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Commissioner of Income-tax Vs. Amalgamations (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 160 of 1969 and 239 of 1971 (Reference Nos. 52 of 1969 and 100 of 1971)
Judge
Reported in[1977]108ITR895(Mad)
ActsCompanies Act, 1956 - Sections 37, 198 and 295; Income Tax Act, 1922 - Sections 10(2), 12B and 33B
AppellantCommissioner of Income-tax
RespondentAmalgamations (P.) Ltd.
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateK.R. Ramamani and ;S.V. Subramaniam, Advs. for Subbaraya Aiyar and Padmanabhan
Cases ReferredAmalgamations P. Ltd. v. Commissioner of Income
Excerpt:
direct taxation - deduction - sections 37, 198 and 295 of companies act, 1956 and sections 10 (2), 12b and 33b of income tax act, 1922 - whether tribunal right in holding that expenditure on account of services provided by assessee to its subsidiaries admissible as deduction in assessments of assessee - services rendered by assessee to other companies also - requirements to be fulfilled to claim deduction under section 10 (2) (xv) is that expenditure should be incurred wholly and exclusively for purpose of business of assessee - there must be nexus between expenditure and business of assessee - in present case expenditure not incurred wholly and exclusively for assessee's business - question answered against assessee. - - would not have parted with these shares at cost on 31st july,.....sethuraman, j. 1. the first two questions in t. c. no. 239 of 1971 and the two questions in t. c. no. 160 of 1969 arise out of identical facts. t. c. no. 160 of 1969 relates to the assessment year 1958-59, and t. c. no. 239 of 1971 is a common reference for the assessment years 1958-59 to 1962-63. therefore, we consider the first two questions in t. c. no. 239 of 1971, along with the two questions in t.c. no. 160 of 1969.2. the assessee is a company incorporated on 22nd december, 1938, as a private limited company. the objects of the company cover a very wide field. the acquisition of shares, stacks, debentures, etc., taking part in the formation, management, supervision or control of the business or operations of any company or undertaking and for that purpose to act as directors are.....
Judgment:

Sethuraman, J.

1. The first two questions in T. C. No. 239 of 1971 and the two questions in T. C. No. 160 of 1969 arise out of identical facts. T. C. No. 160 of 1969 relates to the assessment year 1958-59, and T. C. No. 239 of 1971 is a common reference for the assessment years 1958-59 to 1962-63. Therefore, we consider the first two questions in T. C. No. 239 of 1971, along with the two questions in T.C. No. 160 of 1969.

2. The assessee is a company incorporated on 22nd December, 1938, as a private limited company. The objects of the company cover a very wide field. The acquisition of shares, stacks, debentures, etc., taking part in the formation, management, supervision or control of the business or operations of any company or undertaking and for that purpose to act as directors are some of the objects with which this company came into existence. It held shares in several companies, such as Simpson and Company Ltd., Addison & Company Private Ltd., George Oakes (Private) Ltd., Addision Paints and Chemicals Private Ltd., India Pistons Private Ltd., etc. Out of the issued capital of 7,50,000 shades of Rs. 10 each in Simpson & Company Ltd., the assessee held at the material time 7,06,933 ordinary shares. Simpson & Company Ltd. had a subsidiary by name Simpson and General Finance Company (Private) Ltd., carrying on the business of financing by way of hire purchase transactions to outsiders and by way of loans and advances to the companies of this group. Till the Companies Act, 1956, came into force on April 1, 1956, there was no legal difficulty in Simpson and General Finance Company (Private) Ltd. in carrying on its financing activity in the manner done by it. As on 1st July, 1956, a sum of Rs. 1,85,16,000 was due to it from the assessee-company.

3. Section 295 of the Companies Act, 1956, provided, inter alia, that no company could, without obtaining the previous approval of the Central Government in that behalf, directly or indirectly, make any loan to a company, which is its holding company. Sub-section (3) of that provision enacted that where any loan made by a lending company and outstanding at the commencement of the Companies Act, 1956, could not have been made without the previous approval of the Central Government if that section had then been in force, then the lending company had to, within six months, from the commencement of the Act or such further time not exceeding six months as the Central Government might grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made. Certain penal consequences follow the contravention of this provision. There is a similar prohibition with reference to a loan to any private company of which any director of the lending company is a director or a member. The liability of Rs. 1,85,16,000 to Simpson and General Finance Company (Private) Ltd. by the assessee was affected by the aforesaid provision, and it became, therefore, necessary for the assessee to liquidate this liability. Simpson and General Finance Company (Private) Ltd. itself owed a sum of Rs. 1,05,21,750 to Simpson & Company Ltd. The assessee approached the Government of India for necessary approval to put through certain transactions of sale of shares held by it to Simpson and General Finance Company (Private) Ltd. in liquidation of the liability. Simpson and General Finance Company (Private) Ltd., in its turn, would discharge its liability to Simpson and Company Ltd. by selling its holdings to Simpson and Company Ltd. The assessee and Simpson and General Finance Company (Private) Ltd. proposed to sell the shares at certain specified price per share and sought the approval of the Central Government for such a sale. The Central Gove-rnmment, in approving the sale, fixed its own prices and stated that the said fixation was without prejudice to any valuation of shares for purposes of capital gains. The following table will give an idea of the rates at which the assessee proposed to sell the respective shares to Simpson and General Finance Company (Private) Ltd. and the rate at which the Government of India gave its approval. We are also giving below, for purposes of comparison, the rates which were fixed by the Income-tax Officer with reference to these transactions and also the value per share worked out in accordance with the rules under the Wealth-tax Act. The following are the relevant figures :

NAME OF COMPANYSALE VALUE PROPOSED BY THE ASSESS EESALE VALUE PROPOSED BY COMPANY LAW DEPARTMENTSALE VALUE FIXED BY I.T.O.VALUE AS PER WEALTH-TAX RULES

1.Addison & Co. Pvt. Ltd.150140168-75143-102.George Oakcs Ltd.151213.29123.Addison Paints & Chemicals Ltd.101010104.Indian Pistons Ltd.14.7514.7515.0314.755.Wheel and Rim Company of India Ltd.9.507-509.6588.216.Amco Batteries Ltd.100100100100

4. The shares in the companies mentioned above were transferred by the assessee-company with effect from 30th June, 1957, at the prices fixed by the Company Law Administration to Messrs. Simpson & General Finance Company (Private) Ltd., in the first instance, and Simpson and General Finance Company (Private) Ltd. sold part thereof to Simpson & Company Ltd. The transaction between Simpson & General Finance Company (Private) Ltd. and Simpson & Company Ltd. was also at the same prices.

