Bengal and Assam Co. Ltd. vs Commissioner of Income Tax

Pinaki Chandra Ghose, J.—This appeal was admitted in terms of the following questions :

(1) Whether the Tribunal misdirected itself in law in holding that the transactions relating to shares in Hindusthan Aluminium Co. Ltd. were not covered by proviso (b) to Section 43(5) or that the same were speculative transactions or the loss of Rs. 2,67,782 incurred therein was speculative loss and not hedging loss or that the assessee had not explained any aspect of the said transactions and its purported findings in this behalf are based on any material and/or have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or are otherwise arbitrary, unreasonable and perverse ?

(2) Whether the Tribunal misdirected itself in law in holding that the assessee was not carrying on money lending business in a general manner for earning interest or that it granted accommodation loans to sister concerns only or that the loans to sister concerns were granted not in the ordinary course of money lending business, but only to help them and in disallowing the claim for bad debts of Rs. 22,75,000 and its purported findings in this behalf are based on any material and/or have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and extraneous materials and/or are otherwise arbitrary, unreasonable and perverse ?

(3) Whether and in any event the Tribunal should have allowed the assessee''s claim in respect of the sum of Rs. 22,75,000 as a business/trading loss ?

The facts of the case briefly are as follows :

The appeal was admitted in respect of an order passed by the Tribunal on 30th of March, 2001. The issue is involved in this matter that the assessee/appellant has claimed a loan (loss) as hedging loans (loss) in dealing with the shares relating to a loss of Rs. 2,67,782. Such loss of Rs. 2,67,787 in respect of the shares of M/s Hindusthan Aluminium Co. Ltd. dealt with by the assessee during the period from 1st July, 1988 to 31st March, 1989. It is admitted that the transactions were settled through the broker M/s Hindusthan Aluminium Co. Ltd. on different dates.

It is the case of the appellant that the transactions cannot be treated as speculative transactions in terms of the Clause (b) of the proviso to Sub-section (5) of Section 43. The AO as well as CIT(A) in appeal and Tribunal did not accept the contention of the assessee that the assessee was holding investment in the shares of the said company any anticipated loss in the value of such holdings due to probable reduction in the price of the shares was tried to be off-set by transactions in the same shares by way of forward sales. However, AO after noting the market value of the shares shot up from Rs. 78 on 31st March, 1988 to Rs. 261 as on 31st March, 1989 could not accept the explanation given by the assessee and as a result whereof the appeal was filed but was of no effect before the two other judicial authorities.

It appears from the discussion made by the CIT(A) that the CIT(A) agreed with the opinion expressed by the AO and held that the claim towards expenditure under the proviso to Section 43(5) requires the discharge of the burden of proof by the assessee as had been held by the Hon''ble Supreme Court in the case of COMMISSIONER OF Income Tax, KERALA Vs. JOSEPH JOHN., . The CIT(A) also relied on a judgment of the Madras High Court in the case of Commissioner of Income Tax Vs. SK. AR. K. AR. Somasundaram Chettiar and Co., and held that the assessee could not get the benefit of the proviso to Section 43(5).

Being aggrieved, appeal was filed before the Tribunal and the Tribunal came to the conclusion that the benefit of Clause (b) of the proviso to Section 43(5), the onus would lie strongly on the assessee itself to prove that the contracts under consideration were of the nature so as to guard against loss in the holdings of the stocks and shares of the assessee through price fluctuation and the Tribunal held that the assessee has not at all clarified as to what led it to hold that there would be a probable loss in its holdings of shares of Hindusthan Aluminium Company Ltd. through the price fluctuations and came to the conclusion that the assessee has failed to explain as to whether and in what circumstances the purchases and sales were made and thus came to the conclusion and held that the assessee failed to substantiate its claim about the transactions coming within the ambit of Clause (b) to the proviso of Section 43(5) and thereby concluded by upholding-both the lower authorities have acted correctly in holding the loss under consideration as a "speculative loss" and not of the nature of "hedging loss" as claimed by the assessee.

