# COMMISSIONER Of INCOME TAX, MADRAS v. MIS. AMALGAMATION PVT. LTD

- **Citation:** [1997] 3 S.C.R. 1005
- **Court:** Supreme Court of India
- **Decided:** 1997-04-25
- **Case number:** Civil Appeal Nos. 139-142 of 1980
- **Bench:** S.C. Agrawal, K.S. Paripoornan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madras-v-mis-amalgamation-pvt-ltd-15438
- **Pages:** 22

## Headnote

B
/
Income Tax Act, 1922 :
Section 12-B-Capital gains-Assessee company holding shares of
several companies-Assessee company indebted to a Finance company, a C
subsidiary company of its subsidiary-To liquidate liability, shares were sold
at prices fixed by the Companies Law Department in consultation with
Central Board of Revenue to the Finance company-Object of sale, whether
I
on facts was avoidance of or resultU in reduction of liability to tar-Held,
object of transaction was not to avoid or reduce liability to capital gain tax
as the sale was made to a company with whom the assessee company was D
directly or indirectly connected and the sale was a farced sale since the price
had been fixed by Company Law Administration-companies Act, 195(r-Ss.
295 and 372.
Section 10(2)(XV}-Business loss-Deductibility-Relevant year-AsE
sessee standing guarantee to loan taken by its subsidiary-Subsidiary going in
liquidation-Dues recovered from guaranto~oss occasioned to assessee is
business loss since its business includes furnishing of guarantee to its subsidiaries-Held, loss could be ascertained but only at the stage of final
payment by the liquidators and deduction allowed in assessment year relevant /
to the year in which last payment was made by liquidator.
F
Business expenditure-Test-Nexus between expenditure and business
of assessee necessary-Assessee company holding bulk shares in several
companies and its business was of holding investments-Assessee paying
managerial remuneration to Directors of subsidiary companies and claiming G
deduction of such. payment under Section 10(2) (XV)--However, no part of
payments relatable to any service directly rendered by the Directors to assessee
company-Held, expenditure has no direct and immediate connection with
the business of assessee-Hence, deduction could not be allowed.
The assessee-Company was bulk shareholder in several companies H
1005
1006
SUPREME COURT REPORTS
(1997] 3 S.C.R.
A and in the relevant year there were 16 companies. The business of the
assessee-Company was to stand guarantee to the loan taken by its subsidiary companies and to render certain common-services to its subsidiaries and the assessee-company had to pay certain amount to the
directors/Managers for the said services.
B
In these appeals, the following questions in respect of the Tax-assessment of the assessee Company arose before this court for consideration:
1. Whether the loss incurred by the assessee Company in selling
C shares of different company to a subsidiary of its subsidiary at the price
fixed by the Company Law Administration in liquidation of its liability
amounts to a capital loss?
2. Whether the loss incurred by the assessee-Company in standing
guarantee to the loan taken by its subsidiary companies amounts to a
D business loss?
3. Whether the amount paid by the assessee Company to the directors of the subsidiary companies for the common services rendered by
them was deductible under section 10(2) (XV) of the 1922 Act or 37(1) of
E
the 1961 Act?
Dismissing the appeals, this Court
HELD : 1. The first requisite for application of the proviso to
Sub-Section 12B(2) that the person to whom sale is made should be a
F person with whom the assessee is directly or indirectly connected was
satisfied because the sale of shares to a subsidiary of a subsidiary is one
to a person with whom the assessee company is directly or indirectly
connected. The second requirement of the proviso, as to whether the sale
was effected with the object of avoidance or reduction of the liability of the
assessee company under that section, the High Court has pointed out that
G the Income Tax Officer had not given a finding that the object with which
the transaction was put through was the avoidance or reduction of the
liability to capital gains tax. The object of the transaction was not to avoid
or reduce such liability to capital gains tax, that the sale was a forced sale
since the assessee company had no option and that the price ha

## Text

_Characters 0–39,892 of 53,681. This is a partial read: ask again with offset=39892 for what follows._

COMMISSIONER Of INCOME TAX, MADRAS
A
v.
