is in the nature of business expenditure which is revenue. The assessee has argued that • Siddhayu Aayurvedic invested in subsidiary and has advanced loan to the subsidiary to procure coal and to be able to sell coal which in turn can be utilized by Siddhayu Aayurvedic for the purpose of its business. • Siddhayu Aayurvedic and its overseas subsidiary were in the same line of business and their activities were inter-connected. Siddhayu Aayurvedic had set up subsidiary in Indonesia for the sole purpose of carrying out its power generation operations more economically and for the purposes of expansion. Siddhayu Aayurvedic had deep interest in the operations carried out by the subsidiary. • The loan has been extended to subsidiary out of commercial expediency and is incidental to the business of Siddhayu Aayurvedic as the funds were utilized by the resultant entity for the purpose of its coal mine. • Loan was given by Siddhayu Aayurvedic to subsidiary to avoid legal obligations from Bank and any ensuing threat of this account becoming a non-performing asset in a foreign jurisdiction heavily regulated by MAS (Monetary authority of Singapore). • The purpose of giving advances was in the course of and for the purpose of protecting the interests of business of the company. 6.2.6 The Assessee has next placed reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders v CIT 288 ITR 1, wherein it held that where a holding company borrows loan and advances it to its subsidiary and the same is used by the subsidiary for its business purposes or the amount was advanced to the subsidiary due to commercial expediency, the holding company was entitled to deduction of the interest on the said loan and argued that the expression for the purpose of business' includes any expenditure voluntarily incurred for commercial expediency though the expenditure may not have been incurred under any legal obligation, and that it is allowable as business expenditure, if it was incurred on grounds of commercial expediency 6.2.7 The assessee has further placed reliance on the following judicial precedents wherein it is held corporate guarantees are in the nature of commercial expediency and therefore loss on account of corporate guarantee given to subsidiaries is allowable business loss: • Essen (P) Ltd vs. CIT (65 (TR 625), Hon'ble SC. • CIT vs. Delhi Safe Deposit Co. Ltd (133 (TR 756), Hon'ble SC • CIT vs. Khambhata Family Trust (34 Taxman.com 36) Gujarat HC, • J.R. Patel & Sons (P) Ltd. vs. CIT (69 ITR 782), Gujarat HC • CIT vs. Rao Construction (P) Ltd. (33 Taxman.com 61 3), Gujarat HC • CIT vs. Williamson Magor & Co Ltd. (117 (TR 858), Cal. 6.2.8 Thus argued that the assessee has advanced interest free loan to its subsidiary for business / strategic consideration and the expenditure was incurred for preserving the asset by way of investment in the subsidiary due to its interest in the business. 6.2.9 In addition to the above, the Assessee has submitted that losses of any business carried on by the assessee would be allowable as loss under the head “Profits and gains of business or profession" under section 28 of the Act as long as it is a trading loss and the same is arising directly from the carrying on of the business and incidental to it and in this regard, relied on the decisions of Hon'ble Supreme Court in the case of Badridas Daga [1958] 34 ITR 10 and Ramchandar Shivnarayan [1977] 111 ITR 263 wherein it is held that If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. 6.2.10the assessee has also drawn our attention to decision of Jurisdictional Bombay High Court in the case of Cable Corporation of India. Ltd. [2016] 75 taxmann.com 117 wherein it is held that even a single/solitary transaction could by itself be classified as a business transaction and loans given to the subsidiary on account of business expediency so that the banks do not adopt legal proceedings against the assessee, was considered as loans given for the purpose of business. The assessee has also drawn our attention to decision to the decision in the case of ACE Designers Ltd vs. CIT [2020] 120 taxmann.com 321 (Karnataka High Court) wherein even investment on write off of shares was treated as revenue, and the decision in the case of Colgate Palmolive India Ltd. (ITA No.5485/Mum/2009) dated25 October 2011 (Mumbai Tribunal) wherein it has been held that if the investments made in the subsidiary are justified on the ground of commercial expediency and the Assessee has suffered any loss on such investment, the said loss can be considered as business loss and allowed as deduction while computation of profits. 6.2.11the assessee also place reliance on the decision of Madras High Court in the case of Crescent Films (P.) Ltd wherein it was held that in any business, credit is an indispensable part and advance of a temporary nature with or without interest is a common incidence of business, to contend that it is not a pre-set condition that the company shall be engaged necessarily in the business of borrowing and lending for the purposes of deduction.
