Bombay High Court
Grindwell Norton Ltd. vs Dy. Cit on 31 August, 2004
Equivalent citations: (2004)85TTJ(MUMBAI)389
ORDER
Mukul Shrawat, J.M. This is an appeal filed by the assessee arising out of the order of Commissioner (Appeals) XXIII, Mumbai, dated 6-8-1998 for the assessment year 1992-93. At the outset, learned authorised representative, Shri Golvala, has informed that the appellant is not interested to adjudicate ground No. 1 (wrongly numbered 2); therefore, the same is dismissed being not pressed. Rest of the grounds are in respect of confirmation of addition of Rs. 25,07,833 being the amount of advance written off.
2. The following advances were written off by the appellant :
(i) Advanced to International Power Semi Conductors Ltd.
Rs. 21,88,243
(ii) Advanced to Siltronics (Ind) Ltd.
Rs. 3,19,590 Rs. 25,07,833 It was observed by the revenue authorities that M/s. International Power Semi Conductors Ltd. was incorporated on 14-4-1975 and it was engaged in the business of manufacture of various types of semi-conductor devices and it was a 100 per cent export-oriented unit. This company was taken over by the appellant by acquiring 61 per cent stake in it on 19-9-1979. The said company was facing financial crisis and in order to enable it to tide over the financial crisis, the appellant-company advanced interest-free unsecured loan to the extent of Rs. 21,88,243 in the year 1979-80. The said amount was appearing in the balance sheet of the appellant as an asset in the form of loans and advances, whereas in the books of the International Power Semi Conductors Ltd., the said amount was appearing as a liability in the form of unsecured loans. The company, viz., Siltronics (Ind) Ltd., was incorporated on 1-5-1980 and the appellant-company was one of its promoters. The appellant-company held 24.5 per cent of the shares of the said company. The appellant used to provide funds to the said company as and when required. As on 31-3-1990, advances made by the appellant to the said company amounted in all to Rs. 3,19,590. It was mentioned that both the companies could not survive the financial crisis and ultimately, went into liquidation. The appellant in its books of account wrote off the amount of loans advanced to those parties amounting in all to Rs. 25,07,833 and claimed it as an expenditure. The assessing officer concluded that the advances in question had been made for non-business purposes and, therefore, the deduction as claimed was inadmissible.
3. Before the first appellate authority, a question was raised whether the claim was made under section 36(1)(vii) and the answer was in negative. According to assessee, the claim was made under section 28 read with sections 30 to 43D of Income Tax Act. However, learned Commissioner (Appeals) was of the opinion that the provisions of section 37(1) were to be applied because it was required to be ascertained whether the expenditure in question was laid out or expended wholly and exclusively for the purpose of business. Learned Commissioner (Appeals) has observed that the appellant was not in the business of advancing of loans but in the business of manufacturing grinding wheels, refractories, etc. According to him the advances were not a trade debt. He has further opined that the advances were the property of the appellant hence in the shape of capital asset, therefore, by extinguishing its right over a capital asset, the assessee has incurred capital loss and not a revenue loss. Before learned Commissioner (Appeals), certain case laws were cited for the proposition that the write off of investment could not be treated as a trading loss but the right off of advances could be so treated. The first appellate authority has distinguished those case laws with the facts of the assessee-company and concluded that the company being manufacturer, advance of loans were not for the purpose of the business, therefore, did not constitute the nature of trading loss, consequently the claim was rejected.