MIS. AMALGAMATION PVT. LTD.
APRIL 25, 1997
[S.C. AGRAWAL AND K.S. PARIPOORNAN, JJ.)
B
/
Income Tax Act, 1922 :
Section 12-B-Capital gains-Assessee company holding shares of
several companies-Assessee company indebted to a Finance company, a C
subsidiary company of its subsidiary-To liquidate liability, shares were sold
at prices fixed by the Companies Law Department in consultation with
Central Board of Revenue to the Finance company-Object of sale, whether
I
on facts was avoidance of or resultU in reduction of liability to tar-Held,
object of transaction was not to avoid or reduce liability to capital gain tax
as the sale was made to a company with whom the assessee company was D
directly or indirectly connected and the sale was a farced sale since the price
had been fixed by Company Law Administration-companies Act, 195(r-Ss.
295 and 372.
Section 10(2)(XV}-Business loss-Deductibility-Relevant year-AsE
sessee standing guarantee to loan taken by its subsidiary-Subsidiary going in
liquidation-Dues recovered from guaranto~oss occasioned to assessee is
business loss since its business includes furnishing of guarantee to its subsidiaries-Held, loss could be ascertained but only at the stage of final
payment by the liquidators and deduction allowed in assessment year relevant /
to the year in which last payment was made by liquidator.
F
Business expenditure-Test-Nexus between expenditure and business
of assessee necessary-Assessee company holding bulk shares in several
companies and its business was of holding investments-Assessee paying
managerial remuneration to Directors of subsidiary companies and claiming G
deduction of such. payment under Section 10(2) (XV)--However, no part of
payments relatable to any service directly rendered by the Directors to assessee
company-Held, expenditure has no direct and immediate connection with
the business of assessee-Hence, deduction could not be allowed.
The assessee-Company was bulk shareholder in several companies H
1005
1006
SUPREME COURT REPORTS
(1997] 3 S.C.R.
A and in the relevant year there were 16 companies. The business of the
assessee-Company was to stand guarantee to the loan taken by its subsidiary companies and to render certain common-services to its subsidiaries and the assessee-company had to pay certain amount to the
directors/Managers for the said services.
B
In these appeals, the following questions in respect of the Tax-assessment of the assessee Company arose before this court for consideration:
1. Whether the loss incurred by the assessee Company in selling
C shares of different company to a subsidiary of its subsidiary at the price
fixed by the Company Law Administration in liquidation of its liability
amounts to a capital loss?
2. Whether the loss incurred by the assessee-Company in standing
guarantee to the loan taken by its subsidiary companies amounts to a
D business loss?
3. Whether the amount paid by the assessee Company to the directors of the subsidiary companies for the common services rendered by
them was deductible under section 10(2) (XV) of the 1922 Act or 37(1) of
E
the 1961 Act?
Dismissing the appeals, this Court
HELD : 1. The first requisite for application of the proviso to
Sub-Section 12B(2) that the person to whom sale is made should be a
F person with whom the assessee is directly or indirectly connected was
satisfied because the sale of shares to a subsidiary of a subsidiary is one
to a person with whom the assessee company is directly or indirectly
connected. The second requirement of the proviso, as to whether the sale
was effected with the object of avoidance or reduction of the liability of the
assessee company under that section, the High Court has pointed out that
G the Income Tax Officer had not given a finding that the object with which
the transaction was put through was the avoidance or reduction of the
liability to capital gains tax. The object of the transaction was not to avoid
or reduce such liability to capital gains tax, that the sale was a forced sale
since the assessee company had no option and that the price had been fixed
H by the Company Law Administration. So, the first proviso to section 128
C.I.T. v. AMALGAMATION PVT. LTD.
