2014 (9) TMI 166 - HC - Income Tax

High Court rules against appellant company for subsidiary expenses; expenditure lacked direct business nexus.

M/s UNITED BREWERIES LTD (NOW KNOWN AS UNITED BREWERIES (HOLDING) LTD) Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGLORE

The High Court upheld the decisions of the lower authorities, ruling against the appellant company. The court determined that the expenditure incurred for ... Deduction on payment of interest for borrowed loan u/s 37 - Claim of expenditure u/s 37 on account of loss incurred by the subsidiary company in abandoning the new project - claim of expenditure incurred by the appellant as a part of the expansion into a new line of business for wholly owned subsidiary - tribunal decided 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 – Held that:- What the sister concern did with the money has to be found out in order to find out whether it was for commercial expediency or not - the assessee was incorporated in the year 1951 - from time to time there is alteration of objects - as decided in Travancore Titanium Product Limited .vs. Commissioner of Income Tax [1966 (1) TMI 21 - SUPREME Court] - the establishment of resorts is not one of the objects of the company as is clear from their Memorandum of Association - the assessee company identified tourism and related business having great potential for earning revenue - 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 - the 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 - 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. 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 - 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 - 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 claim is only made after the claim was not accepted u/s 36(1)(vii) of the Act - 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 - merely because the money was lent to a sister concern or to a subsidiary company would not enable the assessee to claim deduction - The AO and the appellate authorities on careful consideration of the material on record have recorded the finding of fact – there was no justification to interfere with the finding of fact recorded – Decided against Assessee. Issues Involved:1. Entitlement to deduction under Section 37 of the Income Tax Act, 1961.2. Classification of the expenditure as business loss or bad debts written off.3. Legal distinction between the appellant company and its subsidiary.Detailed Analysis:Issue 1: Entitlement to Deduction under Section 37 of the Income Tax Act, 1961The core issue revolves around whether the expenditure incurred by the assessee for its subsidiary company, M/s. U.B. Resorts Ltd., qualifies for deduction under Section 37 of the Income Tax Act. The assessee argued that the expenditure was for business expansion and hence should be deductible. However, the Assessing Officer, Commissioner of Income Tax (Appeals), and the Tribunal all held that the expenditure was not incurred wholly and exclusively for the purpose of the assessee's business. The Tribunal emphasized that the subsidiary was a separate legal entity and the loss incurred by the subsidiary could not be allowed in the hands of the assessee. The High Court upheld this view, stating that the expenditure did not relate to the existing activities of the assessee and was not allowable under Section 37.Issue 2: Classification of the Expenditure as Business Loss or Bad Debts Written OffThe assessee initially claimed the expenditure as bad debts under Section 36(1)(vii) but later shifted to an alternative claim under Section 37 after the initial claim was not substantiated. The Tribunal and the High Court both concluded that the expenditure was related to the setting up of a new business in tourism, which is distinct from the assessee's existing brewery business. Therefore, it could not be considered as a business loss or bad debts written off. The High Court reiterated that the expenditure was capital in nature and not revenue expenditure, thus disallowing the claim.Issue 3: Legal Distinction Between the Appellant Company and its SubsidiaryThe assessee contended that there was interlacing and interlocking of funds and unity of control between the assessee and its subsidiary, implying that the loss should be deductible. However, the Tribunal and the High Court maintained that both entities are separate legal entities. The High Court cited the case of S.A. Builders Limited vs. Commissioner of Income Tax (Appeals) to explain that even if the holding company has a deep interest in its subsidiary, the expenditure must be for the purpose of the business of the assessee to qualify for deduction. The High Court found no direct nexus between the expenditure and the business of the assessee, thus upholding the disallowance of the claim.Conclusion:The High Court dismissed the appeal, affirming the decisions of the Assessing Officer, Commissioner of Income Tax (Appeals), and the Tribunal. The substantial questions of law were answered in favor of the revenue, concluding that the expenditure incurred by the assessee for its subsidiary did not qualify for deduction under Section 37 of the Income Tax Act, 1961. The court emphasized the legal distinction between the assessee and its subsidiary and the necessity of a direct nexus between the expenditure and the business of the assessee for such claims to be allowable.