6.2.12additionally the assessee has also placed reliance on following judicial precedents: CIT vs. Gillanders Arbuthnot and Co. Ltd (Supra) (Calcutta High Court) Even if an amount cannot be treated as a bad debt in the sense that it was not in the course of money lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of business. T.J. Lalwani vs. CIT (Supra) (Bombay High Court) It is not necessary that in order that the expenditure should be in connection with the carrying out of a business or incidental to it, it must be necessarily referable to any specific or direct transaction in the course of the carrying on of the business. Jackie Shroff vs. ACIT (Supra) (Mumbai Tribunal) When the moneys are advanced as measure of commercial expediency such advances are in the nature of business advances and the write off of such advances by the assessee under section 37(1) or section 28(i) of the Act. Gulf Oil Corporation Ltd v. ACIT (Supra) (Hyderabad Tribunal) Where the holding company and subsidiary were in the same line of business and their activities were inter-connected. The purpose of giving advances was in the course of and for the purpose of protecting the interests of business of the taxpayer. The advance made by the taxpayer was incidental to carrying on the business by the taxpayer itself and borrowed money should be considered to be utilized for the purpose of the business of the taxpayer. The advance been made in the normal course of business of the taxpayer when written off had to be held as revenue field and advances written off are allowable as deduction either as bad debts or as business loss, incidental to carrying on the business by the taxpayer. 6.2.13 To conclude the assessee has argued that where expenditure/ proposed activity forms part of existing business and no new asset is created or fructified, the expenditure on such account is revenue in nature and placed reliance on the following decisions in this regard: • Tamilnadu Magnesite Ltd V. ACIT [2018] 407 ITR 543 (Madras HC) • CIT v Graphite India Limited [1996] 221 ITR 420 (Cal HC) • CIT v Tata Robins Fraser Ltd [2012] 253 CTR 227 (Jharkhand HC) • Idea Cellular Ltd v Addl. CIT [2016] 76 taxmann.com 77 (Bom HC) • Binani Cement Ltd v. CIT [2016] 380 ITR 116 (Cal HC) 6.2.14 Thus, based on the above arguments, the Assessee has submitted that the assessee company has advanced loan to subsidiary for carrying out its trading operations indirectly by serving off its debt and if such loan were not provided by Siddhayu Aayurvedic, it would have impeded its current operational business and future business prospects too severely. And that the loan was issued for business objectives only, not to earn income or capital, and the loss was caused by fraud and non-fructification of assets used by Siddhayu Aayurvedic, therefore, write off of loan should also be allowed as business loss given that same is actual loss incurred by Siddhayu Aayurvedic on account of fraud and non-recoverability of the same. 6.3 Discussions and Directions of the DRP: 6.3.1 We have considered the submission of the assessee. The arguments advanced by the assessee can be summarized as under: • The loan was given in the course of business and to address the business need of the company. In as the funds were utilized by the resultant entity for the purpose of its coal mine. i.e. • Loan was given by Siddhayu Aayurvedic to PEC to avoid legal obligations from Bank and any ensuing threat of this account becoming a non-performing asset in a foreign jurisdiction heavily regulated by MAS (Monetary authority of Singapore).
Siddhayu Aayurvedic Research Foundation Pvt. Ltd. • In case, where Siddhayu Aayurvedic wouldn't have infused funds via loan, the Bank was threatening to invoke the corporate guarantee, personal guarantees of the promoters and the collateral that was offered as part of the security package to the Bank. • Since, Siddhayu Aayurvedic had given guarantee to the agreement between PEC and bank, it became the primary responsibility of Siddhayu Aayurvedic to ensure that PEC complies with its obligations and undertakings under the said agreement. 6.3.2 In order to justify the write off the loan of INR 8, 91, 78,685/- advanced to subsidiary in Indonesia, the assessee has placed on record various documents as discussed below I. Statement of meeting shareholders resolution of "PT Equity Commodities" Number: 29 concerning decrease of authorised capital from previously 75,200,000,000 Rupiahs (Rs. 75, 200, 000, 000) or 8 million United States of American dollar (US $ 8, 000, 000) to 28,200,000,000 Rupiahs ( Rs. 28, 200, 000, 000) 3 million United States of American dollars (US $ 3, 000,000) divided into 3 million (3, 000, 000) shares, each share has nominal value of 9400 Rupiahs ( Rs. 9,400) or one United States of American dollar (US $ 1) II. Comprehensive Mining Plan for South Block, Muara Bongo, Jambi, Indonesia of PT Equity Commodities, Indonesia prepared to fulfil the following objectives: 1. To evaluate the reserve Extech table by opencast method of mining 2. To suggest it technically safe and sound method of excavation 3. To draw the choir really outs showing progress of excavation and Kobe dump at 1 year interval up to year 5 for annual production of 0.6 to 0.7 Mt. of coal/and indicating the aid yet to be acquired for excavation, Kobe dump and also for construction/diversion of roads and streams. III. Terms and conditions communicated by Bank of India to M/s. P T Equity Commodities vide letter dated 09.06.2008 for Additional Term Loan of US $ 8.00 mns. And Working Capital by way of Revolving Loan for US $2.90 mns, sanctioned in terms and conditions as per Annexure-l enclosed. IV. Terms and conditions revised by Bank of India vide letter dated 17.07.2008 addressed to M/s. P T Equity Commodities. V. Sanction of banking facilities by Bank of India vide letter dated 18.11.2008addressed to PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn communicating change of properties offered as security, waiver of processing charges and accepting of alternate security in lieu of assignment of mining rights. VI. Loan agreement among PT Equity Commodities (the "Lender') and PT Dharam minerals Jaya and Akhirudin (the "Borrowers") dated 21 May 2008for provisioning of loan as under. VII. Various communications as regards reporting of fraud committed by Indonesian nationals in a foreign joint venture company in Indonesia. VII. Share Purchase Agreement by and between Siddhayu Aayurvedic Research Foundation Private Limited (as Seller) and PT Equity commodities (Target Company) and PT Prema Kencana Mitra Sejahetra (as Purchaser) dated 1st March 2017 conveying 1,65,0000 shares to the purchaser for a lump sum consideration of USD 5,000/- (USD Five Thousand). VIII. deed of assignment of business Debts between Siddhayu Aayurvedic Research Foundation Private Limited (Assignor) and PT Prema Kencana Mitra Sejahetra (Assignee) and PT Equity commodities (PTEC / Confirming Party) dated 15t March 2017 assigning an amount of USD 20, 24, 173.09 (Actual amount of Debt) being the business Debt appearing in the financials of PTEC / Confirming Party to the assignee for a consideration of USD 12,000/- (Debt Purchase Consideration). 6.3.3 The various arguments advanced by the assessee are now examined in the light of the above documents placed on record by the assessee. 