1007
(2) cannot be attracted. The High Court has rightly construed the A
provisions contained in the proviso to ·section 128(2) of the 1922 Act.
Hence, the finding of the Higb Court does not suffer from any legal
infirmity. (1013-F-H; 1014-B-C; 1015-B-C]
2. The business of the assessee Company included furnishing
guarantee to debts borrowed by its subsidiary companies. The assessee
Company had incurred loss in carrying on its own business which included
furnishing guarantees to the debts borrowed by its subsidiary companies.
So, the loss was allowable as a deduction in the year in which it came to
be ascertained and in the instant case the loss in the transaction of the
guarantee could have been ascertained only at the stage of final payment
by the liquidators which was received in the relevant assessment year. As
such High Court was right in upholding the same. (1017-E-G)
Amalgamations P. Ltd. v. Commissioner of Income Tax, (1996) 73 ITR
380 Mad, referred to.
3. The amounts paid by the assessee Company to the directors of its
subsidiary companies can be admissible as deduction under Section 10(2)
(XV) of the 1922 Act or 37(1) of the 1961 Act only if they can be regarded
as expenditure "laid out or expended wholly and exclusively for the purposes of the business" of the assessee Company. There must be nexus
between expenditure and business of the assessee. The expenditure incurred in payment of managerial remuneration to the directors of the
subsidiary companies cannot be said to be expenditure incurred in carryB
c
D
E
F
ing on the business of the assessee Company of holding its investments.
Since the subsidiary companies were not obliged to distribute by way of
dividends the entire profits earned on account of their managerial
remuneration paid by the assessee Company and the assessee company
only entitled to dividend from the subsidiary company as and when
declared, it could not be said that there was a direct and immediate
connection between the expenditure incurred and the business of the
assessee company. As such, the High Court rightly held that the deduction G
could not be allowed. [1021-G-H; 1023-B-C; 1024-A-B]
Athe1to11 v. British Insulated and Helsby Cables Ltd., (1925) 10 TC 155
(HL); Eastem Investments Ltd. v. Commissioner of !11come Tax, (1951) ITR
1; Commissioner of Income Tax v. Chandulal Keshavalal & Co. Ltd., (1960)
38 ITR 601, relied on.
H
1008
SUPREME COURT REPORTS
(1997) 3 S.C.R.
A
Travancore Titanium Product Ltd. v. Commissioner of Income Tax,
(1966) 60 ITR 277 and Indian Aluminium Co. Ltd. v. Commissioner of
Income Tax, (1972) 84 ITR 735, referred to.
Tata Sons Ltd. v. Commissioner of Income Tax, (1950) 18 ITR 460
and J.R. Patel and Sons (P) Ltd. v. Commissioner of Income Tax, (1968) 69
B ITR 782, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 139-142
of 1980 Etc.
From the Judgment and Order dated 23.8.79 of the Madras High
C Court in T.C. Nos. 160/69 and 239 of 1971.
K.N. Shukla, T.A. Ramachandran, K. B. Ramamani, B.K. Prasad, C.
Radha Krisna, Anil Srivastava and Janki Ramachandran for the appearing
parties.
D
The Judgment of the Court was delivered by
S.C. AGRAWAL, J. These appeals, by certificate of fitness granted
by the Madras High Court under Section 66(A) (2) of the Income Tax Act,
1922 (hereinafter referred to as 'the 1922 Act') and Section 261 of the
Income Tax Act, 1961 (hereinafter referred to as 'the 1961 Act') read with
E
Article 133 of the Constitution of India, are directed against the judgment
of the said High Court dated March 1, 1976 in Tax Cases Nos. 160 0(1969
and 239 of 1971 (References Nos. 52 of 1969 and 1 of 1971). T.C. No. 160
of 1969 related to the assessment year 1958-59 wherein two questions were
referred by the Income Tax Appellate Tribunal (hereinafter referred to as
p
'the Tribunal') for the opinion of the High Court. T.C. 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
G in T.C. No. 239 of 1971 was answered in favour of the Revenue and against
the assessee. Civil Appeals Nos. 139-142 of 1980 have been filed by the
Revenue in respect of the questions that have been answered against the
Revenue and Civil Appeals Nos. 7-11 of 1980 have been filed by the
assessee in respect of question No. 3 in T.C. No. 239 of 1971 which has
H been answered against the assessee.
