M/s Kemwell Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1019/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60794 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 20-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITIDR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency; Capital expenditure
• Section: 37; 28; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.1019/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. KEMWELL PVT. LTD., KEMWELL HOUSE, NO.11, TUMKUR ROAD, BANGALORE 560 022. PAN : AAACK 5854F VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI S. PARTHASARATHI, ADVOCATE RESPONDENT BY : SHRI S.K. AMBASTHA, CIT-I(DR) DATE OF HEARING : 03.07.2012 DATE OF PRONOUNCEMENT : 24.07.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 20.05.2010 OF THE CIT(APPEALS), LTU, BANGALORE, RELATING TO AS SESSMENT YEAR 2006-07. 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR N O SPECIFIC ADJUDICATION. GROUND NO.2 WAS NOT PRESSED AND THE SAME IS DISMISSED AS NOT PRESSED. 3. GROUNDS NO.3 TO 5 READ AS FOLLOWS:- ITA NO.1019/BANG/2010 PAGE 2 OF 16 3. THE LEARNED COMMISSIONER (A) OUGHT TO HAVE ALLO WED THE LOSS OF RS.1,89,80,481/- ON ACCOUNT OF IRRECOVERABL E ADVANCE WRITTEN OFF. 4. THE LEARNED COMMISSIONER (A) OUGHT TO HAVE APPRECIA TED THE ADVANCE MADE WAS IN THE COURSE OF BUSINESS AND FOR THE PURPOSE OF BUSINESS AND THE DEDUCTION CLAIMED ON AC COUNT OF RECOVERABILITY OF THE SAID AMOUNT IS INCIDENTAL TO THE BUSINESS AND ACCORDINGLY A LOSS RIGHTLY TO BE ALLOWED WHILE COMP UTING THE BUSINESS INCOME OF THE APPELLANT. 5. THE LEARNED COMMISSIONER (A) ON THE FACTS OF THE CASE OUGHT TO HAVE APPRECIATED THAT THE VARIOUS CASE LAW CITED BY THE ASSESSING AUTHORITY HAD NO APPLICATION AND ON THE O THER HAND THE CASES CITED BY THE APPELLANT WERE FULLY SUPPORTS TH E CASE OF THE APPELLANT AND THUS THE DEDUCTION CLAIMED OUGHT TO H AVE BEEN ALLOWED IN FULL. 4. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN TH E BUSINESS OF MANUFACTURE OF DRUGS AND PHARMACEUTICALS. IN THE P ROFIT & LOSS ACCOUNT, THE ASSESSEE HAD DEBITED A SUM OF RS.1,89,90,481 AS BAD DEBTS /ADVANCES WRITTEN OFF. THE PROFIT AS PER THE PROFIT & LOSS A CCOUNT WAS ARRIVED AT BY THE ASSESSEE AFTER CLAIMING THE AFORESAID DEDUCTION. T HE QUESTION BEFORE THE AO WAS AS TO THE ALLOWABILITY OF THE AFORESAID CLAI M OF DEDUCTION BY THE ASSESSEE. THE ASSESSEE GAVE A SUM OF RS.1,96,08,9 54/- AS LOAN/ADVANCE TO ITS 100% SUBSIDIARY, M/S. RUBTECH E XPORTS PVT. LTD. (RUBTECH FOR SHORT). RUBTECH WAS FORMED FOR THE PURPOSE OF CARRYING ON THE BUSINESS IN BIOINFORMATICS AND BIOTECHNOLOGY. THE AMOUNT BORROWED BY RUBTECH FROM THE ASSESSEE WAS UTILIZED FOR MAKIN G INVESTMENTS IN EQUITY SHARES OF AN AMERICAN COMPANY BY NAME BIOSIF T INC. (BI OR BIOSOFT FOR SHORT). ACCORDING TO THE ASSESSEE, T HE LOAN WAS GIVEN BY THE ASSSESSEE TO RUBTECH WITH THE INTENTION OF HAVING B USINESS CONNECTION IN BIOTECHNOLOGY AND OTHER RELATED ACTIVITIES WITH BI THROUGH RUBTECH. IT TURNED OUT THAT BI WAS NOT ABLE TO LIVE UP TO ITS E XPECTATIONS, TO PREVENT ITA NO.1019/BANG/2010 PAGE 3 OF 16 FURTHER LOSS AND TO RETRIEVE INVESTMENTS TO THE MAX IMUM EXTENT POSSIBLE, RUBTECH SOLD ITS INVESTMENT IN BI AND COULD GET ONL Y A SUM OF RS.6,28,473. THE REMAINING SUM OF RS.1,89,80,481/- (1,96,08,954 6,28,473) WAS TREATED AS EROSION IN THE NET WORTH OF RUBTECH. CO NSEQUENTLY, THE ASSESSEE WROTE OFF THE AFORESAID LOSS IN ITS BOOKS OF ACCOUNT AND CLAIMED THE SAME AS DEDUCTION. 