4. On behalf of the appellant, learned authorised representative, Shri Golvala, has argued that actually a business loss has occurred as the assessee has lost its money advanced to the abovementioned two companies. Narrating the nature of advance, he has drawn our attention to the minutes of the meeting of the Board of directors, pp. 12-14 of paper book. The board has approved advance of such loans to M/s. International Power Semi Conductors Ltd. (hereinafter referred to as the IPS). The advances were regularly reflected in the balance sheet as "Loans and Advances" throughout the years. In support, he has also invited our attention to clauses 22, 23, 36, etc. of the memorandum of the appellant-company. He has referred that the assessee-company through the clauses of memorandum was entitled to lend money, securities and other properties for the purpose of the business of the company. The assessee-company through clause 23 was also entitled to carry on another business, if profitable. The company as per clause 22 was entitled to lend money with or without security upon such terms and conditions as thought fit and in the interest of the company. The said M/s. IPS being a subsidiary of the appellant-company, therefore, the appellant-company was actively involved in the management as well as other matter. M/s. IPS remained in crisis due to losses. Due to heavy losses M/s. IPS was not in a position to pay the dues to its bankers. One of the banks namely, bank of India filed a winding up petition and the said subsidiary company was ordered for winding up by the court. The assets and liabilities were taken over by "The liquidator". The other company, i.e., M/s. Siltronics (India) Ltd. (SIL) was promoted by the appellant-company. The appellant-company was a major shareholder of M/s. SIL. Due to the changed policies of the government M/s. SIL have become uneconomical and losses were suffered. That unit had become a sick unit and a reference was made to BIFR. As per the order of the court the company was also wound up. In the background of these facts learned authorised representative has relied upon decisions of Vassanji Sons & Co. (P) Ltd. v. CIT (1980) 125 ITR 462 (Bom), Turner Morrison & Co. Ltd. v. CIT (2000) 245 ITR 724 (Cal), CIT v. Gillanders Arbuthnot & Co. Ltd. (1982) 138 ITR 763 (Cal) and CIT v. F.M. Chinoy & Co. (P) Ltd. (1969) 74 ITR 780 (Bom). On the principle of business loss, he has cited certain decisions viz., Ramachandra Shivnarayan v. CIT (1978) 111 ITR 263 (SC), Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and Indore Malwa United Mills Ltd. v. State of Madhya Pradesh & Ors. (1965) 55 ITR 736 (SC).
5. On behalf of the revenue, learned Departmental Representative, Shri K.K. Sharma, has strongly supported the orders of assessing officer and Commissioner (Appeals) and argued that there was no business necessity of the appellant-company and the advances were not in the course of business, therefore, rightly disallowed. He has also argued that a precedent can only be relied if the facts of the particular case are identical. He has also mentioned that the primary rule is that the intention of the legislature has to be taken into account. For this proposition, he has cited a decision of Padmasundara Rao v. State of Tamil Nadu & Ors. (2002) 255 ITR 147 (SC).
6. We have carefully considered the submissions of both the sides and also thoroughly perused the orders of the authorities below in the light of the material placed before us as well as the case laws cited hereinabove. Briefly, the facts of the case have already been narrated in foregoing paras. The undisputed fact is that M/s. IPS was a subsidiary of the appellant-company. The said subsidiary company had gone into liquidation due to the heavy liability of Bank of India. An Official Liquidator was also appointed, who has taken over assets and liabilities of the said subsidiary company by the order of the court.
To this subsidiary company an advance of Rs. 21,88,243 was made. This company was incorporated in the year 1975 and the appellant-company has taken over the management rights by acquiring 61 per cent stake in the year 1979. Due to heavy losses the said subsidiary company was unable to come out of the financial crisis, therefore, the appellant-company has decided to write off the said advance as authorised and resolved by the board of directors. Copy of such resolution is placed on record along with the letters of authorisation through which the appellant-company has advanced the aforesaid amount to the said subsidiary company. With these background of facts we have carefully perused the citation of Vassanji Sons & Co. (supra), wherein also finance was provided to a company in which the assessee was substantially interested. It was held that the debt must be regarded as directly springing from its business activity. It was also opined by the Honble court that the connection could not be considered to be too remote for the purpose of allowance as trade debt. A principle was laid down that the test and the approach to be applied in this case must be that of a businessman. We have also examined the facts of Gillanders Arbuthnot & Co. Ltd. (supra) wherein the Honble Calcutta High Court has observed that the subsidiaries were controlled by the assessee-company and even if the amount could not be treated as a bad debt in the sense that it was not an advance in the course of moneylending business, it can be allowed as a trading loss incurred by the assessee in the course of its business. With this background of cited decision, we have also compared the facts of this case and have found that the appellant has also advanced loans, which is not in dispute, to its subsidiary namely, M/s. IPS. The loans were advanced as per some of the clauses of memorandum and articles of association, as pointed out by learned authorised representative during the course of hearing, also referred in above paras. The financial crisis of the subsidiary is also not in dispute rather it had gone into liquidation by the order of the court. Though the main business of the assessee-company is manufacturing grinding wheels, silicon carbide, refractories, etc. but the clauses of memorandum has also prescribed to lend money for the purpose of any other business with a view to enter into partnership or any joint venture arrangement. Clause 37 has also authorised the assessee-company to establish or promote or concur in establishing or promoting any other company. Due to this financial arrangement, it is stated before us that the management of the subsidiary was also controlled by the appellant. No doubt the advance was not in the course of moneylending business but definitely in the course of its business. As the financial position of the subsidiary company had gone weak, therefore, considering the pros and cons as a businessman, the amount was written off. Under the totality of the circumstances and in view of the precedents cited hereinabove, the write off of advance to M/s. IPS deserves to be allowed.
