High Court Of Karnataka
CIT & ANR. vs. United Breweries Ltd.
Section 5, 35D, 36(1)(vii), 37(1)
Asst. Year 1996-97, 1997-98
D.V. Shylendra Kumar & N. Ananda, JJ.
IT Appeal Nos. 492 of 2001 & 89 of 2003
11th January, 2010
Counsel Appeared :
M.V. Seshachala, for the Appellants : S. Parthasarathi, for the Respondent Judgment
D.V. Shylendra Kumar, J. :
These two set of appeals under s. 260A of the IT Act, 1961 (for short ‘the Act’) are by the Revenue directed against the common order dt. 20th July, 2001 passed by the Tribunal, Bangalore Bench in so far as it relates to ITA No. 630/Bang/1999 with reference to the asst. yr. 1996-97 and order relating to ITA No. 916/Bang/2000 referable to the asst. yr. 1997-98.
2. The respondent-assessee is a public limited company essentially carrying on the activity of manufacture and sale of alcoholic beverage ‘beer’ and in terms of the memorandum of association of the company while this activity constitutes the main activity for which the company M/s United Breweries Ltd., as the very name suggests, had been established, incidentally also had the object of related activities as indicated in the memorandum of association of the company which read as under :
3. The objects for which the company is established are— (a) Primarily and without prejudice to the generality of the other objects of the company, to purchase or otherwise acquire and takeover as going concerns the businesses of brewers and otherwise heretofore carried on under the names of the Bangalore Brewery Co. at Bangalore and elsewhere, the Rose and Crown Brewery at Kaity in the District of Nilgiris and elsewhere, the Madras B.B.B. Brewery Co. Ltd. at Madras and elsewhere and all or any of the assets and liabilities in connection therewith and with a view thereto to enter into and carry into effect (either with or without modification) certain articles of agreement (referred to in art. VIII of the additions and modifications of the company’s articles of association) as being proposed to be made between John Oakshott Robinson of the one part and the company of the other part. (b) To carry on the business of brewers and maltsters in all its branches. (c) To carry on all or any of the business of hop merchants and growers, timber merchants and growers, malt factors, corn merchants, wine and spirit merchants, either as exporters or importers and distillers, coopers and bottlers, bottle makers, bottle stopper makers, potters, manufacturers of and dealers in aerated and mineral waters and other drinks, licensed victuallers, beer house keepers, yeast dealers, grain and produce growers, sellers and driers, isinglass merchants and printers. (c-1) To manufacture, repair, alter, improve, process, buy, sell, import, export or otherwise deal in— (i) Electrical or other equipment, appliances, accessories, tools, utensils, products and articles meant for industrial, domestic or other purposes. (ii) Cycles and motor-cycles of all sorts and all components and accessories pertaining to them. (iii) Surgical, electro- therapeutic and other instruments, appliances, apparatus, materials and articles. (iv) Screws, nails, bolts, nuts, hinges, windows, louvres, doors, frames and all other such articles, materials, appliances and products, whether metallic or wooden or plastic or of any other sort whatsoever. (v) All sorts of chemicals, drugs, perfumes, essences, pigments, colours, varnishes and polishes. (c-2) To prepare, compound, blend, process, can, bottle and render marketable vegetables, fruits, fish, meat, grains, pulses, spices, condiments and other food and culinary products.
To buy, sell, manipulate and deal both wholesale and retail in commodities, articles and things of all kinds which can conveniently be dealt in by the company in connection with any of its objects. (e) To carry on any other business whether manufacturing or otherwise which may seem to the company capable of being conveniently carried on in connection with any of the above businesses or objects or calculated directly or indirectly to enhance the value of or render profitable any of the company’s property or rights for the time being. (f) To purchase or otherwise acquire and undertake the whole or any part of the business, property and liabilities of any person, corporation or company, carrying on any business which this company is authorised to carry on, or possessed of property suitable for the purposes of this company. (g) To acquire by purchase or otherwise for the business of the company in India orelsewhere, any lands, manufactories, buildings, mills, plant, engines, machinery and other things and to erect and maintain or reconstruct and adapt buildings, mills, plant, engines, machinery and other things found necessary or convenient for the purposes of the company. (h) To enter into partnership or into any agreement for sharing profits, union of interest, cooperation, joint adventure, reciprocal concession, or otherwise, with any person or company, carrying on or engaged in, or about to carry on or engage in any business or transaction which this company is authorised to carry on, or to engage in any business or transaction, capable of being conduced so as directly or indirectly to benefit this company. (i) To purchase or otherwise acquire any patents, brevets d’invention, licenses, concessions, and the like, conferring any exclusive or non-exclusive or limited right to use any invention or privilege which may seem capable of being used for any of the purposes of the company, or the acquisition of which may seem calculated, directly or indirectly, to benefit this company, and to use, exercise, develop or grant licenses in respect thereof or otherwise turn to account the property and rights so acquired. (j) To construct, improve and maintain manufactories, warehouses, shops, stores and other works and conveniences which may seem calculated, directly or indirectly, to advance the company’s interests. (k) To sell, exchange, mortgage (with or without a power of sale) assign, lease, sublet, and generally otherwise deal with the whole or any part of the business, estates, property or undertaking of the company, as a going concern or otherwise, to any person or persons, association or associations, or otherwise, for such consideration as the company may think fit, and either for cash or for shares, debentures or securities of any other company having objects altogether or in part, similar to the objects of this company, and to hold or distribute among the members in specie or otherwise the whole or part of the consideration for such sale.
To promote any company or companies for the purpose of acquiring all or any of the property or liabilities of this company or for any other purpose which may seem directly or indirectly calculated to benefit this company. (m) To borrow or raise money by the issue of or upon bonds, debentures, debenture stock, perpetual or otherwise, charged upon or by mortgage, charge, hypothecation, or pledge, of all or any of the company’s property (both present and future), including its uncalled capital, or in such other manner as the company may think fit, and upon any terms or conditions. (n) To amalgamate with any other company having objects altogether or in part similar to those of this company. (o) To distribute any of the properties of the company among the members in specie or otherwise, but so that no distribution amounting to a reduction in capital be made without the sanction (if any) for the time being required by law. (p) To make, draw, accept, endorse and execute promissory notes, bills of exchange, charter parties, bills of lading, warrants, debentures and other negotiable or transferable instruments. (q) To invest and deal with the moneys of the company not immediately required upon such securities and in such manner as may from time to time be determined. (r) To receive money on deposit at interest or otherwise, and to lend money, and in particular to customers and others having dealings with the company, and to guarantee the performance of contracts by any such persons. (s) To subscribe for, purchase, take, or otherwise acquire and hold shares, stocks, debentures, or any other interest in any other company, whether British, colonial, or foreign, in which the liability of the members is limited by shares. (t) To lend money to any company, partnership, person, or association upon security to their or his undertaking, property, estate, assets and effects, or any part thereof upon such terms as may be deemed expedient, and take such security, either in the shape of mortgages, mortgage debentures, or debentures, or in any other form. (u) To remunerate any person or company for services rendered in placing or assisting to place or guaranteeing the placing of any shares or debentures or other securities of this company or any other company promoted wholly or in part by this company. (v) To manage, improve, develop and turn to account, or otherwise deal with all or any part of the property of the company. (w) To enter into arrangements with any authorities, municipal, local, or otherwise, that many seem conducive to the company’s objects, or any of them, and to obtain from any such authority, any rights, privileges, and concessions which the company may think it desirable to obtain, and to carry out, exercise and comply with any such arrangements, rights, privileges and concessions.
