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October 8, 2022

Allowable bad debt of advance to subsidiary company for business purpose

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Allowable bad debt of advance to subsidiary company for business purpose

Facts and issues of the case

The assessee has raised the following grounds of appeal:

The learned CIT(A) erred in law and on facts in not allowing the amount of Rs.1,36,72,000/- as bad debts as well as business loss//loss incidental to business and by holding it to be a capital advance in respect of advance (given to a subsidiary company) written off. It is submitted that it be so held now and the deduction as claimed be allowed.

The learned CIT(A) erred in law and on facts by disallowing the plant shifting charges of Rs.36,60,000/- by holding it to be in the nature of capital expenditure assessee. It is submitted that it be so held now and the deduction as claimed be allowed.

 The learned CIT(A) erred on facts by not appreciating that judicial precedents relied upon by the learned AO support the case of appellant rather than that of the learned AO. Also, the learned CIT(A) erred in not considering the Apex Court judgement in case of Sitalpur Sugar Works Ltd. v. CIT (1963) 49 ITR 160. It is submitted that it be so held now and the deduction as claimed be allowed.

The learned CIT(A) has erred in disallowing the amount of bad debts written off of Rs.69,33,446/- by holding that the appellant had not written off the same in its books of accounts. It is submitted that it be so held now and the deduction as claimed be allowed.

It is submitted that such amounts are already written off against the account of debtors and hence the same falls in the ratio of Supreme Court decision in case of TRF Limited vs. CIT (2010) 323 ITR 397 and the same should be allowed accordingly.   It is submitted that it be so held now and the deduction as claimed be allowed.

The learned CIT(A) erred in law and on facts by not allowing the long term capital loss of Rs.1,59,85,643/- in respect of equity shares of a subsidiary company which went into liquidation. It is submitted that it be so held now and the deduction as claimed be allowed.

The learned CIT(A) has erred in disregarding the sanctioned scheme of the Board of Industrial and Financial Reconstruction (BIFR) by not granting exemption from the tax payable on long term capital gains earned on transfer of land. It is submitted that it be so held now and the deduction as claimed be allowed.

The learned CIT(A) erred in law in holding that the appellant is not entitled to this relief in view of Supreme Court decision in case of Goetz Limited vs. CIT (2006) 284 ITR 323 inspite of the fact that Goetz (I) Limited cannot be applied at appellant’s stage and learned CIT(A) did have the powers to entertain legal claim even if it was not there before learned AO. It is submitted that it be so held now and the relief as claimed be allowed.”

The assessee company is engaged in the manufacture of high speed draw frame which is used in textile industry.   The assessee also does the business by selling spare parts sourced locally, imported and some parts made in-house. The return of income was filed on 29.10.2007 declaring total income at Rs. Nil. Notice under Section 143(2) of the Income Tax Act, 1961 was issued on 07.08.2008 and notices under Section 142(1) of the Act dated 07.09.2009 and 14.09.2009 were also issued to the assessee.   The Assessing Officer observed that the assessee has written off advance given to subsidiary company, namely Gujarat Textronic Limited (GTL) amounting to Rs.1,36,72,000/-.

 The assessee furnished its reply vide letter dated 14.12.2009. After taking into consideration the same, the Assessing Officer made addition of Rs.1,36,72,000/- in respect of advance to subsidiary company written off and treated the same as loss of capital. The Assessing Officer also made addition of Rs.36,60,000/- towards expenditure incurred on plant and machinery charges. The Assessing Officer disallowed the claim of the assessee relating to bad debt amounting to Rs.1.06,00,000/-. The Assessing Officer further disallowed Rs.1,59,85,645/- in respect of Long Term Capital Gain loss.

Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. As regards ground no.1 relating to bad debt, the Ld. AR submitted that during the year under consideration the assessee had written off amount of Rs.1,36,72,000/- being amount of advances given to subsidiary company namely Gujarat Textronic Limited (GTL). The amount in GTL was written of when GTL became defunct and no amount was recovered from its liquidator.   The main purpose for the assessee to invest in the equity shares of GTL was to control the operations of GTL and to oversee that the manufacturing cost of the yarn clearer remained below its import cost to be cost effect for the company.

 During the assessment proceedings the assessee has explained the background of the assessee to invest in GTL and the purpose of providing advances. The assessee also explained the reasons for GTL into loss making and became defunct. Thus, the advances at no point of time can be recovered from the defunct company. Hence the assessee has treated the same as bad debt as well a business loss/loss incidental to business. The Ld. AR submitted that the advances are for working capital and purchase materials, thus it was for the purpose of business and, therefore, the said amount should be allowed as business loss incidental to business.   The Ld. AR relied upon the decision of the Hon’ble Gujarat High Court in the case of CIT vs. GMDC Limited, 314 ITR 322. The Ld. AR further relied upon the decision of Hon’ble Supreme Court in the case of SA Builders Limited, 288 ITR 1.