7. In respect of other claim of write off of Rs. 3,19,590 to M/s. Siltronics (India) Ltd., the assessee being a promoter having major share holding of 24.5 per cent, the funds were arranged as per the requirements. In this case as well, the appellant-company was authorised to appoint its representative in the management board. The said company was also declared as sick unit and BIFR has recommended for the winding up. It is a practice that a managing company in the course of its duty is under obligation to procure finance for the companies under its management. In the case of F.M. Chinoy & Co. (supra), the Honble Bombay High Court has opined that, if the managing company has advanced money, then the same would be in the course of their business. The court has also observed that although the assessee was not under obligation to do so, but the decision of advancing money would be held to be a normal business decision. In the case of Turner Morrison & Co. (supra), money was advanced to subsidiary company and that subsidiary company wound up and the recovery of the advance was impossible. Since, in that case the assessee had no chance of recovery of the amount in question from the subsidiary, therefore, it was held that amount would be treated as bad debt entitled to deduction from the income for the relevant year. The circumstances and facts of the instant appeal being identical, therefore, the precedents cited can be relied upon. Respectfully following the decisions of the Honble courts, the ground raised by the assessee is hereby allowed.
8. In the result, the appeal of the assessee is partly allowed.
V.D. Wakharkar, A.M.
9. I have gone through the order proposed by my learned brother.
10. In regard to the disallowance of Rs. 6,57,606 under rule 6D of the Income Tax Rules, 1962, ground No. 1 was not pressed by the assessee and is proposed to be dismissed. I agree with the order of my learned brother on this ground.
11. As regards grounds Nos. 3 and 4 relating to deduction for advances written off, I have carefully gone through the order proposed by my learned brother. I have also discussed the matter with him. However, after going through the proposed order and after having discussed the proposed order with my learned brother, I have not been able to persuade myself to agree with the order proposed by him on this point, for reasons which I propose to set out below.
12. The question is whether monies advanced by the appellant-company to two other companies can be allowed as a deduction in computation of assessees income on the ground that the monies were irrecoverable. Admittedly, the assessee is not engaged in the business of lending money. Further, by assessees own admission, the claim for deduction was not made under section 36(1)(vii) of the Income Tax Act, 1961. The claim had been made under section 28 of the Income Tax Act, 1961, on the ground that this was a bona fide business loss which had to be allowed as deduction in computation of assessees income from business. The assessees contention in this regard has been rejected by the learned Commissioner (Appeals) for sound reasons and after proper appreciation of facts and law on the point as brought out in paras 9 to 13 of his order. It has been rightly pointed out by the learned Commissioner (Appeals) that the assessee was not entitled to deduction of the said amount either as bad debts under section 36(1)(vii) or as bona fide business expenditure since the losses incurred by the other two companies could not be considered as expenditure incurred by the assessee for the purpose of earning its profits from business. Deduction was not allowable for these amounts either under section 28 or under section 37(1). The judicial pronouncements relied upon by the assessee and referred to by my learned brother related to assessees who were engaged in the business of managing agency and the decisions were rendered in a totally different context. The assessee in present case is not engaged in the business of managing agency and in fact, it could not do so as the entire system of managing agency has been done away with under the Indian law. The assessee had purchased shares of the two companies to which it lent monies. The losses due to fall in value of shares have been written off in the assessees books as capital losses. The loss due to non-recoverability of the monies lent was similarly a capital loss in the assessees case and could not be regarded as expenditure incurred for earning business profit. In fact, if the proposition but forth by the assessee is accepted, the loss incurred by, say company A can be set off against profit of company B merely by company B advancing monies to company A and then writing off the amounts as irrecoverable. Such a proposition is totally contrary to the scheme of the Income Tax Act which under section 72 did not permit for the assessment year under appeal even set off of loss carried forward by the assessee from one business against the profit of another business, if the original business in which loss was incurred was discontinued. This position in law changed only after amendment made by the Finance Act, 1999, with effect from 1-4-2000. What the assessee has done in the present case is to apply its profits to make advances to two companies in which it had some interest. It is a case of application of income and not a case of expenditure incurred for earning income.