To do all or any of the above things, in any part of the world, and as principals, agents, contractors, trustees or otherwise, and by or through trustees, agents or otherwise, and either alone or in conjunction, with any other person or association, and to contract for the carrying on of any operation connected with the company’s business by any person or other association. (y) To do all such other things as are incidental or conducive to the attainment of the above objects. (c-3) To carry on business of exploration, extraction, manufacture, production, distribution and sale of oil and all oil products of every description. (c-4) To search for, inspect, examine, carry out drilling and other prospective operations, geological and geophysical surveys to prove and estimate reserves of petroleum, work, take on lease, purchase, construct, erect and commission, hire, charter, purchase or lease oil drilling rigs or platforms and other works and conveniences suitable for the purpose. (c-5) To carry on the business of producers, refiners, stores, suppliers and distributors of petroleum and petroleum products in all its branches. (c-6) To construct, set up, maintain, manage and control any oil drilling rigs or platforms whether offshore or onshore and everything incidental or ancillary to the exploration, search, development, production, transport, refining and acquisition of solid, liquid and gaseous hydrocarbon and their products and by-products. (c-7) To hire, purchase, otherwise acquire and work ships and vessels of any class, and to establish and maintain lines or regular services of ships or other vessels and to generally carry on the business of ship owners, and of providing marine services covering marine transportation, offshore engineering, including installations and repairs of platforms, chartering of vessels, rigs, to wages, port operations, salvage and underwater services, and to enter into contracts for the carriage of mail, passengers and goods by means of either by its own vessels or otherwise. (c-8) To repair ships and vessels of every description and to keep and maintain ship building, repair and breaking yards.
To maintain for the use of the company, or for letting out on hire any other conveniences for the repairing or docking of ships and other vessels and to aid in or contribute to the aforesaid activity. (c-9) To manufacture, buy, sell, deal in, import and export television sets of all types and descriptions and its components, all electric goods, radios, radiograms, loudspeakers, phonograms, cassette and radio cassette players and decks, recording tapes of all kinds, compact discs and video cassette players, amplifiers, personal stereo cassette players of whatever description, dictaphones, all sorts of electric and wireless sets and equipment, radio receiving of transmitting sets of all types. (c-10) To manufacture, install, maintain, repair, buy, sell, deal in, import and export all types of electronic articles/instruments, components, and equipment including transmitters, receivers, walkie-talkie sets, systems circuits required in military and commercial, electrical and electronic industry, including heavy-duty weatherproof communications, EPABX and PABX sets and systems, telecommunication and intercommunication sets and systems of all kinds and varieties, key telephone systems, automatic message recording telephone answering devices, radio frequency microphones, computer rack and panel printed circuits, micro switches and trimmers, including computers, computer peripherals, computer software, hard discs, floppy discs and diskettes, test and measuring instruments, materials for electronics, broadcasting equipment, control instrumentation and industrial and professional electronics and communication equipment. (c-11) To act
as consultants and provide advice, services, consultancy in various fields of financial, taxation, management consultancy, mechanical and electrical engineering, electronics, computer and computer software, pollution control, oil exploration and material handling systems and any business which the company is entitled to carry on. (c-12) To carry on the business of manufacturers, importers, exporters and to sell and deal in drugs and pharmaceuticals, bulk drugs, medicines, biologicals, industrial products, chemicals and petrochemicals of all types including inorganic and organic chemicals and fine and photographic chemicals, man-made fibres and films, petroleum and petroleum products, soaps, cosmetics and toilet preparations and all kinds of medical and surgical appliances including electrical, chemical, photographical and scientific apparatus and materials.”
1. The respondent company is a regular assessee under the provisions of the Act and is being assessed in the status of a resident company. In the returns filed for the asst. yr. 1996-97 and for the asst. yr. 1997-98, the assessee had claimed various deductions in the course of computation of the profits of the business which profit becomes taxable as income under the provisions of the Act and insofar as these two appeals are concerned, we are essentially examining the claims of the assessee relating to the claim in nature of a written off’ irrecoverable debt which is also characterized as ‘bad debt’ in terms of s. 36(1)(vii) of the Act.
2. The assessee, it appears had in the course of its activity of manufacture and sale of beer furnished guarantee for repayment of certain loans and advances which its subsidiary companies and other business associates to the subsidiary companies had raised from banks and other financial institutions and on the failure of subsidiary companies or its business associates to repay the amount on the premise that they have become incapable of repayment, had reimbursed the guarantee amount to the creditors and had claimed that amount as an expenditure in terms of the provisions of s. 37 of the Act and as to whether an expenditure of this nature qualifies for deduction.
3. One question relating to the claim towards ‘legal expenses’ incurred for obtaining certain advice and by way of consultation and as to whether it qualifies for deduction under s. 37 of the Act is a question related to the asst. yr. 1996-97 and the other question relating to the interest which had accrued to the assessee-company in respect of the amounts advanced to its business associates, whether could be construed as ‘not real income’ and therefore not taxable, notwithstanding the provisions of s. 5 of the Act is a question which arises for the asst. yr. 1997-98.
