1. As there was a difference of opinion between the Accountant Member and judicial Member, who heard this appeal originally, following question was referred Under Section 255(4) of the Act to the Hon'ble President for nominating a Third Member to resolve the controversy.
"Whether on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833/- being advances made to two other companies, in computation of profits of business?" 2. The learned Vice-President, Shri M.K. Chaturvedi, sitting as the Third Member vide his order dated 28^th April, 2004, has concurred with the view taken by the Accountant Member. In accordance with the majority view, we hold that the assessee is not entitled to deduction of Rs. 25,07,833/- being advances made to two other companies, which were written off by the assessee in computation of profits of business.
3. In the result, the appeal of the assessee is dismissed, the other ground pertaining to disallowance of Rs. 6,57,606/- Under Rule 6D having been rejected as not pressed in our differing order.
1. This appeal came before me as Third Member to express my opinion on the following question:- "Whether on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833/- being advances made to two other companies, in computation of profits of business of profits of business?" 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee advanced Rs. 21,88,243/- to International Power Semi Conductors Ltd. This company was incorporated on 14^th April 1975. It was engaged in the business of manufacture of various types of semiconductor devices. The assessee took over this company by acquiring 61% stake in it on 19^th September 1979. The total capital of this company was Rs. 6.87 lakhs. The assessee made an investment of Rs. 4.00 lakhs in the share capital of this company.
3. The assessee made a further advance of Rs. 3,19,590/- to Siltronics (India) Ltd. This company was incorporated on 1st May 1980. The total share capital of this company was Rs. 1,72,79,475/-. The holding of equity shares of the assessee company in Siltronics (India) Ltd. was to the tune of Rs. 40.00 lakhs. It was submitted that the assessee did provide funds to the said company to the extent of Rs. 3,19,590/- to meet the financial crisis.
4. Both the aforesaid companies went into liquidation. The total amount of Rs. 25,07,833/- due to these companies was written off in the books of account. The assessee did make claim under Section 28 of the Income Tax Act, 1961 (hereinafter called the Act), on the ground that this was a bona fide business loss, which had to be allowed as deduction in computation of assessee's income from business. Admittedly, the amount was not claimed as bad debt under Section 36(1)(vii) read with Section 36(2) of the Act.
5. The AO disallowed the claim on the ground that the advances in question were made for non-business purposes. CIT(A) held that the provision of Section 37(1) needs to be applied to ascertain as to whether the expenditure in question was laid out or expended wholly and exclusively for the purposes of business. It was noted that the assessee was not in money lending business. It was engaged in the business of manufacturing grinding wheels, refractories, etc. On this factual backdrop, the advances could not be construed to be trade debt.
These were reflected as assets of the assessee company. Extinguishment of right in property amounts to capital loss. As such, it cannot be allowed as a revenue loss. Since it was not claimed to be a bad debt, as such its allowability was not considered on the touch stone of Section 36(1)(vii) read with Section 36(2) of the Act.
6. It was submitted before me by Shri Govala that these advances were regularly reflected in the Balance Sheet under the caption "Loans and advances". As per the object clause of the Memorandum, the Assessee was entitled to lend Money, securities and other properties for the purpose of business. The assessee was also entitled to carry other profitable businesses. It was possible on the part of the assessee to lend money without security upon such terms and conditions as thought fit in the interest of the company. International Power Semi Conductors Ltd, and Siltronics (India) Ltd. were the subsidiaries of the assessee company.
The assessee was actively involved in the management of those companies. The money was advanced with a view to review those companies. Ultimately those companies went into liquidation. Money was given to enable the companies to recover from the financial crisis and also to meet the day-to-day obligation. It was submitted that this is not expenditure but this is a business loss; as such it is allowable under the law while computing the total taxable income.
7. To buttress the point canvassed, reliance was placed on various precedents discussed hereinafter. In Vassanji Sons and Co. P. Ltd. v.CIT, 125 ITR 462 (Bom), the main object of the assessee company was to carry on the business of managing agents, selling agents, commission agents, etc. Further by its Memorandum, it was permitted to carry on business of money lending, etc. It promoted a company called NI Ltd. and started another company designated as VHDA Ltd., to manage NI Ltd. as its managing agents. It held shares in VHDA Ltd. It also acquired shares in NI Ltd. Money was advanced to NI Ltd. NI Ltd. went into liquidation. Loss was claimed in respect of the value of shares held in NI Ltd. Amount advanced to NI Ltd. was also claimed as business loss.
