CA Isha Seth
1. The assessee company sold its right to recover a sum of Rs. 103 lakhs from Varun, to M/s Pearl Thread Mills Ltd. as an actionable claim for Rs. 45 Lakhs for the relevant assessment year under consideration.
2. The assessee company claimed the differential loss of Rs. 57,84,590/- by writing it off as bad debts. The assessee claimed the same as deduction from the total income as business loss.
CIT (Appeals) Order
Subsequently, the CIT(A) held that it was not in ordinary course of business of the company to advance loans. It was not a business loss as this was a loan advanced as a part of the investment programme. Further held that the loss could not in any case be allowed in the assessment year 1978-79. The assessee questioned the correctness of these findings by filing an appeal to the Income Tax Appellate Tribunal.
Question of Law Raised by ITAT
“Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the loss on sale of actionable claim by the assessee was a business loss allowable as a deduction in the accounting period ending 31.12.1977?”[RELEVANT EXTRACT FROM HIGH COURT ORDER]
1. All the circumstances were duly studied and it was held that the amount was advanced not by way of investment but purely in an attempt to prevent the State Bank Proceeding against the assessee, as a guarantor. Guaranteeing of the loan by State Bank to Varun was a part of business activities of the assessee company.
2. Advancing such loan for avoiding suit and legal repercussions was only an act of business expediency as otherwise, business could have been affected. The investment by the assessee was the share capital of Varun contributed by the assessee and this is different from the loan advanced.
3. As Income Tax Officer has himself treated interest on loan as income of the assessee company, he himself has treated the same as trade advance loan. The CIT(Appeals) was not justified in holding that the loss of assessee was not a business loss.
4. The CIT(Appeals) was also incorrect in holding that the business loss, in any case can be treated as loss in the subsequent assessment year. The CIT(Appeals) has adopted the reasoning that in the Board meeting dated 27.10.1977, they approved only a package arrangement by which Mr. Khatau one of the directors agreed to take the assignment of the actionable claim in his name and/or his nominee that actually the assignment was in favour of Pearl Thread Mills Ltd., who was not a part to the agreement dated 27.10.1977 and that the actual transaction was completed only by executing the assignment deed dated 30.3.1978 after approving draft of the assignment deed dated 9.3.1978.
5. The CIT(Appeals) therefore held that on 27.10.1977 there was nothing but only an understanding between directors & shareholders to sell the debt, while the actual sale took place in the subsequent assessment year. However, the ITAT held that the logic and reasoning given by CIT(Appeals) will hold good on in case of determination of capital loss, but not in case of writing off the balance amount.
6. By the agreement itself, it became final that a director agreed to take the assignment of the actionable claim for Rs. 45 Lakhs which clearly meant that there was no chance for the assessee to recover the balance amount. The assessee was completely justified in treating the balance amount as loss in the accounting period ending on 31.12.1977.
Questions of Law Framed by High Court
The question as framed for our opinion consists of two sub-questions.
Therefore, for the convenience of consideration, we consider the two sub-questions separately as under:
(i) The first is whether the loss on sale of actionable claim was a business loss allowable as a deduction to compute its profits and gains from business? and
(ii) Second – if the answer to (i) is in the affirmative whether the loss on sale of actionable claim is allowable as deduction in the subject Assessment Year or in the following Assessment Year?
[RELEVANT EXTRACT FROM HIGH COURT ORDER]
IN RELATION TO QUESTION (i) FRAMED BY HC
a) The amount was advanced to M/s Varun Shipping Co. Ltd. on account of business expediency. The advance was to ensure that State Bank of India does not enforce guarantee given by assessee to Bank in respect of loan advanced by it to M/s Varun Shipping Co. Ltd.
b) The fact that the Assessing Officer while passing the assessment order treated the interest on amount so advanced as income of the assessee chargeable to tax concludes the issue in assessee’s favour. The treatment itself establishes that Revenue did not treat the amount as investment but as a part of assessee’s business activities. Consequently, non-recovery loss is correct to be treated as business loss.
a) The loss on account of actionable claim was not a business loss allowable as deduction to compute profits and gains of business and profession, as the appellant is not in the business of providing loans. Thus, the amount advanced was in the nature of investment.
b) The amount was advanced to M/s Varun Shipping Co. Ltd. when it was bearing huge losses and no prudent businessman would advance a loan to a company which is suffering losses.
