@JUDGMENTTAG-ORDER
1. The assessee has preferred this appeal against the concurrent finding recorded by three authorities that the assessee is not entitled to the deduction of Rs. 1,41,76,836/- claimed as deduction which represents the payment of interest paid for borrowing the loan under Section 37 of the Income-tax Act, 1961. The assessee is a public limited company carrying on the business of manufacture and sale of beer and liquor. In other words, the assessee is in the line of brewery business. The case of the assessee is that it established a subsidiary company U.B. Resorts Ltd., which was also incorporated as a Company and registered with the Registrar of Companies, Bangalore, with a view to extend the business of the assessee-company. It was in the year 1994. On 18.4.2001, they informed the Registrar of Companies to strike off the name of U.B. Resorts Ltd. under Section 560 of the Companies Act, 1956 for the reasons that the subsidiary Company could not do any business or commercial activity as laid down in the memorandum of association and that the same had become defunct. U.B. Resorts Ltd. was a wholly owned subsidiary of the assessee. Till the financial year 1997-98, all the expenditure incurred on the executives of the subsidiary Company were absorbed by the assessee as the employees were on the rolls of the assessee-company. It was only later that the expenditure incurred for the years 999-2000 and 2000-01 aggregating to Rs. 1.28 crores were debited to U.B. Resorts Ltd. Since no business was carried on by U.B. Resorts Ltd., the amounts owed by U.B. Resorts Ltd. were written off during the year ended 31.3.2001 by the assessee. The object behind the expansion by the incorporation of U.B. Resorts Ltd., was mainly the expansion of the business in tourism. The main purpose of the said subsidiary was to put up resorts at important tourist destinations and since the date of incorporation, expenses like employee cost and other establishment costs were being incurred regularly. The same worked out to Rs. 1.28 crores during the year 2000-01. The said Company was referred to as a division of the United Breweries Ltd., the assessee for all practical purposes. The said division was consisting of specialized staff having requisite experience in running/operating well reputed hotels like Taj and other resorts in the country. The task of the specialized staff was to identify tourist destinations, putting up resorts, working out the cost of such projects, arrangement of meetings with potential bankers apart from all other related works. A good amount of preliminary work was done by this staff who came out with various proposals for the consideration of the management. During the financial year ending on 31.3.2001, the assessee made a claim of Rs. 1,41,76,836 as bad debts written off, including the amount of Rs. 1,28,36,876/- which is given as a loan to the subsidiary company.
2. The Assessing Officer held at the outset that there is no entity by name U.B. Resorts Ltd. that is in existence. As explained by the assessee, with an idea of starting a separate line of business, certain preliminary expenditure were incurred under the head U.B. Resorts division. Obviously, the expenditure did not relate to any of the existing activities of the assessee. It continues to be so for the assessment year 2001-02 also. While filing the returns of income, the assessee did claim the expenditure under the head ''bad debts''/''advances written off with a specific indication that the claim is under the head section 36(1)(vii) of the Act. During enquiry, as the assessee was unable to substantiate the said claim and since such expenditure does not relate to any of the existing activities of the company, it was not allowable. The said claim was given up and withdrew the said claim under Section 36(1)(vii) of the Act. Therefore, an alternative claim under Section 37 of the Act was put forth contending that it is an expenditure expend wholly and exclusively for the purpose of the business. The Assessing Authority was of the view that the said alternative claim was only an afterthought and the said expenditure was not incurred by the assessee wholly and exclusively for the purpose of the business and therefore, he disallowed the claim of Rs. 1,28,36,876/-. Aggrieved by the said order, the assessee preferred an appeal.
3. The Commissioner of Income-tax (Appeals), on re-examination of the entire material on record and after taking note of the various judgments of Courts, was of the view that the impugned expenditure related to the setting up of an altogether new business pertaining to tourism like putting up resorts, etc. It is separate and distinct from the existing business of manufacture and sale of liquor and beer. The impugned expenditure cannot be considered as a business loss. The impugned expenditure cannot be allowed as a revenue expenditure. It cannot be treated as a business loss since loss, if any, will be a loss on capital account and therefore, the order passed by the Assessing Authority was upheld and the appeal came to be dismissed. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal.
