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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT(A)-10, Mumbai, in appeal No. CIT(A)-10/ITO-5(3)(4)/225/2013-14 dated 03-02- 2015. The Assessment was framed by ITO Ward-5(3)(4), Mumbai for the A.Y. 2010-11 vide order dated 26-03-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of bad debts or business loss. For this assessee has raised following two grounds: - “1. Based on the facts and circumstances of the case and in law, the lower authorities have erred in disallowing bad debts amounting to Rs.2,00,00,000/-
Without prejudice to the above, based on the facts and circumstances of the case and in law, the Star Gold P. Ltd. (A.Y:2010-11) lower authorities have erred in not allowing the amount of Rs. 2,00,00,000/- as a business loss.”
However, now the assessee has also raised additional ground regarding this claim of bad as alternatively as business loss and for this he raised the following ground:-
1. Without prejudice and in the alternative the Income-tax Officer as well as the Commissioner(Appeals) erred in not allowing the loss of Rs.2,00,00,000/- as Short term Capital Loss
Briefly stated facts are that during the course of assessment proceedings, assessee stated that it is a private limited Company and a subsidiary of Kiya Lifestyle Pvt. Ltd., who is holding majority of 99.97% shares. The assessee claimed that it is not in the business of Gold and from the beginning company has been in the Real Estate business. The assessee stated that the company has acquired premises in court auction for sum of Rs. 5.9 crores and building is constructed on MIDC leased plot. This building has been leased out to Fullerton India Credit Limited and the income between companies for use of premises was offered to tax as income from house property and income from amenities & facilities has been accounted for as business income. Assessee company was incorporated in February 2004 and drawn memorandum and article of association. It was explained that out of the object clause of the Memorandum of association, clause No. 72 stated that it was engaged in acquiring, developing and selling the properties and this was pointed out to the AO in the note. The assessee made an advance for business purposes as the company acquired tenancy rights from Lorance Investments and Trading Limited as the company was awarded contract to develop real estate business. As per Memorandum of Understanding, the consideration of the transaction was at Rs. 8.11 crores against which a sum of Rs. 2 crores were paid as advance to the state Govt. pursuant to MOU dated 18-01-2008. This payment was made by account payee Star Gold P. Ltd. (A.Y:2010-11) cheque dated 19-01-2008 but the transaction could not be completed and company decided to write off this amount pursuant to the resolution of Board dated 22-03-2010. Accordingly, the amount was written off after given legal notice to the State Government. The assessee claimed this as bad debts. The AO during the course of assessment proceedings held that the MOU dated 18-01-2008 entered into agreement between the assessee and lorance Investment and Trading Limited is for the purchase of shares and not for purchase of real estate. The AO also noted that assessee is not in the business of real estate rather advance is given towards purchase of shares of the company. He also noted that the assessee had not carried out the business of finance. For this he recorded the fact in Para 7.1 and 7.2 as under: - “7.1 In view of the foregoing findings, first of all, the assessee cannot be said to be a dealer in “Real Estate”. Assuming without admitting for the time being that the assessee is a dealer in “Real Estate”, even then, it cannot be said that the advances were given for developing and selling properties. The fact remains the fact that it were given towards the purchase of share of the company.
7.2 The assessee at no point of time carried out any of banking business or money lending business and hence in the instance case, the advances given by the assessee, though it could be in the ordinary course of business, yet cannot be claimed as allowable revenue expenditure, abiding by the provisions of sub section 2 to section 36(1)(vii).”
