Commissioner Of Income Tax vs Triveni Engineering & Industries ...
2010 Latest Caselaw 4278 Del

                              Reportable
*           IN THE HIGH COURT OF DELHI AT NEW DELHI



+                          ITA No.56 OF 2009


                             Judgment Reserved on: 18th August, 2010.
%                      Judgment Pronounced on: 14th September, 2010.


      COMMISSIONER OF INCOME TAX                             . . . Appellant

                        through :          Ms. Prem Lata Bansal, Advocate


                              VERSUS


      TRIVENI ENGINEERING & INDUSTRIES LTD.                . . .Respondent

                        through:           Mr. Ajay Vohra with Ms. Kavita
                                           Jha and Ms. Akansha Aggarwal,
                                           Advocates.


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MS. JUSTICE REVA KHETRAPAL

      1.    Whether Reporters of Local newspapers may be allowed
            to see the Judgment?
      2.    To be referred to the Reporter or not?
      3.    Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. This appeal pertains to the Assessment Year 2000-01. The

respondent-assessee, for that year, filed the return declaring loss

at `12.58 Crores. The Assessing Officer (AO) while making the

assessment took note of the fact that the assessee had claimed a

sum of `8.65 Crores as unrealizable assets written off and

adjusted against the reserves in computation of income. The

figure of unrealized assets written off included the following two

sums:

(i) `15,34,951 representing security deposit, which was

written off by the assessee as unrealizable; and

(ii) `5,18,380 which was the amount of advance given to

various employees and the assessee had written off

this as well on the ground that the same had become

unrealizable.

2. The AO disallowed these two amounts. The nature of these

deposit/advances under which these were disallowed by the AO

are as under:

The assessee company was amalgamated with

Gangeshwar Ltd. By virtue of this amalgamation, all the assets

and liabilities of the amalgamating company became the assets

and liabilities of the amalgamated company (i.e. the assessee

company). Thus, the assets of the amalgamated company

included certain security deposits, which were given to landlords

for obtaining lease of premises for purposes of business as well as

certain advances, which were given to the employees. Such

security deposits as well as advances given to the employees

were not recoverable. It was accordingly provided in Para 3.3 in

the Scheme of Amalgamation, which was submitted to the High

Court of Allahabad under Section 391-394 of the Companies Act,

1956, as under:

"3.3 Treatment of Reserves:

Upon this Scheme coming into effect, the reserves of the Transferor Company in the same form as those appeared in the financial statements of the Transferor Company as on the Appointed Date. Subject to any other treatment as deemed appropriate by the Board of the Transferee company, it is further provided that Amalgamation Reserve as appearing in the financial statements of the Transferor Company, may be adjusted to the extent of difference, if any, between nominal issue price and carrying cost of any securities between the Transferor Company and the Transferee Company and may be further adjusted with the difference, if any, in the valuation of assets and liabilities of the Transferor Company as determined by the Transferee Company in accordance to Clause 2.15. In the event of Amalgamation Reserve being not sufficient to meet such adjustments as aforesaid, the balance adjustments may be carried out in Share Premium Account."

3. In accordance with the approved scheme, the respondent-

assessee wrote off unrecoverable security deposits given to

landlords for lease of premises, and unrecoverable employee

advances given by the amalgamating company in the earlier

years, by debit to the amalgamation reserve account and claimed

deduction as pointed out above.

4. The reason for denying these deductions given by the AO was that

security deposits and employees balance written off did not spring

directly from carrying on of the business and were not incidental

thereto, though it was admitted that the same may have some

connection with the business.

5. Aggrieved by the disallowance, the assessee-company preferred

appeal before the CIT (A). Before CIT (A), the assessee-company

submitted that the security deposits were given for obtaining

premises on rent and that the advances were given to employees

in the course of carrying on of the business. The assessee

triumphed in this appeal, as CIT (A) accepted the plea of the

assessee that it had not advanced the amounts for securing

capital assets, non-recovery of which could have resulted in

capital loss. The CIT (A) was further of the opinion that non-

recovery of security deposits and employees advances were

directly linked with the business of the appellant and, therefore,

the loss suffered as a result of writing off of the same was in the

nature of business loss allowable under Section 28 of the Income

Tax Act (hereinafter referred to as „the Act‟). In this behalf, the

CIT (A) observed:

"The security deposits were made for obtaining contracts. The same were not advanced for securing of capital asset, non- recovery of which would have resulted into capital loss. Similarly, non-recovery of employee‟s advance was directly linked with the business of the assessee and therefore, it was in the nature of business loss allowance under Section 28 of the Act."