In these circumstances, we have examined the facts and we must accept that the three authorities came to the same conclusion on concurrent findings and we do not have any hesitation to hold that in the case of CIT v. Joseph John (supra), the appellant has failed to discharge his liability to prove the said fact in his favour and thereby we do not have any hesitation to hold that all the lower authorities including the Tribunal in the facts and circumstances of this case did not commit any mistake to come to such conclusion and we expressed the same opinion as has been expressed by the learned Tribunal and thereby held against the appellant/assessee and answer the question No. 1 in the negative and in favour of the Department.

The next question which has been put forward before us for answer that the amount so paid by the appellant and whether the appellant/assessee has right to the claim or can get benefit to declare the said amount being a sum of Rs. 22,75,000 as bad debt in its account. From the facts it appears that the claim of bad debts is in respect of the amounts of Rs. 17,75,000 and Rs. 5,00,000 lent to M/s Hoyle''s Baints Ltd. and M/s Ganges Mfg. Co. Ltd. respectively.

It is not in dispute that both these companies were the sister concerns of the assessee company. Admittedly, the accommodation of loan to Hoyle''s Paints Ltd. had been advanced during the period from 3rd May, 1979 to 14th May, 1986, whereas the amount under consideration had been lent to M/s Hoyle''s Paints Ltd. in March, 1978 to other company. The case of the appellant/assessee that both the loans have been advanced in the normal course of business and both the borrower companies had become unable to pay back the loan amounts and their liabilities had valued of the assets. The assessee had thus claimed the bad debts in terms of the provisions of Sections 36(1)(vii) and 36(2) of the IT Act.

The AC) noted that there was no evidence on record to show that assessee was carrying on any such money lending business and such loan was granted with an intention to pull up their sister concerns from their dire financial condition. It has also been noted by the AO that no steps or efforts have been made by the assessee company to recover these loans from the debtor-companies and furthermore, the assessee could not produce any money lending licence and held against the assessee after relying on the decisions reported at 112 ITR 895 (sic) and K.J. Somaiya and Sons Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay City-III, and disallowed the claim of the assessee before the CIT(A).

The CIT(A) accepted the contention of the assessee on the ground that the activities of the company during the period covered by asst. yrs. 1981-82 to 1988-89 be examined. It would be found that the assessee was having money lending as one of its ordinary business activities during all these years and thus, the CIT(A) allowed the claim towards bad debts. The learned Tribunal after analyzing the facts found that the main evidence of carrying on a money lending business would be that the assessee was giving loans to different parties at different points of time solely for the purpose of earning interest thereon. But in the instant case, it is admitted that the assessee had granted accommodation of loans to its sister concerns only save and except such accommodation. There is no evidence anywhere that the assessee was carrying on money lending business in a general manner. Therefore, on this evidence the learned Tribunal found out that the two loans under consideration had been granted by the assessee to the sister concerns who were already in bad financial share and the purpose of granting of such loans only to reestablish those businesses financially and it is not for earning interest. It further submitted that the assessee did not make any attempt at any point of time to recover any portion of these loans. Therefore, it would be evident from these facts that the sole intention of the assessee was to help other companies. Another fact was also considered by the Tribunal that no security was received for granting such loans. In money lending business, security forms a major consideration for the lender and accordingly, the Tribunal came to the conclusion that the conditions relating to claim of bad debts are not satisfied in the instant case and thereby reversed the order so passed by the learned CIT(A) and restored the addition done by the AO.

We have heard the learned Counsel for the parties at length and the following decisions were cited at the Bar :

(i) CIT v. Joseph John (supra), wherein the Court held as follows :

As regards the first question, the High Court took the view that the finding of the Tribunal that the transactions are speculative transactions and not hedging transactions seemed to be based on a misapprehension of the ambit of the assessee''s business. It was observed by the High Court that the Tribunal had proceeded on the basis that the assessee was only a miller who bought copra, crushed it and then sold the resultant oil. The High Court said that the assessee had, as a matter of fact, the business of buying and selling quite apart from his business as a miller. The assessment order only clearly showed that, in addition to the oil produced in the assessee''s oil mill, he was selling oil purchased by him. It was argued on behalf of the appellant that the finding of the Tribunal that the transactions were speculative transactions and not hedging transactions was a finding of fact based on proper evidence and the High Court acted beyond its jurisdiction in interpreting with that finding. In our opinion, the argument put forward on behalf of the appellant is well-founded and must be accepted as correct. Upon examination of the order of the Tribunal we are satisfied that the majority of the Tribunal entertained no misapprehension with regard to the scope of the assessee''s business and the High Court had no justification for saying that the Tribunal''s conclusion was based upon any such misapprehension. It is manifest that the finding of the Tribunal that the transactions were speculative transactions and not hedging transactions is essentially a finding on a question of fact and it is not open to the High Court to interfere with that finding unless there is no evidence to support that finding or it is perverse.

