TaxTMI 
TaxTMI 
1997 (4) TMI 8
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....urt. Tax Case No. 239 of 1971 related to the assessment years 1958-59 to 1962-63, wherein the Tribunal referred six questions for the opinion of the High Court. By the impugned judgment both the questions in T. C. No. 160 of 1969 and all the questions, except question No. 3, in T. C. No. 239 of 1971 were answered by the High Court against the Revenue and in favour of the assessee. Question No. 3 in T. C. No. 239 of 1971 was answered in favour of the Revenue and against the assessee. Civil Appeals Nos. 139 to 142 of 1980 have been filed by the Revenue in respect of the questions that have been answered against the Revenue and Civil Appeals Nos. 7, to 11 of 1980 have been filed by the assessee in respect of question No. 3 in T. C. No. 239 of 1971 which has been answered against the assessee. We will first take up Civil Appeals Nos. 139 to 142 of 1980 filed by the Revenue. These appeals can be split up into two parts, one relating to the answers to the two questions in T. C. No. 160 of 1969 and questions Nos. 1 and 2 in T. C. No. 239 of 1971, and the other relating to answers to questions Nos. 4, 5 and 6 in T. C. No. 239 of 1971. The two questions in T. C. No. 160 of 1969 and questio....
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.... Government in that behalf, directly or indirectly, make any loan to a company, which is its holding company. In sub-section (3) of section 295 it was provided that where any loan made by a lending company and outstanding at the commencement of the Companies Act, 1956, could not have been made without the previous approval of the Central Government if that section had then been in force, then the lending company had to, within six months from the commencement of the Act or such further time not exceeding six months as the Central Government might grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made. The liability of Rs. 1,85,16,000 to Simpson and General Finance Company (Private) Ltd. by the assessee-company was affected by the aforesaid provision and, therefore, it became necessary for the assessee-company to liquidate this liability. Simpson and General Finance Company (Private) Ltd. owed a sum of Rs. 1,05,21,750 to Simpson and Company Ltd. The assessee-company approached the Government of India for necessary approval to put through certain transactions of sale of shares held by it to Simpson and....
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....s the net capital gains. Even according to his computation there were certain capital losses which were adjusted as against the capital gains determined by him. In the case of S. R. V. S. (Private) Ltd., the Income-tax Officer took the break-up value as on January 1, 1954, at Rs. 36,35,350 and their sale value at Rs. 21,88,395 resulting in the capital loss of Rs. 14,46,955. The assessee-company appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the said appeal was pending, the Commissioner of Income-tax proceeded under section 33B of the 1922 Act as he was of the view that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue in so far as he had wrongly allowed the capital loss amounting to Rs. 14,46,955 on the sale of the shares in S. R. V. S. (Private) Ltd. After considering the submission of the assessee-company, the Commissioner held that the appreciation in value of the shares of Simpson and Company Ltd. held by S. R. V. S. (Private) Ltd. should not have been taken into account and if the value of the shares held by S. R. V. S. (Private) Ltd. in Simpson and Company Ltd., as on January....
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....mple evidence to show that the sale of shares was a forced one and that the assessee-company had no option but to comply with the statutory provisions and that the evidence produced clearly established the assessee-company's contention that the sale was not motivated by any desire to avoid capital gains tax and that the Revenue had not proved by any conclusive evidence that the motive underlying the transaction was the avoidance or reduction of the liability to capital gains tax. He worked out the figures in accordance with the rules framed under the Wealth-tax Act and found that the prices fixed by the Company Law Administration were not very much different from the figures worked out by him. After receiving the report of the Appellate Assistant Commissioner, the Tribunal considered the matter again and held that the proviso to section 12B of the 1922 Act could not be invoked in the instant case as there was no evidence to support the view that the sales were effected with a view to avoid the provisions of section 12B. The Tribunal accepted the contention of the assessee-company and held that the Revenue was not justified in computing the capital gains and disturbing the figures f....
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....ept 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, 1957 (annexure--G.VII. 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. On that view, the High Court answered the second question in T. C. No. 160 of 1969 and the second question in T. C. No. 239 of 1971 in the affirmative and against the Revenue. As regards the first question in T. C. No. 160 of 1969 which raises the question of valuation, the High Court felt that on the view it had taken as regards the second question it would not survive for consideration because, the question of valuation would be material only if the proviso applied. The High Court has, however, considered the said question and has indicated....
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....ssessments for 1959-60, 1960-61, 1961-62 and 1962-63, respectively ? (6) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that an amount of Rs.4,23,256 representing the real loss sustained by the assessee on account of standing guarantee of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in the assessment for 1962-63 ?" There was a company by name Sembiam Saw Mills (Private) Ltd. (for short, " SSM "), which was originally a subsidiary of Addison and Company (Private) Ltd. On and from February 1, 1954, the assessee-company purchased all the shares of SSM from Addison and Company (Private) Ltd. and SSM thus became the direct subsidiary of the assessee-company. Sembiam Saw Mills (Private) Ltd. had borrowed monies from the National Bank of India Ltd., and the assessee-company had guaranteed the loan to the said company by the said bank. Sembiam Saw Mills (Private) Ltd. went into liquidation some time in 1955. For the purpose of overdraft facilities, SSM executed a promissory note in favour of the assessee-company which was endorsed by the assessee-company to the bank along with a separate guar....