6.3.4 At the outset the assessee has submitted that the loan was given in the course of business and to address the business need of the company. It is contended that a close business nexus exists between the assessee and PEC and the loan has been extended to PEC out of commercial expediency and is incidental to the business of the assessee. The assessee has also argued that during the Financial Year ('FY') 2005-06, the assessee diversified its business by entering into power sector and accordingly, the MOA was suitably amended and that promoters of the assessee company through their group entities decided to venture into thermal power plant generation along with renewable power generation too. It is claimed that the primary motive of venturing into Indonesia was to scout for additional “high grade" coal reserves to power the thermal plant that was proposed to be set up in India. However, we find that though the assessee has alleged that a firm M/s. Design Indure Pvt. Ltd. was entrusted with the task of preparing project report for the thermal power plant, there is not even an iota of evidence which may support the claim of assessee that it has ventured into thermal power plants generation. And even though the assessee claims that the assessee company has entered into an agreement with PEC to provide interest free loan to PEC to the extent of INR 8,99,55,565/- from the Financial years 2007-2015 for meeting its funding requirements i.e. to facilitate the PEC's liability to honour its repayment liabilities against the loan availed by it from Bank of India, Singapore Branch, there is no evidence which may suggest that the assessee has carried out any activity to set up any thermal power plants during this period. The financial statements of the assessee for the financial years 2007-2015 do not show any 'capital work in progress' towards setting up of any thermal power plants. We have noted that as per assessee own admission it is only after the term loan was squared off by PEC, the shareholders and Indonesian citizens of Nominee company PT DMJ, namely Mr. Akhirudin and Mr.Haloman Wahyudi Pasaribu denied every claim of PEC over the assets and profits of PT BBP and PT DJ, therefore, we find no justifiable reason for not carrying out any activity for setting up of thermal power plant prior to that. Merely relying on project report for the said thermal power plant would not justify the claim of assessee that it has diversified into thermal power plant generation. Therefore, we do not find any merit in the claim of the assessee that it invested in subsidiary and has advanced loan to the subsidiary to procure coal and to be able to sell coal which in turn can be utilized by the assessee for the purpose of its business. We also reject the claim of the assessee that the assessee had set up subsidiary in Indonesia for the sole purpose of carrying out its power generation operations more economically and for the purposes of expansion. For identical reasons, we also do not find any merit in the claim of the assesse that the assessee company and its overseas subsidiary were in the same line of business and their activities were inter- connected, more so when it is assessee's own admission that PEC is a start-up company formed for coal trading and consultancy, which in our view is an altogether different line of business. 6.3.5 Moreover, the activity of the thermal power plant generation is an altogether new source of income could not be allowed as revenue expenditure, more so when Wind Mill Project itself was itself altogether new source of income, the commissioning of the wind mill project is w.e.f. 30.09.2005 itself, hence the expenses claimed by the cannot allowed as revenue expenditure as it is not a case of expansion of business as claimed by the assessee. Observation of Bench: The observations of the Ld. DRP is self-contradictory in nature as the same is based on their evaluation of the facts of the matter, whereas the assessee never said so in any of its submissions. Rather, vide para 6.2.1“the assessee has submitted that the assessee company is engaged in the business of manufacturing and trading in pharmaceuticals and other products. During the Financial Year 2005-06, it diversified its business by entering into power sector and its promoters through their group entities decided to venture into thermal power plant generation along with renewable power generation too and hence decided to make investment in Indonesia. It is stated that the primary motive of venturing into Indonesia was to scout for additional "high grade" coal reserves to power the thermal plant that was proposed to be set up in India. Accordingly, during the F.Y. 2006-07, the assessee expanded overseas and acquired a controlling 55% equity stake in a coal mine located at Muara Bungo, Sumatra held by a company PT Bumi Bara Perkasa ('PT BBP') through a foreign JV called PT Equity Commodities (PEC'), the balance 45% shares were held by two individuals, Mr. Rajiv Behal (who was then a non-resident Indian) and Mr. Vinay Hariani (an Indonesian resident). It is stated that PEC is a start-up company formed for coal trading and consultancy. 6.3.6 In this regard, we may rely on the judgment of Karnataka High Court in the case of United Breweries Ltd. v. Assistant Commissioner of Income-tax, Central Circle-2(3), Bangalore [2015] 54 taxmann.com 8 (Karnataka) wherein during the financial year ending on 31-3-2001, the assessee made a claim of Rs. 1.42 crore as bad debts written off, including the amount of Rs. 1.28 crore which was given as a loan to the subsidiary company and it was held that “when the assessee is in the business of manufacture and sale of beer and liquor, if they have lent money to a sister-concern, may be a subsidiary, for the purpose of setting up a new line of business, it cannot be said that the money lent by them to the subsidiary company as an assistance could be characterized as an expenditure laid down and expended wholly and exclusively for the purpose of business of the assessee”. If the argument of the assessee is to be accepted, whenever a holding company lends money to a subsidiary company, then the holding company would be entitled to the said benefit. That is not the intent of law. Though there is no prohibition in law for starting subsidiary company, to get the benefit of Section 37, the moneys lent should be laid out and expended only for the purpose of business of the assessee. There should be a direct nexus between the assessee and the business for which the money is lent. If that connection is not there merely because the money was lent to a sister-concern or to a subsidiary company would not enable the assessee to claim such deduction. 6.3.7 It would also apropos to refer to the judgment of the jurisdictional High Court of Bombay in Trade Wings Ltd. v. Commissioner of Income-tax [1990] 185 ITR 267 (BOM.) wherein the assessee was engaged in business of travel agency and in the relevant assessment year it claimed deduction in respect of expenditure incurred on feasibility of a hotel project and the Hon'ble Tribunal held that the expenditure incurred in connection with the feasibility of a new business was not an admissible deduction, and the Hon'ble High Court affirmed the order of the order. It would also be apropos to refer to the order of the jurisdictional tribunal in Ge Global Sourcing India (P.) Ltd. v. Income-tax Officer Range 3(1) (4) [2017] 83 taxmann.com 39 (Mumbai - Trib.) wherein the assessee-company expanded the scope of its present business of infrastructure projects to manufacture and supply of train locomotives, etc., it is held that “The assessee company has amended the object clause in MOA during the relevant previous year and contemplates to enter into an entirely different line of business which is an altogether different source of income vis-a-vis existing business of the assessee company of rendering sourcing services to GE Global Sourcing LLC USA, by proposing to set up a manufacturing facilities for manufacturing and supplying locomotives to Indian Railways at Marhowra, Bihar. This was entirely a new line of business whereby new source of income would emerge and there was no connection with the existing business and source of the income of the assessee-company and hence Since, these are pre- operative and preparatory expenses which are incurred prior to setting up of business and prior to coming into an existence altogether new source of income as set out above, these expenses cannot be allowed as revenue expenditure as per provisions of Section 3 and 4 of the Act.”