4. In respect of the questions involving these three aspects, while the adjudicating authority had answered all questions relatable to these issues against the assessee and the first appellate authority the CIT(A) has affirmed this view of the adjudicating authority and all questions covering these three aspects were held against the assessee in terms of the findings recorded by the first appellate authority also, it is the second appellate authority the Tribunal which has reversed the findings of the first two authorities covering all three aspects and for the two assessment years and the effect on the revenue is that an amount of Rs. 5,38,28,633 had come to be reduced from the total income of the assessee in respect of the return relevant for the asst. yr. 1996-97 which according to the assessee was an amount representing what is known as ‘bad debts’ and a further amount of Rs. 54,27,363 had been reduced from the total income as an amount allowable by way of deduction under s. 37 of the Act being the amount spent by the assessee for honouring the guarantee it had provided in favour of M/s Tamilnadu Alkaline Batteries Ltd. for a sum of Rs. 26,43,204.33 which was a company owned by two subsidiary companies of the assessee-company, namely, M/s Golden Investments Ltd. and M/s East Coast Investments Ltd. and M/s Tamilnadu Alkaline Batteries Ltd. having taken loan of Rs. 16 lakhs from M/s Tamilnadu Investments Corporation for repayment of which loan, the two subsidiaries of the assessee-company had guaranteed which it appears had subsequently amalgamated with the assessee company w.e.f. 1st April, 1994 and therefore it was the case of the assessee that during the period relevant for the asst. yr. 1995-96, the original guarantee issued by its subsidiaries in favour of M/s Tamilnadu Alkaline Batteries Ltd. in the year 1990 had been honoured in favour of the financiers of M/s Tamilnadu Alkaline Batteries Ltd.
5. Likewise, another amount of Rs. 26,63,001 had been paid by the assessee to M/s Nagarjuna Finance Ltd., M/s Vysya Bank Leasing Ltd. and M/s Excel Finance Ltd., which again is said to be an amount borrowed by M/s Unitel Communications Ltd. from these financial institutions and the said M/s Unitel Communications which had been promoted amongst others by the assessee-company, having fallen sick, the assessee- company by way of nursing the sick company had honoured its guarantee by repaying the loan that the said sick company had raised from the three financial institutions and had claimed this amount also as deductible business expenditure under s. 37 of the Act.
6. While the first two authorities, namely, adjudicating authority and the first appellate authority had disallowed this amount, the Tribunal has reversed the findings and allowed the deduction of this amount, also by reducing it from the total taxable income of the assessee for the assessment year in question.
7. The third claim for deduction which had been declined by the first two authorities and allowed by the Tribunal was a sum of Rs. 15 lakhs which had been paid by the assessee-company by way of ‘legal fee’ to M/s Fraser & Ross, a chartered accountant firm who incidentally also happens to be the auditors of the assessee-company and which amount had been paid to them for eliciting their opinion about the feasibility of the assessee-company taking over a foreign company, namely, M/s National Sirghum Brewery a company located in South Africa and being of the view that the consultation fee paid to M/s Fraser & Ross is an expenditure incurred by way of ‘revenue expenditure’ and not as part of ‘capital expenditure’ as had been opined by the two lower authorities.
8. It is for answering these substantial questions which have been mentioned in paras 29 to 37 of the memorandum of appeal, IT Appeal No. 492 of 2001 relating to the asst. yr. 1996-97 this appeal had been admitted and the said questions read as under :
“1. Whether the Tribunal was correct in holding that a sum of Rs. 43,77,633 should be treated as a bad debt when this amount was paid to M/s Pharmacia United Ltd. for purchase of share capital by the assessee who had failed to deliver the share and therefore should be treated as a capital loss ?
1. Whether the Tribunal was correct in arriving at a conclusion that a sum of Rs.18.48 lakhs claimed by the assessee as wastage on account of defective stock during the asst. yr. 1994-95 could be written off during the assessment year i.e., 1996-97 when it is following mercantile system of accounting ?
2. Whether the Tribunal was correct in holding that the payment made by the assessee of Rs. 264.75 lakhs to M/s UB Elastomers Ltd. to start a Butyl Rubber project which failed to take off was a revenue loss when this payment made to a different entity to acquire new business is a capital loss investment and consequently a capital loss ?
1. Whether the Tribunal was correct in holding that a sum of Rs. 32.76 lakhs paid to M/s Tamilnadu Alkaline Batteries Ltd., could be written off as liability as the two subsidiary companies M/s Golden Investments Ltd. and East Court Ltd. of M/s Tamilnadu Alkaline Batteries Ltd. has merged with the assessee-company, by ignoring the essential principle that the trading activity of the assessee and that of M/s Tamilnadu Alkaline Batteries Ltd. were entirely distinct and both these companies were separate legal entities ?
2. Whether the Tribunal was correct in holding that a sum of Rs. 32.73 lakhs paid to M/s Marine Products to export shrimps which is not supported by any evidence could be treated as expense allowable to the assessee under s. 37 of the Act as it was incurred wholly and exclusively for the purchase of its business when admittedly the business activity carried out by the assessee is the manufacture and sale of beer ?
3. Whether the Tribunal was correct in holding that a sum of Rs. 145.79 lakhs payable by M/s Sunny Enterprises could be treated as an irrecoverable debt when the assessee has not produced any proof for supplying goods nor any exchange of correspondence between the assessee and M/s Sunny Enterprises nor initiating any legal action to recover the same ?
4. Whether the Tribunal was correct in allowing the assessee’s claim to treat the various amounts claimed by it as bad debt and allowed it as deduction under s. 36(1)(vii) when there was no proof for making such payment and there was no effort to recover the debt nor an explanation given as to supervening impossibility on the part of the debtor to pay ?
5. Whether the Tribunal was correct that once the assessee enters into an agreement to stand guarantee and in the case of default such payments made would automatically be in the course of business, even though the party is a separate legal entity carrying on a distinct business without receiving any guarantee commission nor disclosing the profit on account of standing such surety ?
6. Whether the sum of Rs. 15,00,000 paid to M/s Frazer & Ross for obtaining the feasibility/viability report for purchasing Natural Sirghum Breweries, South Africa was a
business expenditure allowable under s. 37(1) of the Act as held by the Tribunal or a capital investment as held by the AO ?”
11. We may mention here itself that insofar as the substantial question No. 8 mentioned hereinabove and raised at para 36 of the appeal was concerned, the Tribunal had answered this question purporting to follow the judgment of this Court on identical question for the asst. yr. 1995-96 in terms of a reported judgment of this Court in the case of CIT vs. United Breweries Ltd. & Anr. (2007) 209 CTR (Kar) 385 : (2007) 292 ITR 188 (Kar) in respect of IT Appeal Nos. 24 and 25 of 2000 as per judgment dt. 25th Jan., 2007.
12. Insofar as the asst. yr. 1997-98 is concerned, that part of the order of the Tribunal relevant for this assessment year in the common order dt. 20th July, 2001, constitutes the subject-matter of IT Appeal No. 89 of 2003 which is an appeal filed later by the Revenue, but which had earlier been part of the memorandum of appeal in IT Appeal No. 492 of 2001 and covering both the assessment years and the questions relating to this assessment year which figured as questions mentioned in paras 38 to 42 of the memorandum of appeal in IT Appeal No. 492 of 2001, are identical questions figuring at paras 14 to 18 of the memorandum of appeal in IT Appeal No. 89 of 2003 and reads as under :
“10. Whether the Tribunal was correct in holding that the payment of Rs. 13,93,404 for acquiring M/s Western India Enterprises was allowable under s. 37(1) of the Act when the object of acquisition was capital in nature by erroneously laying emphasis on the clause in the memorandum of association of assessee company which permitted money lending ?
