1997 Supreme(SC) 751

1997(5) Supreme 382
SUPREME COURT OF INDIA
S.C. Agrawal and K.S. Paripoornan, JJ.
Commissioner of Income Tax, Madras -Appellant
versus
M/s. Amalgamation Pvt. Ltd. -Respondent
(With Vice Versa)
Civil Appeals Nos. 139-142 of 1980
with
Civil Appeals Nos. 7-11 of 1980
Decided on 25-4-1997
Counsel for the Parties :
For the Appearing Parties : K.N. Shukla, T.A. Ramachandran, K.B. Ramamani, Sr. Advocates, B.K. Prasad, C. Radha Krishna and Anil Srivastava, Mrs. Janki Ramachandran, Advocates.

Headnote:(i) Taxation-Income Tax Act, 1922-Section 12B(2), proviso-Assessment year 1958-59-Forced sale of shares held by assessee company in various companies-Assessee-company claimed a capital loss in respect of these trans-Finding recorded by Appellate Assistant Commissioner and accepted by Tribunal that object of transaction was not to avoid or reduce liability to capital gains-Proviso to Section 12B(2) held not applicable-No ground to interfere with judgment of High Court.

       Held : After referring to the finding recorded by the Appellate Assistant Commissioner, which was accepted by the Tribunal, that the object of the transaction was not to avoid or reduce such liability to capital gains tax, that the sale was a forced sale since the assessee-company had no option and that the prices had been fixed by the Company Law Administration, the High Court held that the first proviso to Section 12B(2) cannot be attracted to the present case. The High Court did not accept the contention urged on behalf of the Revenue that the sale price had been fixed by the Company Law Administration on ad hoc basis and, in this context, it has observed that the letter dated May 18 of 1957 (Annexure G.VIII.A to the remand report of the Appellate Assistant Commissioner) clearly shows that the Company Law Administration worked out the figures in consultation with the Central Board of Revenue and when the assessee-company sold the shares at those prices, it could not be validly contended that the assessee-company transferred the shares at certain prices with the object of avoidance or reduction of liability to capital gains. (Para 8)

       (ii) Income Tact, 1922-Section 12B-Assessment year 1958-59-Loss sustained by assessee on account of standing guarantee to its subsidiary company-Claim of deduction-Assessee-company had guaranteed loan in course of carrying on its own business-Loss admissible as a deduction-Assessee company had received last of payments from liquidator in previous year relevant to assessment year 1962-63-Balance of remaining unrecoverable represented real business loss allowable for assessment year 1962-63-Judgment of High Court affirmed.

       Held that the assessee-company had incurred the loss in carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. According to the High Court, the loss was allowable as a deduction in the year in which it came to be ascertained and in the instant case the High Court held that the assessee-company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators which was received in the relevant previous year for the assessment year 1962-63 and that the Tribunal was right in allowing it in that year. (Para 14)

       (iii) Income Tax Act, 1922-Section 10(2)(xv)-Income Tax Act, 1961-Section 37(1)-Amounts paid by assessee-company to directors of subsidiary company-Admissible as a deduction u/s 10(2)(xv) or u/s 37(1) only if they can be regarded as expenditure laid out or expended wholly and exclusively for purposes of business of assessee-company-There must be a nexus between expenditure and business of assessee-Business of assessee company being the holding of investments-Expenditure incurred in payment of managerial remuneration to directors of subsidiary companies - Not an expenditure incurred in carrying on business of assessee company -Deduction claimed disallowed.

       Held : The amounts paid by the assessee-company to the directors of its subsidiary companies can be admissible as a deduction under Section 10(2)(xv) of the 1922 Act or Section 37(1) of the 1961 Act only if they can be regarded as expenditure "laid out or expended wholly and exclusively for the purposes of the business" of the assessee-company. (Para 19)

       The High Court, in our opinion, has rightly pointed out that the business of the assessee-company is the holding of investments and if with reference to the business of holding investments any expenditure had been incurred that could have been allowed as deduction. The expenditure incurred in payment of managerial remuneration to the directors of the subsidiary companies cannot be said to be expenditure incurred in carrying on the business of the assessee-company of holding its investments. The assessee-company could hold its investments and earn its dividends without incurring this expenditure. Since the subsidiary company was not obliged to distribute by way of dividends the entire profits earned on account of their managerial remuneration paid by the assessee-company and the assessee-company was only entitled to dividend from the subsidiary company as and when declared, it cannot be said that there was a direct and immediate connection between the expenditure incurred and the business of the assessee-company. (Para 22)

       The alternative claim by the assessee-company for deduction in respect of the expenditure incurred by the assessee-company in respect of amounts paid to its own directors who were also the members of the finance committee has been rightly rejected by the High Court in view of the resolution passed by the assessee-company wherein the directors, where they be the members of the finance committee or not, have been treated as a class and with reference to all of them the assessee-company incurred the expenditure only because they could not be remunerated to that extent by the subsidiary companies. The fact that they were directors of the assessee-company and members of the finance committee was not taken into account in taking over the remuneration payable to them. (Para 23)