6.3.8 Identical is the view in the following judgements: A. E.I.D. Parry (India) Ltd. v. Commissioner of Income-tax [2002] 257 ITR 253 (Madras) wherein Assessee was engaged in manufacture of certain products - Wanting to add a new product, it incurred expenditure by way of entering into a collaboration agreement for purchase of machinery over a period of time from 1975 to 1978 - Subsequently, it abandoned said project and claimed deduction on account of expenditure incurred for said project in assessment year 1981-82 it was held that That the expenditure was incurred for the purpose of setting up a new project. The expenditure had been incurred in the years prior to the assessment year in question. The assessee's case that it subsequently abandoned that project does not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure. The setting up of a new project was clearly in the capital field and not in that of revenue. The abandonment of that project is the abandonment of a project on which capital expenditure had been incurred. The expenditure incurred on that capital project was not something which could be regarded as revenue expenditure laid out exclusively and wholly for the purposes of business of the assessee as what the assessee was trying to start was a new business for the manufacture of a new product. The expenditure incurred therein was clearly capital expenditure and not revenue expenditure.
B. Tube Investments of India Ltd. v. Joint Commissioner of Income Tax, Special Range-1, Chennai [2019] 107 taxmann.com 72 (Madras) wherein Assessee was engaged in manufacture of narrow width strips in its unit set up at Chennai - During relevant year, assessee had set up a different unit at Haryana to manufacture wide width strips and door frames - Assessee claimed deduction of interest paid on borrowing made for setting up of Haryana unit, it was held that even though assessee was one company and it had set up a different unit at Haryana, since interest paid on borrowings pertained to Haryana unit, which was a new unit set up by same company, it could not be construed as a mere expansion of business existing at Chennai. 6.3.6 Therefore, the claim of the assessee that the loan has been extended to subsidiary out of commercial expediency and is incidental to the business of the assessee as the funds were utilized by the resultant entity for the purpose of its coal mine, is rejected. 6.3.7 The assessee has next contended that the Loan was given by the assessee to subsidiary to avoid legal obligations from Bank and any ensuing threat of this account becoming a non- performing asset in a foreign jurisdiction heavily regulated by MAS (Monetary authority of Singapore).
6.3.8 In this regard we consider it apropos to examine the various letters issued by Bank of India for Sanction of Banking Facilities to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $ 2.90 mn, i.e. I. Terms and Conditions communicated by Bank of India vide letter dated09.06.2008 addressed to M/s. P T Equity Commodities for Additional Term Loan of US $ 8.00 mn and Working Capital by way of revolving loan for US $2.90 mn sanctioned in terms and conditions as per Annexure-l enclosed. Il. Terms and Conditions revised by Bank of India vide letter dated 17.07.2008 addressed to M/s. P T Equity Commodities. III. Sanction of Banking Facilities by Bank of India vide letter dated 18.11.2008addressed to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn communicating change of properties offered as security, waiver of processing charges and accepting of alternate security in lieu of assignment of mining rights. 6.3.9 It is noted from the above documents that the principal security for Sanction of Banking Facilities by Bank of India vide letter dated 18.11.2008addressed to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn as per modified terms were as under [Page 467 of Paper Book]: (a) Assignment of mining and marketing of coal agreement between M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target Company). (b) Fiduciary deed of stocks of PT Bumi Bera Parkasa. (c) Fiduciary deed of movable assets of M/s. P T Equity Commodities. (d) Fiduciary deed of receivables of P T Equity Commodities. Both the entities i.e. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target company), continue to be in operation. 6.3.10 It is noted from Annexure-l enclosed with Terms and conditions communicated by Bank of India to M/s. P T Equity Commodities vide letter dated 09.06.2008 for Additional Term Loan of US $ 8.00 mn and Working Capital by way of Revolving Loan for US $2.90 mn, one of the terms under the head Covenants of the security and Guarantee is as under: The Security created pursuant to the above clause shall be subject to, and shall rank after, any charge created or to be created over any of the Borrower's stocks of raw material, semi-finished and finished, goods and consumable stores in favour of any bank or financial institution for securing any working capital credit facility made available by the bank or finance in a situation to the Borrower. It clearly emerges from the combined reading of the above clauses that, what was under threat was the profit-making apparatus of the entity M/s. PT Equity Commodities, which continues to be in operation and at no point of time the profit making apparatus of the assessee company was under any threat since both the entities i.e M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target company, continue to be in operation and continue to hold assets as held under principal security for Sanction of Banking Facilities. 6.3.11further, the collateral security for the credit facility, for which Equitable Mortgage was to be created at Nagpur Corporate Banking Branch, was as under [Page 468 of Paper Book]:
Sl.No. Owners as per Sale Deed Property Details Area M.V.Value of Property Rs. in lacs (USD Mn.)