1. Whether the sum of Rs. 10,50,000 paid by the assessee-company to M/s Best and Cromption Engineering Ltd. a separate legal entity under the Act and the Companies Act carrying on different business activities without any arrangement of profit-sharing could be treated as an associated company and the payment made by the assessee on behalf of that company treated as an expenditure in the hands of the assessee ?
2. Whether the payment of Rs. 14,85,820 made in favour of M/s Sivan & Co. for purchase of shares was a capital payment not allowable under s. 36 of the Act on failure to deliver the shares especially in view of the nature of business of manufacturing and sale of beer carried on by the assessee ?
3. Whether the Tribunal was correct in holding the a sum of Rs. 73,13,726 could be treated as bad debt despite the fact that there was absolutely no material to show that these debts arise out of the business of manufacturing beer or that their payment was made towards advance for supply or for carrying on the business of the assessee ?
4. Whether the Tribunal was correct in holding that a sum of Rs. 74.75 lakhs should be excluded on the principle of real income in accordance with the decision of the apex Court in CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC), when the interest income had accrued and reflected in the P&L a/c in the present case and the judgment was not applicable to the facts of the present case ?”
1. Out of these questions, question No. 14 alone is a question raised afresh for the asst. yr. 199798 on the theory of ‘no real income’ to the assessee though on accrual basis the income whether it has been realized or not, becomes taxable under the provisions of the Act and the question has to be independently considered and answered for this assessment year.
2. It is covering questions from Nos. 1 to 14 mentioned at paras 29 to 42 of the memorandum of appeal in IT Appeal No. 492 of 2001 which are the questions relating to the two assessment years on which elaborate submissions have been made by Sri Seshachala, learned senior standing counsel for the appellant-Revenue and if not more equally as elaborate submissions are made by Sri Parthasarathi, learned counsel appearing for the respondent-assessee.
3. We have been taken through the orders in question in great detail and learned counsel for the parties have also placed before us several authorities in support of their respective contentions on behalf of their clients.
4. We shall consider the submissions made at the Bar by the learned counsel and the authorities relied upon in support of such submissions in seriatim.
17. Insofar as the first aspect of the questions relating to the assessee’s claim for writing off certain amounts by way of ‘bad debts’, the details are as under : Sl. No. Borrowers Amount 1.Pharmacia United Ltd. 43,77,633 2.Premier Enterprises 18,48,000 3. U.B. Elastomers Ltd. 2,64,75,000 4. T N Alkaline Batteries Ltd. 32,76,000 5. Marine Products 32,73,000 6. Sunny Enterprises 1,45,79,000 Total 5,38,28,633
18. In respect of these claims which had been specifically disallowed by the adjudicating authority and affirmed in appeal by the CIT(A) who had given elaborate reasons for doing so and while detailed discussion of the adjudicating authority for not allowing the claim of the assessee under s. 36(1)(vii) of the Act in terms of the assessment year is as under : “(i) Bad debts claimed in respect of M/s Pharmacia United Ltd. : On necessary enquiry, it was found that PUL was assessed to tax with Jt. CIT, Special Range-3, Bangalore. Hence a letter was written to the said Jt. CIT to send the copies of the correspondence relating to the amounts owed by M/s PUL to this assessee as furnished before her during the assessment proceedings. Accordingly, the copy of the letter furnished by the Authorised Representative of M/s PUL dt. 4th Sept., 1998 was obtained. The said letter states as under : ‘Share advance from U.B. Ltd.—There was a sum of Rs. 61,85,257 under advance against share capital from U.B. Ltd. in the books of assessee company at the beginning of the assessment year. During the asst. yr. 1996-97, the assessee company by mutual agreement paid to U.B. Ltd. Rs. 18,07,624 as full and final settlement against the amount received towards share capital. Confirmation letter from U.B. Ltd. to this effect is enclosed herewith. Difference between the book balance against U.B. Ltd. i.e., Rs. 61,85,257 and the amount settled Rs. 18,07,624 i.e., Rs. 43,77,633 was credited to the capital reserve account.’
Thus from the above submissions made by M/s PUL before its AO, it was very clear that the loss was not a revenue loss as the amounts given by the assessee-company were towards share application money and not towards trade advances as claimed by the assessee-company in its return. The copy of the said letter was made available to the Authorised Representative of the assesseecompany to give an opportunity to make their submissions in this regard. The assessee-company vide letter dt. 11th March, 1999 submitted as under : The point to be noted here is at the time when the original advance was made, it constituted a trade advance in our books as it was part of the pharmaceutical portfolio of the U.B. Group. At the same time, when the joint venture came to an end, the loss being U.B. Ltd.’s share had to be absorbed as the new company was unable to repay, owing to the losses accumulated by it. If it is assumed that what we have incurred above is a capital loss, we submit that the same should be set off against the capital gain made by the company.’ The assessee company did not produce any evidence in support of their claim that the original advance was a trade advance. At the same time, the PUL has been claiming in its letter that it was an advance against the share capital. The copies of the ledger extracts furnished from financial year 1990-91 has the entry of balance brought down. Therefore, the account of the PUL was debited earlier to that period. The original entry as appearing in the books at the time of giving the advance was not produced in spite of the sufficient opportunity given to the assessee company in support of their claim. And hence I treat Rs. 43,77,633 claimed by the assessee company as a bad debt of capital nature, which cannot be allowed as deduction under s. 36 or 37 of the IT Act. Therefore the bad debt claimed by the assessee company is hereby disallowed. (ii) Debts written off to M/s Premier Enterprises, Secunderabad amounting to Rs. 18.48 lakhs :
After obtaining the address of this company from the assessee company a letter under s. 133(6) was written calling for the details. M/s Premier Enterprises stated in its letter dt. 28th Feb., 1999 that as on 31st March, 1996, they do not owe any amount to M/s U.B. Ltd. The copy of this letter was made available to the assessee company to file their submissions, if any. In letter dt. 17th March, 1999, the assessee company submitted as under : ‘As per the books of our Hyderabad brewery, the balance outstanding as of 1st April, 1994 was Rs. 38.78 lakhs from Premier Enterprises. However, from this sum, the credit note issued to the dealer on account of annual turnover bonus of Rs. 16.36 lakhs is deducted. Further, during 1993-94, there was a claim by the dealer amounting to Rs. 15.40 lakhs on account of sedimented beer supplied to him. It may be recalled that during that period there was a prohibition in Andhra Pradesh due to which we could not despatch our goods in time. We have now obtained the confirmation of balance from the party which proves that the amount outstanding is Rs. 3.61 lakhs, after adjusting for the claim made on account of sedimented stock and also the bonus due to him. Under the circumstances, we request that instead of treating the amount as bad debts written off we may request that it may be considered as process wastage/claims paid on account of defective stock. At the same time, we also request that the amount of claim may be restricted to Rs. 14.87 lakhs.’ From the above reply, it is very much clear that the assessee company had written off the amount due from M/s Premier Enterprises without making any efforts to collect the same. As per the said letter, M/s Premier Enterprises have accepted a debt of Rs. 3.61 lakhs and to that extent the assessee company’s claim of bad debt warrants disallowance. As regards, the process wastage/claims paid on account