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.... But since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, it was held that the balance of Rs. 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. At the instance of the Revenue, the Tribunal referred the aforementioned questions Nos. 4, 5 and 6 for the opinion of the High Court. The High Court, while dealing with said questions, has observed that the real point in issue was whether the guarantee that was executed in favour of the bank in respect of the loan to SSM, the subsidiary of the assessee-company, was done in the course of its own business. The High Court has referred to its earlier judgment in Amalgamations (P.) Ltd. v. CIT [1969] 73 ITR 380 (Mad), wherein the nature of the business of the assessee-company has been considered and it has been held that the provisions of section 23A of the 1922 Act were applicable to the assessee-company since the assessee-company's business includes furnishing guarantees to debts borrowed by subsidiary companies. The High Court has held that the said finding given in that case is clearly ap....
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....eir business more efficiently. All purchase requisitions for the purchase of capital equipment beyond Rs. 500 of each purchase and Rs. 2,500 with reference to purchase of raw materials were submitted to the finance committee for their approval. The purpose of such control was to judiciously use the funds of the company to the best advantage of each company. Various data were gathered before such sanction was accorded or refused. Technical matters or other matters of management were also referred to the members of the finance committee who were experienced in their respective fields. The finance committee went through the financial position of each company daily. The directors of the assessee-company were also directors/managers in the subsidiary companies. As per the service agreements between them and the concerned subsidiary company they were entitled to payment of remuneration and also a certain percentage of the profits as commission. Similar service agreements had been entered into by other directors of the subsidiary companies who were not the directors of the assessee-company. In view of the provisions of section 198 of the Companies Act, 1956, fixing a ceiling on the overal....
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....years relevant to the assessment years 1958-59 and 1959-60. On appeal, the Appellate Assistant Commissioner took the same view. The matter was remanded by the Tribunal to the Appellate Assistant Commissioner for consideration and submission of the report on the points mentioned in the order of remand. The Appellate Assistant Commissioner after taking further evidence submitted his report wherein he reported that deduction may be allowed in respect of remuneration paid to persons who were directors of the assessee-company and were members of the finance committee, but such deduction could not be allowed in respect of remuneration paid by the assessee-company in respect of persons who were only directors and employees of the subsidiaries, but neither directors of the assessee-company nor members of the finance committee. The Tribunal was of the view that looking to the nature of the business of the assessee-company of holding shares of a number of subsidiary companies and that it was looking after the interest and welfare of those companies with a view to earn dividends, the whole of the expenditure referable to the remuneration paid by the assessee-company was admissible as a deduct....
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....re incurred by the assessee-company in remunerating its own directors who were also members of the finance committee should be allowed as deduction as there is a nexus between the expenditure and the business of the assessee-company in rendering services to its subsidiaries, was not accepted by the High Court for the reason that the resolution passed by the assessee-company does not say that the expenditure was incurred for the purpose of remunerating its own directors, in so far as they rendered services to it as members of the finance committee. The High Court has observed that the resolution treated the directors, whether they be the members of the finance committee or not, 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 and the fact that they were directors of the assessee-company and that they were members of the finance committee had not been taken into account in taking over the remuneration payable to them. Question No. 3 was, therefore, answered in the negative and against the assessee-company. The amounts paid by the assessee-company to the dir....
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....ng that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. " The High Court, in our opinion, has rightly proceeded on the basis that there must be a nexus between expenditure and business of the assessee. Shri T. A. Ramachandran, learned senior counsel appearing for the assessee-company, has submitted that the said test is satisfied in the present case since the purpose of the payment of remuneration to the directors of the subsidiary companies was to enable these companies to earn higher profits which would be passed on to the assessee-company as and by way of dividends. Learned counsel has placed strong reliance on the decision of the Bombay High Court in Tata Sons Ltd. v. CIT [1950] 18 ITR 460, and the decision of the Gujarat High Court in J. R. Patel and Sons (P.) Ltd. v. CIT [1968] 69 ITR 782, and has urged that the High Court has committed an error in distinguishing these cases on the ground that they related to managing agents, whereas the present case relates to a holding company and it....
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....ct. While dealing with the contention urged on behalf of the Revenue that the payment had been made not to the employees of the assessee but to the employees of a managed company---a different entity altogether--the High Court has observed : " Here again if it can be shown that there was a very important nexus between the assessee-company and the managed company which necessitated the assessee-company making the payment to the employees of the managed company, then again it would be possible for the assessee-company to satisfy us that the expenditure was one which fell within the ambit of section 10(2)(xv). Now, it cannot be seriously disputed that the bonus was paid by the managed company to their employees in order to increase the efficiency of the working of the company. An increased efficiency of that company would incidentally result in higher and better profits, and the assessee-company would be as much interested in the working of the managed company being more efficient as the managed company itself. Whatever tended to increase the profits of the managed company would also tend to increase the income and profits of the assessee-company. Therefore, it cannot be suggested th....