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order dated 24/08/2012 of the CIT (A)-18,Mumbai the Assessing Officer (AO)has filed the present appeal.Assessee-company,engaged in the business of trading and manufacturing of surgical implants,filed its return of income on 9/09/2008, declaring total income of Rs. 71.83 lakhs.Later on, a revised return of income was filed on 30/09/2009. The AO completed the assessment on 27/12/2011, u/s.143 (3) of the Act, determining its income at Rs. 2.28 crore. 2.Effective ground of appeal is about deleting the disallowance of Rs. 1.55 crore made by the AO under the head advance and loans given by the assessee to its 100% subsidiary.During the assessment proceedings, the AO found that the assessee had written off a sum of Rs. 1, 55,78,489/-,being amounts advanced to its 100%wholly owned subsidiary (WOS) is a working capital loan.He directed the assessee to justify the claim. After considering the same, the AO observed that the loans and advances given by it to the WOS, a foreign company, could not fit within the parameters laid down by the provisions of section 36(1)(vii)/36(2)of the Act,that the disputed amount was not of revenue nature and had never been considered for tax in the hands of the assessee.Referring to the judgment of Premier Industries (257ITR 762),he held that same would bear the nature of quasi equity, that they were synonymous of investment equities and were capital in nature, that the writing off of capital asset would give rise to capital loss, that same was not admissible under the provisions of chapter IVD of the Act, that the loan advanced to the subsidiary was reflected in the Balance sheet in Schedule- 6.Finally, he held that loans and advances amounting to Rs.1.55 crores did not qualify for deduction and same was to be added to the total income of the assessee.
6859/M/12(09-10) M/s. Sushrut Surgicals Pvt.Ltd.
3.Aggrieved by the order of the AO, assessee preferred an appeal before the First Appellate Authority (FAA).Before him it was argued that as per Clause 10 of the Memorandum of Association the assessee was authorized to carry on its business through a branch/a 100% WOS, that it had powers to finance 100% WOS or to guarantee its liability to achieve the desired objective of carrying on its business of manufacturing and trading of surgical implants, that in order to tap the overseas market a 100% German WOS was registered in Germany in the year 2003, that the business of the assessee with the WOS were closely inter- dependent, that for the AY.s 2005-06 to 2008-09 all the purchases by the WOS were made from the assessee, that the products bought from the assessee were processed by the WOS and were sold in Germany,WOS had no other purchaser other than the assessee, that the goods sold by it were only from the assessee, that the assessee had offered to tax the profit on the sale to WOS, that there was direct and immediate nexus of assessee with its subsidiary, that the advances made by the assessee to WOS had a character of revenue as far as the assessee is concerned, that the sale for the assessee and consequential sale of the assessee in the European market would not have been possible without such an advance, that the business of subsidiary suffered losses from the AY.2005-06 to 2008-09,that over the period assessee under business compulsions had to finance working capital of the subsidiary that accordingly it granted interest bearing 6% loan to the tune of Rs.22.43 lakhs and advance of Rs.1.33 crores, that the advance had been given for business exigencies, that the expenditure in question was fully revenue in nature, that the financial help to the subsidiary was in assessee’s own business interest, that the loan and advances given by the assessee to the subsidiary were wholly incidental to its business,that incurring of losses by WOS could not form basis of adverse inference against the assessee. The assessee relied upon certain case laws and argued that the loss claimed by it u/s. 28 r.w.s. 37(1) of the Act should be allowed.