13. The relevant aspects of the issue involved are brought out in paras 9 to 13 of the order of the learned Commissioner (Appeals) which read as under :
"9. As to the disallowance of Rs. 25,07,833 being advances written off, it consists of the following :
(i) Rs. 21,88,243 advanced to International Power Semi Conductors Ltd.
(ii) Rs. 3,19,590 advanced to Siltronics (India) Ltd.
As to the first company, i.e., International Power Semi Conductors Ltd., it was incorporated on 14-4-1975 and it was engaged in the business of manufacture of various types of semi-conductor devices and it was a 100 per cent export-oriented unit. This company was taken over by the appellant acquiring 61 per cent stake in it on 19-9-1979. Apparently, the said company was facing severe financial crisis and in order to enable it to tide over the financial crisis, the appellant-company advanced interest-free unsecured loan to the extent of Rs. 21,88,243 in the year 1979-80. From the very beginning, the said amount was appearing in the balance sheet of the appellant as an asset in the form of loans and advances, whereas in the books of the International Power Semi Conductors Ltd., the said amount was appearing as a liability in the form of unsecured loans.
10. As to the second company, viz., Siltronics (India) Ltd., it was incorporated on 1-5-1980 and the appellant-company was one of its promoters. The appellant-company held 24.5 per cent of the shares of the said company. The appellant used to provide funds to the said company as and when required. As on 31-3-1990, advances made by the appellant to the said company amounted in all to Rs, 3,19,590.
11. Apparently, both the companies could not survive the financial crisis and ultimately, they went into liquidation. During the previous year relevant to the assessment year in question, the appellant in its books of account wrote off the amount of loans advanced to these parties amounting in all to Rs. 25,07,833 and claimed it as expenditure. As it appears from the assessment order, required explanation was furnished to the assessing officer vide the appellants letter dated 20-11-1995. In support of the claim made, reliance was placed on the judgment of the Bombay High Court in the case of Vassanji Sons & Co. (P) Ltd. v. CIT (1980) 125 ITR 462 (Bom). The explanation as given was considered by the assessing officer and he concluded that the advances in question had been made for non-business purposes and therefore, the deduction as claimed was inadmissible, After having disallowed the amount in question, the assessing officer initiated proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars.
12. During the course of the proceedings before me, I asked the authorised representative to state whether the said claim had been made under section 36(1)(vii) of the Act. He replied in the negative. He clarified by saying that the appellants claim was made under section 28 of the Act. As it is, section 28 of the Act deals with the types of income which are assessable under the head profits and gains of business or profession, According to section 29 of the Act, income assessable under section 28 shall be computed in accordance with the provisions of sections 30 to 43D. Therefore, I think the claim of the appellant has to be considered under section 37(1) of the Act and not under section 28, as claimed. For the purposes of section 37(1) of the Act, it is to be ascertained whether the expenditure in question was laid out or expended wholly or exclusively for the purposes of the appellants business. As has been stated above, the appellant is engaged in the business of manufacturing grinding wheels, silicon carbide and refractories. The appellant did not carry on any business of advancing loans. Admittedly, the advances made to the parties concerned did not constitute a trade debt as the appellant was not purchasing any raw material from the said parties or making any sale to them. Further, it is noticed that the advances made had been treated as assets in the books of the appellant. In respect of the advances made, the appellant had an actionable claim against the said parties which is a company and accordingly, it has to be treated as a capital asset. By writing off the amounts in question, the appellant has extinguished his capital asset and, therefore, it constitutes capital loss and not a revenue loss. In this context, it is to be noted that the value of the appellants shares of the said two companies amounted to Rs. 46.75 lakhs. The said amount of Rs. 46.75 lakhs has also been written off by way of "investments in shares of companies in liquidation written off". The write off in respect of the shares of the said two companies has been treated by the appellant as a capital loss whereas the write off in regard to the advances has been treated as trading loss. As it is, investments and advances both constituted capital assets and any write off in respect of the same would constitute capital loss. In this connection, it was clarified by the authorised representative that the write off of investments could not be treated as a trading loss but write off in respect of the advances could be so treated in view of the following judgments
(i) Essaen (P) Ltd. v. CIT (1967) 65 ITR 625 (SC)
(ii) Indore Malwa United Mills Ltd. v. State of Madhya Pradesh & Ors. (1965) 55 ITR 736 (SC)
(iii) Vassanji Sons & Co. (P) Ltd. v. CIT (1980) 125 ITR 462 (Bom)
(iv) CIT v. Gillanders Arbuthnot & Co. Ltd. (1932) 138 ITR 763 (Cal)
(v) CIT v. Investa Industrial Corpn. Ltd. (1979) 119 ITR 380 (Bom)
(vi) FM Chinoy (P) Ltd. v. CIT (1969) 74 ITR 780 (Bom).
