Salem Mangnesite (P.) Ltd. Vs. Commissioner of Income-tax-iii - Court Judgment

R.S. Mohite, J.

1. The question referred to this Court under Section 256(1) of the Income-tax Act, 1961 is as under:

Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the write off of Rs. 4,58,500, being part of the loan advanced by the assessee to its fully owned subsidiary company, was not a loss incidental to the business of the assessee and, as such, not allowable?

2. The brief relevant facts of the case are as follows:

(a) M/s. Salem Mangnesite Pvt. Ltd., the assessee-company, was solely in the business of mining. It was not in the business of financing or lending money. It had a fully owned subsidiary company by name Janjira Mining Co. Pvt. Ltd., which was also in the business of mining.

(b) In the year 1968, for the purpose of constructing a jetty, the assessee-company lent to its aforesaid subsidiary company an amount of Rs. 5 lakhs repayable with 10 per cent interest. In the years that follows, the subsidiary company Janjira Mining Co. Pvt. Ltd., suffered heavy losses and as a result, was not in a position to repay the loan taken from the assessee-company. In the previous year relevant to the assessment year 1980-81, the assessee-company accepted a sum of Rs. 41,500 in full and final settlement of its aforesaid loan of Rs. 5 lakhs and wrote off the balance of Rs. 4,58,500. In its return for the assessment year 1980-81 the assessee-company claimed a deduction of Rs. 4,58,500 on the ground that it was loss incidental to its business. Reliance was placed upon a judgment of the Apex Court in the case of Essen Ltd. v. CIT : [1967]65ITR625(SC) .

(c) By his assessment order, the ITO disallowed the claim of deduction by holding that the ratio in the judgment of Essen Ltd. (supra) was not applicable as in that case the deduction was allowed as a bad debt.

(d) The assessee carried the matter in appeal before the CIT(A)-VII. The appeal was also preferred on several grounds.

(e) The Appellate Commissioner partly allowed the appeal in respect of certain other grounds but dismissed the appeal insofar as it related to the grant of deduction for the amount of Rs. 4,58,500 as a loss incidental to business.

(f) The assessee then filed an appeal before the IT AT. The revenue had also filed a cross appeal in relation to the other grounds which had been allowed. Both these appeals were disposed off by a common judgment and order dated 24-10-1986, by which the ITAT dismissed the revenue appeal. The assessee's appeal was also dismissed subject to certain observations made in paragraph-7 of the judgment which pertained to some other grounds which are not germane to the issue before us. Insofar as the grounds concerning grant of deduction of Rs. 4,58,500 as a business loss, the ITAT dismissed this ground and recorded a finding in favour of revenue.

(g) The assessee then filed an application for rectification before the ITAT, limited to its ground concerning the grant of deduction for the amount of Rs. 4,58,500. This application for rectification was rejected by the ITAT on 11-5-1987.

(h) Thereafter on an application made by the assessee for reference, the above mentioned question was referred by the ITAT.

3. At the very outset we may state that Counsel for the assessee made considerable efforts to contend that the amount of Rs. 4,58,500 should be allowed as a deduction as it was a bad debt which was written off and was therefore, deductible under Section 36(1)(vii) of the Income-tax Act, 1961. We wish to make it clear that this contention is not within the parameter of the question referred, since the question referred only pertains to the issue as to whether this amount is a loss incidental to the business of the assessee. The issue therefore, pertains as to whether amount would be inherently deductible under Section 28 while calculating the business income of the assessee.