3.1.After considering the submission of the assessee and the assessment order, he referred to the cases of Chenab Forest Co.(96ITR568); V.S. Dempo & Co.Ltd.(206ITR291);Colgate Palmolive India Ltd. (2011/TIOL/758/ITAT/Mum) and Business India (ITA/160/Mum/2005) and held that the assessee had advanced the money in the course of business, that the amount paid by the assessee to WOS had to be allowed as business loss u/s. 37 of the Act, that the assessee was required to make advances in normal course of business as per Clause-10 Part- B of MOA.He firther held that facts of the case of Premier Industries (supra), were quite different from the facts of the case under consideration, that in this case the assessee itself had admitted that the advances were in the nature of quasi equity, that the advances given by 2
6859/M/12(09-10) M/s. Sushrut Surgicals Pvt.Ltd. its subsidiary was as per the requirements of the bank.Finally, he reversed the order of the AO. 4.Before us the Departmental Representative (DR) argued that it was a case of bad debt and not business loss, the expenditure was not incurred wholly and exclusively for business purposes.He referred to the case of Premier Industries (I) Ltd.(257/762).The Authorised Representative (AR) contended that the assessee wanted to expand business to Europe, a 100% WOS was formed in Germany, that to keep the business running the assessee had to advance loans/advances to WOS, that it was revenue expenditure .He relied upon the case of Colgate Palmolive (India) Limited(370ITR728). 5.We have heard the rival submissions and perused the material before us .We find that two amounts were advanced to the WOS under the head loan and advances, that the MOA in Clause 10B clearly stipulated that assessee could run a subsidiary outside India, that the subsidiary was purchasing goods from the assessee only,that it suffered losses and finally the European business had to be discontinued,that the loan/advances made to the WOS were for running the business of the assessee in Germany.In our opinion,the nature of the transaction in the hand of the recipient cannot decide the allowability of expenditure in the hands of the lender.We are deciding the case of an entity which had advanced certain amount to its subsidiary for running its business.In such a case expenditure incurred by it has to be allowed as business loss or an expenditure incurred for running the business i.e. u/s. 28/37 of the Act.
Here,we would like to refer to the case of Chenab Forest Co. (supra).Facts of the case are that the assessee was a firm of forest lessees. For the exploitation of forests it had to engage sub- contractors and they had to be given advances before coming to the works, besides supplies of subsidised rations to the labour at the works. Both the advances and cost of rations supplied had to be recouped from the sub-contractors' earnings during the working season. Any balance left as debit or credit would be carried forward to the year following, when again some advances had to be made.In its return,the assessee declared a net loss of Rs.1,72, 669/-which included Rs.40,977/- in respect of bad debts.The AO disallowed bad debts amounting to Rs.27,959/-and the disallowance was confirmed by both the appellate authorites. The Tribunal held that the deductions claimed on account of bad debts were not permissible u/s.36(2)(i)(a)of the Act,that the claim could not be allowed u/s.37 also for the reason that the claim was covered by the special section 36 and the principle generalia specialibus non derogant applied.On a reference, the Hon’ble J & K High Court held as under:
6859/M/12(09-10) M/s. Sushrut Surgicals Pvt.Ltd.
“….. if section 28 is read along with section 29, the computation of income as contemplated by section 28 has to be in accordance with the provisions contained in sections 30 to 43, which means that it should also be in accordance with section 37 if the case falls under section 37. In the present case, out of sections 30 to 43, the only section which could be made applicable was either section 36 or section 37. Sections 28 and 29 read together do not show that if a case comes under section 36; the applicability of section 37 will be taken out, but a case may come under section 36 or 37 and a computation may be made under either of the sections. There is a clear distinction between a business expenditure and a business loss; the former is indicative of a volition but a loss comes so to speak as ab extra. Section 37 clearly appears to be a residuary section extending the allowance to items of business expenditure and not of business losses which are deductible on the ordinary principles of commercial accounting. Non-capital expenditure incurred for the purpose of business would fall to be deducted under the omnibus residuary section 37. In the instant case, it was clear that, in order to carry on the business, it was necessary that advances should be made, without which the forest lessees might find it impossible to carry on the business. The advances made in the ordinary course of business would have been adjusted and recouped if there had been a renewal of the leases but there was no renewal of the leases and the non-recoverability was a result of the circumstances. The word "income" or "profit" should not be given an artificial meaning but should be given a meaning as would be given by a reasonable and prudent businessman. The assessee was, therefore, entitled to a deduction of Rs. 27,959 as expenditure as contemplated by section 37 of the Act.”