5. THOUGH THE CLAIM OF THE ASSESSEE WAS SOUGHT TO B E MADE U/S. 36(1)(VII) OF THE ACT AS A BAD DEBT, THE SAME WAS E XAMINED ONLY IN THE CONTEXT OF LOSS INCIDENTAL TO THE BUSINESS, WHICH C OULD BE ALLOWED U/S. 28 OF THE ACT. IT IS IN THESE CIRCUMSTANCES THAT THE QUE STION AROSE FOR CONSIDERATION BEFORE THE AO AS TO WHETHER THE LOSS WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND COULD BE ALLOWED AS A DEDUCTION. 6. THE AO WAS OF THE VIEW THAT THE LOSS IN QUESTION WAS A LOSS OF CAPITAL AND COULD NOT BE ALLOWED U/S. 28 OF THE ACT . IN OTHER WORDS, THE LOSS WAS NOT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE LD. CIT(APPEALS) CONFIRMED THE ORDER OF THE AO GIVING RISE TO THE AF ORESAID GROUNDS OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE SHALL F IRST REFER TO THE EVIDENCES AVAILABLE ON RECORD TO SEE IF THE LOSS IN QUESTION CAN BE SAID TO BE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE OR AR ISING OUT OF BUSINESS OF THE ASSESSEE. RUBTECH WANTED TO INVEST IN SHARES O F BI, FOR WHICH IT APPLIED FOR PERMISSION FROM THE RBI. ON 20.06.2011 AN APPLICATION TO RBI WAS MADE. THE APPLICATION READS AS UNDER:- AT THE OUTSET, LET ME INTRODUCE OURSELVES. OUR C OMPANY RUBTECH TILL NOW A DORMANT COMPANY HAS BEEN ACTIV ATED WITH A ITA NO.1019/BANG/2010 PAGE 4 OF 16 SINGULAR PURPOSE OF HAVING BIOTECHNOLOGY AS ITS COR E ACTIVITY AND FOR TAKING OVER ALL BIOTECHNOLOGY AND RELATED ACTIV ITIES OF KEMWELL GROUP, AND IS A 100% SUBSIDIARY OF KEMWELL LTD. (PLEASE REFER ANNEXURE KEMWELL PROFILE). KEMWELL BEING A PROGRESSIVE AND CONSISTENTLY PROFITABLE PHARMACEUTI CAL COMPANY HAS ALWAYS LAID EMPHASIS ON RESEARCH AND DEVELOPMEN T AND ADOPTION OF NEW TECHNOLOGIES FOR FURTHERING ITS OWN AND ITS CUSTOMERS INTEREST. IN DEVELOPMENT AND ADOPTION O F NEW TECHNOLOGY WORLD WIDE KEMWELL HAS BEEN WORKING WITH LEADING COMPANIES LIKE BECTON AND DICKENSON USA AND WITH PH AMACIA BIOTECHNOLOGY, SWEDEN AS THEIR INDIAN PARTNERS. W HILST THE PROPOSED JOINT VENTURE IN THIS APPLICATION SHALL FO CUS ON BIOINFORMATICS, THE COMPANY IS ALSO IN THE PROCESS OF SETTING UP IN PARALLEL A BIOTECH DIVISION IN INDIA SPECIALIZIN G IN DIAGNOSTICS, GENE EXPRESSION, GENE THERAPY AND MICROARRAY (BIOCH IP) IN BIOTECH. (NOTE: KEMWELL IS ASSESSEE IN THIS APPEAL) 8. ALONG WITH THE AFORESAID APPLICATION, THE ASSESS EE ALSO GAVE A PROFILE OF KEMWELL, IN WHICH IT HAS BEEN EXPLAINED THAT THE DIRECT INVESTMENT IN A JOINT VENTURE OF BI WAS DONE ONLY FOR THE PURP OSE OF A STRONG BASE IN BIOINFORMATICS. IN THIS REGARD, IT HAS ALSO BEEN E XPLAINED IN THE PROFILE AS FOLLOWS:- KEMWELLS PROGRESS TO CAPITALIZE BIOTECHNOLOGY KEMWELL BEING A PROGRESSIVE COMPANY HAS ALWAYS LAID EMPHASIS ON RESEARCH AND DEVELOPMENT AND ADOPTION OF NEW TEC HNOLOGIES FOR FURTHERING ITS OWN AND ITS CUSTOMERS INTEREST. IN TUNE WITH THE DEVELOPMENT OF BIOTECHNOLOGY WORLD WIDE KEMWELL HAS BEEN WORKING WITH LEADING COMPANIES LIKE BECTON AND DICK ENSON USA, AND WITH PHARMACIA BIOTECHNOLOGY, SWEDEN AS TH EIR INDIAN PARTNERS. WITH EXPERTISE AND EXPERIENCE IN BIOTECH NOLOGY AVAILABLE, KEMWELL IS IN THE PROCESS OF SETTING UP A BIOTECH COMPANY SPECIALISING IN DIAGNOSTICS, GENE EXPRESSIO N, GENE THERAPY, BIOTECH RESEARCH IN MICROARRAY (BIOCHIP) A