(ii) Commissioner of Income Tax Vs. Gillanders Arbuthnot and Co. Ltd., , where the Court held as follows :

That because of certain difficulties, the assessee could not directly advance the loan to the company managed by it. It advanced the sum to its 100 per cent subsidiary which, in turn, loaned the money to such managed company. The financing was really done by the assessee and such financing was incidental to its business of managing agency. Hence, the loss incurred by the assessee in financing its subsidiary must be allowed as a business loss.

(iii) Commissioner of Income Tax Vs. Gillanders Arbuthnot and Co. Ltd., , wherein the Court held as follows :

Since we have held that the assessee was engaged in the business as a holding company of financing its subsidiaries, the other argument of the Departmental Representative that the assessee''s claim cannot be allowed against the dividend income if at all, loses its significance. Even if the amount cannot be treated as a bad debt in the sense that it was not an advance in the course of money-lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of its business.

(iv) Commissioner of Income Tax Vs. Williamson Magor and Co. Ltd. (now known as Macniel and Magor), , wherein the Court held as follows :

That the finding of the Tribunal in the instant case was that the debt became bad during the relevant previous year and that the suit of the assessee against the managed company was withdrawn during the relevant previous year. The Tribunal had also found that the furnishing of guarantee for the debt of the managed company by the assessee was incidental to the carrying on of the assessee''s business and these findings not having been challenged by the Revenue stood concluded. Moreover, though it was no part of the assessee''s business to lend money to its employers, there was sufficient material before the Tribunal to arrive at a different conclusion. Therefore, the sum of Rs. 1,68,292 including to the debit of T. Co. Ltd. was a debt arising in the course of the assessee''s business and had become bad during the previous year and that it was an allowable deduction.

(v) Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , wherein the Court held as follows :

That the Tribunal had evidence before it from which it could be concluded that by introducing the ''Casablanca conversion system the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs u/s 10(2)(v) of the Act.

(vi) Essen Private Ltd. Vs. Commissioner of Income Tax, Madras, , wherein the Court held as follows :

In our opinion, the High Court was not justified in criticizing the finding of the Tribunal as hazy and indecisive and thereafter upsetting the findings of fact recorded by the Tribunal. We consider that the High Court was in error in disregarding the findings of fact which the Tribunal has recorded. As we have already indicated, there was proper material before the Tribunal in support of its finding that the debt in question was incurred in the course of the business of the appellant-company so as to make it deductible u/s 10(2)(xi) of the IT Act. The Tribunal has found in this case that it was part of the managing agency business to provide funds to the managed company and there was no justification for the High Court to disregard the finding of the Tribunal on this aspect of the case. Reference has also been made to Sub-clause (19) of Clause 13 of the memorandum of association which clearly indicates that the moneys advanced by the appellant-company and the guarantee given by it in respect of the loans advanced to the managed company by the bank were all in the course of the managing agency business. We consider that the High Court has exceeded its jurisdiction in traversing into the findings of fact reached by the Tribunal in the present case. As regards the question actually referred to it, the High Court should have held that there was proper material in support of the finding of the Tribunal that the loans advanced by the appellant-company to the managed company and the payments made by it under the terms of the guarantee given to the bank were in the course of the appellant-company''s business and the claim for allowance of the loss sustained by the appellant-company was therefore admissible u/s 10(2)(xi) of the IT Act.

(vii) S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, wherein the Court held as follows :

To consider whether one should allow deduction u/s 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the Courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

(viii) Commissioner of Income Tax Vs. Mohanlal Ranchhoddas, wherein the Court held as follows :

The Full Bench of this Court, in the case of Pankaj Oil Mills Vs. Commissioner of Income Tax, Gujarat, , also found that there should be a reasonable nexus as to the time so as to enable a manufacturer or merchant to claim that his hedging transactions are not speculative transactions and the loss suffered thereunder be allowed to be set off against the profits and gains of any other business. What would be reasonable connection is always a question of fact depending on the circumstances of each case. Nevertheless, the second set of contracts, though they may be subsequent in point of time to the first set, cannot be generally beyond the assessment year.