Accordingly, he disallowed the claim of bad debt of Rs. 2 Crores. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO, vide para 5.2 of his appellate order as under: - Star Gold P. Ltd. (A.Y:2010-11) “5.2. The only substantial issue in this appeal is regarding the deduction claimed by the appellant u/s 28 / 37 of T.T. Act regarding the bad debt / loss of Rs.2 crores in connection with purchase of shares. It is the claim of the appellant that the advance in question was given to the concerned party, namely M/s Lowance Investments and Trading Ltd. for the purchase of shares with the intention of acquiring the rights in the property belonging to the said company. As the transaction could not mature the appellant surrendered the said advance of Rs.2 crores which was claimed as a deduction being related to business of real estate. On the other hand, the AO has observed that the assessee was never doing business of real estate which is evident from the return of income where it has mentioned its code No.0714, which stands for service sector/ others, whereas for business of real estate one has to show the code no.0401 to 0404. Besides it, the advance of Rs 2 lakhs was given by the assessee for purchase of shares of the company so it is on capital account. The AO has also observed that though the memorandum of agreement between the assessee and the said company contemplates for the actions, if the transaction of purchase of shares is not matured, however, the assessee has not made any effort to get back the said advance of Rs.2 crores, rather claimed it as a business loss, which is not allowable either as a bad debt or allowable revenue expenditure.
After considering the rival submission, I do not agree with the contention of the appellant that the unilateral surrender or non-recovery of the advance, admittedly given for part payment of purchase of shares of a company, can be claimed as bad debt or Page 4 of 14 Star Gold P. Ltd. (A.Y:2010-11) revenue expenditure, particularly under the peculiar facts of the instant case, where neither the appellant is a dealer of shares nor it is doing the business of real estate. The advance in question was made for investment in shares, therefore, even if such advance becomes dead and non-recoverable, even then it will be a loss on capital account which cannot be claimed as business loss u/s 28 I 37 as claimed by the appellant. The heavy reliance of the appellant on the decision of M/s Rose Services Apartment India P. Ltd. 326 ITR 100 (Del) is misplaced because the ratio of that case is not applicable on the facts of the appellant, because in the said case it was the finding of the 1TAT that the business of the appellant was real estate business who had shown the land and flat purchases as stock-in-trade, whereas in the instant case the appellant has income only from house property and it is not doing business of real estate. Under these circumstances, the AO has correctly denied the claim of the appellant for business loss of Rs. 2 crores, which is confirmed.”
Aggrieved, now assessee is in second appeal before Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. We find the fact that the assessee company is in the business of real estate, i.e. acquiring land, developing it and putting it on rent and/or sell the property. During the year under consideration the assessee had let out two floors in the building belonging to it along with amenities. The rent income was shown under the head 'Income from house property' and the compensation for amenities is shown as 'Business income' and the same is accepted on completion of the assessment. M/s. Escol Electromech Ltd. was having tenancy rights in the structure admeasuring about 12,000 sq.ft. on plot of land situated at Page 5 of 14 Star Gold P. Ltd. (A.Y:2010-11) Kriplani Industrial Estate, Saki Vihar Road, Andheri (East). Another company known as Lorance Investments & Trading Limited was holding 32,048 equity shares of Rs.100/- each out of total capital of 35,000 shares of Escol Electromech Ltd and in this way Lorance was holding 91.57% shares of Escol Electromech Ltd. Accordingly, to acquire the aforesaid tenancy rights admeasuring about 12,000 sq.ft. in Kriplani Industrial Estate, the assessee company entered into the Memorandum of Understanding dated 18th January, 2008 with Lorance whereby the assessee company agreed to purchase the said 32,048 equity shares of Rs.100/- each of Escol Electromech Ltd. for a total consideration of Rs.8,11,00,000/- subject to fulfilling certain conditions recorded in the said MOU. Pursuant to the execution of the aforesaid MOU, the assessee company paid a sum of Rs.2,50,00,000I- to Lorance Investments & Trading Limited as recorded therein. As recorded in the aforesaid MOU, prior to 1964, one Mr. Ramnikial M. Shah was the monthly tenant of the said premises admeasuring about 12,000 sq.ft. which was owned by G. Kriplani & Ors. who were the Landlords.
