Case Law Details
DCIT Vs. Colgate Palmolive India Limited (ITAT Mumbai)- Camelot was a 100% subsidiary of the appellant and the appellant had deep business interest in Camelot. The main reason for setting up Camelot was to manufacture toothbrushes exclusively for the appellant. The appellant was relying upon Camelot for manufacturing of toothbrushes to be traded by the appellant. The entire investment in Camelot was made by the appellant only as a measure of commercial expediency to further its business objectives and were primarily related to the business operations of the appellant. At no poi nt of time, the investments in Camelot was made or held with an intention to realize any enhancement in value thereof over a period of time or to earn dividend income. Rather the investments were made only to separately house an integral part of the business activity of the appellant, which essentially operated as a single unified business.
Thus, relying on the principles laid down by Hon’ble Supreme Court in the case of Patnaik & Co Ltd (supra) and SA Builders vs CIT (supra), since the investment in Camelot was made by the appellant from a commercial perspective only in the course of business. Keeping in view the commercial expediency of the transaction, I hold that the loss of Rs 5.50 crores , incurred upon sale of shares in Camelot, should be allowed as a business loss in the hands of the appellant, and the action of the Assessing Officer denying the deduction as business loss stands reversed.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.: 5485/Mum/2009 Assessment year: 2003- 04
Deputy Commissioner of Income Tax
Vs.
Colgate Palmolive India Limited
Date of Decision : 25th October, 2011
O R D E R
Per Pramod Kumar:
1. By way of this appeal, the Assessing Officer has challenged correctness of CIT(A)’s order dated 15th July, 2009, in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2003-04.
2. In the first ground of appeal, the Assessing Officer has raised the following grievance:
“On the facts and circumstances and in law the CIT (A) was not justified in holding that the loss of Rs 5.50 crores incurred upon sale of shares of ‘CAMELOT’ be allowed as a business loss without appreciating the fact that the investment in equity shares of ‘CAMELOT’ was not a business asset but was invested for the purpose of obtaining enduring benefit.”
3. Briefly stated, the relevant material facts are like this. The assessee is engaged in the business of manufacturing and trading of oral care products. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction, on account of loss on sale of shares held in ‘Camelot Investment Pvt Ltd.,’ amounting to Rs 5,50,00,000. As stated in the notes to accounts, the assessee has made investments in 100% owned subsidiary, i.e. Camelot Investment Pvt. Ltd. (Camelot, in short), and the said investment was made purely for business reasons. The stand taken by the assessee was that since investment was made in the course of and for the purposes of business, the loss on sale of such investment is required to be treated as business loss in nature. Reliance was placed on Hon’ble Madras High Court’s judgment in the case of Indian Commerce and Industries Co. P. Ltd. Vs. CIT (213 ITR 513) , on Hon’ble Calcutta High Court’s judgment in the case of CIT Vs. Gillanders Arbuthnot & Co. Ltd (138 ITR 765) , on Hon’ble Supreme Court’s judgment in the case of Patnaik & Co. Ltd Vs. CIT (161 ITR 365), and on Hon’ble jurisdictional High Court’s judgment in the case of CIT vs. Investa Industrial Corporation Ltd (119 ITR 360). Without prejudice to this stand, it was contended that in the event of this loss not being allowed as a deduction in computation of business income, the company reserves its right to claim the same as a short term capital loss. In the course of the assessment proceedings, and in response to the questions raised by the Assessing Officer, it was submitted by the assessee that the assessee company had made an investment of Rs 5,95,00,000 in Camelot, a fully owned subsidiary of the assessee company which was engaged in manufacturing tooth brushes exclusively for the assessee, and that the as the shares so purchased in Cameot were sold by the assessee, during the relevant previous year, to one Ramesh Sukharam Vaidya for a consideration of Rs 45,00,000. It was also submitted that the shares were sold for a consideration of Rs 45 lakhs, whereas valuation of these shares at Rs 43 lakhs was arrived at on the basis of valuation report prepared by R S M & Co, a chartered accountants’ firm based in Mumbai.