4. The Tribunal was of the view that the impugned amount was spent towards the project cost. The subsidiary company has not done any business right from the date of incorporation and is also not intending to do any business or commercial activity as laid down in the main objects of its Memorandum of Association. The company has become defunct. Therefore, a request was made to strike off the name of U.B. Resorts Limited under section 560 of the Companies Act, 1956. The said request has been accepted by the Assistant Registrar of Companies. Therefore, both the companies are separate legal entities and the loss incurred by the subsidiary company in abandoning the new project cannot be allowed in the hands of the assessee-company. Therefore, the Tribunal confirmed the order passed by the Appellate Authority as well as the Assessing Officer. Aggrieved by the said order, the present appeal is filed.
5. The following substantial questions of law arises for consideration in this appeal:--
"(a) Whether in law, the Tribunal was justified in holding that the amount incurred was not a necessary expenditure incurred for and during the course of the appellant''s business and thus was not allowable under section 37(1) of the Act?
(b) Whether the claim made by the appellant which in substance reflect the normal administrative expenditure incurred by the appellant as a part of the expansion into a new line of business and later, due to commercial reasons repositioned and operated through a wholly owned subsidiary (but funded entirely by the parent) and hence on account of non-recovery of the aforesaid sums, the said amount is an allowable deduction either as a business loss or in the alternative claimable as bad debts written off?
(c) Whether in law, the Tribunal was justified in holding that the appellant company and the subsidiary company are two separate legal entities and the loss incurred by the subsidiary company could not be allowed in the hands of the appellant without appreciating that the subsidiary company was floated by the appellant during the course of its business with a view to expand its business and there was interlacing and interlocking of funds and there was unity of control in the business and thus the loss of incidental in the course of business of the appellant?"
6. Learned senior counsel appearing for the assessee assailing the impugned orders contended that the impugned expenditure incurred is not in dispute. It is incurred by the assessee for the business of the subsidiary. The assessee is in the business of manufacture and sale of beer and liquor. The assessee company in furtherance of its business started the business of establishment of resorts by incorporating the company under the name and style "UB Resorts Limited". There is a direct nexus between the business of the assessee and the business of the subsidiary company. The business of the subsidiary if it had been carried on would have helped and expanded the business of the assessee. Therefore, any expenditure laid out or expended fully or exclusively in the business of subsidiary has to be allowed in computing the income chargeable under the profits and gains of business or profession of the assessee. In fact the case is covered by the judgment of the Apex Court in the case of
7. Per contra, the learned counsel appearing for the revenue supporting the impugned orders contended that the expenditure which was incurred for expansion of business has no nexus with the business carried on by the assessee. It cannot be allowed deduction in the hands the assessee. Secondly, he contended that the subsidiary company was established in the year 1994 and closed in the year 2001-02 and the expenditure incurred by the subsidiary company were bunched under the head "U.B. Resorts division" and a claim is put forth which is only an afterthought and not permissible in law. Therefore, he submits that no case for interference is made out.
8. In order to appreciate the contentions of the appellant it is necessary to look into section 37 of the Income-tax Act, which reads as under:--
"Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession.
Explanation:--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party."
9. The said provision has been the subject-matter of interpretation by the Apex Court as well as other Courts.
10. The Apex Court in the case of
"6. But every item of expenditure merely because it is connected with the trade may not necessarily be treated as a permissible deduction. A fairly reliable approach for determining what may be regarded normally as expenditure laid out or expended wholly and exclusively for the purpose of the business has to be looked into.
The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business i.e. between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business."
The Apex Court in the case of
"The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commerce or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However, wide the meaning of the expression may be its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business."
11. The Apex Court in the case of S.A. Builders Ltd. (supra) explaining the meaning of the word "commercial expediency" used in Section 37 of the Act has held as under:--
"20. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
21. Thus, in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 Tax Cases 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test in Atherton''s case (supra) has been approved by this Court in several decisions e.g.
22. In our opinion, the High Court as well as the Tribunal and other IT authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister-company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed.
23. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency."
Further it was observed that:--
"What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Once it is established that there was nexus between the expenditure and the purpose of the business (which need not be necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman."