REAS AND RELATED BIOINFORMATICS TECHNOLOGIES. AS A PART OF EXPANDING TECHNICAL HORIZONS, KEMWELL HAS ENTERED INTO A SERIES OF TECHNICAL AGREEMENTS WITH PRESTIGI OUS RESEARCH INSTITUTES LIKE: ITA NO.1019/BANG/2010 PAGE 5 OF 16 CENTRE FOR CELLULAR AND MOLECULAR BIOLOGY, HYDERABAD, INDIA, IN THE AREAS OF BIOTECHNOLOGY AND BIOINFORMATICS. NATIONAL BOTANICAL RESEARCH INSTITUTE, LUCKNOW, IND IA IN THE AREA OF TISSUE CULTURE. THEY ARE ALSO IN NEGOTIATIONS WITH THE DIRECTOR, INSTITUTE OF MICROBIAL TECHNOLOGY, CHANDIGARH, FOR TECHNOLOGY ADOPTION IN THE AREA OF GENETIC ENGINEER ING FOR MANUFACTURING DRUGS. AT PRESENT, KEMWELL IS IN ADVANCED STAGE OF DISCUSSIONS REGARDING STREPTOKINA SE A DRUG DEVELOPED WITH NEW DELIVERY MECHANISM. FURTHER DISCUSSIONS ARE UNDER ADVANCED STAGE WITH D R. WILLIAM J. RUTTER, FOUNDER OF CHIRON CORPORATION AND PRESENTLY CHAIRMAN EMIRATES OF CHIRON, PRAXSYS CORPORATION USA, SILGEN E INC., TO ENTER IMMUNO DIAGNOSTICS FOR INFECTIOUS DISEASES AN D TO DEVELOP NEW TESTS ON INDIA PREVALENT DISEASES. GENOMIC STU DIES ON TISSUES USING ANTIBIOTICS AND DATA MINING FOR BOTH DIAGNOST ICS AND TISSUES, BIOSCIENCES FACILITY FOR DNA DIAGNOSTICS, DNA SEQUE NCING, GENE EXPRESSING AND MAPPING, GENETIC SCREENING, PLA NT GENOMICS, GENOMICS, PHARMACOGENOMICS, TOXICOGENOMIC S AND BIOINFORMATICS DATA MINING AND COMPILATION FOR THE ABOVE. 9. FURTHER IN THE APPLICATION FORM, RUBTECH HAS EXP LAINED THE EXISTING LINE OF ACTIVITY OF THE ASSESSEE AS FOLLOWS:- (V) EXISTING LINE OF ACTIVITY (RUBTECH EXPORTS PVT. LTD .): CORE ACTIVITY IN BIOTECHNOLOGY AND BIOINFORMATICS EXISTING LINE OF ACITIVITY (KEMWELL LTD.) : MANUFACTURING OF PHARMACEUTICALS AND BIOTECHNOLOGY RESEARCH (V) YEARS OF EXPERIENCE IN THE LINE OF ACTIVITY (R UBTECH EXPORTS PVT. LTD.) : NEW COMPANY YEARS OF EXPERIENCE IN THE LINE OF ACTIVITY (KEMW ELL LTD.): ABOUT 30 YEARS IN PHARMACEUTICAL MANUFACTURING AND CLOSE TO 2 YEARS IN BIOTECHNOLOGY . ITA NO.1019/BANG/2010 PAGE 6 OF 16 10. THE ADVANTAGES OF THE JOINT VENTURE HAVE BEEN M ENTIONED IN THE ASSESSEES LETTER DATED 20.06.2011 TO RBI AS FOLLOW S:- THE FORMING OF JOINT VENTURE HAS UNIQUE ADVANTAGES TO RUBTECH AND KEMWELL GROUP IN PARTICULAR AND INDIA IN GENERA L E.G., IT SHALL CATAPULT IN INDIAN ENTRY TO ACCESS THE TAP OF BIOTECHNOLOGY RESEARCH IN THE WORLD-UNLIKE MOST CURRENT INDIAN BIOTECH COMPANIES, WHICH ARE AT THE BOTTOM OF THE VALUE CHAIN. THE INVESTMENT HAS A STRATEGIC ALLIANCE FOR OUTSOUR CING FROM INDIA WHICH SHALL GENERATE EMPLOYMENT AND FOREIGN EXCHANGE TO INDIA. BIOSIFTS PROJECTION SHOW PROFITS AND IT IS HOPED T HAT THERE WILL BE DIVIDEND FLOWS INTO THE COUNTRY FROM YEAR THREE ONWARDS. THE RELATIONSHIP COULD LEAD TO SOPHISTICATED RESEAR CH PROJECTS IN ACADEMIC INSTITUTIONS IN INDIA SUCH AS INDIAN INSTITUTE OF SCIENCE, CENTRE FOR CELLULAR AN D MOLECULAR BIOLOGY, NATIONAL BOTANICAL RESEARCH INSTITUTE AND INSTITUTE OF MICROBIAL TECHNOLOGY. 