Whether written off loss arising out of advances extended to a sister concern, which later got amalgamated, can be claimed as capital loss - NO: HC

THE issues before the Bench are - Whether written off loss arising out of advances extended to a sister concern, which later got amalgamated, can be claimed as capital loss; Whether such advances fulfills the meaning of transfer as per section 2(47) of the Income Tax Act and Whether such advances can be alternatively shown as inter corporate deposits for claiming such capital loss. And the verdict goes against the assessee.

Facts of the case

The assessee, a company was carrying on the business of manufacturing of transformers, switch gears, electrical products, home appliances, etc. The assessee had extended advance to a sister concern which was amalgamated. On amalgamation, it has given equity shares of Rs.60 lacs only as against an advance of Rs.17.25 crores and Rs.17.87 crores, respectively. The assessee, therefore, lost the advance due to amalgamation of the Company with one of it's sister concern and had claimed this amount as capital loss and required the same to be carried forward for set off in subsequent years. AO rejected the claim by holding that in order to be eligible to carry forward of the capital loss, there should be a capital asset as defined in Section 2(14) and the same should be transferred in the manner as defined in Section 2(47). Since the deposits or advances given to M/s JCT Limited and M/s Bharat Starch Industries Limited and written off, were not capital assets nor there was any transfer, no capital loss was allowed to be carried forward to the subsequent year. CIT(A) rejected the appeal. Before the Tribunal it was submitted that amount advanced to M/S JCT Limited was in the nature of inter corporate deposit (ICD) and further amount of interest of Rs.7.25 crores was due on account of interest, therefore, this was a case of capital asset and it has been transferred. However, the Tribunal held that there was no evidence to show that it is a case of an ICD because before the AO and rejected the appeal. Aggrieved, appeal has been filed before the High Court.

The counsel for the assessee contended that in the case of M/s Bharat Starch Industries Limited and M/s JCT Limited, the advances have been written off. It was submitted that there was no possibility of recovery of loans and hence, same were written off. The sum consisted of interest from both companies. Since interest has already been offered for tax on accrual basis, therefore, at least these amounts should be allowed. It was alternately submitted that if the inter corporate deposits (ICDs) were capital assets in terms of Section 2(14) and there has been transfer of the same in terms of Section 2(47), then, the assessee was entitled to claim a capital loss.

The Departmental Representative relied on the orders of the lower authorities.

Having heard the parties, the High Court held that,

++ the judgments relied upon have been, therefore, distinguished and we do not find that in the facts and circumstances of the present case, the Tribunal was required to render any other finding or conclusion. The observations from paragraph 13 onwards are based on assumption. The assumption is made by the Tribunal and in that regard, reference to various judgments has been made including the order passed on the Petition for amalgamation by the Gujarat High Court. We are of the opinion that the Tribunal was strictly not required to go into any other matters. Therefore, the findings based on assumption need not detain us. We are of the opinion that the findings of fact rendered in the peculiar factual backdrop do no give rise to any substantial question of law. The questions as projected before us cannot be said to be rising from the orders impugned before us. In the facts and circumstances, we do not feel that the Appeal is required to be entertained;

++ in dealing with the argument that the right claimed of the nature cannot be termed as property that the Supreme Court held that the property is a term of the widest import and subject to any limitation which in the context is required. It signifies every possible interest which a person can clearly hold and enjoy. We are of the opinion that on the basis of the definition noted by us that the Supreme Court held as above. This judgment, therefore, cannot be of any assistance to the Assessee before us;

++ the judgment of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat III v/s Minor Bababhai @ Lavkumar Kantilal, has been rightly distinguished by the Authorities. Therefore, alternate argument which was raised was in relation to the loss of advance due to amalgamation of the Company to which it was advanced with one of the sister concern of the Assessee before us. That was an alternate argument and in relation to which the judgment of the Gujarat High Court was cited. Once this issue did not arise for determination and consideration of the Authorities and particularly because of the stand taken now before us that we are of the opinion that the judgment of the Gujarat High Court is of no assistance to the Assessee.