(i) Joint names of Mr. Siddhesh Plot No.4 at 1260 Sq. 339(USD Suresh Kumar Sharma and M/s. Mouje TakliSim, 0.737Mn.) Jatiala Road,
Update Marketing Pvt. Ltd Nagpur Mtrs (il) Joint names of Ms. Kalpana Plot No.2 at 1408.07Sq. 378(USD Suresh Kumar Sharma and Mr. Mouje TakliSim, Mtrs 0.821Mn.) Suresh Kumar Ramnarayan Jatiala Road, Sharma Nagpur (lil) Joint names of Mr. Pranav Plot No. 1 at 1471.00Sq. 395(USD Suresh Kumar Sharma and M/s. Mouje TakliSim, Mtrs 0.859Mn.) Nova Marketing Pvt. Ltd Jatiala Road, Nagpur (iv) Mrs. Kalpana wife of Shri Suresh House No.300, 2380.00 226(USD Sharma B/A, WardNo.66, Sq.ft 0.491Mn.) City Survey No. (276.85Sq. 1548/1, Street Mt.) No.17/56, Henessey Road, Civil Lines, Mouje, Stiabuldi, Nagpur (v) Shri Pranav son of Shri Suresh House No.300, 2500 Sq.ft 237(USD Sharma B/A, WardNo.66, (232.25Sq. 0.515Mn.) City Survey No. Mt.) 1548/1, Street No. 17/56, Henessey Road, Civil Lines, Mouje, Stiabuldi, Nagpur
1US$=Rs.46.00 TOTAL 1575(USD 3.423Mn)
And, it is assessee own admission that it is primarily on the credit worthiness of the promoters of Siddhayu Aayurvedic supported by corporate guarantees of three Baidyanath Group companies coupled with collateral security, Bank of India-Singapore Branch, sanctioned credit facilities to PEC for a sum of USD 10.90 million for acquisition and working capital/ trade finance purposes of the aforesaid coal block. Therefore, what were next under threat were primarily the Siddhayu Aayurvedic Research Foundation Pvt. Ltd. assets of the promoters of Siddhayu Aayurvedic for which Equitable Mortgage was created at Nagpur Corporate Banking Branch to repay the loan. 6.3.12 Moreover, joint and several guarantees for US dollar 10.9 MN were to be signed by Mr. Suresh Kumar Sharma, Pranav Kumar Sharma, Mrs. Kalpna Sharma (wife of Suresh Kumar Sharma), Mr. Siddhesh Kumar Sharma, Mr. Rajiv Bahal and Mr. Vinay Hariani, besides several and independent corporate guarantee for an identical amount of US dollar 10.9 MN by Siddhayu Research Foundation Private Limited, PT Dharam Mineral Jaya and PT Bumi Bera Parkasa. 6.3.13 In view of the aforesaid, a conclusion can be drawn that no assets of the assessee company which could impact profit-making apparatus of the assessee were under threat for recovery of loan by Bank of India from the entity M/s. PT Equity Commodities. Therefore, the contention of the Assessee that the assessee company has advanced loan to subsidiary for carrying out its trading operations indirectly by serving off its debt and if such loan were not provided by Siddhayu Aayurvedic, it would have impeded its current operational Business and future business prospects too severely, is found to be untenable and hence is rejected. Observation of Bench: It is astonishing for us that the Ld. DRP and the AO observed the matter in isolation without applying any knowledge of banking industry. The reference of the communication by the bank taken by the authorities below are misplaced as the facility from the Bank of India, Singapore Branch were extended on the behest of strong credentials of the assessee company and its group leader Baidyanath Group and its promoters/shareholders and directors. M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target Company) has no value in the eyes of bankers and as the assessee wants to quit the same once for all, one has to understand their obligations and compulsions also keeping in mind the prevailing market/business practices. Based on above, we are not in agreement with the half cooked view taken by the revenue.
To further strengthen the facts of matter in favour of the assessee we placed our reliance on following judicial pronouncements by the Hon’ble Supreme Court as under:
[2024] 166 taxmann.com 319 (SC) PCIT v. Industrial Development Corporation of Orissa Ltd.
This Court has perused the order of the ITAT dated 25th September, 1997 in and 70/CTK/1994. The said appeals were filed indeed by the very same Assessee and the issue concerned expenditure incurred by the Assessee in the form of loans and advances to its subsidiaries which were subsequently written off. There again the issue was whether such amount could be legitimately claimed as business expenditure within the purview of section 37 of the Act? After the AO and the CIT (A) had disallowed the said amount as deduction, the Assessee approached the ITAT. Among the reasons that weighed with the ITAT for allowing the claim of the Assessee was that "Loans and advances, promotional activities, etc., in our opinion, are not outside the objects of the assessee-company as per its Memorandum of Association and hence the loss arising in writing off the loans and advances is liable to be treated as loss incurred in the course of carrying on its business and allowable as deduction in the years under consideration. Similarly, the expenditure incurred on the aborted projects in the wake of the decisions mentioned herein above, is allowable as revenue expenditure. As far as the year of allowability is concerned, neither the assessing officer nor the first appellate authority disputed the bona fides of the assessee in writing off the amounts in the year under consideration."