5. The assessee wanted the sale prices fixed by the Company Law Administration to be revised in accordance with the prices claimed by it in submitting its proposals for the sale of the shares. The assessee was represented by its chartered accountants, S. Vaidyanatha Aiyar & Company. On 18th May, 1957, there was a letter from the chartered accountants saying that Mr. Vaidyanatha Aiyar had a conversation with Mr. Gupta, I.C.S., of the Company Law Administration and explored the chances of the department reviewing the take-over valuation of the shares. He was informed that the department had taken into consideration all the relevant points in fixing the share valuation and that the valuation so fixed was a more realistic and fair one. He was also informed that the Company Law Administration had consulted the Central Board of Revenue regarding the valuation of the shares and that the Central Board of Revenue had agreed that the Company Law Department's valuation was a more realistic one. If the assessee's valuation was to be reconsidered, then, according to M/s. Vaidyanatha Aiyar & Company, the department would have to consult the Central Board of Revenue again and much valuable time would be lost and little would be gained in the end if the valuation was reaffirmed. As a result of this letter, the assessee did not pursue this matter of price revision.

6. The assessee in submitting its income-tax return for the assessment year 1958-59, the relevant previous year ending 30th June, 1957, claimed a capital loss of Rs. 4,37,703, in respect of the above transactions. In arriving at this loss the assessee-company opted for the substitution of the market value as on 1st January, 1954, in respect of the shares in, (1) S.R.V.S. (Private) Ltd., (2) Addison & Company Ltd., (3) George Oakes (Private) Ltd., and (4) India Pistons (Private) Ltd. As regards the rest of the shares, the assessee adopted the cost prices.

7. The Income-tax Officer went into the question whether this claim of capital loss was correct. He was of the view that the price structure approved by the department of Company Law Administration for the transfer of the aforesaid shares was pure and simple on an ad hoc basis and meant to serve the limited purpose of approval to be given under Section 372 of the Companies Act of 1956. He considered that the price at which the sales took place could not, therefore, be taken to represent the fair market value of the shares. In his view, there was a reduction of the liability to capital gains. He took the break-up value as on 1st January, 1954, for the purpose of computation of capital gains and revised the sale prices as shown in the table. In this process he arrived at Rs. 6,95,082 as the net capital gains. Even according to his computation, there were certain capital losses which were adjusted as against the capital gains determined by him. In the case of S.R.V.S. (Private) Ltd. he took the break-up value as on 1st January, 1954, at Rs. 36,35,350 and their sale value at Rs. 21,88,395 resulting in the capital loss of Rs. 14,46,955. There were sales of certain other shares also in which the capital gains or loss arose but they need not be gone into for our purpose.

8. The assessee appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the appeal was pending, the Commissioner of Income-tax proceeded under Section 33B of the Indian Income-tax Act of 1922, as he was of the view that the order of the Income-tax Officer was erroneous and prejudicial to the interest of revenue in so far as the officer had wrongly allowed the capital loss amounting to Rs. 14,46,955 on the sale of the shares in S.R.V.S. (Private) Ltd. The Commissioner noticed that the Income-tax Officer in fixing the market value of the shares on 1st January, 1954, looked behind the balance-sheet of S.R.V.S. (Private) Ltd. and took into consideration the balance-sheet of Simpson and Company in which S.R.V.S. (Private) Ltd. held shares, the book value of which came to Rs. 5,96,052. He found that the Income-tax Officer had enhanced the value of those shares to Rs. 24,38,578 as on 1st January, 1954. For determining the sale value of the shares in 1957, no reference to the balance-sheet of Simpson and Company Ltd. was found necessary, inasmuch as S.R.V.S. (Private) Ltd. had already parted with the said shares at their face value. In the opinion of the Commissioner, the secondary valuation of the holdings of S.R.V.S. (Private) Ltd. with reference to the balance-sheet of Simpson and Company Ltd. was not proper. He, therefore, issued notice to the assessee asking it to show cause why the Income-tax Officer's order should not be revised in so far as it was prejudicial to the interest of the revenue. After considering the assessee's submission he held that the appreciation in value of the shares of Simpson and Company held by S.R.V.S. (Private) Ltd. should not have been taken into account, that if the value of the shares held by S.R.V.S. (Private) Ltd. in M/s. Simpson & Company as on 1st January, 1954, had been Rs. 24,38,578, S.R.V.S. (Private) Ltd. would not have parted with these shares at cost on 31st July, 1955, and that to compare the market price as on 1st January, 1954, with the market price of the shares as on 30th April, 1957, it would not be comparing the like with the like if this revaluation of the Simpson & Co. shares was made. He, therefore, revised the capital loss allowed by the Income-tax Officer of Rs. 14,46,955. He considered that there was capital gains liable for assessment of Rs. 3,91,579. This figure was directed to be substituted and the assessment of capital gains revised accordingly.

9. The assessee appealed against this order to the Appellate Tribunal contending that the sale value fixed by the Company Law Administration represented the correct value of the shares, that the transactions were without any motive to avoid capital gain, that they had been necessitated by the various provisions of the Companies Act which prohibited inter-company loans and that the method adopted by the Income-tax Officer, viz., the secondary valuation, was proper.

10. The Tribunal was of the view that, in putting through these transactions, the company had no idea of avoiding or reducing its liability to capital gains, that it did not fix the sale price of its own accord and that it transferred the shares at the prices fixed by the Company Law Administration. Though S.R.V.S. (Private) Ltd. was a transport company, as it held a substantial portion of its funds in Simpson & Company, the method adopted by the Income-tax Officer of secondary valuation was held to be proper and confirmed by text books and a chartered accountant whose report was in evidence. The Tribunal, therefore, allowed the appeal against the order of the Commissioner of Income-tax revising the assessment.

11. The Appellate Assistant Commissioner took up the appeals for this and other years subsequent to the order of the Tribunal mentioned above. Following the Tribunal's order he worked out the capital loss in respect of the other shares under consideration and in effect accepted the assessee's claim of capital loss of Rs. 4,37,703.