It would be useful to consider the one more judgment dealing with the identical issue.i.e. case of Mysore Sugar Co.Ltd.(46ITR649)of the Hon’ble Apex Court.In that matter the assessee,a manufacture of sugar,used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered.A Committee appointed by the Government recommended that the assessee should ex gratia forgo some of its dues. The assessee accordingly waived its right in respect of Rs.2,87,422/- and claimed this amount as a deduction.Matter travelled up to the Hon’ble Supreme Court.Deciding the matter the Hon’ble Court held as under: ……in our opinion, the central point to decide is whether the money which was given up represented a loss of capital, or must be treated as a revenue expenditure. XXXXX ……To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because loosed in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.
6859/M/12(09-10) M/s. Sushrut Surgicals Pvt.Ltd.
The amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee company was concerned, represented the current expenditure towards the purchase of sugarcane, and it makes no difference that the sugarcane thus purchased was grown by the Oppigedars with the seedlings, fertiliser and money taken on account from the assessee company. In so far as the assessee company was concerned, it was doing no more than making a forward arrangement for the next year's crop and paying an amount in advance out of the price so that the growing of the crop may not suffer due to want of funs in the hands of the growers. There was hardly any element of investment which contemplates more than payment of advance price. The resulting loss to the assessee company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.”
Lastly,we would like to refer to the case of Colgate Palmolive(supra).One of the issues to be decided by the Hon’ble Bombay High Court dealt with was ‘business loss arising out of investment in 100% subsidiary’.The question framed by the Revenue read as under :- “(5.1) Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal is justified in holding that the loss incurred on the sale of shares of Camelot a wholly owned subsidiary was a business loss when the investment made in the latter was not a business asset but investment for obtaining an enduring benefit ?” The Hon’ble High Court decided the matter as under :- 6. The facts necessary for that question are that the assessee is engaged in the business of manufacturing and trading of oral care products. In the course of the assessment proceedings, the Assessing Officer noted that the assessee claimed deduction on account of loss on sale of shares held in Camelot Investment Pvt. Ltd. ("Camelot", in short) amounting to Rs. 5,50,00,000. The assessee had made investment in 100 per cent. Owned subsidiary Camelot as claimed for purely business reasons. The stand of the assessee that the investment was made because and for the purposes of business, the loss on sale of such investment is required to be treated as business loss. The assessee placed reliance, inter alia, on a judgment of the hon'ble Supreme Court in the case of Patnaik and Co. Ltd. v. CIT [1986] 161 ITR 365 (SC) and of this court in the case of CIT v. Investa Industrial Corporation Ltd. [1979] 119 ITR 380 (Bom). The alternative argument and which was canvassed without prejudice need not detain us.
The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client, namely, the assessee. Shares purchased of Camelot were also sold by the assessee to one Ramesh Sukharam Vaidya for a consideration of Rs. 45,00,000. The Assessing Officer held that the sum of Rs. 5,50,00,000 which was invested by the assessee in the equity of Camelot on March 17, 2003, and which have been used to repay the loan to the assessee- company, amounting to Rs. 5.50 crores, before March 1, 2003, would demonstrate that the purpose of investment was to give a long-term enduring benefit to the assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long-term investment. This conclusion of the Assessing Officer was challenged in the appeal before the first appellate authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the assessee. Since the assessee was relying on Camelot for manufacturing of tooth brushes to be traded by the assessee, the investment is nothing but a measure of commercial expediency to further business objectives and primarily related to the business operations of the assessee. At no point of time the investment in Camelot was made with an intention to realise any enhancement value thereof or to earn dividend income. The investment was made to separately house the integral part of the business activity. In such circumstances, the Commissioner relied upon the above judgments and allowed the appeal. He concluded that