Apropos the first claim, the AO held that the assessee was not a dealer in shares. In regard to the second claim, it was held that the assessee could not be considered to be a money lender. No interest was charged on the advance. The only object of advancing the money was to provide finance for a company in which the assessee company was substantially interested. As such, the amount written off could not be allowed as a deduction. On appeal, both the AAC and ITAT agreed with the findings of the AO. On a reference, the Hon'ble Bombay High Court has held that in view of the circumstances in which the assessee had purchased the shares of NI Ltd. and the fact that the assessee had never traded in the shares, the Tribunal rightly concluded that there was nothing to show that the shares had been acquired by the assessee with a view to trading in them, and, therefore, the assessee was not entitled to deduction; and in this case the Court was entitled to pay regard to the economic realities which existed behind the legal fae. The assessee company, under its Memorandum, was entitled to undertake managing agency business. It undertook that business but not directly and wholly but acting in concert with two other parties and through the device of a limited company, viz. VHDA Ltd. There was no reason why the moneys lent by the assessee company to NI Ltd., the managed company, could not be regarded as finance provided for a company in which the assessee was substantially interested. It was not necessary for the assessee company to have undertaken any money lending activity. If the object of advancing of money was to provide finance for a company in which the assessee was substantially interested, the debt must be regarded as directly springing from its business activity and the connection could not be considered too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a business. The amount of advance was held to be deductible as a trading loss for the year in question. In CIT v. F.M Chinoy and Co. (Pvt.) Ltd., 74 ITR 780 (Bom), in order to retrieve as much as loss possible to one of its managed companies, the managing agents had to assure and pay Rs. 35,000/- as retrenchment claim, under Section 25F, to the workers of the managed company going into liquidation. This amount was held to be allowable in the hands of the managing agents. In the case of Turner Morrison and Co. Ltd. v. CIT, 245, ITR 724 (Cal), the assessee advanced some monies to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by the Government of India and the entire amount went to the secured creditors. As a result there was no change of recovery of the amounts from the subsidiary. The Tribunal disallowed the deduction for bad debt on the ground that the bad debts were shown after the close of the accounting year, and secondly, the assessee was not in the business of money lending. Hon'ble High Court has held that it was immaterial whether the bad debt was shown after the close of the accounting year or during the accounting year itself. Bad debt was allowable as a deduction in computing the income even if the bad debt came into existence because of the expenditure incurred for advancing money to a subsidiary company of the assessee. Since, the assessee had no chance of recovering the amount in question from the subsidiary, the amount could be treated as a bad debt entitled to deduction from the income for the relevant year. It is pertinent to note that in the present case the assessee did not claim the amount as bad debt as a business loss. As such, the facts of the present case are not analogous to the case of Turner Morrison and co. Ltd. (supra). In the case of CIT v. Gillanders Arbuthnot and Co. Ltd., 138 ITR 763 (Cal), the assessee advanced loans to subsidiaries. The subsidiaries were controlled and managed by the assessee. Due to the weak financial position of the subsidiary, its share capital was taken over. The amount due from the subsidiary was written off and claimed as bad debt. The claim of the Assessee was allowed under Section 36(2) of the Act. In the present case the assessee did not claim the amount as bad debt. In the case of Ramchandar Shivnarayan v. CIT, 111 ITR 263 (SC), the loss by theft was held to be a business loss. It is true that the list of expenditure enumerated under the stature is not exhaustive. As such, depending upon the circumstances and having regard to the business proximity, the Courts have allowed the expenditure not listed in the section. The facts of the present case are different. In the case of Indore Malwa Mills Ltd. v. state of Madhya Pradesh, 55 ITR 736 (SC), it was held that the money borrowed by the managing agents which had become irrecoverable was trading loss deductible in computing the profits of the managed company in the assessment year; it was a loss incidental to the company business. The fact that the managing agents brought into the company's till larger amounts than what the company's business demanded at a particular moment of time did not make the dealings or the lending of money to themselves any the less incidental to the sanctioned business operations. Therefore, it is to be seen that whether the loss occasioned to the assessee was incidental to the business or not. If it is incidental to the business operation; it is allowable as per the decision of the Hon'ble Apex Court, otherwise not.
In the case of Badridas Daga v. CIT, 34 ITR 10 (SC), there was loss due to embezzlement by an employee. The assessee was engaged in the question of money lending. The employee was empowered to operate the bank account. The loss by embezzlement was held to be business expenditure. Hon'ble Supreme Court has held that Section 10(2) of the Indian Income Tax Act, 1922, enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining to profits of a business taxable under Section 10(1). Profits and gains, which are liable to be taxed under Section 10(1), are what are understood to be such ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision, it can be decided having regard to the accepted commercial practice and trading principles. Accordingly the loss sustained by a business by reason of embezzlement by an employee was held to be an admissible deduction. In deciding this issue the Apex Court approved the principle laid down in the case of Lord's Dairy Farm Ltd. v. CIT, 27 ITR 700 (Bom).
