2009 (1) TMI 404 - HC - Income Tax

Loan write-off for jetty construction not deductible as business loss under Income-tax Act

The Bombay High Court ruled that the write-off of a loan by a mining company to its fully owned subsidiary for constructing a jetty did not qualify as a ... “Whether Tribunal was correct in holding that the write off of Rs. 4,58,500, being part of the loan advanced by the assessee to its fully owned subsidiary company, was not a loss incidental to the business of the assessee and, as such, not allowable?” - In the present case there are concurrent findings of the three authorities that the assessee-company was not in the business of lending money. There is a further concurrent finding of fact that the money was lent to its subsidiary company to enable the subsidiary company to construct a jetty which was clearly a capital asset of the subsidiary company. - the loan granted to the subsidiary company did not spring directly from the business of the assessee-company nor was incidental to it – It was not deductible Issues:1. Whether the write-off of a loan by an assessee to its fully owned subsidiary company constitutes a loss incidental to the assessee's business and is allowable as a deductionRs.Analysis:The case involved a question referred to the Bombay High Court under section 256(1) of the Income-tax Act 1961. The primary issue was whether the write-off of Rs. 4,58,500, being part of a loan advanced by the assessee to its fully owned subsidiary company, qualified as a loss incidental to the business of the assessee and thus allowable. The assessee, a mining company, had lent money to its subsidiary for constructing a jetty, which the subsidiary failed to repay due to heavy losses. The assessee wrote off the balance of the loan and claimed it as a business loss deduction. However, the Income-tax Officer disallowed the deduction, leading to appeals and subsequent rejections, culminating in a reference to the High Court.The High Court analyzed the case in light of relevant legal principles. It cited the Supreme Court's decision in Badridas Daga v. CIT, emphasizing that deductions must arise from the carrying on of the business and be incidental to it to be allowed, even in the absence of a specific provision. The Court highlighted the distinction between losses directly related to business operations and those incurred as an owner of funds, noting that the former are deductible. In this case, all authorities concurred that the loan to the subsidiary did not directly relate to the assessee's business of mining, as the subsidiary's jetty construction was a capital asset. Consequently, the Court found no reason to deviate from this view.The assessee relied on several judgments to support its claim, but the Court found them distinguishable as they involved different factual scenarios. For instance, in cases like CIT v. V. S. Dempo and Co. Pvt. Ltd. and Ramchandar Shivnarayan v. CIT, the losses were directly connected to the respective businesses, unlike the present case. Similarly, in Indore Malwa United Mills Ltd. v. State of Madhya Pradesh and Vassanji Sons and Co. P. Ltd. v. CIT, the grant of loans was an integral part of the businesses involved, unlike the assessee's situation. Therefore, the High Court concluded that the loan write-off did not qualify as a business loss incidental to the assessee's mining business, affirming the Revenue's position.In conclusion, the High Court answered the question in the affirmative and in favor of the Revenue, disposing of the reference with no order as to costs. The judgment underscored the importance of losses being directly linked to business activities to be considered deductible, reiterating the principle that losses incidental to business operations are allowable deductions under the Income-tax Act.