In arriving at the above conclusion, the ITAT relied on the decisions of the Supreme Court in CIT v. Amalgamation (P.) Ltd. [1997] 92 Taxman 132/226 ITR 188 and Essen (P.) Ltd. v. CIT [1967] 65 ITR 625 (SC) and of the Calcutta High Court in CIT v. Gillanders Arbuthnot & Co. Ltd. [1982] 9 Taxman 76/138 ITR 763.
In the present case, while the nomenclature used for the expenditure incurred may have been different during AYs 1989-90 and 1990-91 where it was 'loans and advances' which were subsequently written off, the fact remains that it was an irrecoverable expenditure as far as the Assessee was concerned. In the present AYs as well, what was paid as 'compensation' by the Assessee to the very same subsidiaries was to recoup the business losses of the subsidiaries, and was again irrecoverable as far as the Assessee is concerned. Considering that the expenditure was in the nature of moneys advanced to the subsidiaries, it cannot be said that there is no intimate connection between the Assessee and the two subsidiaries as far as the business activities are concerned. In that sense the decision of the ITAT to allow the expenditure cannot be said to be inconsistent with the dictum of the Supreme Court in Travancore Titanium Products Ltd. (supra).It must therefore be concluded that the expenditure incurred by the Assessee in the present cases is not only incidental to the business of the Assessee but also necessitated or justified by commercial expediency.
[2024] 164 taxmann.com 304 (SC) PCIT/CIT (A) v. Adadyn Technologies (P.) Ltd. It is not disputed that the assessee had invested money to develop a software platform for the Desktops. It is also not disputed that due to rapid change in the technology, the application sought to be developed by assessee had become obsolete and the assessee abandoned further development. In substance, assessee has incurred expenditure in these two years to develop software but due to change in technology, it had to abandon the product. In effect, it had lost money spent on this product. The product having been abandoned, the assessee shall not get any endure in benefit. The Tribunal has correctly analysed the facts in the impugned judgment and allowed the appeals. There is no ground to interfere with the findings recorded by the Tribunal. [Para 10] [2024] 162 taxmann.com 237 (SC) CIT v. Nirma Ltd.
At this stage, it is necessary to make a mention of the submissions made by learned senior standing counsel Shri Mehta that the Question in Tax Appeal No. 811 of 2013 pertains to interest on disallowance of Soda Ash Project whereas as far as the instant case is concerned, it relates to Soda Ash Project Expenses [other than interest expenses] and therefore, reliance of the Court while deciding such an issue on the decision of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206 (SC) would have no bearing.
Learned senior advocate Shri Soparkar has empathetically urged that both the authorities in the earlier year and in the present year had held the issue in favour of the assessee pointing out that this expenditure was in connection of expansion of the existing business. The Court on elaborate discussion had confirmed such a view of these authorities, and therefore, the interest expenses or otherwise, would get covered for the same being expenditure in connection with expansion of the business.
On due consideration of rival submissions, we notice at this stage that this Court, while adjudicating the said issue, had at length discussed the same to hold that the expansion since was of an existing business, the tests applied in case of Alembic Glass Industries Ltd. (supra) as also in case of Core Health Care Ltd. (supra) would have relevance and the borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus:— "The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of Rs.3.33 crores (rounded off) and lab project interest of Rs.12.27 crores (rounded off). The Assessing Officer questioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre-operative expenditure and secondly the assessee had capitalized such expenditure. The assessee carried the matter in appeal. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable. It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment. Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, inter-lacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called 'lab' for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and 'lab' so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming pre- operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence." 15.1 Question, as raised in the instant case, does not speak of the interest. In light of the observations made earlier, decision relied upon by this Court; this would be clearly covered and needs to be held in favour of the assessee. [2023] 155 taxmann.com 229 (SC) PCIT v. Wadia Ghandy& Co.
The Respondent-Assessee is a partnership firm. The assessee paid certain amount to a retired partner on the basis of the provisions made in the partnership deed. The deed provided that the partner whose share is determined on account of resignation, retirement or death, shall also be paid by the continuing partners of the firm, a sum equivalent to one and a half times the share of the profits and remuneration received by him in the last accounting year immediately preceding the date of determination of his share. This was primarily based on the premise that the partner of the firm during his tenure would render service to the clients for which bills may have been raised, but payments in full may not have been received and would be received after the partner retires, dies or resigns. The assessee claimed such payment by way of a deductible expenditure. The revenue objected the same. The tribunal by the impugned judgment by relying upon the judgment of this Court in case of CIT v. Crawford Bayley & Co. [1977] 106 ITR 884 (Bom.), held in favour of the assessee, upon which the present Appeal has been filed.
Learned Counsel for the revenue fairly pointed out that such an issue had come up before this Court on earlier occasions, where the revenue's Appeals have been dismissed. We may refer to one recent order dated 12/02/2019 passed by this Court in Income-tax Appeal No. 1696/16. While dismissing the revenue's Appeal, the Court made following observations; "2. The respondent assessee is a Partnership Firm engaged in providing legal services. During the course of scrutiny of the assessed return for the assessment year 2007- 2008, the Assessing Officer objected to the claimant for deduction of a sum of Rs. 3.68 Crores which was paid by the assessee firm to its retired partner. The assessee pointed out that the payment was made in terms of clause 23.5 contained in partnership agreement. By further elaborating the stand before the Assessing Officer, the assessee pointed out that the amount was paid by way of compensation to the outgoing partner towards the appreciation in the value of the immovable properties held by the assessee firm to the extent of his share of the partnership and also for the work done during the period of partnership, which was in progress on account of the fact that the work had not been completed and therefore the clients could be charged for the same. The assessee pointed out that in the partnership agreement itself there was formula to compensate the outgoing partner for his share of those profits of the firm in relation to the period during which he was a partner and which profits had not been realized by the firm on account of non- completion of the work during the tenure of the partner. The assessee firm further pointed out that it would be paying taxes on the entire fees received by it in the year in which the bills would be raised. This was also including capital gains on the sale of the immovable properties, without claiming any depreciation in those years in respect of which payments to the outgoing partner were made.