4. The question as to whether a deduction is allowable when there is no specific provision, was decided by the Apex Court in the case of Badridas Daga v. CIT : [1958]34ITR10(SC) . In that case the Apex. Court was considering Section 10(1) of the Income-tax Act, 1922 which is akin to Section 28 of the Income-tax Act, 1961. The Apex Court observed as under:

The result is that when a claim is made for a deduction for which there is no specific provision in Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. (p. 15)

The further relevant observation of the Supreme Court on the issue in question was as under:

At the same time, it should be emphasised that the loss for which a deduction could be made under Section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under Section 10(1) or not. (p. 16)

5. In the present case there are concurrent findings of three authorities that the assessee-company was not in the business of lending money. There is a further concurrent finding of fact that the money was lent to its subsidiary company to enable the subsidiary company to construct a jetty which was clearly a capital asset of the subsidiary company. All authorities had concluded that the loan granted to the subsidiary company did not spring directly from the business of the assessee-company or was incidental to it. On the facts of this case we find no reason to take a different view.

We record that on the issue in question, Counsel appearing for the assessee relied upon the following four judgments:

(1) CIT v. V.S. Dempo and Co. (P.) Ltd. : [1994]206ITR291(Bom)

(2) Ramchandar Shivnarayan v. CIT : [1978]111ITR263(SC)

(3) Indore Malwa United Mills Ltd. v. State of MP. : [1965]55ITR736(SC)

(4) Vassanji Sons & Co. (P.) Ltd. v. CIT : [1980]125ITR462(Bom)

We are afraid that the judgments in the aforesaid cases do not help the case of the assessee as they turn on different set of facts.

In V.S. Dempo and Co. (P.) Ltd.'s case (supra) the facts were that the assessee-company was doing active business with another company which was not its own fully owned subsidiary but in which the assessee-company had 50 per cent shares. The loan given to the assessee was in fact utilised by the loanee company and the consideration was paid by making adjustment in the price of iron ore supplied by the said company to the assessee. These facts were different than those in the present case. The question before the High Court was also different insofar as the loan amount which was given to the loanee company had been earlier taken from a Japanese company and the loan had increased in view of exchange fluctuation. The question to be decided by the High Court in that case was whether this loss which occurred due to devaluation of the rupee, was a revenue loss and in the circumstances of the case it was held to be a revenue loss allowable as a deduction. In our view, the ratio of the said case turns on different facts and points of law and has no bearing on the question referred and required to be answered.

6. In Ramchandar Shivnarayan 's case (supra) the facts were that cash was brought to the place of business of the assessee for buying Government securities. The business of the assessee was dealing in gold and silver and investing in Govt. securities. In this background, it was held by the Apex Court that the loss of cash due to theft by a stranger was directly connected with its business operation and was incidental of purchase of Govt. securities to earn profits and in the circumstances of the case it was treated to be a part of the trading loss and deductible as such in arriving at the profits of the assessee. In our view, this judgment of the Supreme Court related to a case where the loss directly arose from the carrying on the business insofar as cash was brought in for purchase of Govt. securities which was the business of the assessee-company. The present case turns upon different facts as narrated hereinabove.

7. In Indore Malwa United Mills Ltd.'s case (supra) the assessee-company carried on business of manufacturing cloth and was also involved in grant of funds to others. In pursuance of its business it resolved to invest surplus funds with its managing agents as 10 per cent interest. The managing agent borrowed, on behalf of the company, large sums of money from outsiders, entered them in the company's books of account, withdrew the sums and utilised them for their own purposes. The managing agents thereafter went into liquidation. In computing its profits the company claimed deduction which could not be recovered from the managing agents as bad debts and trading loss. In this background it was held that the money borrowed by the managing agents was a trading loss deductible in computing the profits as it was a loss incidental to the business. This case can be distinguished from present case on facts as in that case, it was admittedly the business of the company to grant loans to others. The grant of loan was therefore, an activity which was a part of its business.

8. In Vassanji Sons and Co. (P.) Ltd.'s case (supra) the assessee-company was enabled by its memorandum to carry on business of money lending. In such circumstances this Court held that monies lend by the assessee-company and the debts due to its must be regarded as directly springing from its business activity. As stated above in the present case it has been held that money lending/financing was not one of the business of the assessee-company.

9. In the net result, we answer the question in the affirmative and in favour of revenue. Reference is disposed of with no order as to costs.