TaxTMI 
TaxTMI 
2010 (7) TMI 671
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....er cent of the shares issued by the subsidiary company and hence was holding controlling interest thereon. The assessee company sold the subsidiary company to M/s GGCL for a consideration of Rs.15.50 crores. An agreement was entered into to this effect on 23-11-1999. The assessee company also passed a board resolution, wherein the modalities of the transfer were discussed. The details of the resolution are noted by the assessing officer at page 11 of his order. It was also noticed by the assessing officer that an annexure was attached to the agreement wherein the balance sheet as on 1-12- 1999 was reconstructed. The proposed balance sheet is extracted at page 12 of the assessment order. The assessing officer noticed that the assessee company entered into a supplementary agreement on 24-12- 1999 making a minor variation in the proposed balance sheet. The assessing officer held that the assessee company entered into a "package deal" to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The assessing officer held that the assessee company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The assessi....
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.... allowed. The learned counsel for the assessee with due respect to the lower authorities, submitted that the lower authorities totally misunderstood the facts of the case. According to him, the intention of the parties is to be seen and in the present case, the intention is only to sell the shares and there is no meaning in calling the same as "package deal" by the lower authorities. He drew our attention to the impugned agreement of sale entered into between the parties on 23-11-1999 and also drew our attention to the supplement agreement dt.24-12-1999 and submitted that the agreement itself shows that the assessee shall transfer and convey the legal title of the purchased shares of the company as on the date of transfer and whereupon the purchaser shall pay the total consideration of Rs.15.50 crores to the seller in consideration of such transfer of shares in the manner described in the agreement. He submitted that by no stretch of imagination it can be called as transfer of the undertaking or slump sale and disallow the claim of the assessee as capital loss. 5. On the other hand, the learned Departmental Representative submitted that this impugned transaction is nothing but t....
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....d on the company for the period prior to the date of transfer, which has come to the knowledge of the purchaser after the date of transfer, including any retrospective orders and the principal seller undertakes to indemnify the company as well as the purchaser in this regard. She drew our attention to clauses III and IV of the agreement dt.23-11-1999, available in the paper book at page Nos. 28 to 57, wherein it was stated as follows. i) The obligations of the sellers to complete the sale of the purchased shares under this agreement shall be subject to the satisfaction of or compliance with, at or before the date of transfer, each of the following conditions precedent, any one or more of which maybe waived by the purchaser in its sole discretion. ii) Board Resolutions: That the sellers and/or the company as the case may be, have passed the requisite board resolutions in respect of the following: a). Detailing the scheme of entries to arrive at the balance of assets and liabilities as reflected in the proposed or projected balance sheet of the company as annexed hereto as Annexure III. b) Waiver of all liabilities of the company towards the Principal Seller. c) Waiver....
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....d as a "slump sale." As per Explanation 1 to sec. 2(42C) of the Act, "undertaking" shall have the meaning assigned to it in Explanation 1 to sec. 2(19AA) of the Act. Explanation 1 to sec. (19AA) says that Explanation 1 to sec.(19AA) "undertaking" shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting as business activity. From this, it is clear where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale. In the light of the above, we have carefully gone through the material on record and we have carefully gone through the agreement entered into by the parties on 23-11-1999, which is placed on record. By this agreement, though the assessee transferred and conveyed the legal title of the shares to the purchaser for a consideration of Rs.15.50 crores by transfer of the shares to GGCL, actually the assessee transferred the entire undertaking i.e. subsidiary company i.e. VST NPL to GGCL. On the transfer of shares, all outstanding liabilities of the ....
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.... market. Subsequently, VST promoted a 100% subsidiary named VST Agrotech Ltd. which was subsequently renamed as VST Natural Products Limited (NPL) a 100% export oriented unit for carrying on the business of processing value added horticultural products. These horticulture products included Gherkins-both in bulk and bottled form, Dehydrated products, spices - power, Oleoresins etc. He submitted that this constitutes all together a new line of business in which the company did not have prior experience and was mainly dependent on the highly demanding export market as there was no ready market in India for such products and the "Made in India" product not easily acceptable to the foreign buyer and had to go through stringent process of product acceptance. For the above and various other reasons the business of NPL did not succeed and the amounts financed to NPL by the Company could not be recovered due to its mounting losses. The company as a matter of prudence had, in the financial year 1998-99 relevant to the ay 1999-2000, provided Rs.53 crores towards loss from NPL covering the aggregate of investments, fixed assets and monies advanced but unrecoverable. Such loss was taken as a di....
