ORDER
R.N. Singhal, Accountant Member
1. In this appeal by the assessee, main grounds taken are as follows-
1. The learned Commissioner of Income-tax (Appeals) and the learned Income-tax Officer have erred in not allowing as business loss the sum of Rs. 37,11,433 pertaining to advances made to Mysore Spinning and Manufacturing Company Limited and Minerva Mills Limited which became irrecoverable during the previous year relevant to assessment year 1975-76.”
2. “The learned Commissioner of Income-tax (Appeals) has failed to appreciate that the aforesaid advances were incidental to business and were therefore fully allowable when the same became irrecoverable.
Thus, the dispute is about the deductibility of Rs. 37,11,433 as business loss.. The assessee-company was engaged in manufacture of textiles. The previous year relevant to this appeal comprised of 12 calendar months of the year 1974. There were two other textile mills under the same management. They were (1) Mysore Spinning and Manufacturing Company Limited (Mysore Mills for short) and (2) Minerva Mills Ltd. (Minerva Mills for short). A total sum of Rs. 37,11,433 was due from these two mills to the assessee, as per the assessee’s books of accounts at the end of the relevant previous year. Those two mills were nationalised by the Sick Textile Undertakings (Nationalisation) Act, 1974. During the previous year relevant to this appeal. Assessee, therefore, claimed that the said sum of Rs. 37,11,433 due from these two mills was deductible in the computation of business income. The claim was rejected by Assessing Officer and that view was confirmed by the CIT(A). Assessee is before us in appeal.
2. Learned representative for the assessee drew our attention to the analysis of amounts due from these two concerns, as given in para-5 on pages 8 and 9 of the order of the CIT(A) and submitted that out of a total sum of Rs. 37,11,433, Rs. 17,07,108 representing interest which had been offered for taxation by the assessee in this year and preceding years by way of business income. He further submitted that all the three mills were not merely under the same management, but had also common bankers, common fixed deposit holders, common suppliers of stores and raw-materials. He submitted that if the assessee-company had not lent the moneys to the two debtor companies named above, there would have been problems for the assessee to continue the over-draft facility with the Bank and also in procuring the stores and raw-materials and further that there would have been a run on the assessee-company by the fixed depositors. He therefore, submitted that the moneys were lent to the two debtor companies purely as a business proposition and that the same had become totally irrecoverable consequent upon the passing of the Nationalisation Act in the year 1974. He drew our specific attention to the position of law, as explained through cited decisions on pages 454 and 455 of the Kanga & Palkhiwala’s book, 8th Edition Vol. I and placed main reliance on the following decisions-
(a) CWT v. S.C. Kothari [1971] 82 ITR 794 (SC)
(b) 3 Tax Cases 185 (House of Lords)
(c) Badridas Daga v. CIT [1958] 34 ITR 10 (SC)
(d) CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)
He submitted that the learned CIT(A) has blown out of proportion, the fact that some payments were to the sister concerns and ultimately ignored the aspect that there were substantial receipts also by way of return of moneys from the above-mentioned two debtor companies. He further submitted that compensation receivable on nationalisation of the debtor mills was far less than the amounts due to the secured creditors, etc. and hence there was no chance of the assessee-company as unsecured creditor, getting anything at all from these two companies. He submitted that the Departmental authorities were not justified in rejecting the assessee’s claim merely because there were no transactions of sale or purchase between the assessee and the debtor mills because according to him, the loans given were incidental to the business. He relied on Tribunal’s decision in the case of a sister concern, viz. – Sundatta Sirur (P.) Ltd. [IT Appeal No.-4007 (Bom.) of 84 for Assessment Year 1977-78, vide order dated 2-6-1988]. He also relied on the following decisions-
(a) CIT v. Jwala Pd. Radha Kishan [1977] 107 ITR 540 (All.)
(b) Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736 (SC)
(c) TJ. Lalvani v. CIT [1970] 78 ITR 176 (Bom.)
(d) CIT v. Gillanders Arbuthnot & Co. Ltd. [1982] 138 ITR 763 (Cal.).
In the alternative, he submitted that vide Directors’ Report of the assessee-company for the year ended 31st October, 1970, there was a proposal for making the Minerva Mills, a subsidiary and therefore, at any rate, the amount due from that debtor was certainly allowable as a business loss.
3. On the other hand, learned Departmental Representative submitted that it was not allowable as a business loss under Section 28(1), let alone as bad debt under Section 36 or business expenditure under Section 37(1). He cited the following decisions-
(a) A.V. Thomds & Co. Ltd. v. CIT [1963] 48 ITR 67 (SC),
(b) Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514 (SC)
(c) Madan Gopal Bagla v. CIT [1956] 30 ITR 174 (SC)
and in particular emphasized the Supreme Court decision in the case of Indian Aluminium Co. Ltd. (supra). He submitted that in that case deduction was held as notallowable for the amount of Indian income-tax, which should have been deducted at source, by that assessee while remitting to foreign company, the technical know-how fees, etc., when the said foreign company declined to reimburse that assessee that amount of income-tax deductible at source.