of defective stock, the assessee company has not produced any documents/ correspondence in this regard. Further, if the claim was relating to asst. yr. 1994-95 (relevant to previous year 1993-94) then the assessee company should have accepted the claim of the assessee or rejected in the same assessment year. As the assessee company is following the mercantile system of accounting, any loss pertaining to asst. yr. 1994-95 cannot be allowed in this assessment year. Therefore, the loss claimed on account of wastage/defective stocks amounting to Rs. 14.87 lakhs is hereby disallowed and added to the total income/reduced from the loss returned. The total disallowance is Rs. 18.48 lakhs. (iii) Debts written off in case of M/s U.B. Elastomers Ltd. : During the course of assessment proceedings, the assessee furnished the details of bad debts written off as on 31st March, 1996. They are as under : 1. UBIME Rs. 11.94 lakhs 2. U.B. Elastomers Ltd. Rs. 264.75 lakhs 3. Tamilnadu Alkaline Batteries Ltd. Rs. 32.76 lakhs
The assessee company was asked to produce the addresses of the said concerns along with their ledger extracts in the year in which their accounts were debited. However, till date the assessee company has not been able to produce their addresses in case of all the concerns referred above. As regards, Pharmacia United Ltd. it has been found that the debt written off was in the nature of share application money and hence it is not a revenue loss as discussed in the earlier part of this order. However, in their letter dt. 24th Dec., 1998 the assessee company has stated as under : ‘With regard to advances written off pertaining to U.B. Elastomers Ltd., Pharmacia United Ltd. and Tamilnadu Alkaline Batteries Ltd. we would like to submit, these companies were sick companies and hence the amounts are not recoverable.’ Further, vide letter dt. 4th March, 1999, the assessee company submitted that due to the inability of UBEL to pay to the lenders, the guarantees given by the assessee company were invoked and the same were settled by the latter. The assessee company enclosed the ledger extracts of UBEL in their books and also furnished the audited P&L a/c and balance sheet of UBEL.
The ledger extract of UBEL very clearly shows that the assessee company was paying for the business needs of UBEL, which did not derive any trading or business gain for the assessee company. The payments made by the assessee company to various parties on behalf of UBEL, have been accounted by UBEL as ‘advances received for future issue of snares’ in its balance sheet dt. 31st March, 1996. This itself shows that whatever payments were made by the assessee company on behalf of UBEL were in the nature of advances for issue of shares in UBEL. Further, as regards, U.B. Elastomers Ltd. the assessee company had produce necessary details during the course of the assessment proceedings for the asst. yr. 1995-96 before the AO as well as the CIT(A). From the said details produced, it is found that the U.B. Group wanted to enter the field of petrochemicals and more specifically wanted to start a Butyl Rubber project and the said project was to be started by M/s U.B. Elastomers Ltd. The latter company entered into collaboration with few companies abroad for importing of technology for their proposed plant. However the project could not be implemented because of financial reasons and also because of some disagreements with the foreign collaborators. Though the agreement for the project was finally signed with some foreign collaborator in February, 1989, but due to foreign exchange crisis in 1991 and also due to new policy of economic liberalisation and consequent reduction in the import duties in line with the international standards, made the project unviable and thus had to be given up.
During the course of formulation of the project of U.B Elastomers Ltd., the assessee company has made some advances which have been written off during the previous year relevant to this assessment year. Any advances given to a company which is totally a different entity and which is dealing in a product which is totally different from the products dealt by the assessee company, in that case it is very much clear that the advance given is in the nature of capital advance and not in the nature of trade advance as claimed by the assessee company. Here I would like to rely upon the decision of the Calcutta High Court in Hasimara Industries Ltd. vs. CIT (1990) 184 ITR 174 (Cal). In the said case advance made to a mill which was taken over on lease by the assessee for modernisation of mill’s plant became irrecoverable as the mill went into liquidation. The Calcutta High Court held that the loss was not a trading loss and hence cannot be claimed as a bad debt also. I rely on the decision of the Delhi High Court in Narang Industries Ltd. vs. CIT (1967) 66 ITR 316 (Del). Therefore, the assessee cannot claim it as a bad debt in its P&L a/c. It is in the nature of capital loss and hence the assessee’s claim of bad debt of Rs. 264.75 lakhs is fully disallowed. (iv) Debts written off in case of M/s Tamilnadu Alkaline Batteries Ltd : During the assessment proceedings, the assessee company was asked to produce the ledger extracts of TNABL in its books to ascertain the nature of advance and transactions between the two companies. Vide letter dt. 4th March,1999, the assessee company pleaded that the debts of TNABL came to its books upon merger of two investment companies with it. The assessee company also expressed its inability to produce the ledger extracts as the books of accounts of the erstwhile companies were maintained at Chennai.
As being discussed under the head ‘Guarantee obligation’, TNABL was a small scale industry at Chennai manufacturing batteries. As discussed in the case of U.B. Elastomers Ltd., this company also did not have any trade relations as the products dealt by the assessee company are totally different from those dealt by TNABL and therefore any amount of advance given by the assessee company cannot be in the regular course of the assessee company’s business. It has to be in the nature of capital advance and hence cannot be claimed as a bad debt in the P&L a/c. Thus the bad debt written off amounting to Rs. 32.76 lakhs is hereby disallowed. (v) Debts written off in case of M/s Marine Products Rs. 32.73 lakhs : During the course of assessment proceedings, it was pleaded that the marine advances were made to suppliers of shrimp which was exported by the assessee company. Due to the slump in the market, the business was disrupted and the advance made to suppliers became doubtful and the assessee company did not receive the money back till 31st March, 1996.