The Ld. AR further submitted that the amounts were written off in the books since resolution passed by the Board of assessee for writing off such advance and investments in subsidiary, the same should have been considered as business loss by the Assessing Officer.Ld. DR relied upon the Assessment Order and the order of the CIT(A). The Ld. DR further submitted that the assessee company is not engaged in the business of advancing loan and in fact it is engaged in the manufacture of high speed draw frame which is used in textile industry. Thus, the Assessing Officer has rightly disallowed the writing off of advances and observed that the same cannot be allowed under Section 36(1)(viii) of the Act as the same was never considered as part of the profit of the assessee company and hence the conditions as prescribed under Section 36(2) of the Act was never satisfied.

Observation by the court

Court had heard both the parties and perused all the material available on record. It is pertinent to note that though the assessee has stated that the intention of the assessee to give advances to its subsidiary for making capital and subsidy but the intention was to control the operation of the GTL and to oversee that the manufacturing cost of the yarn clearer remained below its import cost which has to be economical/cost effective for the assessee.   Thus, the advances were intended to have a smooth running of manufacturing activities of the assessee company taking into account the cost effectives while investing in the equity shares of GTL. Thus, the same cannot be stated as advance given for acquisition of capital and hence it was rightly treated as bad debt as well as business loss/loss incidental to business by the assessee when GTL became defunct and it was impossible to recover the amount on its liquidation. Thus, ground no.1 is allowed.

Ground no.2 is not pressed by the Ld. AR and hence dismissed.

As regards to ground no.3 related to bad debts written off of Rs.69,33,446/-, the Ld. AR submitted that the amounts were outstanding for more than six years and the details of debts written off giving the names of the debtors and the amounts were submitted during the course of assessment proceedings. The individual amount in most of the cases were less than Rs.1 lakh and despite following the same, the debtors never responded due to the fact that the debtors consisted of large number of textile mills which had either closed down or changed ownership or had shifted operations.   Since the assessee could not recover its dues, the same was written off as bad debts.Ld. DR relied upon the Assessment Order and the order of the CIT(A).

Court had heard both the parties and perused all the relevant material available on record. It is pertinent to note that the only contention of the assessee is that the said debts were outstanding for last more than six years but the assessee has not been able to show as to any correspondence made with the parties for recovering the said amount. There was no efforts made by the assessee to recover the said amount and simplicitor saying that the amount was less than Rs.1 lakh cannot be held as bad debt. In the common parlance of business each and every rupee matters and the businessman always try to recover even if it is not filing any legal action as such. But here intention of recovering the said debts were not shown by the assessee before the Assessing Officer or before the CIT(A) as well as before us. Thus, ground no.3 is dismissed.

As regards to Ground No. 4 relating to Long Term Capital Loss of Rs. 1,59,85,643 in respect of equity shares of subsidiary company i.e. Gujarat Textronics, the Ld. AR submitted that the share of Gujarat Textronics Ltd. which is a subsidiary of the assesse was written off as in liquidation. The indexed cost of acquisition was worked out to Rs. 1,59,85,643/-, therefore the same was claimed as Long Term Capital Loss by the assessee company. The Assessing Officer held that there is no transfer, hence it is capital loss and not allowable under Sections 45 to 48 of the Act. The Ld. AR further submitted that The Ld. AR relied upon the decision of the Hon’ble Supreme Court in case of Kartikeya V. Sarabhai vs. CIT 94 Taxman 164, decision of the Hon’ble Gujarat High Court in case of CIT vs. Jay Krishna Harivallabhdas 112 Taxman 683 and relied upon Board Resolution for the same.

The Ld. AR submitted that the decision of B. C. Srinivas Shetty 128 ITR 292 (SC) relied by the CIT(A) only says that when cost of acquisition is not determinable computation mechanism fails. It does not observed about consideration as being not determinable. In the present assessee’s case, consideration is NIL as the investee company is wound up and no amount is realized for the shareholders to be paid back to them. The Ld. DR relied upon the assessment order and the order of the CIT(A).

Court had heard both the parties and perused all the relevant material available on record. It is pertinent to note that the share of Gujarat Textronics Ltd. which is a subsidiary of the assesse was written off as in liquidation and its index cost of acquisition was worked out at Rs. 1,59,85,643/- by the assessee company. The Revenue at no point of time disputed that the assessee company was having share of Textronics Ltd. Since the Investee company was wound up, no amount can be realized for the shareholders to be paid back to them. The Hon’ble Gujarat High Court in case of CIT vs. Jay Krishna Harivallabhdas (Supra) held that once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt, so as to treat the subjects without discrimination.

Where there does not appear to be ground for such different treatment the Legislature cannot be presumed to have made deeming provision to bring about such anomalous result. The Hon’ble Gujarat High Court further observed that the thrust of the provisions of section 46(2) is that though there is no transfer of the asset on its distribution by the company on its liquidation and such distribution cannot be computed under the head “Capital gains”, the same even has to be computed under that ‘head, when it comes to assessing the share- holder.