11. THE ASSESSEE ALSO FILED AN AGREEMENT BETWEEN RU BTECH & BI DATED 10.06.2001 WHEREBY BI AGREED THAT IT WILL OUTSOURCE ALL ITS WORK IN INDIA THROUGH RUBTECH, BECAUSE RUBTECH WAS INVESTING IN T HE SHARE CAPITAL OF BI. THIS AGREEMENT IS BASICALLY FOR RUBTECH AGREEING TO INVEST IN THE SHARES OF BI. THERE WAS ALSO ANOTHER OUTSOURCING AGREEMENT D ATED 10.06.2001 CALLED OUTSOURCING AGREEMENT BETWEEN RUBTECH AND BI, WHEREBY BI HAS AGREED TO OUTSOURCE WORK IN INDIA THROUGH RUBTECH S O LONG AS RUBTECH CONTINUES TO HOLD SHARES IN BI. 12. IN THE LIGHT OF THE AFORESAID EVIDENCE AVAILABL E ON RECORD, WE HAVE TO EXAMINE THE CLAIM OF THE ASSESSEE. IT HAS BEEN THE SUBMISSION OF THE ITA NO.1019/BANG/2010 PAGE 7 OF 16 ASSESSEE THAT IT WANTED TO EXPAND TO CAPTURE THE FO REIGN MARKET ESPECIALLY US MARKET AND WANTED TO HAVE A TIE UP WITH BI, WHIC H WAS IN RELATED LINE OF BUSINESS. THE ASSESSEE FOUND THAT RUBTECH IS WHOLL Y OWNED SUBSIDIARY, WAS IN THE BUSINESS OF BIOTECHNOLOGY AND BI WAS ALS O IN THE BUSINESS OF BIOTECHNOLOGY AND SINCE BOTH THE OBJECTS WERE SIMIL AR, THE ASSESSEE DECIDED TO MAKE THE INVESTMENTS IN BI THROUGH ITS S UBSIDIARY, RUBTECH. THUS, ACCORDING TO THE ASSESSEE, BY REASON OF JOINT VENTURE BY WHICH RUBTECH INVESTED IN BI, THE ASSESSEE HAD ACCESS TO BI FOR ITS BUSINESS NEEDS. THE ASSESSEE ALSO SUBMITTED EVIDENCE TO SHO W THAT THE SUBSIDIARY HAD TO BOOK ITS LOSSES IN RESPECT OF THE INVESTMENT S MADE IN BI, AS BI BECAME BANKRUPT. RUBTECHS NET WORTH WAS ALSO NEGA TIVE AND THEREFORE THE ASSESSEE COULD NOT RECOVER ANYTHING FROM RUBTEC H AND THEREFORE HAD TO WRITE OFF THE LOSS AS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. 13. ACCORDING TO THE ASSESSEE, THE LOAN TO THE SUBS IDIARY WHICH WAS FOR THE PURPOSE OF INVESTMENT IN BI, WAS FOR THE PURPOS E OF ENABLING THE ASSESSEE TO EXPAND ITS BUSINESS AND TO ENTER US MAR KETS WITH A VIEW TO DEVELOP BIO-MEDICAL PRODUCTS AND WAS THEREFORE INCI DENTAL TO THE BUSINESS OF THE ASSESSEE AND THE LOSS CLAIMED HAD TO BE ALLO WED AS A DEDUCTION. 14. THE LD. DR, ON THE OTHER HAND, WHILE REITERATIN G THE STAND OF THE REVENUE AUTHORITIES AS REFLECTED IN THE ORDER OF TH E LD. CIT(APPEALS), SUBMITTED THAT THE AMOUNT ADVANCED TO THE SUBSIDIAR Y WAS PURELY AN INVESTMENT FOR THE PURPOSE OF EARNING RETURNS AND H AD NO NEXUS WITH THE BUSINESS OF THE ASSESSEE. HE ALSO BROUGHT TO OUR N OTICE THAT THE BOARD RESOLUTIONS BEFORE MAKING INVESTMENTS BOTH BY RUBTE CH AS WELL AS BY THE ASSESSEE, WERE IDENTICALLY WORDED. ACCORDING TO TH E LD. DR, THE MONIES ITA NO.1019/BANG/2010 PAGE 8 OF 16 ADVANCED WAS PURELY ON CAPITAL ACCOUNT AND THE LOSS IN QUESTION HAS TO BE TREATED AS A CAPITAL LOSS. IT WAS SUBMITTED THAT T HE LOAN TO THE SUBSIDIARY WAS NOT IN ANY WAY CONNECTED WITH THE BUSINESS OF T HE ASSESSEE AND CANNOT BE ALLOWED AS A DEDUCTION. 15. THE PARTIES BEFORE US HAVE RELIED ON SEVERAL JU DICIAL PRONOUNCEMENTS. WE DO NOT WISH TO MAKE A REFERENC E TO ALL THOSE DECISIONS FOR THE SIMPLE REASON THAT THE LAW IN THI S REGARD IS WELL SETTLED THAT A DIRECT LOSS NOT BEING A CAPITAL LOSS HAS TO BE AL LOWED AS A DEDUCTION, WHILE COMPUTING THE INCOME. THE LOSS IN THE COMMER CIAL SENSE LIKE THEFT OR DACOITY IS A TRADING LOSS. IF THERE IS A DIRECT AN D PROXIMATE NEXUS BETWEEN THE BUSINESS OPERATION AND THE LOSS OR INCIDENTAL T O IT, THEN THE LOSS IS DEDUCTIBLE, AS WITHOUT THE BUSINESS OPERATION AND D OING ALL THAT IS INCIDENTAL TO IT, NO PROFIT CAN BE EARNED. THE DIRECT AND PRO XIMATE CONNECTION AND NEXUS MUST BE BETWEEN THE BUSINESS OPERATION AND TH E LOSS. THE ABOVE PROPOSITION EMANATES FROM THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF RAMACHANDAR SHIVNARAYAN V. CIT 111 ITR 263 (SC) . THEREFORE THE QUESTION WILL REVOLVE AROUND THE FACT S OF EACH CASE AS TO WHETHER THERE WAS A DIRECT AND PROXIMATE NEXUS BETW EEN THE BUSINESS OPERATION AND THE LOSS OR WAS IT INCIDENTAL TO IT. THE ABOVE BEING THE LEGAL POSITION, WE WOULD PROCEED TO EXAMINE AS TO WHETHER FACTUALLY IT COULD BE SAID THAT THERE WAS ANY NEXUS BETWEEN THE LOSS IN T HE PRESENT CASE WITH THE BUSINESS OF THE ASSESSEE OR WAS IT INCIDENTAL T O THE BUSINESS OF THE ASSESSEE. 16. THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURE AND TRADING OF DRUGS AND PHARMACEUTICALS. RUBTECH WAS A 100% SUBS IDIARY OF THE ITA NO.1019/BANG/2010 PAGE 9 OF 16 ASSESSEE. IT WAS FORMED WITH BIOTECHNOLOGY AS ITS C ORE ACTIVITY AND FOR TAKING OVER ALL BIOTECHNOLOGY AND RELATED ACTIVITIE S OF KEMWELL GROUP. ON 20-6-2001 RUBTECH HAD APPLIED TO THE RBI FOR MAKING INVESTMENT IN 4,00,000 PREFERENCE SHARES OF A COMPANY BY NAME BIO SIFT INC., A COMPANY INCORPORATED IN THE STATE OF DELAWARE, USA(BIOSIFT) . THE ABOVE INVESTMENT CONSTITUTED 7.9% OF THE SHARE CAPITAL OF BIOSIFT. BIOSIFT WAS A NEW COMPANY WHICH WAS INCORPORATED ON 31.1.2001. ITS MAIN OBJE CT WAS TO PROVIDE SOFTWARE TOOLS AND SERVICES IN THE FIELD OF BIOTECH NOLOGY. BY AN AGREEMENT DATED 10.6.2001 BETWEEN RUBTECH AND BIOSOFT, BIOSIF T AGREED THAT IN CONSIDERATION OF RUBTECH SUBSCRIBING TO 7.9% OF ITS SHARE CAPITAL, BIOSOFT WILL NEGOTIATE ALL ITS OUTSOURCING WORK IN INDIA TH ROUGH RUBTECH. BY ANOTHER AGREEMENT DATED 10-6-2001 RUBTECH HAD A RIGHT TO NO MINATE A DIRECTOR IN THE BOARD OF DIRECTORS OF BIOSIFT. BY LETTER DATE D 17.9.2001 RBI GAVE ITS APPROVAL FOR THE PROPOSED INVESTMENT BY RUBTECH IN THE SHARE CAPITAL OF BIOSIFT. IT IS NOT IN DISPUTE THAT THE ASSESSEE AD VANCED A SUM OF RS.1,96,08,954/- TO RUBTECH. THE AMOUNT WAS SHOWN UNDER THE HEAD LOANS AND ADVANCES. RUBTECH IN TURN USED THE MON IES SO BORROWED FROM THE ASSESSEE IN MAKING INVESTMENTS IN THE SHARE CAP ITAL OF BIOSIFT. BIOSIFT COULD NOT PERFORM WELL. VALUE OF RUBTECHS INVEST MENT IN BIOSIFT ERODED. RUBTECH DECIDED TO SELL ITS INVESTMENT IN BIOSIFT. BY DOING SO RUBTECH COULD RECOVER A SUM OF RS.6,28,473/-. THE REMAINI NG SUM OF RS.1,89,80,481/- WAS LOSS RUBTECH SUFFERED ON SALE OF ITS INVESTMENTS. RUBTECH COULD NOT REPAY THE LOAN TO THE ASSESSEE TO THE EXTENT OF RS.1,89,80,481/-. THE ASSESSEE THEREFORE WROTE OFF THE SAID SUM AS LOSS INCIDENTAL TO BUSINESS. THE QUESTION IS AS TO WHET HER THE CLAIM OF THE ITA NO.1019/BANG/2010 PAGE 10 OF 16 ASSESSEE FOR DEDUCTION ON THE ABOVE FACTS AND CIRCU MSTANCES CAN BE ALLOWED. THE PARTIES AGREED BEFORE US THAT THE CLA IM OF THE ASSESSEE HAS TO BE TESTED ON THE PARAMETERS LAID DOWN IN SEC.28 OF THE ACT. 17. THE TEST THAT TO BE APPLIED IN DECIDING SUCH CL AIM FOR DEDUCTION HAS BEEN LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF RAMCHANDAR SHIVNARAYAN VS. CIT 111 ITR 263(SC) . THE FACTS OF THE CASE BEFORE THE HONBLE SUPREME COURT WAS THAT THE ASSESSEE WAS A REGISTERED FIRM WHICH CARRIED ON BUSINESS IN GOLD, SILVER AND GUNNIES AT RAJAHMUNDRY. IT ALSO DERIVED INCOME FROM INVESTMENT IN GOVERNMENT SECURI TIES. IN YEARS BOTH PRECEDING AND SUCCEEDING THE RELEVANT ACCOUNTING YE AR, THE ASSESSEE HAD SOLD GOVERNMENT SECURITIES AND BONDS. A SUM OF RS. 50,000 BORROWED FROM A CREDITOR FOR THE PURPOSE OF PURCHASING GOVERNMENT SECURITIES, WAS BROUGHT IN CASH TO RAJAHMUNDRY BY ITS EMPLOYEE AND WAS HANDED OVER TO ITS CASHIER. AT A TIME WHEN THE CASHIER HAD TURNED HIS BACK TO TAKE OUT SOME BOOKS, A