8. The learned Departmental Representative submitted that the pronouncements relied upon by the learned counsel for the assessee, were concerning those cases where the assessees were engaged in the business of managing agents. As such, the text and context of those decisions are not matching the facts of the present case, as in the present case the assessee is not engaged in the business of managing agency. As a matter of fact the entire system of managing agency has been done away with under the Indian law. The learned DR placed his reliance on CIT v. Amalgamations Pvt. Ltd., 226 ITR 188 (SC). In this case the Hon'ble Apex Court has held that there must be a nexus between expenditure and business of the assessee. The expenditure incurred in payment of management remuneration to the directions of the subsidiary companies could not be said to be expenditure incurred in carrying on the business of the assessee company of holding its investments. The assessee company could hold its investments and earn its dividends without incurring this expenditure. Since the subsidiary companies were not obliged to distribute by way of dividends the entire profits earned on account of their managerial remuneration paid by the assessee company and the assessee company was only entitled to dividend from the subsidiary company as and when declared, it could not be said that there was a direct and immediate connection between the expenditure incurred and the business of the assessee company. In Indequip Ltd. v.CIT, 202 ITR 417 (Bom), it was held that when a claim is made for deduction for which there is no specific provision in law, whether it is admissible or not will depend on whether, having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it.
The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business, and not any loss sustained by the assessee even if it has some connection with his business. The approach essentially means the approach of a prudent businessman. In the facts of the case it was found that the loan was not incidental to the carrying on of the business of supply of goods by the assessee. As such the amount was not deductible under Section 28 or Section 36 of the Act. In the case of Phaltan Sugar Works Ltd. v. CIT, 208 ITR 989 (Bom), it was held that Section 36(1)(iii) of the Act, provides for deduction for payment of interest only if the assessee borrows capital for its own business. A subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself. Thus the interest on money borrowed by the assessee for advancing to its subsidiary company could not be deducted from the income of the assessee under Section 36(1)(iii) of the Act. Similar view was taken by the Hon'ble jurisdictional High Court in the case of Phaltan Sugar Works Ltd. v.CIT, 216 ITR 479 (Bom).
9. The learned counsel for the assessee submitted that interest under Section 36(1)(iii) of the Act was allowed of the assessee in the preceding years; as such the decision of Phaltan Sugar Works Ltd. (supra) cannot be applied. Reliance was placed on the decision of the Apex Court rendered in the case of Radhasoami Satsang v. CIT, 193 ITR 321 (SC). In this case the Hon'ble Supreme Court has held that strictly speaking, res judicata does not apply to income-tax proceedings.
Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
It is pertinent to note that the Court emphasised that this decision is confined to the facts of the case and may not be treated as an authority on aspects, which have been decided for general application.
10. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordozo, by matching the colour of one case against the colour of another. We are reminded of heraclitus who said "you never go down in the same river twice". what, the great philosopher has said about time and flux can relate to law as well. It is trite that a ruling of superior Court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of available circumstances and myriad developments.
11. Because as a general rule the principle of res judicata is not applicable to decisions of income-tax authorities, an assessment for a particular year is final and conclusive between the parties only in relation to that year. The decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. The Apex Court in the case of M.M. Ipoh v. CIT, 67 ITR 106, 118 (SC) has held that the finding on question of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive. Similar view was taken by the Apex Court in the cases of Investment Ltd. v. CIT, 77 ITR 533, 536 (SC); CIT v. Durga Prasad More, 82 ITR 540, 546 (SC); and Karnani Properties Ltd. v. CIT, 82 ITR 547, 554 (SC). In view of these decisions it is not possible to ignore the decision of the jurisdictional High Court, which was not considered in the preceding assessment years.
12. In the case of Phaltan Sugar Works Ltd. v. CIT, 208 ITR 989 (Bom), it was made clear that a subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself.
13. In the case of CIT v. Motiram Nandram, 8 ITR (Privy Council) it was held that the deposit was not a loan made in the course of carrying on the business of organizing agents or in the course of the business of a money lender. It was exacted by the company as a condition of the assessees being given an agency which they hoped to manage profitably; the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature and the deposit amount could not, upon a true view of the terms of the agreement and in the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. The loss of the deposit was therefore a loss of capital and could not be deducted from the profits of the business made by the assessees for purposes of income tax.
14. I have considered the various facts. In my opinion, the factum of advancing the loan cannot be considered to be expenditure incidental to the carrying of business. international Power Semi Conductors Ltd. and Siltronics (India) Ltd. were two different separate legal entities.
Just because they were the subsidiaries of the assessee company, it cannot be said that the business of these two companies was the business of the assessee itself. It is sine qua non to consider here the nature of advantage, which the assessee has derived, in commercial sense by advancing the funds to the subsidiaries. It is evident that the purpose was to earn interest. This is the immediate advantage the assessee is deriving. Rescuing the subsidiary companies from the financial crisis is the other reason. This advantage is also in the capital field. As such, the loss was also occasioned in the capital field. Having regard to the facts and after considering the precedents available on the point, I am inclined to concur with the decision of the learned Accountant Member on this issue.
15. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.