12. This order led to appeals both by the assessee and the department to the Tribunal. The assessee's appeal related to the computation of the capital loss at Rs. 4,37,703 as emerging from the order of the Appellate Assistant Commissioner instead of Rs 4,90,244 which would be the correct figure. The department contested the acceptance of the claim of the assessee with reference to the capital loss of Rs. 4, 37,703 as shown in its return.

13. On the first occasion when the matter came before the Tribunal, it remanded the case to the Appellate Assistant Commissioner and called for a specific finding whether the sales under consideration were effected with the object of avoidance of tax or reduction of liability to tax and also wanted the full value of consideration to be worked out, in case the first proviso to Section 12B(2) should be held to be applicable. The Appellate Assistant Commissioner observed that there was ample evidence to show that the sale of shares was a forced one, that the assessee had no option but to comply with the statutory provisions, that the evidence produced clearly established the assessee's contention that the sale was not motivated by any desire to avoid capital gains and that the department had not proved by any conclusive evidence that the motive underlying the transaction was the avoidance or reduction of the liability to capital gains tax. He worked out the figures in accordance with the rules framed under the Wealth-tax Act and found that the prices fixed by the Company Law Administration were not very much different from the figures worked out by him.

14. After receiving his report, the Tribunal considered the matter again and held that proviso to Section 12B could not be invoked in the instant case, as there was no evidence to support the view that the sales were effected with a view to avoid the provisions of Section 12B. It accepted the, report with reference to this aspect and held that the department was not justified in computing the capital gains and disturbing the figures fixed by the Government of India, It thus accepted the assessee's contention in this regard.

15. Against the proceedings under Section 33B of the Act, the following two questions have been referred in T.C. No. 160 of 1969 :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the basis of valuation adopted by the Income-tax Officer for the shares in Messrs. Sri Rama Vilas Service (Private) Ltd. as on January 1, 1954 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to Section 12B(2) has no application in regard to the sale of shares to M/s. Simpson & Company Ltd. ?' Out of the order of the Tribunal in the appeal against the Appellate Assistant Commissioner's order for 1958-59, the following two questions have been referred in T.C. No. 239 of 1971 :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to Section 12B(2) has no application in regard to the sale of various shares by the assessee-company to M/s. Simpson & Co. Ltd. through M/s. Simpson & General Finance Co. (Private) Ltd. and that the assessee was entitled to a capital loss of Rs. 9,47,541 in the assessment year 1958-59 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the second proviso to Section 12B(2) had no application and that the full value of the consideration accounted for by the assessee should not be altered ?'

16. The second question in T.C. No. 160 of 1969 and the two questions in T.C. No. 239 of 1971 raise more or less the same issue. Section 12B of the Act provides for the levy of tax in respect of any profits arising from the sale (among others) of a capital asset effected after the 31st day of March, 1956, such profits and gains being deemed to be the income of the previous year in which the sale took place. Section 12B(2) provides the manner of computation of capital gains from the full value of the consideration for which the sale or transfer of capital asset was made. Certain deductions are to be allowed, viz., expenditure incurred in connection with the sale and the actual cost of the capital asset. The third proviso to Section 12B gives the choice to the assessee to substitute the actual cost for the fair market value on 1st January, 1954, in case the capital asset became the property of the assessee before that date. The first proviso to Section 12B(2) is material and, therefore, it is extracted here :

'Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer, is a person with whom the assessee is directly or indirectly connected and the Income-tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or redaction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place.'

17. The first requisite for the application of this proviso is that the person to whom the sale is made should be a person with whom the assessee is directly or indirectly connected. There can be no dispute that in the present case the sale of shares to a subsidiary of a subsidiary is one to a person with whom the assessee is directly or, in any view, indirectly connected. It cannot be denied that there is a connection between the assessee and its subsidiary. The subsidiary of a subsidiary is also, at any rate, indirectly connected with the assessee. Therefore, the first requisite contemplated by the proviso is satisfied here.

18. The next point is to see whether the sale was effected with the object of avoidance or reduction of the liability of the assessee under that section. The Supreme Court has pointed out in I.C.I. (India) Private Ltd. v. Commissioner of Income-tax : [1972]83ITR710(SC) , that the question whether the object of the assessee in transferring assets was to avoid or reduce his liability to tax on capital gains by making the transfer, did not involve the application of any legal principles to the facts established by the evidence. The intention with which the particular transfer was made and the object which was to be achieved by such transfer was, it was held, essentially a question of fact, the conclusion relating to which was to be arrived at on consideration of the relevant material. The Supreme Court was dealing with the corresponding provisions of the Income-tax Act of 1961. The principles laid down in the said decision would equally apply to the provision before us also, as both are pari materia.

19. In the present case, the Income-tax Officer had not given a finding that the object with which the transaction was put through was the avoidance or reduction of the liability to capital gains tax. The only observation that he had made in his order was that there was a reduction of liability to capital gains. Such a finding of taking the result as if it was the object would not satisfy the requirements of the first proviso to Section 12B(2) and when the matter came before the Tribunal it rightly called for a finding on this point specifically from the Appellate Assistant Commissioner. Taking into account the circumstances in which the transaction took place, the Appellate Assistant Commissioner reported that the object was not to avoid or reduce such liability to capital gains tax. He was of the view that the sale was a forced sale, that the assessee had no option and that the prices had been fixed by the Company Law Administration. The Tribunal accepted this finding and proceeded on the basis that the sale which was in accordance with the value fixed by the Company Law Administration could not be used to be with the object of avoidance or reduction of liability to capital gains. In view of this finding, it follows that the proviso to Section 12B cannot be attracted to the present case.

20. We are not also satisfied that the department was right in its contention that the sale price had been fixed by the Company Law Administration on some ad hoc basis. The letter of 18th May, 1957, which is annexure 'G. VII.A' to the remand report to the Appellate Assistant Commissioner, is clear to show that the Company Law Administration worked out the figures in consultation with the Central Board of Revenue, two departments of Government had consulted each other and fixed up the prices and when the assessee sold the shares at those prices, it cannot, in our opinion, be validly contended that the assessee transferred the shares at certain prices with the object of avoidance or reduction of liability to capital gains. The result is that the second question in T.C. No. 160 of 1969 and the second question in T.C. No. 239 of 1971 have to be answered in the affirmative and against the revenue.