STRANGER SUDDENLY ARRIVED AT THE PLAC E OF THE ASSESSEE'S BUSINESS AND COMMITTED THEFT OF RS. 30,000. IN SPIT E OF LODGING A COMPLAINT WITH THE POLICE THE AMOUNT COULD NOT BE RECOVERED. THE ASSESSEE CLAIMED DEDUCTION OF RS. 30,000 AS A BUSINESS LOSS IN COMPU TING ITS PROFITS AND THE TRIBUNAL ALLOWED THE CLAIM ON THE GROUND THAT THE L OSS WAS INCIDENTAL TO THE CARRYING ON OF ITS BUSINESS. ON A REFERENCE AT THE INSTANCE OF THE COMMISSIONER, THE HIGH COURT HELD THAT THE LOSS WAS NOT ALLOWABLE AS A DEDUCTION AS THE LOSS WAS NOT INCIDENTAL TO THE ASS ESSEE'S BUSINESS. ON FURTHER APPEAL, THE HONBLE SUPREME COURT EXPLAINED THE PRINCIPLE APPLICABLE WHEN A CLAIM FOR DEDUCTION IS MADE U/S.2 8 OF THE ACT IN THE FOLLOWING WORDS: ITA NO.1019/BANG/2010 PAGE 11 OF 16 UNDER SECTION 10(1) OF THE INDIAN INCOME-TAX ACT, 1922, HEREINAFTER CALLED THE 1922 ACT, THE ASSESSEE WAS REQUIRED TO PAY TAX IN RESPECT OF THE PROFITS OR GAINS OF ANY BUSI NESS CARRIED ON BY HIM. THE CORRESPONDING PROVISION IN THE 1961 ACT I S TO BE FOUND IN SECTION 28. SUB-SECTION (2) OF SECTION 10 OF TH E 1922 ACT PRESCRIBED THE METHOD FOR COMPUTATION OF PROFITS OR GAINS AFTER MAKING THE ALLOWANCES ENUMERATED IN THE VARIOUS CLA USES OF THAT SUB-SECTION. THE CORRESPONDING SECTION 29 OF THE 19 61 ACT SAYS : 'THE INCOME REFERRED TO IN SECTION 28 SHALL BE COMP UTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION S 30 TO 43A.' IN TERMS NO SPECIFIC PROVISION IS TO BE FOUND IN EI THER OF THE TWO ACTS FOR ALLOWING DEDUCTION OF A TRADING LOSS OF T HE KIND WE ARE CONCERNED WITH IN THIS CASE. BUT IT HAS BEEN UNIFO RMLY LAID DOWN THAT A TRADING LOSS NOT BEING A CAPITAL LOSS HAS GO T TO BE TAKEN INTO ACCOUNT WHILE ARRIVING AT THE TRUE FIGURES OF THE A SSESSEE'S INCOME IN THE COMMERCIAL SENSE. THE LIST OF PERMISSIBLE DE DUCTIONS IN EITHER OF THE ACTS IS NOT EXHAUSTIVE. WE MAY JUST R EFER TO SECTION 10(2)(XV) OF THE 1922 ACT CORRESPONDING TO SECTION 37 OF THE 1961 ACT. THE RELEVANT WORDS OF THE SAID PROVISION, NAMELY, 'ANY EXPENDITURE ... NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE LAID OUT OR EXPEN DED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS.. .' OCCURRING IN EITHER OF THE TWO PROVISIONS HAS NOT BEEN ABLE TO TAKE WITHIN ITS AMBIT LOSS OF PROPERTY OR MONEY BY THEFT OR DACOIT Y AS IT IS NOT AN EXPENDITURE WHICH HAS AN ELEMENT OF VOLITION, BUT A FORCED LOSS. IT IS TO BE REMEMBERED THAT THE DIRECT AND PROXI MATE CONNECTION AND NEXUS MUST BE BETWEEN THE BUSINESS O PERATION AND THE LOSS. IT GOES WITHOUT SAYING THAT A BUSINE SSMAN HAS TO KEEP MONEY EITHER WHEN HE GETS IT AS SALE PROCEEDS OF THE STOCK- IN-TRADE OR FOR DISBURSEMENT TO MEET THE BUSINESS EXPENSES OR FOR PURCHASING STOCK-IN-TRADE AND IF HE LOSES SUCH MON EY IN THE ORDINARY COURSE OF BUSINESS, THE LOSS IS A DEDUCTIB LE TRADING LOSS. IT IS IMMATERIAL WHETHER THE MONEY IS A PART OF THE STOCK-IN-TRADE, SUCH AS, OF A BANKING COMPANY OR A MONEY-LENDER, OR IS DIRECTLY CONNECTED WITH THE OTHER BUSINESS OPERATIONS. THE RISK IS INHERENT IN THE CARRYING ON OF THE BUSINESS AND IS EITHER DI RECTLY CONNECTED WITH IT OR INCIDENTAL TO IT. 18. IN PATNAIK & CO. LTD. VS. CIT 161 ITR 365 (SC) , THE HONBLE SUPREME COURT HAD OCCASION TO DEAL WITH A CASE WHER E THE ASSESSEE, A ITA NO.1019/BANG/2010 PAGE 12 OF 16 DEALER IN AUTOMOBILES AND SPARE PARTS, HAD SUBSCRIB ED TO CERTAIN