13. With reference to the abovementioned judgments, it may be stated that in all the cases assessees concerned were engaged in the business of managing agency and they were closely connected with the business of the managed companies to whom they had advanced loans. On that basis, it had been held that advances made to the managed companies was for the purposes of the business of the managing company and therefore, if the money so advanced was lost, then it constituted admissible deduction. In the present case, the facts are totally different. The appellant-company is a manufacturer and it had advanced loans to the said two companies which was not for the purposes of the appellants business. Therefore, if the amount so advanced is lost, then it would not constitute trading loss. In view of this position, the claim as made at Rs. 25,07,833 deserves to be rejected and it is rejected accordingly. However, before parting with this issue, I would like to contradict two findings of facts recorded by the assessing officer which are unsubstantiated, i.e., firstly, the assessing officer was not correct in saying that the amounts in question had been given as debt in the normal course of the appellants business. Secondly, the loans in question had not been advanced in connection with acquiring any sources of income as pointed out by the assessing officer. It is not clear as to on what basis the assessing officer had given these two findings of facts. In fact, the authorised representative quite frankly admitted during the course of the proceedings before me that there was no justification for the assessing officer to record these two findings. He further pointed out that if one had to depend on these two facts, then the appellants claim would consequently become admissible. However, since these two facts were nonexistent, the authorised representative did not intend to depend on them. The authorised representative argued his case in the context of the abovementioned judgments and not on the basis of the erroneous facts recorded by the assessing officer."
14. The learned authorised representative for the assessee has not been able to controvert the logic underlying the order of the learned Commissioner (Appeals). The decisions cited and relied upon on behalf of the assessee are of no relevance as pointed out by the learned Commissioner (Appeals). On facts and in law, the order of the learned Commissioner (Appeals) deserves to be confirmed and the ground Nos. 3 and 4 raised by the assessee have to be rejected.
Reference under section 255(4) of the IT Act, 1961 3-12- 2003 Since the two Members of the Bench have differed in opinion on grounds 3 and 4, raised in this appeal, we state the following question for reference to Third Member :
"Whether, on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833, being advances made to two other companies, in computation of profits of business ?"
The matter is now referred to the Honble President for reference to Third Member.
M.K. Chaturvedi, V.P. (as Third Member) :
28-4- 2004 This appeal came before me as a Third Member to express my opinion on the following question :
"Whether, on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833, being advances made to two other companies, in computation of profits of business ?"
2. I have heard the rival submissions in the light of material placed before me and precedents relied upon, The assessee advanced Rs. 21,88,243 to International Power Semi Conductors. Ltd. This company was incorporated on 14-4-1975. It was engaged in the business of manufacture of various types of semi-conductor devices. The assessee took over this company by acquiring 61 per cent stake in it on 19-9-1979. The total capital of this company was Rs. 6.87 lakhs. The assessee made an investment of Rs. 4 lakhs in the share capital of this company.
3. The assessee made a further advance of Rs. 3,19,590 to Siltronics (India) Ltd. This company was incorporated on 1-5-1980. The total share capital of this company was Rs. 1,72,79,475. The holding of equity shares of the assessee-company in Siltronics (India) Ltd. was to the tune of Rs. 40 lakhs. It was submitted that the assessee did provide funds to the said company to the extent of Rs. 3,19,590 to meet the financial crisis.
4. Both the aforesaid companies went into liquidation. The total amount of Rs. 25,07,833 due to those companies was written off in the books of account. The assessee did make claim under section 28 of the Income Tax Act, 1961 (hereinafter referred to as the Act), on the ground that this was a bona fide business loss, which had to be allowed as deduction in computation of assessees income from business. Admittedly, the amount was not claimed as bad debt under section 36(1)(vii) read with section 36(2) of the Act.