The assessee company is basically engaged in the manufacture and sale of beer. It wanted to venture into a new line of business of marine export. The assessee company has claimed that they have exported the marine product for which no evidence as produced during the assessment proceedings. Therefore, I feel that these advances were made by the assessee company for a totally new line of business and therefore it cannot be claimed as a bad debt of revenue nature. This was decided by the Calcutta High Court in Hasimara Industries Ltd. vs. CIT (supra). In the said case advance made to a mill which was taken over on lease by the assessee for modernisation of mill’s plant became irrecoverable as the mill went into liquidation. The Calcutta High Court held that the loss was not a trading loss and hence cannot be claimed as a bad debt. I also rely on the decision of the Delhi High Court in Narang Industries Ltd. vs. CIT (supra). During the assessment proceedings, the assessee company relied upon the decision of the Supreme Court in CIT. vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC) in support of its claim. The facts of the said case are totally different from that of the assessee company as Mysore Sugar Co. had given advances to the farmers of sugarcane which is their basic raw material of the business already established and thus it was held as a bad debt in the nature of revenue loss. However, in the case of the assessee company, the advances given are to a new venture which has not materialised or is yet to be set up. It was not in the regular course of the assessee’s existing business and therefore on the facts, the assessee’s case is not comparable with that of Mysore Sugar Co. Ltd.
Hence, Rs. 32.73 lakhs claimed by the assessee company as bad debt is disallowed. (vi) Debts written off in case of M/s Sunny Enterprises Rs. 145.79 lakhs : In this case, a letter was written to M/s Sunny Enterprises after obtaining the address of the assessee company calling for the information under s. 133(6). However, till this date the required information has not come from the said concern. Therefore, during the assessment proceedings, the assessee company was asked to produce the correspondence with the said company and steps taken by the assessee company to recover the debts outstanding. To this the assessee company vide their letter dt. 4th March, 1999 stated that consequent to introduction of prohibition in Andhra Pradesh the outstanding debt could not be recovered from M/s Sunny Enterprises as majority of the customers went out of the business. Due to closure of business the assessee company could not initiate legal steps for recovery of the debts outstanding.
The explanation given by the assessee company cannot be accepted in this regard for the following reasons—
1. The amount of debt involved is quite substantial and if the assessee company intended it could have definitely taken legal steps to recover the amount outstanding. The reasons given for non-initiation of legal steps are vague, unproved and not convincing.
2. The policy of prohibition does not stop anybody from recovering the debt which is so to say covered by the Contract Act and has noting to do with the prohibition policy.
3. The customer owed Rs. 145.79 lakhs to the assessee company itself shows that the volume of turnover of the said customer M/s Sunny Enterprises was quite huge and he cannot just go out of the business taking all his assets overnight as claimed by the assessee company. Therefore, I am of the opinion that the assessee company has not satisfactorily proved the circumstances in which the debts relating to M/s Sunny Enterprises have become bad and irrecoverable. The burden of proof lies on the assessee company to clearly establish and furnish all the particulars regarding the claim made in the return of income. No such particulars were filed nor any documents were produced to show that the debt has really become bad and its efforts to recover did not bear fruit. Therefore, the bad debt claim of Rs. 145.79 lakhs is hereby disallowed. In this regard, I rely upon the following three decisions in support of my view : 1. CIT. vs. Radhakrishna Ramnath AIR 1929 Nag 153, 2. CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC), 3. Mannalal Ratanlal vs. CIT (1965) 58 ITR 84 (Cal).” and insofar as for the asst. yr. 1997-98 relating to disallowances of the claim towards bad debts is concerned, the discussion of the adjudicating authority is to be found in para 9 of the order of adjudicating authority. The first appellate authority in the following discussion affirmed this finding which reads as under : “Issue No. 6 : Bad debts written off Rs. 1,34,75,416
18. The assessee claimed various sums aggregating to Rs. 1,41,27,379 as expenditure by way of bad debts written off. In the letter dt. 27th Feb., 2000, the assessee gave the break- up of the bad advances written off as follows : The AO disallowed the claim of deduction in respect of items (i) to (ix) above aggregating to Rs. 1,34,75,416 and the appellant objects to this. Each of the case is discussed below : (i) M/s Western India Enterprises Rs.13,93,404
19. Vide letter dt. 15th Feb., 2000 the assessee company explained the reason for the claim, under the caption ‘reason for writing off of bad advances’ as follows : ‘This amount was advanced way back in 1989 at the time of acquisition of this company to tide over temporary liquidity problems. Later the company was declared as a sick company by the BIFR. Thus, during the financial year 1996-97, we have written off the entire amount, as we are of the view that no recovery can be made in respect of this advance. 19.2 The AO noted that for allowing a claim as bad debt written off, the item must be one which can be called a trading debt, i.e., a debt of the trade which goes into computation of profit, as held by Supreme Court in the case reported at Madan Gopal Bagla vs. CIT (1956) 30 ITR 174 (SC). A capital loss cannot be claimed as bad debt by writing off. A debt which has already gone into the balance sheet as a trading debt in the business or trade of the assessee can be claimed as deduction [CIT vs. Birla Bros. (P) Ltd. (1970) 77 ITR 751 (SC)]. The funds were given to Western India Enterprises not in connection with trade, but to enable the latter to tide over liquidity problem. It is not allowable under s. 36 of the IT Act.
20. The appellant objects to this. Though no specific written argument was given, Sri Parthasarathi told that the assessee was doing money lending business and therefore, this should be considered as incurred in course of moneylending business.