Bombay High Court’s Judgment:
a) Revenue’s contention that the assessee is not in the business of advancing loans cannot be sustained because the same is not supported by any evidence such as the objects clause of Memorandum of Association etc. Furthermore, merely because the assessee is not in the business of advancing loans does not mean that grant of advance to M/s Varun Shipping Co. Ltd. has to be considered as an investment.
b) It is a settled position in law that even a single/solitary transaction could by itself be classified as a business transaction as per the judgments in cases of Venkataswami Naidu & Co., v/s. CIT 35 ITR 594 and CIT v/s. Sutlej Cotton Mills 100 ITR 706.
c) The second contention of the Revenue that no prudent businessman would advance a loan to a company which is suffering losses is also unacceptable for the reason that the assessee is the sole one to decide the method to carry out his own business and is under no obligation to maximize his profits. The Supreme Court in A. Builders Ltd., v/s. CIT(A) 268 ITR 1, has observed to the effect that the Assessing Officer cannotput himself in the arm chair of a businessman and decide how the business is to be conducted, by the businessman.
d) We find that the decision of advancing the amount to M/s Varun Shipping Co. Ltd. on account of business expediency to ensure that State Bank of India does not enforce guarantee given by assessee to Bank in respect of loan advanced by it to M/s Varun Shipping Co. Ltd. is a possible course of action that is adopted by the business.
e) The investment of the appellant in M/s Varun Shipping Co. Ltd. is reflected as its contribution to the share capital. The contribution can be considered to be an investment as any increase in profitability of M/s Varun Shipping Co. Ltd. would result in dividends and likely appreciation of share price of the company resulting in investor earning more than the investment made. The advance is not with the above intention.
f) The assessment order further makes it clear that the interest, to the extent the assessee had waived on advance of Rs. 103 Lakhs was treated as business income anf not as income from other sources. In the above view as well, the amount advanced cannot be treated as investment in present facts but appropriately as a loan in the course of business. Thus, the treatment of short recovery as business loss is also correct. It cannot be treated as loss on investment.
IN RELATION TO QUESTION (ii) FRAMED BY HC
a) The agreement was entered into by the appellant with one of its directors for the sale of actionable claim on 27.10.1977. By the arrangement, the appellant agreed to sell an actionable claim worth Rs. 103 Lakhs for Rs. 45 lakhs to the director or his nominee. The resultant loss of Rs. 58 Lakhs was to be allowed as deduction for the accounting period ending 31.12.1977 in the assessment year 1978-79
b) The above deduction was permissible as the applicant was following mercantile system of accounting and the Tribunal allowed the same on the above basis. It was contended that the question of law as framed does not arise from Tribunal’s order and must be returned unanswered. Alternatively, the question of law framed is academic in present facts.
a) The loss on account of sale of actionable claim cannot be allowed as deduction in the accounting period ending 31.12.1977 i.e. Assessment Year 1978-79. The actionable claim was transferred by the appellant to M/s Pearl Threads Ltd. for Rs. 45 Lakhs by an assignment deed dated 30.03.1978, resulting in a loss of Rs. 58 Lakhs.
b) The writing off can only take place on deed execution date of sale of actionable claim under section 130 of Transfer of Property Act, 1882. As the sale admittedly took place on 30.03.1978, it can be allowed as loss only in subsequent assessment year i.e. 1979-80.
Bombay High Court’s Judgment:
a) The question of law framed does not arise from Tribunal’s impugned order. It was Revenue’s case before the Tribunal that sale of actionable claim only takes place when transfer deed is executed and not prior thereto. Thus, loss on sale of actionable claim only takes place on date of execution of transfer deed i.e. 30.03.1978. This issue did not arise before Tribunal as it was urged on behalf of Revenue.
b) The ITAT did not deal with the urged issue and held that the loss was allowable in the Assessment Year 1978-79 as appellant itself had considered the same to be a bad debt consequent to arrangement dated 27.10.1977. It was under this arrangement that M/s Pearl agreed to purchase the actionable claim as the nominee.
c) However, we find merit in the contention on behalf of the appellant that this part of the question viz loss on sale of actionable claim is academic in the present facts and need not be answered. We find that the impugned order of the Tribunal has proceeded on the basis that the amount of Rs.58 lakhs has been written off as loss inthe year ending of 31st December, 1977 i.e. the previous year relating to Assessment Year 1978-79.
d) This loss was claimed in its Profit & Loss Account and Balance Sheet for the year ending 31st December, 1977.Therefore, we need not examine the applicant’s submission that the loss can only be claimed in the following Assessment Year 1979-80, as the finding of the Tribunal that the writing off of Rs.58 lakhs in the subject Assessment Year 1979-80 was on account of the arrangement dated 27th October, 1977 is not even attempted to be shown as not permissible in law.
e) Due to the arrangement dated 27.10.1977, the appellant was able to ascertain the loss of Rs. 58 Lakhs, on sale of actionable claim. Thus, this question need not be answered, as it would be academic in context of Tribunal’s order.
(a) Sub-question (i) above, in the affirmative to the extent the Tribunal held that the loss of Rs.58 lakhs was a business loss allowable for the accounting year ending 31st December, 1977 i.e. Assessment Year 1978-79; and
(b) Sub-question (ii) above i.e. loss on sale of actionable claim to be allowed in the subject Assessment Year is not answered as in the present facts as it would be academic in nature.
[RELEVANT EXTRACT FROM HIGH COURT ORDER]