Mr. D.K. Shome, learned senior advocate appearing on behalf of the respondent pointed out that in the said decisions it would be evident from the facts that various entries were made in the books of accounts of the assessee in support of such hedging transactions. Therefore, it cannot be doubted that the assessee had a hedging transaction.

Mr. Shome further submitted that the said facts are only on the basis of the case and further he pointed out that all the three authorities after dealing with the said facts came to the same conclusion on the basis of such concurrent findings. Therefore, he submitted that all the authorities'' findings are same on the basis of concurrent findings.

He further pointed out that so far the question of bad debts is in question he also relied upon the same facts and submitted that the Court should not apprise the evidence at this stage and the findings of facts are concurrent and all the authorities decided the questions on the same facts and came to the same conclusion.

Therefore, he submitted that in respect of question Nos. 1 and 2, there is no point of law involved since it is nothing but questions of facts are the basis to deal with these questions. So far as the question No. 3 is concerned he drew our attention to the judgment delivered by the learned Tribunal and pointed out that the claim of bad debts as claimed by the appellant and treating the same as business loss, cannot be accepted in view of the fact that the assessee had granted accommodation to its sister concern only.

It is also a fact that interest at ordinary rates should have been charged on those accommodations of loans but it would be evident from the facts that the intention of the assessee only to nurture its sister concerns who are in bad financial shape adapted such process through intra-group financing. There is no evidence which can support the case of the assessee that the assessee was carrying on money lending business in a general manner and to all parties whether intra-group concerns or outsiders. The facts also would show that the assessee did not make any attempt at any point of time to recover any portion of those loans. Money lending loans are generally not of the type of accommodation loans but loans granted indiscriminately as has been pointed out by the learned Tribunal which was the sole intention to earn interest.

He further submitted that the Tribunal after assessing the facts and the evidence correctly held that the conditions relating to claim of bad debts are not satisfied in the instant case and therefore, in these circumstances, the said amount of Rs. 22,75,000 cannot be treated as business course.

After considering the facts of the case it appears to us that the claim of the assessee for Rs. 2,67,782 as hedging loss in shares cannot be accepted by us in view of the fact that the said transactions even after the market value of the shares of M/s Hindusthan Aluminium Co. Ltd. shot up from Rs. 78 on 31st March, 1982 to Rs. 261 as on 31st March, 1989 and there is no satisfactory explanation for holding the said investment by the assessee. From the facts it appears that these shares were ultimately sold in December, 1989 at the capital gain of Rs. 3,82,668 and therefore, there is no ground to claim such hedging loss by the assessee.

We have also considered the decisions cited before us and after considering the proviso to Section 43(5) we find that the said loss only can be treated as speculative loss as correctly held by the learned Tribunal and accordingly we answer the question No. 1 in favour of the Department and in the negative.

So far the question No. 2 is concerned, we have also found that the claim of the assessee towards bad debt of Rs. 22,75,000 the amounts were lent and advanced to its sister concerns and further on the facts it appears that the loans were unsecured and there is no evidence on record in favour of the assessee to show that the assessee was carrying on money lending business and further no efforts had been taken by the assessee to recover those loans from the sister concerns. We have also found out from the facts that it is nothing but a financing between the intra-group to secure the position of the sister concerns and further there is no material to show that the assessee was carrying on money lending business in a general manner and therefore, after considering into these facts we come to the conclusion and affirm the order of the Tribunal holding that the conditions relating to claim of bad debts by the assessee could not be satisfied in the given facts of this case and we affirm the order passed by the learned Tribunal and, accordingly, we answer the question No. 2 in negative and in favour of the Department.

Similarly, the answer to question No. 3 would also be in the negative and in favour of the Department.

For the reasons stated above, the appeal is dismissed and we affirm the order passed by the learned Tribunal.

Sankar Prasad Mitra, J.

I agree.