21. As regards the first question in T.C. No. 160 of 1969 which raises the question of valuation in the view that we have taken as regards the second question, it would not survive for consideration. The question of valuation would be material only if the proviso applied. However, having heard arguments on it, we would indicate our answer to that question also. The point is whether in valuing the shares of S.R.V.S. (Private) Ltd., the shares held by it in Simpson & Company should be taken at the book figure or in accordance with the break-up value determined with reference to the balance-sheet of Simpson and Company Ltd. In Business Mergers and Takeover Bid, by Ronald W. Moon, fourth edition, at page 69, it is stated as follows:

'Shares and securities which are quoted will be valued at the middle price if held for permanent investment, or at lower price if included with the current assets. Unquoted stocks or shares, when the amount involved is material, must be the subject of a secondary valuation by methods similar to those used for the main valuation.'

22. The expression 'secondary valuation' mentioned above is the valuation of the shares held in another company by the break-up value method and not necessarily by the figures shown in the shareholding company's balance-sheet. In a study on share valuation issued by the Institute of Chartered Accountants of India, at page 27, it is stated as follows :

'In the case of unquoted shares, etc., if the amount is material, a secondary valuation of such shares may be necessary ; but if the number and value of unquoted shares are not substantial, the value ascertained on the basis of such evidence as is available in the last annual accounts of the company concerned may be accepted.'

23. This is a case of substantial holding. Thus, there is textual backing to the method adopted by the Income-tax Officer. The Commissioner has found fault with it without any valid reason. The first question in T.C. No. 160 of 1969 is also answered in the affirmative and in favour of the assessee.

24. The first question in T.C. No. 239 of 1971 does not require any independent treatment as whatever we have stated in answering the second question in T.C. No. 160 of 1969 would answer that question also. In the question there is reference to a sum of Rs. 9,47,541. We are not concerned with the figure as such. We answer that question also in the affirmative and in favour of the assessee.

25. We now turn to the third question in T.C. No. 239 of 1971 running as follows :

'(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sums of Rs. 47,066 Rs. 90,896, Rs. 1,08,978, Rs. 1,18,102 and Rs. 1,11,740 are admissible as a deduction in the assessments of the assessee for the assessment years 1958-59 to 1962-63, respectively?'

26. We have seen that the assessee is a company which is a shareholder, as a bulk shareholder, in several companies. There were 16 of them in the relevant year. Apart from the dividend income from the shares in the several companies, the assessee has also been assessed on the profit or loss of 'business'. Mostly, the result was a loss. The assessee was rendering certain common services to its subsidiaries by having: (1) a finance committee ; (2) a liaison office in Delhi ; (3) an export promotion department; and (4) an internal audit department. The expenditure on account of the latter three activities, viz., maintenance of a liaison office in Delhi and the departments of export promotion and the internal audit, was borne by the assessee and recovered from the subsidiaries. The finance committee was working in an advisory capacity to the various subsidiary companies to help them to carry on their business more efficiently. All purchase requisitions for the purchase of capital equipment beyond Rs. 500 of each purchase and Rs. 2,500 with reference to purchase of raw materials were submitted to the finance committee for their approval. It was stated that the purpose of such control was to judiciously use the funds of the company, much of it borrowed, to the best advantage of each company. Various data were gathered before such sanction was accorded or refused. Likewise, technical matters or other matters of management were referred to the members of the finance committee who were experienced in their respective fields. The finance committee went through the financial position of each company daily, containing the cash forecast, profit forecast and other figures for comparison and advice.

27. There were four directors of the assessed by name Austin, Kumar, Lund and Watts. Except Watts the rest of them were members of the finance committee. There were others who were neither directors of the assessee nor members of the finance committee. All the said persons entered into service agreements with the subsidiary companies. Kumar had a service agreement with Amalgamations; but his remuneration was being paid by Addison Paints and Chemicals (Private) Ltd. and Wheel & Rim Company of India (Private) Ltd. He was entitled to a commission on net profits apart from the fixed remuneration from the said companies. There were other agreements between the other persons and other companies. In view of the provisions of Section 198 of the Companies Act, 1956, fixing a ceiling on the overall managerial remuneration at 11 % of the net profits of the company, it was not possible for the different companies to pay the contracted remuneration to the persons concerned. According to the assessee, if the said persons were not paid the contractual remuneration, it would not have been possible to retain their services in the respective companies. The directors of the assessee, therefore, considered these questions of payment of the contractual remunerations. It was found that the Company Law Administration was not agreeable to the inclusion of the commission payable to the managerial staff in the minimum remuneration provided under Section 198 of the Companies Act. It was, therefore, decided by the assessee-company that the payment in excess of what is allowable under Section 198 of the Companies Act, in each company would be met out of the resources of the assessee. The assessee accordingly passed a resolution on 23rd April, 1959, accepting the liability to pay the excess to cover the contractual remuneration out of its own funds. It paid diverse amounts to the said directors and the total amount so paid to the several persons for the different years have been set out in the question itself.

28. The assessee claimed the said amounts as deduction under Section 10(2)(xv) of the 1922 Act for the assessment years 1958-59 to 1961-62 and under Section 37 of the Act of 1961, for the assessment year 1962-63. Section 10(2)(xv) of the Indian Income-tax Act, 1922, and Section 37 of the Act of 1961 are identical in terms in so far as the present claim is concerned. It was not in dispute before the Income-tax Officer that these payments were in respect of the services rendered by respective persons to the various subsidiary companies of which they were directors and that no part of the payment could be related to any services directly rendered by them to the assessee-company. It was argued that though the services were rendered by them to the other companies, they should be deemed to have rendered them to the assessee in view of the nexus between the holding company and its subsidiaries. The Income-tax Officer was not prepared to accept this submission. He held that the excess remuneration, over and above what was admissible under Section 198 of the Companies Act, and was not borne by the respective companies, could not be allowed as deduction under Section 10(2)(xv) of the Act of 1922 as expenditure wholly and exclusively incurred for the purpose of business of the assessee. In his view it was only with a view to overcome certain legal requirements that such an expenditure had been borne by the assessee. He noticed that the sanction of the board of directors was after the relevant accounting year for the assessment year 1958-59. The resolution was passed on 23rd April, 1959, after the previous years for the assessment years 1958-59 and 1959-60. Certain decisions were relied on before him in support of the claim for allowance. He did not consider that those decisions would apply to the facts of the present case. The result was the disallowance of the respective amounts claimed by the assessee. On appeal, the Appellate Assistant Commissioner was also of the same view. When the matter came before the Tribunal there was remand with reference to this point also.