Then they have cautioned the Courts from being carried away by and has observed as under:--
"We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. Where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."
Therefore, what the sister-concern did with this money has to be found out in order to find out whether it was for commercial expediency or not. In the background of the aforesaid judgments, when we look at the facts of this case, the assessee was incorporated in the year 1951. Subsequently, from time to time there is alteration of objects. It was pointed out that though the assessee is primarily in the business of breweries, in their Memorandum of Association at Clause (13) one of the object of the company was as under:--
"To carry on the business of real estate and development in all its Branches, to any lands, buildings, purchase and take on lease and otherwise, acquire any lands, buildings and structure or interest of rights therein and to develop such lands into buildings, sites and/or construct and let out, sell plots of lands and buildings and structures. To construct, let out, furnish and carry on all or any of the functions or properties of flats, marionettes, dwelling houses, shops, offices, clubs, tourists houses, hotels, theatres and restaurants. To act as agents, General Agents, Land Owners, Estate Owners, Property Agents and Agencies of any other types."
It was contended that the word "tourists houses" included in the said object means starting resorts. The context in which the tourist house is included in the object is in the context of doing real estate business and construction of buildings and letting out the same. Construction of tourist houses cannot be construed as commencing a resort. Resorts have a different and distinct connotation. Therefore, the establishment of resorts is not one of the objects of the company as is clear from their Memorandum of Association. As clearly set out in the order of the Tribunal, the assessee-company identified tourism and related business having great potential for earning revenue. Accordingly it started its separate line of business. Specialised staff, having expertise in running/operating well reputed hotels like Taj and other resorts in the country, was recruited. Important places of tourists'' attraction were identified for putting up resorts. Subsequently, due to advice received from experts, the company thought it fit not to increase its area of activities. This was done so that the appellant company may not suffer further losses. Therefore, this subsidiary company was incorporated in July, 1994. The amount lent by the assessee to the subsidiary company was spent towards production cost. The subsidiary company has not done any business right from the date of incorporation and is also not intending to do any business or commercial activity as laid down in the main objects of its memorandum of association. The company has become defunct. Therefore, a request was made to strike the name of UB Resorts Limited under section 560 of the Companies Act. Such a request has been accepted by the Assistant Registrar of Companies. These facts are not in dispute. Therefore, when the assessee is in the business of manufacture and sale of beer and liquor, if they have lent money to a sister-concern, may be a subsidiary, for the purpose of setting up a new line of business, it cannot be said that the money lent by them to the subsidiary company as an assistance could be characterized as an expenditure laid down and expended wholly and exclusively for the purpose of business of the assessee. In fact, the material on record discloses that the subsidiary company was in existence from 1994 to 2001. The entire money is lent and spent only towards payment of salary and travelling expenses over a period of four to five years and no deductions were claimed in each year when such payments were made. On the contrary, for the first time the claim was put forth as bad debts. After writing off the same when they could not substantiate the said claim, then as an alternative, a claim was put forth under section 37 of the Act. Though mere mentioning of a wrong provision would not deprive the assessee of the benefit of deductions or exemptions, in trying to find out the real nature of transaction, intention of the parties at an undisputed point of time, clearly go to show that this expenditure was not incurred wholly and exclusively for the purpose of business of the assessee. The said claim is only made after the claim was not accepted under Section 36(1)(vii) of the Act. If the argument of the assessee is to be accepted, whenever a holding company lends money to a subsidiary company, then the holding company would be entitled to the said benefit. That is not the intent of law. Though there is no prohibition in law for starting subsidiary company, to get the benefit of section 37, the moneys lent should be laid out and expended only for the purpose of business of the assessee. There should be a direct nexus between the assessee and the business for which the money is lent. If that connection is not there, merely because the money was lent to a sister-concern or to a subsidiary company would not enable the assessee to claim such deduction. The Assessing Officer and the appellate authorities on careful consideration of the material on record have recorded the finding of fact. In the circumstances, we do not see any justification to interfere with the said concurrent finding of fact recorded. Therefore, the substantial questions of law framed in this appeal is answered in favour of the revenue and against the assessee. There is no merit in this appeal.
Accordingly, this appeal is dismissed.