GOVERNMENT LOANS. IT SUSTAINED A LOSS OF RS. 53,650 WHILE SELLING THEM AND CLAIMED THAT THE LOSS WAS A REVENUE LOSS. THE APPEL LATE TRIBUNAL FOUND THAT, HAVING REGARD TO THE SEQUENCE OF EVENTS AND T HE CLOSE PROXIMITY OF THE INVESTMENT WITH THE RECEIPT OF GOVERNMENT ORDERS FO R MOTOR VEHICLES, THE CONCLUSION WAS INESCAPABLE THAT THE INVESTMENT WAS MADE IN ORDER TO FURTHER THE SALES OF THE APPELLANT AND BOOST ITS BU SINESS AND THAT THE INVESTMENT WAS MADE BY WAY OF COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF CARRYING ON THE BUSINESS AND, THEREFORE, THE LOSS S UFFERED BY THE APPELLANT ON THE SALE OF THE INVESTMENT WAS A REVENUE LOSS. O N A REFERENCE, THE HIGH COURT RE-EXAMINED THE FACTS ON RECORD AND HELD THAT THE INVESTMENT WAS NOT CONNECTED WITH THE ORDERS PLACED BY THE GOVERNMENT WITH THE ASSESSEE AND HELD THAT THE LOSS WAS A CAPITAL LOSS. ON APPEA L TO THE SUPREME COURT IT WAS HELD BY THE HONBLE SUPREME COURT THAT, ON THE FACTS, NO ENDURING BENEFIT WAS DERIVED BY THE ASSESSEE BY THE INVESTME NT AND THAT THE TRIBUNAL WAS RIGHT IN ITS CONCLUSION THAT THE LOSS SUFFERED BY THE APPELLANT ON THE SALE OF THE INVESTMENT WAS A REVENUE LOSS. T HE COURT HELD THAT WHERE GOVERNMENT BONDS OR SECURITIES ARE PURCHASED BY AN ASSESSEE WITH A VIEW TO INCREASING HIS BUSINESS WITH THE GOVERNME NT OR WITH THE OBJECT OF RETAINING THE GOODWILL OF THE AUTHORITIES FOR THE P URPOSE OF HIS BUSINESS, THE LOSS INCURRED ON THE SALE OF SUCH BONDS OR SECURITI ES IS ALLOWABLE AS A BUSINESS LOSS. 19. THE LEARNED DRS RELIANCE WAS ON THE DECISION O F HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD. 116 ITR 1 (SC) WHEREIN IT WAS LAID DOWN THAT WHERE PROFIT OR LOSS ARISES TO A N ASSESSEE ON ACCOUNT OF ITA NO.1019/BANG/2010 PAGE 13 OF 16 APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIG N CURRENCY HELD BY HIM, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LO SS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS H ELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND , THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH P ROFIT OR LOSS WOULD BE OF CAPITAL NATURE. IT WAS THE LEARNED DRS CONTENTION THAT THE ADVANCE TO RUBTECH HAS NOTHING TO DO WITH THE BUSINESS OF THE ASSESSEE AND THEREFORE THE LOSS IN QUESTION HAS TO BE TAKEN AS CAPITAL LOS S AND CANNOT BE ALLOWED AS DEDUCTION. IN THIS REGARD THE LEARNED DR PLACED STRONG RELIANCE ON THE LETTER DATED 13.3.2006 BY RUBTECH TO THE ASSESSEE W HEREBY THEY SOUGHT WAIVER OF REPAYMENT OF THE LOAN AVAILED BY THEM FRO M THE ASSESSEE FOR MAKING INVESTMENT IN THE SHARE CAPITAL OF BIOSIFT W HEREIN THEY HAVE MENTIONED THAT THE INVESTMENT IN THE CAPITAL OF BIO SIFT WAS TO EARN GOOD RETURN. WE HAVE SEEN THAT LETTER AND FIND THAT THE LETTER ALSO SPECIFIES THAT THE INVESTMENT WAS MADE TO HAVE BUSINESS CONNECTION WITH BIOSFIT AND THEREFORE THIS LETTER CANNOT BE THE BASIS TO CONCLU DE THAT THE LOSS IN QUESTION WAS A CAPITAL LOSS. 20. THE CLAIM OF THE ASSESSEE HAS THEREFORE TO BE T ESTED ON THE PARAMETERS LAID DOWN IN THE DECISIONS OF THE HONBL E SUPREME COURT REFERRED TO ABOVE. AS OBSERVED BY THE HONBLE SUPR EME COURT IN THE CASE OF RAMCHANDAR SHIVANARAYAN (SUPRA ) , THE LINE OF DISTINCTION AS TO WHETHER A PARTICULAR LOSS IS A TRADING LOSS OR A CA PITAL LOSS HAS SOMETIMES BEEN VERY SUBTLE AND THIN RESULTING IN EXPRESSION O F DIFFERENT OPINIONS