29. The Appellate Assistant Commissioner reported that with reference to those persons, who were both the directors of the assessee as well as the members of the finance committee, the amounts could be allowed as deduction and the balance could not be allowed. After this report, the Tribunal considered the matter and came to the conclusion that the assessee's activities were in the nature of a business, that it carried on its business wholly or mainly in the dealing in or holding of investments and that the expenses were wholly and exclusively laid out for the purpose of the assessee's business. Against the allowance so made, at the instance of the Commissioner, the question as set out already has been referred.

30. The only point to be considered is whether the respective amounts could be said to be expenditure incurred wholly or exclusively for the purpose of the assessee's business. The first aspect to be examined would, therefore, be whether the assessee is carrying on any business at all. The learned counsel for the department submitted that the mere holding of an investment would not constitute business. The learned counsel for the assessee brought to our notice a decision in Commissioners of Inland Revenue v. Tyre Investment Trust Ltd. [1924] 12 TC 646 in support of his submission that even holding of investment will be classified as a business.

31. In Commissioners of Inland Revenue v. Tyre Investment Trust Ltd. [1924] 12 TC 646 the assessee-company was formed with the object of acquiring the shares of two foreign companies and of selling them to an English company which was likely to purchase them. After the assessee purchased the shares, it took an active interest in the affairs of the two said companies. The negotiations were proceeding for the sale of the shares. The company had purchased certain other investments including Government loans out of which it sold the Government loans. The company contended that it was not carrying on a trade or business within the meaning of Section 38(1) of the Finance (No. 2) Act, 1915, of the United Kingdom so as to be liable to excess profits tax. In the assessee's submission it was only a holding company and stood in the same position as an individual who had acquired and held investments. The Special Commissioners accepted the submission. Rowlatt J. did not agree with the conclusion and observed at page 655 as follows :

'Now I am bound to say I think that, even in the darkest days of my error as to the necessity of an active carrying on of business, I should have held that this company carried on business, because the whole of its existence seems to be directed to the fact that it should have shares in other companies as to which it should busy itself in the most active way and occupy itself as an alert and astute shareholder looking after its holding in those companies, and the companies themselves ; and that was its activity and it pursued it zealously, so I should always have held that this company was carrying on business. '

32. The learned counsel for the department, however, submitted that this decision would not hold good in India in view of a decision of the Supreme Court in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax : [1966]59ITR547(SC) . That was a case in which the question was whether, in the case of an investment company its dividend income formed part of its profits and gains chargeable to tax under Section 10 of the Indian Income-tax Act, 1922 The company was not a dealer in shares. In answering this question, the Supreme Court observed at page 554 as follows :

'It seems to us that on principle before dividends on shares can be assessed under Section 10, the assessee, be it an individual or a company or any other entity must carry on business in respect of shares; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under Section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares...... '

33. The decision of Rowlatt J. was not brought to the notice of the court. Lower down in the same page it was stated as follows :

'Apart from showing mere investment, no facts have been brought out in this case to show that the company was in any way carrying on business in respect of shares. Its position, on the facts placed before us, is in no way different from an individual merely buying shares with a view to holding them for the purpose of earning dividends.'

34. That was a case where a company purchased shares and sat back on its investments so that it was a case of mere investment without any further activity.

35. The Supreme Court examined this problem in the case of Commissioner of Income-tax v. Distributors (Baroda) P. Ltd. : [1972]83ITR377(SC) . In that case the assessee was a managing agent. It held shares in the managed companies. It had shares in other companies also. The income from the managing agency and the dividend income from the shares held in the managed companies were more than the income earned by it from its share dealing in the relevant years. The question before the Supreme Court was whether the company could be said to be one, whose business consisted 'wholly or mainly in the dealing in or holding of investments'. The Supreme Court pointed out that in such a case the primary activity should be the dealing in or holding of an investment. On the facts the Supreme Court held that the assessee there was not a company whose business consisted wholly or mainly in the holding of or in dealing with investments. In the course of the judgment, the Supreme Court has referred to the decision in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax : [1966]59ITR547(SC) and has also gone into the question as to whether there could be any business of holding of investments. At page 383 the Supreme Court observed as follows:

'We cannot say that the legislature did not know its own mind when it used that expression in Section 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression 'business' is a well-known expression in income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax : [1954]26ITR765(SC) ' some real, substantial and systematic or organised course of activity or conduct with a set purpose'. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the legislature was aware of the meaning given by courts to that expression when it incorporated Section 23A into the Act in 1957. Hence we must hold that when the legislature speaks of the business of ' holding of investments', it refers to real, substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits' (Underlining* ours).

36. The learned counsel for the department wanted us to confine this decision to the language of Section 23A, as in his submission, holding of investments was taken to be a business only by reason of some statutory fiction. We have looked into Section 23A and we do not find in it any words importing a fiction. It considered two kinds of businesses : one is dealing in investments and the other is holding of them and holding of investment in appropriate cases would, in the view of Parliament, equally be a business as dealing in them. The only requirement is that there must be a real substantial and systematic or organised course of activity or conduct with the set purpose of earning profit which is the test for a business.

37. Examined in this light it would be found that the assessee is not a mere investor in a single company. It has investments in 16 companies. It had taken active interest in the business of these companies as is clear from the services that had been rendered in the shape of export promotion, liaison office at Delhi and internal audit. It also rendered consultation in respect of finance by its directors meeting every day with reference to the needs and requirements of each company. It was also stated before us that apart from the original acquisitions, the assessee-company itself was responsible for starting several engineering companies and that it held the shares in such companies which it actively promoted. Even without going into the correctness or otherwise of this submission about which the relevant facts do not appear on record, we consider that the assessee-company had a systematic or organised course of activity in the matter of working for and advising its subsidiaries. This is not a case where the assessee contented itself with merely making an investment and looking for the dividend. We would, therefore, hold that there was a business activity in the matter of holding of investments on the facts here.