The background facts are that as per tenancy agreement dated 20.06.1960, Mr. Ramnikial M. Shah, the tenant, was entitled to transfer his tenancy rights or sublet the premises without the permission of the landlords. Accordingly, in 1964, Mr. Ramniklal M. Shah had transferred his tenancy rights in favour of Escol Electromech Ltd. by handing over possession of the said premises to the said company. Against the aforesaid action of Mr. Ramnikial M. Shah, G. Kriplani & Ors. filed a suit in the Small Causes Court at Bombay which was dismissed and the court held that Escol Electromech Ltd. is in possession of the said premises and therefore, it is deemed direct tenant of G. Kriplani & Ors. and as such the said company was entitled to the tenancy right of the said premises. Thereafter, the heirs of Mr. Ramniklal M. Shah filed a suit against Escol Electromech Ltd. in the Small Causes Court in the year 1994 for vacating premises on various grounds. The said suit of heirs of Mr. Ramnikial M. Shah was pending and therefore, one of the conditions of the assessee Page 6 of 14 Star Gold P. Ltd. (A.Y:2010-11) company with Lorance Investments & Trading Limited was to settle the said suit in respect of the said premises before the transaction of purchase of shares of Escol Electromech Ltd. is completed. As Lorance Investments & Trading Limited did not settle the said suit with the heirs of Mr. Ramnikial M. Shah even after more than two months from the date of the MOU, the assessee company asked to refund of the said consideration of Rs.2,50,00,000I-. As the assessee company pressurized Lorance for refund of the aforesaid amount, a sum of Rs.50,00,000I- was returned by Lorance to the assessee company. Thereafter, Lorance did not refund any further amount and therefore, the assessee company gave a legal notice to Lorance on 16.05.2008 for refund of Rs.2,00,00,000I- with interest thereon. As Lorance did not respond to the said notice, the assessee company gave another legal notice on 22.08.2008 to Lorance for refund of the balance sum of Rs.2,00,00,000I-. Thereafter, the assessee company pursued the matter with Lorance and its director for refund of the money as they had shown their inability to settle the dispute with legal heirs of Mr. Ramniklal M. Shah. In these circumstances, the Board of Directors of the assessee in their meeting held on 22.03.2010 concluded that as the Director of Lorance Investments & Trading Limited, namely, Mr. Percy F. Lakadia, is absconding and hence, the said investment of Rs. 2,00,00,000/- should be written off as lost because there was no chance of recovery.
In view of the above facts, we find that the only reason given by the CIT (A) in respect of the confirming the action of the AO in disallowing the claim of business loss u/s.37 of the Act is that the assessee is not doing the business of Real Estate and the advance was made for investment in shares. In view of trhe given facts of the case, we are of the view that the findings of CIT(A) is contrary to the MOU arrived at between Lorance Investments & Trading Limited and the assessee, whereby the assessee company had agreed to purchase 32,048 shares of Rs.100/- each of Escol Electrornech Ltd. held by Lorance Investments & Trading Limited for a sum of Rs.8. 11 crores. In the recital portion of the MOU, the history Page 7 of 14 Star Gold P. Ltd. (A.Y:2010-11) of the premises acquired by Escol Electromech Ltd. is narrated which reads as under:
“(E) Company is a monthly tenant of the structure admeasuring about 12,000 sq. ft. at a monthly rent of Rs. 12,500/- at Kriplani Industrial Estate, Chakala, Mumbai (hereinafter referred to as “the said premises”) more particularly described in the second schedule written herein under; "(F) Company had acquired the tenancy rights of the said premises from one Mr. Ramnikial Mangaldas Shah who was seized, possessed of the said premises as monthly tenant from G. Kriplani & Others, the landlords under a tenancy agreement dated 20t1 June 1960. As per the said tenancy agreement there was no bar or restriction on the erstwhile tenant to transfer or sublet the said premises. In or about 1964 said Ramnikial Mangaldas Shah had put the company in possession of the said premises as monthly tenant and since then the company is in use, occupation and possession of the said premises. The heirs of G. Kriplani & Others had filed a suit in the Small Causes Court being RAE & R Suit No.733/2376 of 1988 against Ramniklal Mangaidas Shah and the company, wherein the Hon'ble Court has held that since the company is in possession of the said premises they are the deemed direct tenant of G. Kriplani & Others and as such the company is entitle to the tenancy rights of the said premises; "(0) Rarnniklal M. Shah has also filed a suit against the company in the Hon'ble Small Causes Court being Suit No. RAE & R 306 / 881 of 1994 against the said company on various grounds including the ground of non-payment of rent. Company has subsequently paid the arrears of the rent as per the direction of Star Gold P. Ltd. (A.Y:2010-11) the Hon'ble Court and are presently depositing monthly rent in the Hon'ble Court till date; "(H) Transferor has represented to the Transferee that in view of the order passed by the Hon'ble Small Causes Court in RAE & R Suit No.733/2376 of 1988 declaring the company as direct tenant, the heirs of deceased Rarnniklal M. Shah have approached company for settlement of disputes;"
The operative portion of the MOU in paras 5 and 6(a) states as under:
5. Transferor shall at or before the completion of the transfer of said shares satisfy Transferee that the heirs of Ramnikial M. Shah has either withdrawn or settled the RAE & R suit No.306 / 881 of 1994 pending in the Small Causes Court in respect of the premises described in the Second Schedule written hereunder and that there is no other claim by way of charge, lien, possession, lease, inheritance, attachment before or after judgement or any order prohibiting the transfer of tenancy of the said premises.