5. The assessing officer disallowed the claim on the ground that the advances in question were made for non-business purposes. Commissioner (Appeals) held that the provision of section 37(1) needs to be applied to ascertain as to whether the expenditure in question was laid out or expended wholly and exclusively for the purposes of business. It was noted that the assessee was not in moneylending business. It was engaged in the business of manufacturing grinding wheels, refractories, etc. On this factual backdrop, the advances could not be construed to be trade debt. These were reflected as assets of the assessee-company. Extinguishment of right in property amounts to capital loss. As such, it cannot be allowed as a revenue loss. Since it was not claimed to be a bad debt, as such its allowability was not considered on the touchstone of section 36(1)(vii) read with section 36(2) of the Act.
6. It was submitted before me by Shri Golvala that these advances were regularly reflected in the balance-sheet under the caption "loans and advances". As per the object clause of the memorandum, the assessee was entitle to lend money, securities and other properties for the purpose of business. The assessee was also entitled to carry other profitable businesses. It was possible on the part of the assessee to lend money without security upon such terms and conditions as thought fit in the interest of the company, International Power Semi Conductors Ltd. and Siltronics (India) Ltd. were the subsidiaries of the assessee-company. The assessee was actively involved in the management of those companies. The money was advanced with a view to revive those companies. Ultimately those companies went into liquidation. Money was given to enable the companies to recover from the financial crisis and also to meet the day-to-day obligations. It was submitted that this is not expenditure but this is a business loss., as such it is allowable under the law while computing the total taxable income.
7. To buttress the point canvassed, reliance was placed on various precedents discussed hereinafter. In Vassanji Sons & Co. (P) Ltd. v. CIT (1980) 125 ITR 462 (Bom), the main object of the assessee-company was to carry on the business of managing agents, selling agents, commission agents, etc. Further, by its memorandum, it was permitted to carry on business of moneylending, etc. It promoted a company called NI Ltd. and started another company designated as VHDA Ltd., to manage NI Ltd. as its managing agents. It held shares in VHDA Ltd. It also acquired shares in NI Ltd. Money was advanced to NI Ltd. NI Ltd. went into liquidation. Loss was claimed in respect of the value of shares held in NI Ltd. Amount advanced to NI Ltd. was also claimed as business loss. Apropos the first claim, the assessing officer held that the assessee was not a dealer in shares. In regard to the second claim, it was held that the assessee could not be considered to be a moneylender. No interest was charged on the advance. The only object of advancing the money was to provide finance for a company in which the assessee-company was substantially interested. As such, the amount written off could not be allowed as a deduction. On appeal, both the Appellate Assistant Commissioner and Tribunal agreed with the findings of the assessing officer. On a reference, the Honble Bombay High Court has held that, in view of the circumstances in which the assessee had purchased the shares of NI Ltd. and the fact that the assessee had never traded in the shares, the Tribunal rightly concluded that there was nothing to show that the shares had been acquired by the assessee with a view to trading in them, and, therefore, the assessee was not entitled to deduction,. and in this case the court was entitled to pay regard to the economic realities which existed behind the legal facade. The assessee-company, under its memorandum, was entitled to undertake managing agency business. It undertook that business but not directly and wholly but acting in concert with two other parties and through the device of a limited company, viz., VHDA Ltd. There was no reason why the moneys lent by the assessee-company to NI Ltd., the managed company, could not be regarded as finance provided for a company in which the assessee was substantially interested. It was not necessary for the assessee-company to have undertaken any moneylending activity. If the object of advancing of money was to provide finance for a company in which the assessee was substantially interested, the debt must be regarded as directly springing from its business activity and the connection could not be considered too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. The amount of advance was held to be deductible as a trading loss for the year in question. In CIT v. FM. Chinoy & Co. (P) Ltd. (1969) 74 ITR 780 (Bom), in order to retrieve as much as loss possible to one of its managed companies, the managing agents had to assure and pay Rs. 35,000 as retrenchment claim under section 25F, to the workers of the managed company going into liquidation. This amount was held to be allowable in the hands of the managing agents. In the case of Turner Morrison & Co. Ltd. v. CIT (2000) 245 ITR 724 (Cal), the assessee advanced some monies to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by the Government of India and the entire amount went to the secured creditors. As a result there was no chance of recovery of the amounts from the subsidiary. The Tribunal disallowed the deduction for bad debt on the ground that the bad debts were shown after the close of the accounting year, and secondly, the assessee was not in the business of moneylending. Honble High Court has held that it was immaterial whether the bad debt was shown after the close of the accounting year or during the accounting year itself. Bad debt was allowable as a deduction in computing the income even if the bad debt came into existence because of the expenditure