4. We have considered the rival submissions. At this stage, it would be, however, relevant to note that the management of both the debtor companies, was taken over by the National Textile Corporation in the year 1971 and the Department claimed that interest was charged from those two mills on a regular basis only after the management was taken over by the NTC. Now, we may note the analysis of the figures given in para-5 on pages 8 and 9 of the order of the Commissioner of Income-tax in the following format (recost)-
(A) For Mysore Spinning and Manufacturing Co. Ltd. Rs.
(1) From 9-9-1967 (i) Direct payments 14,58,949.50
to (ii) Amount paid to
31-12-1971 sister concerns 8,04,666.09
(iii) Amount paid
to creditors for
expenses 2,90,747.10
(iv) Fixed Depositors 3,12,900.00
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28,67,262.69
(iv) Less : Receipts 13,38,340.50
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15,28,922.19
(vi) Add. Interest
up to 31-12-1971 4,36,946.48
(2) 31-12-1972 Interest for the year
ended 31-12-1972 2,96,765.34
(3) 31-12-1973 Interest for the year
ended 31-12-1973 3,28,508.65
(4) 31-12-1974 Interest for the year
ended 31-12-1974 3,88,671.40
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Total 29,79,814.06
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(B) For Minerva Mills Ltd.
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SI. Period Details Amount Balance
No.
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(1) For the year (i) Amount paid Rs. Rs.
ended 31-12-1971 to creditors for
the cotton,
yarn, etc. 1,87,388.41
(ii) Direct
payments 5,37,120.91
and debits
(iii) Interest 14,512.50
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Total 7,98,021.12
(iv) Less: 3,69,058.00
Receipts
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Balance 3,73,763.80 3,73,763.80
(2) For the year (i) Amount paid
ended 31-12-1972 to sister
concern 1,25,000.00
(ii) Amount paid
to creditors for
cotton, yarn, etc. 152.27
(iii) Interest 73,487.40
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(iv) Total 1,98,639.67
(v) Less Receipts 9,000.00
Balance 1,89,639.67 1,89,639.67
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(3) For the year Interest 72,787.33 72,787.33
ended 31-12-1973
(4) For the year
ended 31-12-1974 95,428.62 95,428.62
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Total 7,31,619.42
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From the above, it is obvious that in respect of Mysore Mills, against direct payments of Rs. 14,58,949 and amounts paid to sister concerns of Rs. 8,04,666, receipts were totalling Rs. 13,38,840. Obviously, receipts cannot be put against the amounts paid to creditors for expenses and fixed depositors. Assessce has not been able to show how direct payments made and the amounts paid to sister concerns, to the extent left due after receipts should be regarded as given for business purposes. However, there is quite some substance in the assessee’s contention that the amounts paid to creditors for expenses and to the fixed depositors were for ensuring regular supply of stores and raw-materials on one hand for avoiding the run of the fixed depositors on the assessee-company itself. Similar would be the position in regard to the amounts due from Minerva Mills. Up to 31-12-1971, direct payments and debits were Rs. 5,37,120, out of which receipts were Rs. 3,65,258 and the assessee has not been able to show how the balance amount should be regarded as directly serving the purposes of assessee’s business. However, amounts paid to the creditors for cotton, yarn, stores, etc., totalling Rs. 1,87,532 (Rs. 1,87,388.41 +Rs. 152.27) were only for ensuring regular supply of cotton, yarn and stores, etc., to the assessee-company on the footing that the suppliers were common. This leaves a sum of Rs. 1,25,000 debited in the accounts of Minerva Mills against the amounts paid to the sister concern. For this also the assessee has not been able to show how the business purpose was served by making this payment. On this basis, we would hold that the amounts paid to creditors for expenses and to the fixed depositors would be regarded as directly for the furtherance of the business interests of the assessee company. The point is that all the three mills were under the management of the same group and they had common fixed depositors and common suppliers. Non-payment of the dues payable by the two debtor companies would haye really hampered the business activity of the assessce. Therefore, those amounts should be regarded as given in furtherance of assessee’s own business.
5. This brings us to the amounts of interest. Now, first and foremost point is that in assessee’s books for this very year, interest charged is Rs. 3,88,671 in respect of Mysore Mills and Rs. 95,429 in respect of Minerva Mills. Since these are the credits in the books for this very year, they may be viewed also as a sort of reversal of charging the interest, impliedly. Of course, the whole of interest has been charged as business income in the relevant years. Therefore, there is a direct nexus between these items of interest and assessee’s business. They would, therefore, constitute allowable deduction. At this stage, we may also note that in the assessment order dated 25-4 -1971 in assessee ‘s own case, set off is allowed for unabsorbed depreciation from Assessment years 1968-69 to 1973-74, totalling Rs. 61,64,591 and for unabsorbed development rebate from Assessment years 1966-67 to 1973-74, amounting to Rs. 9,21,656 and business loss is computed at Rs. 3,55,716 and then positive income of Rs. 26,08,080, was computed in that assessment order on account of the existence of capital gains, etc., amounting to Rs. 31,16,719. The point is that assessee-company itself was not doing well enough in the sense that business profits were not adequate even for absorbing depreciation allowance and development rebate. In such a situation, it was necessary for the assessee-coppany to avoid the possibility of a run by the fixed depositors or hindrance in the supply of raw-materials, stores, etc. In the ultimate analysis totality of circumstances have to be taken into account to decide which of the transactions should be regarded as for business purposes. All the transactions with the same party need not bear the same characteristic. Some of them may be directly for business purpose, but not others. We have analysed the transactions on the basis of information available on record and the claims and counter-claims on the lines indicated above.