38. Even then, the question that would arise is whether the expenditure that has been incurred was wholly and exclusively laid out for the purpose of the assessee's business. The assessee's business is the holding of investments. If the assessee had incurred any expenditure in respect of its business, it would certainly be allowable as deduction.

39. The question as to whether any expenditure that has been incurred was wholly and exclusively laid out for the purpose of the assessee's business is sometimes treated as a question of fact. See Commissioner of Income-tax v. Chandulal Keshavlal & Co. : [1960]38ITR601(SC) and Commissioner of Income-tax v. Indian Mica Supply Company (P.) Ltd. : [1970]77ITR20(SC) . A contrary view has, however, been taken in other decisions. See, for example, Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax : [1967]63ITR57(SC) , Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) and Bengal Enamel Works Ltd. v. Commissioner of Income-tax : [1970]77ITR119(SC) . The predominant trend of authorities is in favour of the view that it is not a pure question of fact.

40. In Indian Aluminium Co. Ltd. v. Commissioner of Income-tax : [1972]84ITR735(SC) the Supreme Court, after quoting Section 10(2)(xv), observed at page 739 as follows:

'The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England. Eminent judges have striven to formulate correct tests to determine whether an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but no one has been able to find a test in the application of which differences of opinion do not arise. It seems to us, therefore, essential that, in each case, the courts must always keep in mind the language of the section.' The problem cannot, therefore, be taken as purely factual.

For our present purpose, it is enough to refer to two decisions of the Supreme Court in which the scope of Section 10(2)(xv) of the Act, 1922, has been considered. In Commissioner of Income-tax v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) the assessee was a company which had to discharge the estate duty liability of a shareholder by reason of Section 84 of the Estate Duty Act of 1953. It claimed the payment as an expenditure deductible under Section 10(2)(xv) of the Act. The Supreme Court rejected the claim. At page 150 it was observed as follows: 'However wide the meaning of the expression 'for the purpose of business' may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.'

41. In Indian Aluminium Co. Ltd. v. Commissioner of Income-tax : [1972]84ITR735(SC) the Supreme Court again considered the question of the deductibility under Section 10(2)(xv) of the Indian Income-tax Act, 1922, of wealth-tax paid by the company. There was an earlier decision in the Travancore Titanium Product Ltd. v. Commissioner of Income-tax : [1966]60ITR277(SC) holding that the wealth-tax paid was not deductible expenditure. This decision came to be reviewed and the unanimous view was that the amount paid as wealth-tax was liable to be deducted. Sikri C.J. pointed out at page 747 as follows :

'......... if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. ' (Underlined* by us).

42. The two tests laid down are that the expenditure must be incurred by the assessee in his capacity as a trader and that it must be incidental to the carrying on of his business. There must be a nexus between the expenditure and the business of the assessee. If there was such a nexus, the fact that the said expenditure would benefit a third party also would not be material.

43. The learned counsel for the assessee laid great emphasis on the decision in Tata Sons Ltd. v. Commissioner of Income-tax : [1950]18ITR460(Bom) . In that case, the assessee was the managing agent of a company. The managed company decided to pay a special bonus for the calendar year 1942, not exceeding Rs. 1,20,000 to certain of its officers. The resolution by the board of directors mentioned that, as in the earlier year, the managing agents had decided to bear half of the sum. In accordance with the terms of that resolution, the managing agents paid one-half of the bonus and claimed it as deduction in its assessment. It was held that looking at the payment from the point of view of commercial principles, what the assessee had done was something which had as its object increasing the profits of the managed company and thereby increasing its own share of the commission and that, therefore, the sum claimed by the assessee was wholly and exclusively expended for the purposes of its business and was an allowable deduction under Section 10(2)(xv) of the Act. In that case the assessee, who was the managing agent, was eligible for a fixed remuneration and was entitled to a share in the net profits of the company. The profits earned by the assessee was thus a share of the profits of the managed company. There was what can be called a joint or co-operative endeavour of making profits. Therefore, the assessee was vitally interested in seeing that the profits of the managed company were maintained at a high level, so that it could share in them. The result of the payment was the direct benefit to the assessee in carrying on its own business. In other words, the business of the managing agent and the managed company could not be dissociated from each other. They were integrally connected so that the expenditure was in the interests of the assessee, as such.

44. Similarly, in the case of J. R. Patel and Sons (P.) Ltd. v. Commissioner of Income-tax : [1968]69ITR782(Guj) the managing agency company, which was the assessee, had a managing director who was remunerated by it at Rs. 1,000 per month. He was also getting a fixed sum as well as commission at a percentage on the sale proceeds from the managed company. With the passing of the Companies Act, 1956, the remuneration that could be received from the managed company was reduced and he could not also get his commission. In view of this, the managing agent decided to pay the managing director Rs. 30,000 and also a percentage of the managing agency remuneration over and above a particular amount. Apart from the sum of Rs. 1,000 per month which was being paid by the assessee both before and after the aforesaid arrangements, the assessee paid and claimed as deduction the sum of Rs. 30,000 and also the percentage in the share of managing agency remuneration. Evidence was produced to show that the managing director was a man of considerable experience and high training and that he was responsible for the progress of the managed company. It was held that the expenditure claimed by the assessee was allowable as a deduction. At page 797 it was observed as follows--See : [1968]69ITR782(Guj) :

'In the instant case, the assessee-company has paid the extra remuneration to its own managing director with the object of seeing to it that the affairs of the managed company are properly looked after in the same manner as before and thus the profits of the managed company are increased and its own share of the commission is thereby increased.'

45. The decision in Tata Sons Ltd. v. Commissioner of Income-tax : [1950]18ITR460(Bom) was followed. This is also a case of a managing agency and as we have already pointed out, in discussing the decision in Tata Sons Ltd.'s case : [1950]18ITR460(Bom) , the business of the managing agent is integrally connected with the business of the managed company. The managing agent being a limited company it had necessarily to render its services through the human agency of the managing director whom it thought fit to remunerate in the manner done. The fact that previously he was directly remunerated by the managed company to some extent cannot in any manner affect the allowability of the deduction, because the employment of a qualified and experienced director for the purpose of rendering services to the managed company was essential in the interest of the assessee in that case.