incurred for advancing money to a subsidiary company of the assessee. Since, the assessee had no chance of recovering the amount in question from the subsidiary, the amount could be treated as a bad debt entitled to deduction from the income for the relevant year. It is pertinent to note that, in the present case, the assessee did not claim the amount as bad debt but as a business loss. As such, the facts of the present case are not analogous to the case of Turner Morrison & Co. Ltd. (supra). In the case of CIT v. Gillanders Arbuthnot & Co. Ltd. (1982) 138 ITR 763 (Cal), the assessee advanced loans to subsidiaries. The subsidiaries were controfied and managed by the assessee. Due to the weak financial position of the subsidiary, its share capital was taken over. The amount due from the subsidiary was written off and claimed as bad debt. The claim of the assessee was allowed under section 36(2) of the Act. In the present case the assessee did not claim the amount as bad debt. In the case of Ramchandar Shivnarayan v. CIT (1978) 111 ITR 263 (SC), the loss by theft was held to be a business loss. It is true that the list of expenditure enumerated under the statute is not exhaustive. As such, depending upon the circumstances and having regard to the business proximity, the Courts have allowed the expenditure not listed in the section. The facts of the present case are different. In the case of Indore Malwa United Mills Ltd. v. State of Madhya the Pradesh & Ors. (1965) 55 ITR 736 (SC), it was held that the money borrowed by the managing agents which had become irrecoverable was a trading loss deductible in computing the profits of the managed company in the assessment year. It was a loss incidental to the companys business. The fact that the managing agents brought into the companys till larger amounts than what the companys business demanded at a particular moment of time did not make the dealings or the lendings of money to themselves any the less incidental to the sanctioned business operations. Therefore, it is to be seen that whether the loss occasioned to the assessee was incidental to the business or not. If it is incidental to the business operation, it is allowable as per the decision of the Honble Apex Court, otherwise not. In the case of Badridas Daga v. CIT (1958) 34 ITR 10 (SC), there was loss due to embezzlement by an employee. The assessee was engaged in the business of moneylending. The employee was empowered to operate the bank account. The loss by embezzlement was held to be business expenditure. Honble Supreme Court has held that section 10(2) of the Indian Income Tax Act, 1922, enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 10(1). Profits and gains, which are liable to be taxed under section 10(1), are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision, it can be decided having regard to the accepted commercial practice and trading principles. Accordingly, the loss sustained by a business by reason of embezzlement by an employee was held to be an admissible deduction. In deciding this issue, the Apex Court approved the principle laid down in the case of Lords Diary Farm Ltd. v. CIT (1955) 27 ITR 700 (Bom).
8. The learned Departmental Representative submitted that the pronouncements relied upon by the learned counsel for the assessee, were concerning those cases where the assessees were engaged in the business of managing agents. As such, the text and context of those decisions are not matching the facts of the present case, as, in the present case, the assessee is not engaged in the business of managing agency. As a matter of fact, the entire system of managing agency has been done away with under the Indian law. The learned Departmental Representative placed his reliance on CIT v. Amalgamations (P) Ltd. (1997) 226 ITR 188 (SC). In this case the Honble Apex Court has held that there must be a nexus between expenditure and business of the assessee. The expenditure incurred in payment of managerial remuneration to the directors of the subsidiary companies could not be said to be expenditure incurred in carrying on the business of the assessee-company of holding its investments. The assessee-company could hold its investments and earn its dividends without incurring this expenditure. Since the subsidiary companies were not obliged to distribute by way of dividends the entire profits earned on account of their managerial remuneration paid by the assessee-company and the assessee-company was only entitled to dividend from the subsidiary company as and when declared, it could not be said that there was a direct and immediate connection between the expenditure incurred and the business of the assessee-company. In Indequip Ltd. v. CIT (1993) 202 ITR 417 (Bom), it was held that when a claim is made for deduction for which there is no specific provision in law, whether it is admissible or not will depend on whether, having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business, and not any loss sustained by the assessee even if it has some connection with his business. The approach essentially means the approach of a prudent businessman. In the facts of the case it was found that the loan was not incidental to the carrying on of the business of supply of goods by the assessee. As such the amount was not deductible under section 28 or section 36 of the Act. In the case of Phaltan Sugar Works Ltd. v. CIT (1994) 208 ITR 989 (Bom), it was held that section 36(1)(iii) of the Act, provides for deduction for payment of interest only if the assessee borrows capital for its own business. A subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself. Thus, the interest on money borrowed by the assessee for advancing to its subsidiary company could not be deducted from the income of the assessee under section 36(1)(iii) of the Act. Similar view was taken by the Honble Jurisdictional High Court in the case of Phaltan Sugar Works Ltd. v. CIT (1995) 216 ITR 479 (Bom).
