M/S.D.V.G.Investments Pvt Ltd vs The Joint Commissioner Of Income ...
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    THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN

                                 AND

     THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY

                     I.T.T.A. No.438 of 2005


JUDGMENT: (Per the Hon'ble the Chief Justice Ujjal Bhuyan)


      Heard Mr. Rohan Aloor, learned counsel for the

appellant and Mr. B.Narasimha Sarma, learned Standing

Counsel, Income Tax Department for the respondent.

2. This appeal has been preferred under Section

260A of the Income Tax Act, 1961 (briefly referred to

hereinafter as 'the Act') against the order dated 15.07.2005

passed by the Income Tax Appellate Tribunal, Hyderabad

Bench 'A', Hyderabad (briefly referred to hereinafter as 'the

Tribunal') in I.T.A.No.53/Hyd/2001 for the assessment year

1997-98.

3. We find that while admitting the appeal, the

substantial questions of law were not framed. In the memo of

appeal, the following questions have been proposed as

substantial questions of law:

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    "1)     On the facts and in the circumstances of the case,

whether the Income Tax Appellate Tribunal is correct in law in holding that the investments made by an investment company in share capital of another company would be capital investment/investment in the capital field for acquiring a profit making apparatus?

2) On the facts and in the circumstances of the case, whether the Income Tax Appellate Tribunal is correct in law in holding that the amounts advanced (as unsecured loans) by the Appellant Company to M/s.Kaveri Steripack Pvt. Ltd. is a capital investment and not entitled to write off as revenue loss as the same was not recoverable."

4. From the above, it is seen that the first question

proposed by the appellant is whether the investment made by

it in the share capital of another company would be a capital

investment or not. Corollary to the above, the next question

proposed is whether the Tribunal was correct in holding that

the amounts advanced by the appellant in the other company

was a capital investment which could not be written off as

revenue loss.

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                                                 I.T.T.A.No.438 of 2005

5. Appellant is an assessee under the Act having the

status of a company. The assessment year under

consideration is 1997-98. In the assessment proceedings, it

is seen that appellant sought to write off an amount of

Rs.11,80,190.00 including Rs.8,31,102.00 advanced to

M/s. Kaveri Steripack Pvt. Ltd. as unsecured loan, as bad

debts. Assessing Officer in the assessment order dated

27.03.2000 held that allowance of bad debt is governed by the

provisions of Section 36(1)(vii) read with Section 36(2) of the

Act. Assessing officer noted that as per appellant's own

admission, it was merely apprehensive of not realising the

loans advanced along with interest. In other words, the

written off was a probability. Accordingly, the claim was

disallowed.

5.1. Additionally appellant claimed investments of

Rs.13,99,800.00 in the share capital of M/s. Kaveri Steripack

Pvt. Ltd. as a bad investment and sought to write off the

same. It was stated during the assessment proceedings that

after investing the aforesaid amount, representatives of the

appellant were inducted as Directors of M/s. Kaveri Steripack 4 HCJ & CVBRJ I.T.T.A.No.438 of 2005

Pvt. Ltd. but during the period June and July, 1996, there

were disputes as regards conduct of affairs of the company

i.e., M/s. Kaveri Steripack Pvt. Ltd. This led to filing of civil

suits and counter civil suits. Ultimately A.P. State Financial

Corporation which had advanced term loan to M/s. Kaveri

Steripack Pvt. Ltd. locked up the premises. In view of the

aforesaid position, appellant decided to write off the

investment to the extent of Rs.13.99 lakhs as well as the

unsecured loan of Rs.8.31 lakhs. Assessing officer vide the

assessment order dated 27.03.2000 referred to the provisions

contained in Section 36(1)(vii) read with Section 36(2) of the

Act and found that the aforesaid amounts were not written on

from the books of the appellant. Additionally it was held that

such expenditure incurred by the appellant was not a trading

liability; rather as per the own admission of the appellant, it

was a capital outlay. Holding that the conditions stipulated

in Section 36(1)(vii) read with Section 36(2) of the Act as well

as Section 37(1) of the Act were not complied with, assessing

officer refused to write off the aforesaid amounts as bad

debts. However, the same was treated as a capital outlay.

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                                            I.T.T.A.No.438 of 2005

6. Aggrieved by the above, appellant preferred first

appeal before the Commissioner of Income Tax (Appeals)-IV,

Hyderabad (briefly referred to hereinafter as 'CIT(A)'). By the

order dated 21.11.2000, the appeal preferred by the appellant

was dismissed.

7. Thereafter appellant preferred further appeal before

the Tribunal. However, by the order dated 15.07.2005, the

appeal was dismissed by the Tribunal.

8. Learned counsel for the appellant has placed

reliance on a decision of the Madras High Court in

Commissioner of Income Tax v. Tamilnadu Industrial

Investment Corpn. Ltd.1 to contend that investments made

by an investment company like that of the appellant would be

considered to be revenue expenditure and entitled to

necessary deductions. He has also placed reliance on a

decision of the Supreme Court in Indore Malwa United Mills

Ltd., Indore v. State of Madhya Bharat2 to contend that

money lent would be a debit item in the accounts of the

1 MANU/TN/1795/2017 2 MANU/SC/134/1964 6 HCJ & CVBRJ I.T.T.A.No.438 of 2005

company in accordance with the accepted commercial

practice. If the amount is realised, it would be a credit item.

Both would be proper items of accounts for ascertaining the

profit and loss of the company. If the debt becomes

irrevocable, it would be a bad debt.