46. In Commissioner of Income-tax v. J. K. Industries (Private) Ltd. : [1969]71ITR594(Cal) a director of the managing agent went on a foreign tour to explore the possibilities of collaboration with certain foreign concerns and also to acquire technical knowledge about the businesses of the managed company. The expenditure on the foreign tour was claimed as deduction by the managing agent. It was held that though by reason of the expenditure, some benefit might have accrued to one or more of the managed companies, the purpose for which the managing agent incurred the expenses was to increase its own earnings or augmenting its own commission. It was, accordingly, allowed as deduction. In our opinion, the case of a managing agency forms a category by itself and in carrying on its own business, the managing agent was obliged to incur the relevant expenditure. The fact that the said expenditure benefited the managed company to some extent cannot rule out the deductibility of the expenditure in the managing agent's hands.

47. The question before us is whether the principle, which is applicable to the managing agency companies, can be applied to a company, which is carrying on the business of holding investments. As we have already seen, the decisions of the Supreme Court required a nexus between the business of the assessee and the expenditure that has been incurred. The business of the assessee is the holding of investments. If with reference to this business of the holding of investments any expenditure had been incurred, that would have been allowed as deduction. The business of holding investment and the businesses of the subsidiary companies are wholly separate and distinct. The expenditure that has been incurred in the present case cannot be said to be in carrying on the assessee's business of holding its investment. It could hold its investments and earn its dividends without incurring this expenditure. Before the introduction of the restrictive provision in the Companies Act of 1956, the respective companies were paying the directors for services rendered to them and they are now remunerated by the assessee. There was no change in the rendering of services. Merely because the law had changed and the managed company was not in a position to pay the same remuneration because of the restrictive statutory provision, it does not mean that what was prior to 1956 Act expenditure of the subsidiary could, after it, become the expenditure of the assessee. It was argued that, but for this expenditure, the services of the respective directors would not have been available. There is some reference to this aspect in the resolution passed by the assessee-company. Even on the basis that the services of the respective directors would not have been available, it does not, in our opinion, follow that the assessee was obliged to take over the expenditure as part of, or incidental to, its own business. The entities, viz., the assessee and the subsidiary companies, are independent for all relevant purposes. Though it was argued before the Tribunal that the assessee-company was carrying on its own business through the agency of the subsidiaries, the learned counsel did not put forward such a contention before us. The income of the assessee could only consist of the dividends from the subsidiary companies as and when declared. Even under the Act of 1922 as a result of the amendments made the dividend income has been specifically brought within the head 'other sources'. There are decisions of the highest authority which hold that notwithstanding the statutory requirement that the computation of the dividend income had to be under the head 'other sources', still the income could be treated as business income for all other purposes. See Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. : [1965]57ITR306(SC) and Commissioner of Income-tax v. Chugandas & Co. : [1965]55ITR17(SC) . Even bearing in mind this principle and assuming that we have to treat the dividend income as business income for our present purpose, still it cannot be held that there is such a nexus between the expenditure and the business or the income of the assessee so as to justify the deduction of the expenditure incurred in remunerating the directors who rendered services to the subsidiary companies and not to the assessee.

48. The learned counsel for the revenue submitted that the expenditure allowable under the head 'other sources' is somewhat restrictive in its scope and relied for this purpose on what was stated in Commissioner of Income-tax v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) . The relevant passage runs as follows :

'The expression 'for the purpose of the business' is wider in scope than the expression' for the purpose of earning profits'.'

49. The learned counsel for the assessee, on the other hand, relied on another judgment of the Supreme Court [Eastern Investments Ltd. v. Commissioner of Income-tax : [1951]20ITR1(SC) --a larger Bench--in which the principles applicable to the deductibility of the expenditure under Section 10(2)(xv) were applied in determining the deductibility of the expenditure under the head 'other sources', i.e., Section 12. For our present purpose, it is unnecessary to go into this question as even on the view that the assessee is earning business income, still the assessee will not be eligible for deduction, as the expenditure is not incidental to its own business. It could hold its investments or earn its income without incurring this expenditure.

50. It is now well-settled in U. K. that a parent company cannot be allowed to claim deduction in respect of a loss or expenditure incurred by or for the purpose of a subsidiary company. See Odhams Press Ltd. v. Cook [1941] 9 ITR (Supp) 92 and Marshall Richards Machine Co. Ltd. v. Jewitt (H. M. Inspector of Taxes) [1956] 36 TC 511 . In the last mentioned case a British company incurred c&rtain; expenditure towards the operating expenses of its American subsidiary. There was a finding that the payment was for the purpose of enabling the American subsidiary to meet its obligations and continue in existence. It was held that the payment was not laid out in any sense to advance the trade of the parent company. Though the motive was to advance the trade of the parent company still it was held that it was not the purpose of the payment. Applying the same ratio, the purpose in the present case is only to bale out the subsidiary from an inconvenient situation in which it found itself as a result of the statutory change restricting the remuneration payable to its directors. The expenditure has not been incurred wholly and exclusively for the assessee's business and cannot, therefore, be allowed as deduction.

51. During the course of the arguments there was some discussion as to whether this claim would not come within the principle of an expenditure incurred in violation of some statute. In the case of infraction of a statute resulting in the payment of a fine, it has been held by the Supreme Court that the fine cannot be allowed as deduction. See Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax : 1983ECR1942D(SC) . Even the expenditure incurred in defending a prosecution has been held to be inadmissible. See Commissioner of Income-tax v. H. Hirjee : [1953]23ITR427(SC) . This court dealt with a situation somewhat similar to the present one in Commissioner of Income-tax v. Ramakrishna Mills (Coimbatore) Ltd. : [1974]93ITR49(Mad) and examined the applicability of the said decisions. In that case the company claimed allowance of remuneration paid to the managing agency firm and also the salary paid to the manager. The manager was a partner of the managing agency firm. The Income-tax Officer allowed remuneration paid to the managing agency firm, but disallowed the salary to the manager on the ground that the salary paid to him amounted to remuneration paid to the managing agency and that it was in excess of the statutory percentage prescribed in the Companies Act. In allowing the deduction claimed, it was pointed out by this court, that there was no infringement of the provision of the Companies Act when the company made payment to a partner of the managing firm in his capacity as the manager of the assessee and that even if there was an infringement, it would not disentitle the assessee to claim deduction under Section 10(2)(xv). The decisions of the Supreme Court on this point have been noticed. The decisions of the Supreme Court would not apply to a case where there is no fine paid or penalty incurred for violation of law. Therefore, even though the expenditure may be allowable as deduction if it satisfied the requirements of Section 10(2)(xv) though the Companies Act may discountenance it, still it has to be disallowed on the facts because it was not incurred wholly and exclusively for the assessee's business.