9. The learned counsel for the assessee submitted that interest under section 36(1)(iii) of the Act was allowed to the assessee in the preceding years; as such the decision of Phaltan Sugar Works Ltd. (supra) cannot be applied. Reliance was placed on the decision of the Apex Court rendered in the case of Radhasoami Satsang, v. CIT (1992) 193 ITR 321 (SC). In this case the Honble Supreme Court has held that strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. It is pertinent to note that the court emphasised that this decision is confined to the facts of the case and may not be treated as an authority on aspects, which have been decided for general application.
10. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordozo, by matching the colour of one case against the colour of another. We are reminded of Heraclitus who said "you never go down in the same river twice". What, the great philosopher has said about time and flux can relate to law as well. It is trite that a ruling of superior court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of available circumstances and myriad developments.
11. Because, as a general rule, the principle of res judicata is not applicable to decisions of income-tax authorities, an assessment for a particular year is final and conclusive between the parties only in relation to that year. The decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. The apex court in the case of M.M. Ipoh v. CIT (196B) 67 ITR 106 (SC) has held that the finding on question of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive. Similar view was taken by the Apex Court in the cases of Investment Ltd. v. CIT (1970) 77 ITR 533 (SC), CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) and Karnani Properties Ltd. v. CIT (1971) 82 ITR 547 (SC). In view of these decisions, it is not possible to ignore the decision, of the jurisdictional High Court, which was not considered in the preceding assessment years.
12. In the case of Phaltan Sugar Works Ltd. v. CIT (supra), it was made clear that a subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself.
13. In the case of CIT v. Motiram Nandram (1940) 8 ITR 132 (PC) it was held that the deposit was not a loan made in the course of carrying on the business of organising agents or in the course of the business of a moneylender. It was exacted by the company as a condition of the assessee being given an agency which they hoped to manage profitably; the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature., and the deposit amount could not, upon a true view of the terms of the agreement and in the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. The loss of the deposit was, therefore, a loss of capital and could not be deducted from the profits of the business made by the assessees for purposes of income-tax
14. I have considered the various facts. In my opinion, the factum of advancing the loan cannot be considered to be expenditure incidental to the carrying of business. International Power Semi Conductors Ltd. and Siltronics (India) Ltd. were two different separate legal entities. Just because they were the subsidiaries of the assessee-company, it cannot be said that the business of these two companies was the business of the assessee itself. It is sine qua non to consider here the nature of advantage, which the assessee has derived, in commercial sense by advancing the funds to the subsidiaries. It is evident that the purpose was to earn interest. This is the immediate advantage the assessee is deriving. Rescuing the subsidiary companies from the financial crisis is the other reason. This advantage is also in the capital field. As such, the loss was also occasioned in the capital field. Having regard to the facts and after considering the precedents available on the point, I am inclined to concur with the decision of the learned AM on this issue.
15. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
Mukul Shrawat, J.M. 31-8- 2004 As there was a difference of opinion between the AM and JM, who heard this appeal originally, following question was referred under section 255(4) of the Act to the Honble President for nominating a Third Member to resolve the controversy :
"Whether, on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833 being advances made to two other companies, in computation of profits of business ?"
2. The learned Vice President, Shri M.K. Chaturvedi, sitting as the Third Member vide his order dated 28-4-2004, has concurred with the view taken by the AM. In accordance with the majority view, we hold that the assessee is not entitled to deduction of Rs. 25,07,833, being advances made to two other companies, which were written off by the assessee, in computation of profits of business.
3. In the result, the appeal of the assessee is dismissed, the other ground pertaining to disallowance of Rs. 6,57,606 under rule 6D having been rejected as not pressed in our differing order.