9. On the other hand, Mr. B.Narasimha Sarma,

learned counsel for the respondent submits that issue

involved in the present appeal is short and precise. The

question is whether investments made by the appellant in

another company could be treated as a bad debt under

Section 36(1)(vii) of the Act.

10. We have heard learned counsel for the parties and

perused the materials on record.

11. We have already noticed the findings returned by

the assessing officer.

12. Assessing officer noted that to writing off any sum

under the head 'bad debt' is governed by the provisions of

Section 36(1)(vii) of the Act read with Section 36(2) thereof.

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                                             I.T.T.A.No.438 of 2005

The foremost condition required to treat an advance as a bad

debt or to write off the same is that such advance must

accrue or arise out of the activity of the business of the

assessee. In other words, it has to necessarily mean a trading

liability of the assessee (appellant). However, it was noted

that as per appellant's own admission, a consolidated sum of

Rs.31.34 lakhs was advanced to M/s. Kaveri Steripack Pvt.

Ltd. with the idea of effecting a takeover of the said company

as a going concern. Therefore, as per the appellant's own

admission, this was a capital outlay and consequently a

capital expenditure though incidentally it may help in the

business of the company in making profit. Therefore,

assessing officer concluded that the outlay of Rs.31,34,000.00

was in the nature of a capital outlay, the write off of which

could not be allowed within the meaning of Section 36(1)(vii)

read with Section 36(2) of the Act.

13. In appeal before CIT(A), it was contended on behalf

of the appellant that the investments/advances to

M/s. Kaveri Steripack Pvt. Ltd. had sprung out of commercial 8 HCJ & CVBRJ I.T.T.A.No.438 of 2005

expediency and that since the transaction had taken place in

the ordinary course of business, appellant was entitled to be

allowed deduction under Section 36(1)(vii) read with Section

36(2) of the Act or alternatively under Section 37(1) of the Act.

After due consideration CIT(A) held as follows:

"4.4 I have considered the arguments from the appellant's side. The effort to take over KSPL was to diversify into health care segment. The appellant had invested money for acquisition of profit making apparatus. The entire investment was, therefore, a capital outlay. Therefore, if on account of subsequent development the appellant had to write off part of the same, it has to be treated as a capital loss and the amount written off cannot qualify for deduction either u/s. 36(1)(vii) r.w.s. 36(2) or u/s. 37(1) of Income-tax Act, 1961. The matter in this regard is squarely covered against the appellant and in favour of the revenue by the decision of hon'ble Supreme Court in the case of Hasimara Industries Ltd. (230 ITR 927). The disallowance of Rs.22,30,902/- made the Assessing Officer is, therefore, confirmed."

13.1. Thus, CIT(A) rejected the contention of the

appellant and confirmed the disallowance made by the

Assessing Officer.

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                                                      I.T.T.A.No.438 of 2005

14. When this was carried forward in further appeal

before the Tribunal, Tribunal also did not accept such

contention of the appellant and by the order dated

15.07.2005 rejected the same in the following manner:

"5. We have heard rival contentions. On a careful consideration of the facts and circumstances of the case, we hold that the issue in question is squarely covered in favour of the Revenue and against the assessee by the decision of the Hon'ble Supreme Court in the case of Hasimara Industries Ltd. (supra). The assessee had decided to take over Kaveri Steripack Pvt. Ltd. as a going concern. The assessee diversified from its activity of investment company. Notes forming part of accounts clearly demonstrate that this was a take-over proposal. The ratio of the judgment of the Hon'ble Supreme Court in the case of CIT v. Amalgamations Pvt. Ltd. (supra) is not applicable to the facts of the case. In that case, there was a loss arising out of a guarantee issued by the assessee company. The case on hand is one where the assessee diversified and took over a running concern and made investment for the same. The judgment of the Hon'ble Supreme Court in the case of Essen Pvt. Ltd. (supra) also does not come to the rescue of the assessee. In that case also, it was a loss arising out of a guarantee issued. The assessee had rightly not argued that the deduction is allowable under sec. 36(1)(vii) read with sec. 36(2). Thus, in the facts and circumstances of the case, we uphold the order of the CIT (A).

6. In the result, the appeal of the assessee is dismissed."

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15. Thus, Tribunal noted that appellant had decided

to takeover M/s. Kaveri Steripack Pvt. Ltd. as a going

concern, thus diversifying from its activity of investment

company. It was clearly a takeover proposal and accordingly

investments were made. Admittedly, this was not a business

expenditure, this being an expenditure in the nature of capital

investment. Tribunal noted that appellant did not argue that

the deduction claimed was allowable under Section 36(1)(vii)

read with Section 36(2) of the Act. If that be the position, we

need not elaborate or labour on the aspect relating to the

allowability as a bad debt under Section 36(1)(vii) read with

Section 36(2) of the Act.

16. That apart, we find that there is consistent and

concurrent agreement on the findings returned by the

assessing officer by the two lower appellate authorities. In

further appeal under Section 260A of the Act, we are not

inclined to disturb such findings. That apart, we do not find

any substantial question of law for interference.

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                                               I.T.T.A.No.438 of 2005

17. Consequently, the appeal is dismissed. However,

there shall be no order as to costs.

18. As a sequel, miscellaneous applications pending, if

any, in this appeal, shall stand closed.

__________________________ UJJAL BHUYAN, CJ

___________________________ C.V.BHASKAR REDDY, J Date: 26.10.2022 KL