STAR GOLD P.LTD,MUMBAI vs. ITO 5(3)(1), 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/-

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

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).”

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.

“(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;"

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.

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.”