6. The Income Tax Appellate Tribunal (hereinafter referred to as „the

Tribunal‟) vide its impugned order dated 08.08.2008 has accorded

its approval to the order of the CIT (A), which order is under

challenge in this appeal.

7. The present appeal was admitted on the following substantial

question of law:

"Whether the amount of `15,34,951 and `5,18,380 were a Revenue loss to the assessee so as to allow the same under Section 28 of the Act?"

8. The plea of Ms. P.L. Bansal, learned counsel appearing for the

Revenue, is that the assessee had claimed deduction of the

aforesaid amount as bad debts under Section 37 (1) (vii) of the

Act. She submitted that the AO rejected the same holding that:

(i) The same had not been written off by debiting the

Profit and Loss Accounts but had been written off by

debiting amalgamation reserve account;

(ii) Section 37(1)(vii) is not applicable as the said amount

had not been taken into consideration as income in

the previous year or the earlier years; and

(iii) It was not allowable even under Section 28 of the Act,

as the said amount did not spring directly from

carrying on of the business, the same is not an

incident to the business of the assessee, though may

have some connection with the business and

therefore, in view of the principle laid down by the

Apex Court in the case of Badri Dass Daga Vs. The

Commissioner of Income Tax [(1958) 34 ITR 10

(SC)], the same was not allowable as trading loss.

9. Her submission was that the assessee had not debited the amount

as written off in the Profit & Loss Accounts, but had charged as

amalgamation reserve. According to Ms. Bansal, reliance placed

by the assessee upon Clause 3.3 of the Scheme of Amalgamation

was not appropriate. This Clause was subject to Clause 2.15,

which lays down that the assets and liabilities of the transferor

company as on the appointed date, as per its audited date, shall

be taken over by the transferee company at the values stated

therein "subject to determination of their realistic value by the

Board of Transferee Company in view of any developments that

might have taken place, subsequent to the appointed date". Ms.

Bansal argued that this circumstance had not been established by

the assessee and in these circumstances, Section 37(1) (vii) read

with Section 36(2) is not applicable to the present case. She also

argued that the security deposits were given by the assessee for

obtaining the premises on rent. Thus, by making refundable

security deposit, the assessee had obtained a right to use the

property (tenancy right), which is a capital asset. Even otherwise,

tenancy right is held to be a capital asset under the Income Tax

Act, which is evident from Section 55(2) of the Act. Therefore, the

CIT (A) and the Tribunal have erred in holding that the security

deposits had been advanced for obtaining contracts. In fact,

earnest money was deposited for obtaining contracts, which had

already been allowed by the AO. In support of her aforesaid

contentions, she referred to various judgments. The first case is

the decision of the Supreme Court in the case of Badri Dass

Daga (supra), wherein it has been held that mere connection with

the business is not sufficient. The items in the present case had

no connection with the trading activities of the assessee and

therefore, the same could not have been allowed as trading loss.

Advances to employees are in the nature of loan, which was

repayable. Loan cannot be the expenditure by any stretch of

imagination. Further, in the case of Commissioner of Income

Tax Vs. Abdullahbhai Abdulkadar [41 ITR 545], the Supreme

Court has held that a debt was allowable only when it was a debt

and arose out of and as an incident to the trade. Except in money

lending trade, debts could only be so described if they were due

from customers for goods supplied or loans to constituents or

transactions of a similar kind. In every case, the test is: Is the

debt due as an incident to the business? If it was not of that

character, it would be a capital loss. She also referred to the

judgment of Jurisdictional High Court in the case of Iron Traders

P. Ltd. Vs. Commissioner of Income-tax 97 ITR 606 wherein

it is held that unless the sum represented the price of stock-in-

trade of the assessee or it represented expenditure incurred for

preserving the assessee‟s business, it could not be said that the

amount was in the nature of revenue expenditure.

10. Mr. Ajay Vohra, learned counsel appeared on behalf of the

respondent-assessee and supported the decision rendered by the

CIT (A) as affirmed by the Tribunal. His submission was that

under Section 28/37(1) of the Act, deduction is admissible for

trading loss/loss incidental to business. The only test to be

satisfied is that the loss must arise from/spring directly from the

carrying on of business. In other words, the loss must be

incidental to the trade itself; there must be some nexus between

the trade and loss which should have been incurred by the

assessee in the course of trade. In order that loss occasioned

from non-realization of advances can be allowed, the loss should

have been incurred by one in the character of trader and the

same should fall on the assessee in that character. He relied upon

the decision of the Supreme Court in the celebrated case of Badri

Dass Daga (supra), wherein the Court while allowing the claim for

loss on account of embezzlement by an employee, observed as

under:

"7. The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."