4. The Assessing Officer was, however, not impressed by any of these submissions. He noted that the shares were all along held as investments and not as business assets, and that the dividend income from these shares was also shown as an income under the head ‘income from other sources’. The Assessing Officer also raised doubts about correctness of the valuation report. He noted that as against the book value of land and building, the valuation report adopts its value at Rs 18 lakhs, whereas, going by the ground business realities, value of land should have appreciated over the years. The Assessing Officer also noted that the assessee company has invested Rs 5.50 crores in the equity of Camelot on 17.03 2003, which have been used to repay the loan to the assessee company, amounting to Rs 5.50 crores, on 2 1.03.2003. The nexus between fresh equity investment by the assessee and repayment of loan to the assessee thus, according to the Assessing Officer, stood fully established. The Assessing Officer concluded that purpose of the investment was to give a long term enduring benefit to the assessee and ‘simply because this investment was made in the normal course of business, it does not divest itself of its inherent feature of being a long term investment’. He further observed that ‘every asset or investment is made to further or facilitate the business of the company but that does not mean that every investment can be given the character of business asset from which an accruing loss can be classified and claimed as business loss, to suit the tax needs of the assessee company’. The judicial precedents relied upon by the assessee were discussed and distinguished. As regards Indian Commerce and Industries Co Ltd’ decision (supra), the Assessing Officer noted that in the said case the assessee had to buy shares in a company to get more business from it, but the facts of this assessee’s case are entirely different. With regard to Investa Industrial Corp Ltd’s decision (supra), the Assessing Officer’s objection was ‘in this case also facts are completely different’ inasmuch as ‘a loan was given by a managing agency company to another company (not its wholly owned subsidiary) under the same management’ and ‘lending company earned interest on the loan which was offered to tax as business income’. Similarly, the Assessing Officer distinguished Gillanders Arbuthnot & Co Ltd (supra) on the ground that ‘the issue here was pertaining to write off of a loan represented by running account of the expenses incurred by the holding company for its subsidiary, and it was held that it was a trading loss incurred in the course of business as the loan actually represented expenses incurred by the holding company’. As regards Patnaik & Co decision (supra), the Assessing Officer distinguished the same on the ground that “the investment (in the said case) was clearly made for commercial expediency for the purposes of business and the loss incurred was held to be revenue loss”. On the basis of this analysis, the Assessing officer finally held that the shares in Camelot were not business assets, and that these shares were held as capital asset, and that, for this reason, loss on transfer of these shares could not be treated as business loss. The Assessing Officer further noted that the investment was made by the assessee company at a time when Camelot was in the process of closing down, and it was made only to enable it to repay the loan to the assessee company, which would not have been a permissible deduction. The whole transaction was thus alleged to be an exercising in avoiding legitimate tax liability. It was in this backdrop that the claim of short term capital loss was also declined. The deduction of Rs 4.50 crores, on sale of shares in Camelot, was thus declined. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) upheld the grievance of the assessee and deleted the impugned dis allowance by observing as follows:
I have considered the arguments and submissions of the appellant as also that stated by the Assessing Officer. I find that the Camelot was a 100% subsidiary of the appellant and the appellant had deep business interest in Camelot. The main reason for setting up Camelot was to manufacture toothbrushes exclusively for the appellant. The appellant was relying upon Camelot for manufacturing of toothbrushes to be traded by the appellant. The entire investment in Camelot was made by the appellant only as a measure of commercial expediency to further its business objectives and were primarily related to the business operations of the appellant. At no point of time, the investments in Camelot was made or held with an intention to realize any enhancement in value thereof over a period of time or to earn dividend income. Rather the investments were made only to separately house an integral part of the business activity of the appellant, which essentially operated as a single unified business.
Thus, relying on the principles laid down by Hon’ble Supreme Court in the case of Patnaik & Co Ltd (supra) and SA Builders vs CIT (supra), since the investment in Camelot was made by the appellant from a commercial perspective only in the course of business. Keeping in view the commercial expediency of the transaction, I hold that the loss of Rs 5.50 crores , incurred upon sale of shares in Camelot, should be allowed as a business loss in the hands of the appellant, and the action of the Assessing Officer denying the deduction as business loss stands reversed.
5. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. We find that Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer than the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee’s own business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot’s only customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interests. When the grant of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business deduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as ‘investment’ per se does not, and cannot, negate the fact that the such investments are made on the grounds of commercial expediency. Similarly, the head under which dividend income is assessed to tax does not also affect determination of question whether the shares are purchased on account of commercial expediency or not. It is only elementary that dividend income, whether the shares are held as investments or as any other asset, is always taxable under the head ‘income from other sources’. Therefore, nothing really turns on Assessing Officer’s emphasis on the fact that the Camelot shares were shown as investments in the balance sheet and that dividend income from these shares is taxable as income from other sources. We have also noted that as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction. Hon’ble Supreme Court’s judgment in the case of Patnaik & Co (supra) deals with a situation in which the assessee had subscribed to certain Government security but incurred a loss on sale of that security. The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee’s business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon’ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT Vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which “ from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting” and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT(A) and decline to interfere in the matter.
8. Ground No. 1 is thus dismissed.
9. In Ground No.2, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the ld CIT(A) erred in holding that the differential amount of Rs.4,38,12,912 representing the actual loan amount and the present value of the future liability was not capital account and not taxable u/s.41(1) or any other provisions of the I.T. Act ignoring the fact that the assessee claimed deduction in respect of the sales tax in earlier years and gained by way of remission/cessation of sales tax liability to that amount which is assessable u/s.41(1) of the Act.
10. Facts in brief are as follows. Under 1983 and 1988 Deferred Scheme of incentives framed by the Government of Maharashtra to incentivize entrepreneurs to set up industries in relatively backward areas, various forms of capital subsidy was given to entrepreneur. As per this scheme, the assessee was entitled to defer the sales tax liability for a period of 7 years. Accordingly, the assessee had availed the benefit of the Sales Tax Deferral Scheme for its tooth powder and soap plant at Waluj, Aurangabad. The Assessing Officer noticed that the assessee opted for the repayment of total liability of Rs. 7,97,06,177 on 1.1.2003 at the net present value. The total amount of prepayment was Rs.3,53,93,265 and an amount of Rs. 4,38,12,912 was credited to the assessee’s account. The Assessing Officer also noticed that the assessee has claimed deduction in respect of sales tax in the earlier years and gained by way of remission/cessation of sales tax liability to the tune of Rs.4,38,12,912. It was in this background that the Assessing officer added the said amount to the total income of the assessee in view of the provisions of section 41(1) of the I.T.Act. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) observed that the case of the assessee is covered by the Jurisdictional Tribunal’s judgment in the case of DCIT Vs. Sterlite Optical Technologies Limited (ITA No. 7136/M/04), as the facts of the assessee’s case is parimateria with the case of Sterlite (supra). Relying on the above decision, the CIT(A) held that the differential amount of Rs. 4,38,12,912 represents the actual loan amount and the present value of the future liability paid by the company is on capital account and not taxable under section 41(1). Accordingly, he reversed the decision of the AO and allowed this ground. Aggrieved, Assessing Officer is in appeal before us.
11. Learned representatives fairly agree that the issue is now covered, in favor of the assessee, by a Special Bench decision of this Tribunal in the case of Sulzer India Ltd Vs DCIT (134 TTJ 385). Respectfully following the esteemed views of the special bench, we uphold the order of the CIT(A) and decline to interfere in the matter.
12. Ground No. 2 is also thus dismissed.
13. In Ground No. 3, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the ld CIT(A) erred in holding that the cash discounting of Rs.1,36,25,787 shall not fall part of total turnover on the wrong perception that the Hon’ble ITAT has given the decision in favor of the assessee in AYs 1998- 99 and 1999- 2000 but the fact was that the Hon’ble ITAT actually set aside the issue to the file of the AO.