52. There was an alternative claim on behalf of the assessee that, at any rate, with reference to the expenditure incurred by the assessee in remunerating its own directors, who were also members of the licence committee, the amount should be allowed as deduction, as there is a nexus between the expenditure and the business of the assessee in rendering services to its subsidiaries. The resolution passed by the assessee does not say that the expenditure was incurred for the purpose of remunerating its own directors in so far as they rendered services to it as members of the finance committee. The resolution of the company treated the directors, whether they be the members of the finance committee or not, as a class. With reference to all of them the assessee incurred the expenditure, only because they could not be remunerated to that extent by the subsidiary companies. The fact that they were directors of the assessee and that they were members of the finance committee had not been taken into account in taking over the remuneration payable to them. In these circumstances, we do not find it possible to accept the assessee's alternative contention either. The result is that the third question has to be answered in the negative and against the assessee.

53. We now take up for consideration the last three questions in T. C. No. 239 of 1971. There was a company by name Sembiam Saw Mills (Private) Ltd., which was originally a subsidiary of Addison & Co. Ltd. On and from February 1, 1954, the assessee-company purchased all the shares of Sembiam Saw Mills (Private) Ltd. from Messrs. Addision & Co. (Private) Ltd. Sembiam Saw Mills thus became the direct subsidiary of the assessee. It had borrowed monies from the National Bank of India Ltd. and the assessee-company guaranteed the loan to the said company by the bank. That company went into liquidation some time in 1955. For the purpose of overdraft facilities the subsidiary, viz., Sembiam Saw Mills, executed a promissory note in favour of the assessee, which in turn endorsed it to the bank along with a separate guarantee letter in favour of the bank. When Sembiam Saw Mills went into liquidation, the assessee, as guarantor, was required to clear those overdrafts in accordance with the terms of the guarantee. After adjusting the amount recovered from the liquidators, the sum due to the assessee from the liquidated company on account of the said overdraft was Rs. 9,08,764. The assessee claimed this amount as a loss which arose in the course of and incidental to its businesss in the assessment for 1958-59. There were receipts by the assessee in the course of the liquidation of Sembiam Saw Mills (Private) Ltd. in the later years. The total amount received came to Rs. 4,85,508.28 spread over the relevant accounting years for the assessment years 1959-60 to 1962-63. The assessee relied on the clause in the memorandum of association authorising it to be the guarantor for the loans and contended that the transactions in question sprang out of normal business transactions and hence the loss was an allowable deduction in the assessment for 1958-59. The Income-tax Officer held that the loss in question did not arise during the course of or incidental to its business. In his view, it was at best a capital loss, which did not come within the scope of Section 12B.

54. The assessee filed an appeal against the assessment for 1958-59. In making the assessments for 1959-60 to 1962-63 the Income-tax Officer treated the receipts from the liquidator as income as a protective measure. The assessee objected to the said assessment also in the appeals before the Appellate Assistant Commissioner. The, Appellate Assistant Commissioner did not accept the assessee's claim for allowance of the loss in 1958-59. In his view, it was not a loss which arose during the course of or was incidental to its business. He, however, allowed the appeals for 1959-60 to 1962-63 in so far as they related to the question of the receipts in the respective years from the liquidator. As the guarantee loss had not been allowed as a deduction in 1958-59, the Appellate Assistant Commissioner held that the subsequent recoveries could not be included in the total income in the later years.

55. The assessee as well as the department preferred appeals against the said orders of the Appellate Assistant Commissioner. The Ttibunal held that the assessee had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. As the assessee had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, it was held that the balance of Rs. 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. It is on these facts that the following questions have been referred :

'(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the loss sustained by the assessee on account of standing guarantee to Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in 1962-63 assessment after taking into account the amounts received from the liquidators during the years 1959-60 to 1962-63?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the receipts of Rs. 1,41,000, Rs. 2,29,627, Rs. 1,10,500 and Rs. 4,381 from the liquidators of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation), from the assessments for 1959-60, 1960-61, 1961-62 and 1962-63, respectively ?

(6) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that an amount of Rs. 4,23,256 representing the real loss sustained by the assessee on account of standing guarantee of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in the assessment for 1962-63 ?' The real point in issue is whether the guarantee that was executed in favour of the bank in respect of the loan to Sembiam Saw Mills (Private) Ltd., the assessee's subsidiary, was done in the course of its own business. The nature of the business of the assessee has been the subject of consideration in Amalgamations P. Ltd. v. Commissioner of Income-tax : [1969]73ITR380(Mad) . There the question was whether the provisions of Section 23A were applicable to the assessee. The assessee had created a reserve of a sum of Rs. 60,000 towards the above mentioned guarantee amount that was anticipated to be enforced against it, in respect of the loan granted to Sembiam Saw Mills (Private) Ltd. The point was whether this reserve could be considered in the application of Section 23A to the assessee. This court accepted the assessee's claim that the reserve was liable to be considered in the context of the application of Section 23A. In the course of the judgment it was observed as follows : 'The assessee's business is peculiar which includes furnishing guarantee to debts borrowed by subsidiary companies.'

56. The finding given above squarely applies to the consideration of the questions now before us. The assessee incurred this loss in carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. It is now well settled that the loss is allowable as a deduction in the year in which it came to be ascertained. In the assessment year 1958-59, the assessee had only been obliged to pay the bank. But it did not become the loss because there were possibilities of recovery from the liquidator as is clear from the later recoveries. The final payment from the liquidator was received only in the previous year for 1962-63. It was only at the stage of the final payment that the assessee could have ascertained what the loss in the transaction of guarantee could be. As the loss arose in the relevant previous year for the assessment year 1962-63 the Tribunal was right in allowing it in that year. Questions Nos. 4 and 6 are answered in the affirmative and against the revenue. We have already indicated the answer to the other questions. As neither party has succeeded wholly in the reference, there will be no order as to costs in both the cases.


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