"6. The Transferor hereby declares that:
(a) Save and except the aforesaid litigation in respect of the said premises, there is no other litigation or proceeding pending in any court of law against the company or their tenancy rights in the premises."
In view of the above terms recorded in the MOU prove beyond doubt that the assessee company had agreed to purchase the shares of Escol Electromech Ltd. from Lorance Investments & Trading Limited only for the purpose of acquiring 12,000 sq.ft. premises in Kriplani Industrial Estate, Chakala, Mumbai and the said property was to be acquired for Page 9 of 14 Star Gold P. Ltd. (A.Y:2010-11) the purpose of carrying on the business of developing the same. And main terms of the MOU of settling dispute with the heirs of Mr. Ramnikial M. Shah could not be complied with by Lorance Investments & Trading Limited and therefore, the assessee company had claimed refund of the investment made by it of Rs.2 Crores. It has been proved that this amount of Rs.2 Crores could not be recovered till 31.03.2010 by the assessee from Lorance Investments & Trading Limited as the director, Mr. Percy Lakadia was absconding and therefore, the Board of Directors of the assess.ee company decided to write off the said amount in its books of account. The said investment for purchase of shares of Escol Electromech Ltd. was made by the assessee company in the course of the business of developing a property and therefore, the assessee company has incurred a business loss on write off of the said investment.
Before us Ld. Counsel for the assessee relied on the co-ordinate bench decision of Mumbai C Bench in ITA 5485/mum/2009 for the AY 2003-04 in the case of DCIT Vs Colgate Palmolive India Limited, wherein the bench held as under:-
7. We find that Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer than the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee’s own business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot’s only Page 10 of 14 Star Gold P. Ltd. (A.Y:2010-11) customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interests. When the grant of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business deduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as ‘investment’ per se does not, and cannot, negate the fact that the such investments are made on the grounds of commercial expediency. Similarly, the head under which dividend income is assessed to tax does not Page 11 of 14 Star Gold P. Ltd. (A.Y:2010-11) also affect determination of question whether the shares are purchased on account of commercial expediency or not. It is only elementary that dividend income, whether the shares are held as investments or as any other asset, is always taxable under the head ‘income from other sources’. Therefore, nothing really turns on Assessing Officer’s emphasis on the fact that the Camelot shares were shown as investments in the balance sheet and that dividend income from these shares is taxable as income from other sources. We have also noted that as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction. Hon’ble Supreme Court’s judgment in the case of Patnaik & Co (supra) deals with a situation in which the assessee had subscribed to certain Government security but incurred a loss on sale of that security. The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of Page 12 of 14 Star Gold P. Ltd. (A.Y:2010-11) carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon’ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT Vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which “ from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT(A) and decline to interfere in the matter.”
We find from the facts of the above case that these are identical with that of the present assessee before us. In view of facts narrated Page 13 of 14 Star Gold P. Ltd. (A.Y:2010-11) above and the precedent relied on the issue by the assessee, we allow the claim of loss as business loss and this issue of assessee’s appeal is allowed.
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 07-07-2017.