14. Having heard the rival contentions and having perused the orders of the coordinate benches in assessee’s own cases for the assessment year 1998- 99 (dated 11th November 2005) and 1999- 2000 (dated 27th August 2008), we find that the above grievance is incorrect inasmuch as the issue was indeed decided in favor of the assessee and the matter was not, as alleged by the Assessing Officer, simply remitted to the file of the Assessing Officer for re-adjudication. The grievance raised by the Assessing Officer is, therefore, ill-conceived and is dismissed as such.
15. Ground No. 3 is also dismissed.
16. In ground no. 4, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the ld CIT(A) erred in directing the AO that the amount of Rs.65,325 being reduction of 90% of foreign exchange gain has to be included for the calculation of deduction u/s. 80HHC.
17. So far this issue is concerned, the Assessing Officer has observed that the assessee company has not included the exchange gain of Rs 65,325 in its total turnover whereas the same is clearly a part of the business turnover of the assessee company. In appeal, the CIT(A) gave relief by relying upon his order for the assessment year 2002-03.
18. Having heard the rival contentions and having perused the material on record, we find that the issue is now covered against the assessee by Special Bench decision in the case of ACIT Vs Prakash I Shah (115 ITD SB 167). Respectfully following the same, we uphold the grievance of the Assessing Officer and vacate the impugned relief granted by the CIT(A).
19. Ground No. 4 is thus allowed.
20. In Ground No. 5, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the ld CIT(A) erred in directing the AO not to reduce 90% of tax free interest of Rs. 6,59,73,156 from the profits of the business as according to him, the full amount does not form part of its profits.
21. The Assessing Officer has reduced 90% of the tax free interest from the profits of the business for the purpose of calculation of relief under section 80 HHC of the Act. Before the CIT(A), it was submitted that since the interest income did not form part of the profits itself as computed under the head “profits and gains from business or profession”, the question of reducing 90% of the said interest for the purpose of computing the deduction under section 80 HHC does not arise. The CIT(A) observed that similar issue had come up for consideration in the immediately preceding year i.e. A.Y. 2002-03, wherein, the issue has been decided in favour of the assessee and, accordingly, following his decision, directed the AO to reduce 90% of tax free interest from the “profits of the business”. Aggrieved, Assessing Officer is in appeal before us.
22. Having heard the rival contentions and perused the material on record, we do not find any infirmity in the order of the CIT(A) for the reason that interest being exempt from tax under section10(15) of the Act is not a part of taxable income of the assessee and could not, therefore, be a part of the profits computed under the head ‘profits and gains from business and profession’. The question of excluding tax exempt income from ‘profits and gains from business and profession’ does not, therefore, arise. The impugned relief granted by the CIT(A) does not, therefore, call for any interference.
23. Ground No. 5 is thus dismissed.
In Ground No.6, grievance is as follows:
On the facts and circumstances of the case and in law, the ld CIT(A) was not correct in directing the AO to delete interest levied u/s.234D of the Act without appreciating the fact that the section 234D has been introduced in the statue w.e.f.1.6.2003 to levy interest on account of excess refund paid to the assessee. That the amount of Rs.65,325 being reduction of 90% of foreign exchange gain has to be included for the calculation of deduction u/s. 80HHC.
24. Having heard the rival contentions, we find that the issue is covered in favor of the assessee by the decision of ITAT Delhi (SB) in the case of ITO v. Ekta Promoters (P)Ltd., (2008) 113 ITD 719 (Delhi)(SB), wherein, it has been held that section 223D will have application only w.e.f. A.Y. 2004-05 and cannot be applied to A.Y. 2003-04. The assessment year under consideration in this case is 2003- 04. We also find that Hon’ble Jurisdictional High Court in the case CIT v. M/s. Bajaj Hindustan Ltd in Income Tax Appeal No. 198 of 2009 , held that the provisions of section 234D inserted w.e.f. 1.6.2003 have no retrospective effect. Respectfully following the decision in the case of Ekta Promoters (supra), and also in the case of Bajaj Hindustan Ltd (supra), we uphold the action of the CIT(A) and decline to interfere.
25. Ground No.6 is thus dismissed.
26. In the result, the appeal is partly allowed in the terms indicated above.
Pronounced in the open court on 25th October, 2011