A shareholder who has incurred total loss in a transaction of sale of shares would be entitled to claim set off or carry forward, as may be, in respect of capital loss suffered, by virtue of section 45 read with sections 48, 71 and 74. There is, therefore, no reason why a shareholder who in distribution of assets has not received any deemed consideration in satisfaction of his rights and interests in the holding and has thereby suffered a total loss, cannot claim the benefit of set off or carry forward of the loss suffered by him. Otherwise, a startling and unjust situation may arise where the receipt of even one paise would enable him to claim set off or carry forward of capital loss as worked out under section 48, while, a shareholder who is a shade worse off and gets nothing in the event of such total loss should be denied the effect of section 46(2) read with sections 71 and 74 of the Act and be put to a perpetual loss.

Therefore, even where the receipt is “nil” on the date of distribution on the liquidation of the company, the case of such shareholder will fall under section and the deemed full value of the consideration for the purpose of section 48 will be regarded as “nil” and on that basis the income chargeable under the head “Capital gains” has to be computed under section 48. Therefore, when the assessee company ensures that the assessee company will not gain any consideration in future as the subsidiary company was in liquidation, the assessee Company has rightly claimed for Long Term Capital Loss. This fact was totally ignored by the CIT(A) as well as by the Assessing Officer. Thus, the CIT(A) was not right in disallowing the Long Term Capital Loss. Ground No. 4 is allowed.

As regards ground no.5 relating to non-granting exemption from the tax payable on Long Terms Capital Gain (LTCG) earned on transfer of land, Ld. AR submitted that there was sanctioned scheme of Board of Industrial and Financial Reconstruction (BIFR) which was passed on 16.08.2005.   The Ld. AR submitted that the LTCG earned thereon was offered for taxation in the particular year. The assessee had incurred huge loss in the past which resulted in erosion of its net worth and, therefore, the assessee’s case was referred to BIFR for rehabilitation. The assessee has filed E- return which does not allow the assessee to claim any such exemption in the written form itself. The assessee wrote letter to the Assessing Officer to grant exemption in respect of the said LTCG while assessing the return of the assessee.

The Assessing Officer disregarded the BIFR sanctioned scheme and the assessee’s request and went on to assessee the aforesaid LTCTG on transfer of land to tax as per the provisions of the Act. The CIT(A) also ignored these facts and simplicitor confirmed the addition. The Ld. AR further submitted that the CIT(A) on similar facts allowed benefit of carry forward of business loss beyond 8 years following the same order of the BIFR. In fact, the order of the BIFR overrides the provisions of Income Tax Act as per the provisions of Section 32(1) of SICA, 1985. Hence, concessions granted by such order prevails over Income Tax Act, 1961.The Ld. DR relied upon the Assessment Order and the order of the CIT(A).

Court had heard both the parties and perused all the relevant material available on record. The CIT(A) has given a categorical finding that the order of BIFR was passed on 16.08.2005 and return of income was filed by the assessee on 29.10.2007 after the order of BIFR. The assessee has disclosed LTCG in the return of income at Rs.13,94,50,634/- which after set of with business loss of the current year and brought forward has been reduced to nil. The CIT(A) further observed that undisputedly the assessee has not filed any revised return of income under Section 139(5) of the Act for rectification of any errors or omissions. It may be noted that the letter filed for claiming LTCG clearly set out the said fact which was totally ignored by the Assessing Officer as well as the CIT(A).

Thus, the observations of the CIT(A) that revised return of income was never filed disclosing LTCG does not sustain. The decision of Hon’ble Supreme Court in case of Goetz (I) Ltd. vs. CIT (2006) 284 ITR 323 was not at all considered in its true spirit in the present assessee’s case.   The Ld. AR relied upon the decision of Hon’ble Gujarat High Court in case of CIT vs. Mitesh Impex 46 taxmann.com 30 which is apt in the present case wherein it is held that though the assessee did not raise a claim in the return for deduction u/s 80IB & 80HHC, it was entitled to raise the claim before the CIT(A) for the first time.

 If a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the AO. Courts have taken a pragmatic view and not a technical one as to what is required to be determined in taxable income. In that sense assessment proceedings are not adversarial in nature. In fact in present case, the assessee made a claim during the assessment proceedings itself before the Assessing Officer which was totally ignored by the Assessing Officer. The decision of Hon’ble Supreme Court in case of Goetz (I) Ltd. vs. CIT (2006) 284 ITR 323 was not at all considered in its true spirit in the present assessee’s case. Therefore, ground no.5 is allowed.

Conclusion

In the result, appeal of the assessee is partly allowed.

Integra-Engineering-India-Ltd.-Vs-ACIT-ITAT-Ahmedabad.

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