21. In this relevance, I requested the Authorised Representative to submit evidence to substantiate this claim by showing the debt as a part of business turnover in the year in which the amount was advanced, the rate of interest if any agreed on such loan alleged to be given during the course of moneylending business, and the interest charged accounted as part of income of the business. (The assessee was following mercantile system of accounting, as the details filed for every year shows). No material or evidence was submitted in this regard. In fact, the accounts for asst. yrs. 1991-92 to date which I have examined does not show that the assessee accounted any amount as interest. The claim of the assessee in this regard is not substantiated and is against available facts. 21.2 Merely because the debt is irrecoverable and written off, it is not allowable as deduction. Sec.36(2) is clear that no deduction for bad debts or part thereof shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount is written off or in any earlier previous year. The assessee has not fulfilled these conditions. I would therefore, uphold the disallowance of this item. (ii) M/s Best & Crompton Engg. Ltd. Rs. 10,50,000
22. The assessee submitted before the AO that it approached ICRA, a reputed credit rating agency, for obtaining a rating as to enable further equity/debt instruments. ICRA indicated that another group company, viz., Best & Crompton Engg. Ltd. (hereinafter referred to as B&C) did not pay them some dues and without clearing of the dues they would not certify the creditworthiness of the assessee. It was decided that for the purpose of protecting the reputation of the company, the amount due by B&C should be paid. The amount was shown as advance due from B&C. Subsequently, liquidation proceedings were initiated against B&C by many creditors and the assessee came to the conclusion that this amount may not be recovered at all. In the circumstance, the assessee wrote off the sum of Rs. 10,50,000. The assessee relied on the decision of House of Lords in Lawson (Inspector of Taxes) vs. Johnson Matthey Plc. (1994) 209 ITR 761 (HL) and the payment was originally made to ICRA to obtain credit rating which is very crucial for the purpose of raising additional long-term debts and since the credit rating agency, stipulated that unless the payment due to them by B&C was cleared they would not be in a position to offer any credit ratings in spite of the fact that they have completed the entire analysis to be carried out in this regard. Therefore, the entire expenditure should be allowed as a revenue deduction. 22.2 The AO observed that in the case relied on by the assessee, the holding company (M/s Johnson Matthey) had to pay the debts of a subsidiary company which was a banking company and in financial difficulties. The Privy Council held that the insolvency of the subsidiary company would adversely affect the assessee company’s trade and therefore the payment made by the holding company was allowable as a revenue expenditure. Thus, the criterion was that insolvency of the subsidiary banking company would have adversely affected the profit earning capacity of the said company. However, in the case of the assessee company, the non-payment of M/s Best & Crompton Engg. Ltd. would not have affected the profit earning capacity of the assessee company. Therefore, the payment made on behalf of the assessee company is held as capital payment which cannot be allowed as a bad debt as claimed.
23. The appellant objects to this and reiterates the contentions before the AO.
24. In this relevance, the following aspects are to be noted— (1) Best & Crompton Engg. Ltd. is not a subsidiary of the assessee and the assessee’s responsibility to discharge liabilities of that company in that company is limited by the shares held. The case, therefore, cannot even be that clearing of the debts of B&C was on account of its position as holding company, or because the adverse financial position, if at all, of B&C would have affected the financial reputation of the assessee. (2) ICRA is not the only credit rating agency available. There are a number of well-known concerns who enjoy reputation in credit rating. It is not as if the assessee was under compulsion to give the credit rating work only to ICRA and be bound by its dictates that unless the assessee clears the debt of B&C, it would not give the credit rating. If only the assessee did not pay the fees agreed to ICRA because of its failure to give the correct rating, not to speak of clearing of debts of B&C, the latter would have suffered. The assessee could have got credit rating from some other famous agency cheaper. On the basis of available material, I would hold that this payment was out of own choice of the assessee and was not dictated by any business compulsion of a genuine nature. (3) The origin of the expenditure as claimed by the assessee was as payment to ICRA and to get a credit rating to enable it to go for further equity/debt instruments and in some earlier year. Arguing without conceding that the expenditure was necessary for the purpose of obtaining credit rating so as to facilitate taking of loan or fixed deposit from public, such expenditure must have incurred in the year in which it had to make the payment.
The amount is not allowable as an expenditure incurred during the year to procure loan in the current year. (4) The clearing of amount, if any, due by B&C to ICRA was not at the request of B&C and was not as a loan given during the course of its business. If the assessee by its own violation made any payment attributing it as amount payable by B&C that does not create a debtor creditor relationship between assessee and B&C. It is not attributable to any moneylending business, as it is not the case of the assessee that it was given to B&C or anybody else with a view to earn interest. (5) The amount involved or even interest thereon has not been taken into account in computing the income of the assessee of the previous year in which the amount was written off or some earlier year, nor does it represent money lent in the ordinary course of banking or moneylending carrying on by the assessee. The claim does not satisfy the requirement of s. 36(2)(i) and is to be disallowed for that reason. (iii) M/s Sivan & Co. Rs. 14,85,820
25. The written explanation given by the assessee to the AO vide letter dt. 15th Feb., 2000 is very brief and as follows : ‘The amount was written off as there was a dispute between the parties as to the amount to be paid to us in respect of certain shares.’
25.2. The AO has observed that M/s Sivan & Co. is a share broker and the amount written off by the assessee during the year was amount in dispute between the two. The advance given to the share broker was not having revenue nature, as the assessee is not a dealer in shares. The advances given was payment towards capital payment and hence cannot be allowed under s. 36 of the IT Act. He disallowed the claim.
26. The appellant objects to the disallowance. It has not added anything to clarify the position.
27. I would not that the assessee has been acquiring shares only as an investor and not as a trader. It has been showing profits and gains of transaction in shares under the head ‘Capital gains’ and not as profit of business. 27.2 Sec. 56(1) requires that income from dividend is to be assessed under the head ‘Other sources’. Therefore, the expenditure, if any, has to fulfill the requirement of s. 57 and not s. 36(1) (vii) r/w s. 36(2) as such. Sec. 57 does not have a provision similar to s. 36(1)(vii) r/w. s.36(2). The claim for write off of expenses connected with earning of dividend has to go through the provisions of s. 57(iii) which provide for deduction of : ‘any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such, income.’ The expression ‘for the purpose of business’ is wider than the expression ‘for the purpose of earning such income’ [CIT vs. Birla Cotton Spg.& Wvg. Mills Ltd. (1971) 82 ITR 166 (SC) 169] used in s. 37(1). Sec. 37(1) covers not only expenses for running of the business and its administration but also measures for the preservation of business and protection of its business properly. It follows from this that s. 57(iii) provides for allowance of only those expenses which are incurred for the purpose of earning the income. In the context of dividends, it is only the expenses incurred for earning the dividend income that is allowable. Sec. 57(iii) is also clear that the expenditure should not be of capital expenditure. If certain amounts are due to the assessee from a share broker on account of money entrusted for purchase of shares, i.e., towards investment, it is amount due on account of capital payment/if the assessee writes off the amount or any part of it as irrecoverable, it is an expenditure of capital nature and obviously not allowable under s. 57(iii). No other provisions of s. 57 is applicable in this case. 27.3 It may be mentioned that even if the claim is to be considered as bad debt of business, the assessee was not dealing in shares as a dealer and the amount due from Sivan & Co. was only in the context of investment in shares. The purchase and sale of shares do not form part of the business turnover of the assessee.
