JUDGMENT
M.S. Janarthanam, J.
1. The assessee-company, Parrys Confectionery Limited, Madras, got permission from the Government of India and from the Reserve bank of India to participate in the equity capital of a Malay-sian company to the tune of Rs. 5,00,000. The name of the Malaysian company is Parrys Confectionery (Malaysia) Sendrian, Berhad (abbreviated as SDN BHD in Malaysia, the meaning being company limited). The assessee-company also agreed to supply technical know-how in the manufacture of sweets and confectionery to the Malaysian company.
2. The assessee-company raised equity capital of Rs. 5,00,000 in foreign exchange from an Indian Bank situate at Kuala Lumpur, viz., United Commercial Bank. However, the assessee-company was required by the Government of India to repay the loan raised from the United Commercial Bank from the earnings out of the Malaysian company. If the assessee-company is unable to repay the loan out of its foreign earnings to the Commercial Bank within five years and if the assessee-company is forced to remit repayment from India after five years, then the assessee-company should pay a penalty, which is equal to such repayment to the Reserve Bank of India. On these terms and conditions, the assessee acquired shares in the Malaysian company in 1970.
Much against the expectations of the assessee-company, the Malaysian company ran into rough weather and started incurring huge losses. The assessee-company subsequently sold its shares at a great loss. It even could not repay the principal and interest to the United Commercial Bank, Kuala Lumpur, from its earning in Malaysia. Meanwhile, the principal and inter est swelled up to Rs. 12,21,340. This the assessee-company was forced to remit from India.
As a consequence, the penal clause came into play. The assessee-company was, therefore, asked to pay the penalty of Rs. 12,21,340 to the Reserve Bank of India. At the end of the accounting year, the assessee-company did not actually pay this penalty. It made a request to the Reserve Bank of India to waive the penalty. But the Reserve Bank of India did not concede.
3. In the profit and loss account for the accounting year, the assessee did not debit the penalty of Rs. 12,21,340. It only showed the amounts as a contingent liability in the annual report. However, at the time of hearing before the Income-tax Officer, the assessee-company wanted to claim it as a deduction.
4. The Income-tax Officer, however, held that whether the assessee debited to the profit and loss account or not, the liability of Rs. 12,21,340 was not an allowable deduction. The rationale for such rejection is that the said liability did not relate to the assessee’s business, and the expenditure was also capital in nature.
5. The Income-tax Officer also disallowed the claims relatable to (1) preliminary expenses ; (2) difference in exchange rates ; (3) amount payable to the United India Fire and General Insurance Company ; and (4) royalty written off, holding” that those items of expenditure do not relate to the business of the assessee-company but relate to the business of the Malaysian company.
6. On appeal, the Commissioner of Income-tax (Appeals) concurred with the decision of the Income-tax Officer. According to him, the penalty arose on account of loan transaction, which was on capital account and, therefore, the penalty was capital, but, not revenue in nature. The assessee also could have avoided the penalty if it had made its own arrangement for remittance in Malaysia itself. The claims of the assessee that its memorandum of association permitted carrying on business in India or abroad and, therefore, the Malaysian company was part of the assessee’s company and, consequently, the loss sustained by the company was revenue loss or in any case it was a case of loss arising on account of the joint venture with the Malaysian company were rejected by the Commissioner of Income-tax (Appeals) as according to him, there was no joint venture as such, but there was only shareholding in the Malaysian company.
7. The Commissioner of Income-tax (Appeals) also concurred with the disallowance made by the Income-tax Officer as relatable to preliminary expenses, differences in exchange rates the amount payable to the United India Fire and General Insurance Company and royalty written off.
8. On further appeal, the Tribunal concurred with the views of the Commissioner of Income-tax (Appeals), reflecting the views of the Income-tax Officer on all claims and disallowances made by the Income-tax Officer.
9. It is on these facts, the questions of law as below had been referred under Section 256(2) of the Income-tax Act, 1961, for the opinion of this court :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant-company did not carry on any business in Malaysia ?
(2) Whether the Tribunal was right in holding that the expenditure incurred is not allowable as business expenditure or as a business loss ?
(3) Whether the Tribunal was right in not considering the issue relating to preliminary expenses incurred by the applicant-company, which was incidental to carrying on of the assessee’s business of promoting and managing other companies ?
(4) Whether the applicant’s claim for exchange of loss of Rs. 3,68,167 in respect of remittance to Malaysia was not an allowable deduction ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the loss sustained by the assessee on account of standing guarantee to the Malaysian company should not be allowed ?
(6) Whether, on the facts and in the circumstances of the case, the sum of Rs. 12,77,347 would not be allowable as expenditure incurred wholly and exclusively for the purpose of the business or a business loss ?
(7) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 87,208 representing royalty written off was not allowable as a bad debt ?”
10. Arguments of Mrs. Asha Vijayaraghavan, learned counsel representing Subbaraya Aiyar, Padmanabhan and Ramamani, learned counsel appearing for the applicant and of Mr. R. Sivaraman, learned counsel for Mr. C. V. Rajan, learned junior standing counsel, representing the Revenue were heard.
11. From a cursory glimpse and glance of questions Nos. (1) to (7) as stated above, one can very well discern that the pivotal or main issue is taken care of by question No. (1) and the issues covered by other questions, viz., questions Nos. (2) to (7), will depend upon the answer to question No. (1). If the answer to question No. (1) turns out in the negative against the assessee-company, in the sense of itself not carrying on any business in Malaysia, the issue covered by other questions said to relate to the business of the company, will bristle next to nothing.
12. In such a back drop and setting, we shall enter into the arena of discussion in finding out an answer to the pivotal issue covered by question No. (1). There is no denial of the fact that the assessee, Parry Confectionery Limited, Madras, is an Indian company. Yet another fact, about which there is no dispute, is that the assessee-company got permission from the Government of India and from the Reserve Bank of India to participate in the equity capital of a Malaysian company to the tune of Rs. 5,00,000. One more fact of some signal importance to be taken note of is that the asses-see-company also agreed to supply technical know-how in the manufacture of sweets and confectionery to the Malaysian company and for the supply of technical know-how the assessee-company agreed to receive a certain amount of royalty from the Malaysian company.
13. The cumulative effect of all these factors would make it appear in a crystal clear fashion that the assessee-company and the Malaysian company are two different and distinct entities, not having any connection and the assessee-company is after all, a shareholder with the Malaysian company, entitled to receive dividend income from the Malaysian company, besides receipt of royalty, for parting with the knowledge relatable to the technical know-how in the manufacture of sweets and confectionery to the said Malaysian company.
14. In this view of the matter, to say that the assessee-company carried on the business on a joint venture with the Malaysian company, cannot at all be expected to commend acceptance at our hands, notwithstanding the fact of the existence of a clause in the memorandum of association of the assessee-company permitting it to enter into a joint venture in India or abroad. To crown it all, no agreement evidencing a joint venture being carried on by the assessee-company with the Malaysian company had been placed on record before any of the authorities. It is for all these reasons, we are of the view that the assessee-company did not carry on any business in Malaysia. Question No. (1) is answered accordingly.
15. Once question No. (1) is answered against the assessee-company and as we have done so, it goes without saying, as already indicated, the issues covered by questions Nos. (2) to (7) would have to necessarily be answered against the assessee without further entering into any sort of discussion whatever and, therefore, it is, we answer the remaining questions, viz., questions Nos. (2) to (7) also against the assessee.
16. This tax case is thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.