6. A slightly more detailed consideration of the Supreme Court decision in Indian Aluminium Co. Ltd.’ s case (supra) is warranted. As indicated above, it is cited by the learned Departmental Representative to submit that each and every payment would not be deductible. He emphasized that when amount of tax deducted at source, borne by the assessee-company was held to be not deductible, there is no cause for holding that the loans given to the sister concerns should be deducted in computation of business income. We find that on material aspects, that decision of the Supreme Court is distinguishable. First and foremost point is that most of the discussion is in regard to claim as bad debt under Section 10(2)(xi) of the old Act or a business expenditure under Section 10(2)(xiv) of that Act. But, in the question referred, there is a specific mention of Section 10(1)also.Atany rate, the main reason for rejecting the assessee’s claim in that case is contained in the concluding part of the decision on page 519 of the Reports (79 ITR), which is in the following terms-
… The…it can afford no assistance to us in determining whether an amount which an assessee had to pay by virtue of the provisions of the Act could be regarded as an expense incurred wholly and exclusively for the purpose of the business. The assessee was presumed to know the relevant provisions of the Act at the time when it entered into an agreement with the Montreal company. There was no provision in the agreement with the Montreal company which created a contractual obligation on the assessee to make payment of the taxes deductible under Section 18(3B). At any rate it is difficult to understand how a payment made under a statutory obligation, because the assessee was in default could constitute expenditure laid out for the purpose of the assessee’s business.
7. Thus, the claim is rejected in that case of account of the payment having been made by virtue of the provisions of the Income-tax Act and in the absence of the contractual obligations. In the case before us, there is no payment in pursuance of any provisions of the Act or any other law and further on account of the intimate relationship of the management of all the three companies, the existence of understanding and expediency of business can be presumed. As already indicated, since the assessee company itself was not generating sufficient profits, it had to ensure that there was no run on it by the fixed depositors and there was no hindrance in the supply of raw-materials and stores. When the fixed depositors and suppliers of raw-rnaterials are common, as a prudent business, entity, the assessee-company rightly made the payments to satisfy those two categories of persons on behalf of those two debtor companies.
8. Similarly, slightly more detailed analysis is required in the context of the Calcutta High Court decision in Gillanders Arbuthnot & Co. Ltd.’ s case (supra) cited on behalf of the assessee. The point is that in the Directors’ Report for the year ended 31st October, 1970, there is a mention of the possibility of the Minerva Mills being made a subsidiary of the assessee-company. This particular aspect does not make any difference in the present case, firstly because the Minerva Mills didnotreally become the subsidiary company. Secondly, the mention of it was in the reports for the year ending October 1970, while as per the analysis of the accounts given above, the payments to Minerva Mills started in the calendar year 1971. Assessee has not shown that when the payments were made to Minerva Mills, there was reasonable possibility of the Minerva Mills being made a subsidiary of the assessee-company. So, that decision of the Hon’ble Calcutta High Court also does not help the assessee.
9. Before parting, we may mention that before the Departmental authorities, assessee had made alternative claims under Section 36 as bad debt and under Section 37(1) as business expenses. As already noted, before the Tribunal, claim is restricted to the category of ‘business loss’. All the same, we may mention that the alternative claims under Section 36 and Section 37(1) have been rightly rejected by the Departmental authorities and rightly not pursued before the Tribunal by the assessee. Claim for bad debt is not available because, it is not written off in the books of and up to this year. Claim for business expenditure is not available because no disbursement had taken place in this year. However, a part of assessee’s claim is acceptable as business loss, consequent upon the nationalisation of the mills, to the extent indicated above and quantified below-
(1) Interest noted in para-2
above Rs. 17,07,108
(2) Payments shown in the analysis
given in para-4 above, against-
(a) A(1)(iii) - Amount paid to
creditors for expenses Rs. 2,90,747
(b) A(1)(iv) - Fixed Depositors Rs. 3,12,900
(c) B(1)(i) - Amount paid to creditors
for cotton etc. Rs. 1,87,388
(d) B(2)(ii) - Amount paid to creditors
for cotton etc. Rs. 152
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Total Rs. 24,98,295
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10. In the result, assessee's appeal is partly allowed.