The requirement of s. 36(2) is not fulfilled, which is a must for deduction to be allowed as bad debt written off under s. 36(1)(vii). 27.4 I am, thus, to hold that the assessee is not entitled to the deduction claimed. (iv) M/s WIE Digital Electronics Rs. 25,00,000 (v) M/s Vipin Industries Rs. 11,00,000 (vi) M/s Eagle Electricals Rs. 32,00,000 (vii) M/s Rita Bottling Rs. 2,57,375 (viii) M/s L & T Food Division Rs. 2,56,351 Rs. 73,13,726
28. The assessee gave the following explanation regarding these items vide letter dt. 15th Feb., 2000 to the AO : ‘WIE Digital Electronics, Vipin Industries, Eagle Electricals The details in this regard, if any, will be furnished to you shortly, as this is not readily available. Rita Bottling, L&T Food Division—Rs. 2.57 lakhs and Rs. 2.56 lakhs These are our suppliers of capital items and the amount has remained outstanding for a long time on account of certain disputes. During the year, it was decided that the amounts are written off. No further details were furnished to the AO who has referred to the submissions of the assessee in the assessment order. 28.2 The AO noted that the amounts were given as advance and not trading debts and are therefore not of revenue nature. For allowance of deduction as bad debt written off, the business or trading debts should spring directly from carrying on of a business or trade and should be incidental to it and cannot be just any loss sustained by the assessee even if it has some connection with the business indirectly as held by the apex Court in Indian Aluminium Co. Ltd. vs. CIT (1971) 79 ITR 514 (SC). As the bad debts did not go to the balance sheet as trading debt in the business of the assessee, it cannot be allowed as deduction as held by the apex Court in the case of CIT vs. Birla Bros. (P) Ltd.
29. The appellant objects to the disallowance of these items aggregating to Rs. 73,13,726. However, it is not in a position to throw any light on the nature of these items.
30. This is a case of claim of deduction in the form of bad debts/ advances written off. It is the onus of the assessee to prove how the conditions of s. 36(1)(vii) r/w s. 36(2) are fulfilled. The assessee has not done anything in this regard except to claim that these represent advances written off. The assessee has not shown how the conditions of sub-s. (2) of s. 36, especially cl. (i) of that sub-section, is fulfilled. In the circumstance, I uphold the disallowance.” and these findings of the adjudicating authority had been affirmed by the first appellate authority and having discussed each and every claim of the assessee as noticed in the order and had examined the correctness of the order of the adjudicating authority and affirmed the same in terms of the appellate order dt. 15th Sept., 1999 as noticed by the appellate order in paras 4 to 34 of its order. 19. The Tribunal on its part has reversed the findings of the two lower authorities on this aspect of the claim of the assessee towards bad debts written off as irrecoverable amount is as under : “15. We have examined the facts thoroughly and considered the arguments of both the sides. We are of the view that so far as the write off in the case of Sunny Enterprises, Premier Enterprises and U.B. International (ME), they fully satisfy the conditions for allowance under s. 36(1)(vii) of the IT Act and the decision of the Calcutta High Court in CIT vs. Coates of India Ltd. (1998) 150 CTR (Cal) 311 : (1998) 232 ITR 324 (Cal) supports the case of the assessee and hence these write off’ should be allowed.
1. The advances given to Gautam Constructions & Fisheries for procuring marine products amounting to Rs. 32.3 lakhs is an allowable expenditure under s. 37 as the same was incurred wholly and exclusively for the purpose of business. There is no doubt that it is a business loss and the same should be allowed under s. 37.
2. So far as the write off in the case of U.B. Elastomers Ltd., Tamilnadu Alkaline Batteries Ltd. and Unitel Communications Ltd., they are covered by the decision of the Tribunal in the assessee’s own case for the asst. yr. 1995-96 and we rely on the same and direct the AO to allow the claim.
3. Lastly, the write off in the case of Pharmacia United Ltd. having been advanced during the course of carrying on a moneylending business, the same should be allowed under the IT Act. The Department had not brought out any reason for denying the claim of the assessee. Hence, we direct the AO to allow the entire claim of the assessee, amounting to Rs. 554 lakhs.
4. Thus, the assessee succeeds on the issue of write off of bad debts.”
5. Insofar as the aspect of honouring the guarantee issued by the assessee-company and as indicated above, the adjudicating authority was of the view that the assessee is not entitled to claim the amount by way of any expenditure under s. 37 of the Act by indicating the reasons as under : “(a) Disallowance of expenses relating to M/s Tamilnadu Alkaline Batteries Ltd. (TNABL) : As per the assessee company, TNABL was engaged in manufacturing of batteries at Chennai which was owned by two subsidiaries of U.B. Ltd. namely Golden Investments Ltd. and East Coast Investments Ltd. TNABL obtained a loan of Rs. 16 lakhs from Tamil Nadu Investment Corporation for which Golden Investments Ltd. and East Coast Investments Ltd. were the guarantors by virtue of the deed executed on 10th Oct., 1985. TNABL availed a loan from Bank of Madura Ltd. and the amount outstanding as on 8th Nov., 1994 was Rs. 60.34 lakhs. This amount was guaranteed by East Coast Investments Ltd. and Golden Investments Ltd. which were the subsidiaries of the assessee company and were amalgamated with the assessee company w.e.f. 1st April, 1994. On account of default on the part of TNABL, Bank of Madura filed a suit against the assessee company after invoking the guarantee. After negotiation, the amount was finally settled by the assessee company which was acknowledged by the bank vide its letter dt. 8th Nov., 1994.
Here it is relevant to note that the liability to pay the guarantees invoked which were undertaken by the assessee company were not as the original guarantors but which were the liabilities of the subsidiary company and only as a result of amalgamation it is claimed that the assessee company is liable to pay. In the case of Saraswati Industrial Syndicate Ltd. vs. CIT (1990) 88 CTR (SC) 61 : (1990) 186 ITR 278 (SC), it was held that the amalgamated company is not the same as the subsidiaries which had stood as guarantors for the loan availed by TNABL and that the nature of the liability in the hands of the amalgamating company need not be same as that of in the hands of the amalgamated company. As guarantees in question were given by the amalgamated companies prior to amalgamation and the default was committed by TNABL, the guarantees should have been invoked on the amalgamated companies long before the effective date of amalgamation. Whatever the assessee company claims now as deduction on account of discharge of guarantee obligations should have been claimed by the amalgamated companies in the computation of their income for the periods they existed as legal entities before the date of amalgamation. Hence it appears that the liability taken over and discharged by the assessee company is of a capital nature. It is immaterial as to whether the amalgamating companies would have been entitled to claim the said payments as expenditure if they had existed during the previous year relevant to the assessment year under consideration.
Apart from the above, no documents were produced by the assessee company to show that TNABL had no assets left from which the assessee company could have made an attempt to recover the amounts paid by it in discharge of the guarantee obligation. It seems that the assessee company has made its claim without exhausting the remedies that the guarantor has to recover the amount from the assets of the TNABL. In the light of the above discussion, thereby disallow an amount of Rs. 26,43,204.33 claimed by the assessee for di
[Citation : 321 ITR 546]