The assessing officer did not accept the stand and disallowed the expenditure. The assessee carried the matter in appeal. Tribunal by impugned judgment referred to and relied upon the earlier decisions on the point to accept the assessee's stand. It appears that the assessee had taken both the grounds namely, that the expenditure was made to discharge the obligation undertaken by the firm as per the relevant clause of the partnership agreement and further that essentially this was a case of diversion of income at source.
We notice that similar questions have been considered by this Court on numerous occasions. In case of Commissioner of Income-tax v. Mulla and Mulla and Craigie, Blunt and Caroe reported in 190 ITR 198 the concept of diversion of income at source by overriding title was discussed at length under somewhat similar circumstances. The Court made the following observations:- "In the present case, the assessee-firm was under a legal obligation in terms of the deed of partnership dated September, 1, 1967, and the clauses in the two subsequent partnership deeds to pay out standing fees for the work done up to and during the period when the deceased partners were partners. This was also an instance of the source of income being subject to an obligation. We are in agreement with the Calcutta decision and hold that the amounts so paid by the assessee-firm to the heirs of the deceased partners cannot be assessed as the income of the firm."
The decision in the case of Mulla and Mulla and Craigie, Blunt and Caroe (supra) was followed by this Court in Income-tax Appeal No. 2277 of 2013 in the case of Commissioner of Income Tax- 11, Mumbai v. M/s Kanga & Co. (ITXA 2277/2013) decided on 1st February, 2016. The Court observed as under:— 3. "The only issue in this appeal is the exclusion from the income of the firm, the amounts relatable to the retired/deceased partner/s share by diversion on account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of the partnership deed.
we find that the impugned order of the Tribunal has dismissed the Revenue's appeal by inter alia recording the fact that in the order of the Commissioner of Income-tax (Appeals) (CIT A)) had only followed the consistent view of the Tribunal in the assessee's own case for the earlier Assessment years. In fact, the impugned order of the Tribunal has further placed reliance upon the decision of this Court in Income-tax Appeal No. 860 of 2009 dated 19/6/2009 rendered in the respondents-assessee's own case as well as decision of this Court in the case of CIT v. Mulla and Mulla and Craigie, Blunt and Caroe, (1991) 190 ITR 198 while dismissing the Revenue's appeal.
In view of impugned order of the Tribunal merely following the orders of this Court, we are of the view that the appeal does not raise any substantial question of law." 6. It is not necessary to refer to long line of decisions of this Court and other High Courts taking a similar view in the similar circumstances. Only to summarize, undisputed facts are that the partnership firm envisaged payment to an outgoing partner on the basis that the partner would have rendered service during his tenure as a partner of the firm but could not enjoy the fruits thereof on account of the fact that the work having remained incomplete, the concerned client had not been billed for the work already done. In similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. No substantial question of law arises for our consideration. The income tax appeal is dismissed." [1961] 41 ITR 414 (SC) Commissioner of Income-tax v. Royal Calcutta Turf Club Ltd The respondent is an association of persons whose business is to hold race meetings in Calcutta on a commercial basis. It holds two series of race meetings during the two seasons of the year. The respondent does not own any horses and, therefore, does not employ jockeys but they are employed by owners and trainers of horses which are run in the races. It is a matter of some importance to the respondent that there should be jockeys available to the owners with sufficient skill and experience because the success of races to a considerable extent depends upon the experience and skill of a jockey who rides a horse in a race. Because it was of the opinion that there was a risk of the jockeys becoming unavailable and that such unavailability would seriously affect its business which might result in its closing down the business, the respondent considered it expedient to remedy that defect. Therefore, in 1948, it established a school for the training of Indian boys as jockeys so that after their training they might be available for purposes of race meetings held under its auspices. The school, however, did not prove a success and after having been in existence for three years it was closed down. During the year ending March 31, 1949, the respondent spent a sum of Rs. 62,818 on the running of its school and claimed that amount as a deduction under section 10(2)(xv) of the Income-tax Act and also in the assessment under the Business Profits Tax Act, for the chargeable accounting period ending March 31, 1949. This claim was disallowed by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner and also by the Income-tax Appellate Tribunal. At the instance of the respondent the question already quoted was referred to the High Court and was answered in favour of the respondent. This appeal is brought by special leave against that judgment. The decision under the Business Profits Tax Act will be consequential upon the decision of the deduction under the Income-tax Act. The Tribunal found that it was not the business of the respondent to provide jockeys to owners and trainers, that the jockeys trained in the respondent's school were not bound to ride only in the races run by the respondent and that the benefit, if any, which accrued was of an enduring nature. It also found that the respondent had been conducting race meetings since long, that it was not the case of the assessee that if it did not train jockeys they would become unavailable and that the mere policy of producing efficient Indian jockeys was not a sufficient consideration for treating the expenditure as one incurred for the business of the respondent. For these reasons the expenditure was disallowed. Before the Appellate Assistant Commissioner, it was contended by the respondent, that the reason for incurring the expenditure was "to promote efficient Indian jockeys" and it was in the interest of the respondent to see that the races are not abandoned on account of the scarcity of jockeys. In the order of the Tribunal it is stated that this was not the case of the respondent, and, therefore, when the respondent wanted paragraph 5 of the statement to be substituted by the following: "It was the case of the assessee that unless it trained Indian jockeys, a time may come when there may not be sufficient number of trained jockeys to ride horses in the races conducted by the assessee," the Tribunal did not agree to do so. Counsel for the appellant raised three points before us: (1) The question as to whether an item of expenditure is wholly and exclusively laid out for the purposes of business or not is a question of fact; (2) the connection between an expenditure and profit-earning of the assessee should be direct and substantial and not remote; and (3) to be admissible as revenue expenditure it should not be in the nature of a capital expense, i.e., it should not bring into existence an asset of an enduring nature. As to the first question this court has held in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 that "though the question must be decided on the facts of each case, the final conclusion is one of law. "In Commissioner of Income-tax v. Chandulal Keshavlal & Co [1966] 38 ITR 601. This court said:
"Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. Commissioner of Income-tax' [1951] 20 ITR 1 ). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessee's business and there is evidence to support this finding." But those observations must be read in the context. In that case the assessee firm was the managing agent of a company and at the request of the directors of the latter agreed to accept a lesser commission for the year of account than it was entitled to. It was found by the Appellate Tribunal there that the amount was expended for reasons of commercial expediency and was not given as a bounty but to strengthen the managed company so that if its financial position became strong the assessee would benefit thereby, and on the evidence the Tribunal came to the conclusion that the amount was wholly and exclusively for the purpose of such business. It was on this evidence that the expense was held to be wholly and exclusively laid out for the purpose of the assessee's business and this was the finding referred to. In that case the Tribunal had not misdirected itself as to the true scope and meaning of the words "wholly and exclusively laid out for the purpose of the assessee's business." In the present case the Income-tax Appellate Tribunal had misdirected itself as to the true scope and meaning of these words. In our opinion, in the circumstances of this case, it cannot be said that the finding of the Tribunal was one of fact. The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meeting would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessary calibre available. Therefore, any expenditure which was incurred for preventing the extinction of the respondent's business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction. This finds support from decided cases. In Commissioner of Income-tax v. Chandulal Keshavlal& Co [1960] 38 ITR 601. This court held that in order to justify a deduction the disbursement must be for reasons of commercial expediency; it may be voluntary but incurred for the assessee's business; and if the expense is incurred for the purpose of the business of the assessee it does not matter that the payment also ensures to the benefit of a third party. Another test laid down was that if the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business it is immaterial that a third party also benefits thereby. In British Insulated and Helsby Cables v. Atherton [1926] AC 205 Viscount Cave, L.C, held that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade. In a case more recently decided, Morgan v. Tate & Lyle Ltd. [1954] 26 ITR 195, the assessee company was engaged in sugar refining business and it incurred expenses in a propaganda campaign to oppose the threatened nationalisation of the industry. It was held by the House of Lords by a majority that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on its business and earn profits, the expense was an admissible deduction being wholly and exclusively laid out for the purpose of the company's trade. Lord Morton of Henryton said: "Looking simply at the words of the rule I would ask: ‘if money so spent is not spent for the purposes of the company's trade, for what purpose is it spent?' If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade." See also Strong & Co. v. Woodifield [1906] AC 448the observations of Lord Davey; and Smith v. Incorporated Council of Law Reporting [1914] 3 KB.
Counsel for the appellant relied upon the judgment of the Privy Council in Ward & Co. Ltd. v. Commissioner of Taxes [1923] AC 145, but that decision proceeds on a different statute where the words were of a very restrictive character, the words being: "... Expenditure or loss of any kind not exclusively incurred in the production of the assessable income derived from that source …" This case was distinguished in Morgan v. Tate & Lyle Ltd [1954] 26 ITR 195. On the ground, that the language of the New Zealand statute was much narrower than the language of rule 3A in England. Reference was also made, by the appellant to Boar land v. Kramat Pulai Ltd [1953] 2 All E.R. 1122. In that case directors of three companies engaged in tin mining in Malaya incurred expenditure on printing and circulating to shareholders a pamphlet containing remarks of the chairman of the company. The pamphlet was an attack on the policy and acts of the socialist Government and it was held that the question whether the money was wholly and exclusively laid out or expended for the purpose of trade within the meaning of rules applicable to the question was one of law, but on a consideration of the question it was held that the expenditure was not solely incurred with that object. It is not necessary to discuss that case at any length because what was held in that case was that the pamphlet was not wholly and exclusively for the purpose of the company's trade. Applying the law, as laid down in those cases, to the present case the conclusion is that the amount in dispute was laid out wholly and exclusively for the purpose of the respondent's business because if the supply of jockeys of efficiency and skill failed the business of the respondent would no longer be possible. Thus the money was spent for the preservation of the respondent's business. As to the third point there is no substance in the submission that the expenditure was in the nature of a capital expense because no asset of enduring nature was being created by this expense. In our opinion, the High Court has rightly held that the expenditure claimed was one which was wholly and exclusively laid out for the purpose of the respondent's business. It was to prevent the threatened extinction of the business of the respondent. In the result this appeal is dismissed with costs.
In view of the above ground nos. 2, 3 and 4 raised by the assessee are allowed and the AO is directed to allow the bad debts amounting to Rs. 8, 91, 78,685/- claimed by the assessee u/s. 37(1) of the Act.
Ground Nos. 5, 6 and 7 are not pressed by the assessee, hence the same are dismissed.
Ground No. 8 is subject to verification and consequential in nature, hence the AO is directed to verify the same in view of directions (supra).
Siddhayu Aayurvedic Research Foundation Pvt. Ltd. 9. Ground Nos. 9 and 10 are premature as the initiation of penalty itself cannot be a matter of appeal before the Bench, hence these grounds are dismissed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 24th September, 2024.
Sd/- Sd/- (ANIKESH BANERJEE) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 24/09/2024 Dhananjay, Sr. PS