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.... of the project implementation was being done by a US company. The project was initially estimated at Rs.29 crores and to be completed over a period of about one year. However, the project was delayed due to various reasons both technical and financial with the result that the project implementation go delayed much beyond the estimated tie resulting in cost escalation. The project ultimately had to be shelved off after the cost touched Rs.73 crores. During the period when the project was getting delayed, VST had to face a peculiar situation of requiring to finance much higher amounts than initially anticipated. Otherwise, even the existing amounts advanced would have been lost. The payments were due to be made to a large number of suppliers and creditors apart from foreign companies and hence VST had no option other than somehow making the payments. Because of the project delays and the doubts associated with the project, no financial institutions were coming forward to lend money to the project, NPL with difficulty managed to get only about Rs.7 crores as long term funding from banks and institutions, during the period when the project was getting delayed and the balance of financ....
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....dent from the scheme of entries passed in the books of accounts that have been reproduced hereunder 9.1. The company has actually written off the debts as bad in the books by squaring off the Provision A/c and the Party A/c and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22 - Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year ( i.e FY 1998-99) under the head 'contingencies - subsidiary' were fully adjusted, meaning written off). 9.2. It is submitted that the amount written off satisfies the requirements of sec.36((1)(vii) and hence are eligible to be allowed as bad debt. Therefore, it is requested to allow the amount of Rs.14,09,13,424 as bad debt. 9.3. In respect of item Non-recovery of monies from NPL on Sale of Agronomy & Marketing Rights considered as income in earlier years written off as irrecoverable and claimed u/s 36(1)(vi)/37(1) - Rs.6,50,00,000- it is submitted that the company had spent considerable time and effort in developing the infrastructure and the know-how both on agricultural and marketin....
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....724 (Kol) wherein it was held that the assessee advanced the money to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by Government of India and the entire amount went to the secured creditor. As a result, there was no chance of recovery of the amount from the subsidiary. It was immaterial whether the bad debt was shown after the close of the accounting year or during the accounting year itself. Bad debt was allowable as a deduction in computing the income even if the bad debt came into existence because of the expenditure incurred for advancing money to a subsidiary company of the assessee company. Since the assessee had no chance of recovering the amount, the amount in question from the subsidiary, the amount could be treated as a bad debt entitled to deduction from the income of the relevant assessment year. ii) CIT v. Amalgamation Pvt. Ltd. 226 ITR 188 (SC) wherein it was held that the assessee company had incurred the loss in carrying on is own business which included furnishing guarantees to debts borrowed by its subsidiary companies. The assessee company could have ascertained whether there was loss in th....
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....ompartmentalization of heads is done away with only under Chapter VI which provides for aggregation and set off of the various heads of income. The reference to the "computation of income" under sec.36(2) must, therefore, be read in the context in which it has been used. A harmonious construction of the provisions of the Act can only lead to the conclusion that income or loss other than profits and gains of business cannot be imported into computation of deduction u/s 36(1)(vii) read with sec.36(2)(i). If the interpretation given by the assessee were to be adopted, it would lead to a situation of discrimination in favour of a class of assessee having income under the head, profit and gains. Since there is no provision comparable to sec.36(1)(vii) under any head other than profits and gains, an assessee having income from the head other than profits and gains can never be in a position to claim such bad debts. This confer unfair advantage on assessees engaged in business and profession. This cannot be the intention of the Act. Further, she relied on the order of the Tribunal in the case of D.C.M. Ltd.,v. DCIT, 123 TTJ 114 (Del) for the proposition that when the assessee is not in th....
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....see or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges or springs from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowances as bad debt, there should be relation between the debtor and creditor from the date of lending the money till the date of write-off of debt as bad debt. The debt arising out of investment activity which is in the capital field cannot be allowed as bad debt as revenue deduction. To claim bad debt the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business oth....
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....e as to the real nature of a transaction and that nature not only has to be deduced from the memorandum but also fro the circumstances in which the transaction took place. If the amount was incurred for ensuring any investment which is very source of its business and that advance is not incidental to the trading activity of the assessee, the same is not allowable as deduction. The advance in the field of investment for the purpose of securing source of income and not for the purpose of earning income does not qualify for deduction as bad debt. In order to entitle for deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue. In the present case, debt claimed as bad debt is not a trading debt emerging from the trading activity of the assessee. The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt. The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in t....