11. He also relied upon the judgment in the case of Abdullahbhai

Abdulkadar (supra) wherein the Apex Court held that in case of

loss arising out of advance made in a business or profession, the

deciding point is whether advances are made for the purpose of

business or profession or whether they are related to business or

profession or result from it. While dealing with similar issue in the

case of Commissioner of Income Tax Vs. Mysore Sugar

Company Limited [46 ITR 649 (SC)], it was held by the Apex

Court as follows:

"8. To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : for that was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstances, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses."

12. Mr. Vohra‟s plea was that the security deposits written off were

given by the amalgamating company in the course of carrying on

business in order to secure use of premises for purposes of

business. Similarly, advances were given to employees employed

with the amalgamating company, in the course of carrying on of

the business. The same were written off due to non-recoverability

thereof on account of disputes with the landlords/vacation of

premises, termination of employees, etc. The security

deposit/advances given to the employees were not for securing

any capital assets or obtaining any enduring advantage in the

capital field. The payment of security deposit to landlords was for

obtaining use of premises for purposes of business against

payment of rent, which payment is clearly in the revenue field, for

facilitating carrying on of business more profitably and efficiently

while leaving the fixed capital untouched. Advances to employees

were given in the ordinary course of business by way of temporary

financial accommodation to be recovered out of the salary paid to

the employees. The giving of such advances was necessitated in

order to share up the personal finances of the employees, to meet

any emergency/financial commitment and keep the employees

motivated, contended and happy.

13. Insofar as deduction of advances given to the employees are

concerned, which had become unrecoverable, that may not pose

much of a problem. Advances were given to the persons who had

been employed by the assessee-company and if they became

unrecoverable, it would clearly be treated as business loss. Law

on this aspect stands crystallized by the judgment of the Bombay

High Court in the case of CIT, Panaji, Goa vs. Maina Ore

Transport (P) Ltd., [(2008)218CTR(Bom)653].

14. Thus, the AO was not correct in holding that this was not allowable

even under Section 28 of the Act, as it does not spring directly

from carrying on of the business and is not incidental thereto.

15. Coming to the security deposit written off by the assessee, the

moot question is as to whether the advances were given for

securing the capital assets. It is not disputed by the Department

that the payment of security deposit to landlords was for

obtaining use of premises for the purposes of business against the

payment of rent. The contention of the assessee, in this

backdrop, is that this payment was clearly in the revenue field,

viz., for facilitating carrying on of business more profitably and

efficiently while leaving the fixed capital untouched. Learned

counsel for the Revenue, however, argues that the security

deposits were given for obtaining the premises on rent and thus,

the assessee had obtained a right to use the property, i.e.,

tenancy right, which is a capital asset.

16. In order to appreciate the controversy, we may first state the true

nature of this deposit. When the premises were taken on rent by

the company, the payments in the form of security deposits were

given to the land lords. Since the Rent Agreement entered into

with the said landlords has not been produced, which could have

shown the purpose for which security deposits were made, in the

absence thereof, we presume that normal practice which is

followed in giving such security deposits existed here also. On

that premise, it can be inferred that these were refundable

security deposits, which were to be given back by the landlords to

the company on the conclusion of tenancy period and

surrendering of the leased premises by the company to the

landlords. Therefore, these security deposits were not in the form

of rent. The question would be when such a security deposit has

become non-recoverable for some reasons whether it can be

allowable as deduction under Section 28 of the Act. The deposits

were not given in the ordinary course of business either. These

were given for securing the premises on rent; albeit for the

purpose of carrying on business therein. Once we keep in mind

this true nature of deposits, we find force in the submission of Ms.

Bansal, learned counsel for the Revenue.

17. We may point out that the assessee had relied upon the judgment

of the Supreme Court in the case of Commissioner of Income

Tax Vs. Madras Auto Service (P) Ltd. [233 ITR 468]. However,

that judgment would not be applicable to the facts of the present

case. The expenditure incurred on the construction of building on

a leased property was treated as revenue expenditure by the

Supreme Court, as the assessee was getting business advantage

and was acquiring the business asset in the context of specific

Clause in the lease deed. Therefore, the property was not treated

as that of the lessor. Further, the Supreme Court found that by

incurring the expenditure of this nature, the assessee had taken

the advantage in the form of reduced rent for a much longer

period. This judgment is, thus, not applicable in the present

context.

18. In view of the above, this appeal is partly allowed, holding that

the amount of `15,34,951/- was not a revenue loss, and therefore

not allowable as deduction.

No costs.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE SEPTEMBER 14, 2010.

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