BY THE DIFFERENT HIGH COURTS ON IDENTICAL OR SIMILAR FACTS . WE WOULD THEREFORE SEE ITA NO.1019/BANG/2010 PAGE 14 OF 16 THE FACTS OF THE PRESENT CASE TO FIND OUT IF THE LO SS IN THE PRESENT CASE CAN BE SAID TO HAVE ANY DIRECT OR PROXIMATE NEXUS BETWE EN THE BUSINESS OPERATION AND THE LOSS OR WAS IT INCIDENTAL TO IT. WE HAVE ALREADY SEEN THE CIRCUMSTANCES UNDER WHICH THE LOAN IN QUESTION CAME TO BE ADVANCED BY THE ASSESSEE TO RUBTECH. WE HAVE ALSO SEEN THAT BI OTECHNOLOGY WHICH WAS THE PURPOSE OF THE JOINT VENTURE WAS A FORWARD INTEGRATION OF THE BUSINESS OF THE ASSESSEE. IT WAS THE STAND OF THE LD. DR THAT VIRTUALLY THE LOAN TO RUBTECH WAS INVESTMENT IN THE CAPITAL OF BIOSIFT BY RUBTECH AND THAT RUBTECH WAS ONLY A CONDUIT AND THAT IT WAS THE INTENTION OF THE ASSESSEE TO INVEST IN THE CAPITAL OF BIOSIFT. IF O NE WERE TO PROCEED ON THE PRESUMPTION THAT IT WAS DIRECT INVESTMENT BY ASSESS EE IN THE CAPITAL OF BIOSIFT OR A LOAN BY THE ASSESSEE TO RUBTECH, THE I NTENTION OF THE LOAN WAS TO FURTHER THE BUSINESS INTEREST OF THE ASSESSEE AN D IT WAS NOT A CASE OF MAKING INVESTMENT WITH A VIEW TO GET RETURNS ON SUC H INVESTMENTS ALONE. WE HAVE ALREADY REFERRED TO THE VARIOUS CORRESPONDE NCE/APPLICATIONS FOR PERMISSION TO RBI FOR MAKING INVESTMENT BY RUBTECH IN THE SHARE CAPITAL OF BIOSIFT. A HOLDING AND SUBSIDIARY ARE TWO DISTINC T ENTITIES IN LAW, BUT GOING BY THE PURPOSE FOR WHICH THE INVESTMENT WAS MADE IN THE SHARE CAPITAL OF BIOSIFT, THE INESCAPABLE CONCLUSION ONE CAN REACH I S THAT THE LOAN BY THE ASSESSEE TO RUBTECH HAD NEXUS WITH THE BUSINESS OF THE ASSESSEE AND WAS ACTUATED BY BUSINESS CONSIDERATIONS AND NOT A M ERE RETURN ON INVESTMENTS. THE LOSS IN QUESTION HAS THEREFORE TO BE CONSIDERED AS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE ASS ESSEE FOR ALL PRACTICAL PURPOSES WAS PROJECTED AS PERSON BEHIND RUBTECH AND THE REFERENCE WAS MADE ONLY TO THE STANDING OF THE ASSESSEE IN THE BU SINESS OF ITA NO.1019/BANG/2010 PAGE 15 OF 16 PHARMACEUTICALS. THIS IS THE BASIS ON WHICH THE RB I HAD GRANTED PERMISSION TO RUBTECH FOR MAKING INVESTMENTS IN BIO SIFT. IT IS DIFFICULT TO DISSOCIATE THE INVESTMENT BY RUBTECH IN THE SHARE C APITAL OF BIOSIFT FROM THE BUSINESS INTERESTS OF THE ASSESSEE. KEMWELL (THE A SSESSEES FORAY INTO THE BUSINESS OF BIOTECHNOLOGY HAS BEEN WELL PROJECTED I N THE APPLICATION TO THE RBI. THE INVESTMENT IN THE CAPITAL OF BIOSIFT THRO UGH A LOAN TO RUBTECH WAS A STRATEGIC INVESTMENT WITH A VIEW TO ENTER FIELD O F BIOTECHNOLOGY. THE FACT THAT THE VENTURE DID NOT TAKE OFF AS EXPECTED CANNO T BE THE BASIS TO SAY THAT THE LOAN BY THE ASSESSEE TO RUBTECH FOR MAKING INVE STMENT IN SHARE CAPITAL OF BIOSIFT WAS NOT GIVEN WITHOUT BUSINESS INTEREST IN MIND AND WAS A MERE INVESTMENT FOR RETURNS. FOR THE REASONS GIVEN AB OVE AND THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WE HAVE NO HESI TATION IN ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF L OSS ON ACCOUNT OF WRITE OF DEBTS DUE BY RUBTECH. THE AO IS ACCORDINGLY DIR ECTED TO ALLOW THE CLAIM OF THE ASSESSEE. 21. FOR THE REASONS GIVEN ABOVE, THE APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF JULY, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDICIAL MEMB ER BANGALORE, DATED, THE 24 TH JULY , 2012. DS/- ITA NO.1019/BANG/2010 PAGE 16 OF 16 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.