-
--
C.I.T. v. AMALGAMATION PVT. LTD. [S.C. AGGARWAL,J.)
1009
V>{e will first take up Civil Appeals No. 139-142 of 1980 filed by the A
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 question 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. 239 of 1971. The two questions in T.C.
160 of 1969 and questions Nos. 1 and 2 in T.C. No. 239 of 1971 were as
follows:
B
T.C. No. 160 of 1969
"(1) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in upholding the basis of valuation adopted
by the Income-Tax Officer for the shares in Messrs. Sri Rama Vilas C
Service (Private) Ltd. as on January 1, 1954?
(2) Whether, on the facts and in the circumstanses of the_ case, the
Tribunal was right in holding that the proviso to section 12B(2)
has no application in regard to the sale of shares to. M/s. Simpson D
& Company Ltd.?"
T.C. No. 239 of 1971
"(1) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in holding that the proviso to section 12B(2)
has no application in regard to the sale of various shares by the
assessee-company to M/s. Simpson & Company Ltd. through M/s.
Simpson & General Finance Co. (Private) Ltd. and that the assessee was entitled to a capital loss of Rs. 9,47, 541 in the assessment
year 1958-59?
(2) Whether, on the fact and in the circumstances of the case, the
Tribunal was right in law in holding that the second proviso to
section 12B(2) had no application and that the full value of the
consideration accounted for by the assessee should not be altered?"
These questions arise in the following facts and circumstances.
•
E
F
G
M/s. Amalgamation Private Limited (hereinafter referred to as 'the
assessee-company') is a company incorporated on December 22, 1938 as a
private limited company. The assesee-company held shares in several
companies, such as Simpson and Company Ltd., Acldison & Company Pvt.
Ltd., George Oakes (Private) Ltd., Addison Paints & Chemicals Private H
1010
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A Ltd., India Pistons Private Ltd., etc. Out of the issued capital of Rs.
7,50,000 shares of Rs. 10 in Simpson and Company Ltd. the assessee-company held, at the material time, 7,06,933 ordinary shares. Simpson and
Company Ltd. had a subsidiary by name Simpson and General Finance
Company (Private) Ltd. carrying on the business of financing by way of
B hire purchase transactions to outsiders and by way of loans and advances
to the companies of this group. As on July 1, 1956 a sum of Rs. 1,85,16,000
was due to Simpson and General Finance Company (Private) Ltd. from
the assessee-company. Under Section 295 of the Companies Act, 1956,
which came into force on April 1, 1956, no company could, without
obtaining the previous approval of the Central Government in that behalf,
C 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 the lending company and outstanding al 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
D 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
E affected by the afores;::id 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 assesscc-company approached the Government of
India for necessary approval to put through certain transactions of sale of
shares held by it to Simpson and General Finance Company (Private) Ltd. in
F liquidation of the liability. Simpson and General Finance Company (Private)
Ltd., in its turn, would discharge its liability to Simpson and Company Ltd. by
selling its holdings to Simpson and General Fmance Company (Private) Ud.
The assessee-company as well as Simpson and General Fmance Company
(Private) Ltd. proposed to sell the shares at certain specified price per share
G and sought the approval of the Central Government for such sale. The Central
Government, in approving the sale, fixed its own prices and stated that the
said fixation was without prejudice to any valuation of shares for purposes of
capital gains. Thereafter the shares held by the assessce;company in various
companies in respect of which approval had been granted by the Central
Government were transferred by the assessee-company to Simpson and
H General Finance Company (Private) Ltd. with effect from June 13, 1957 at
'
(
'
C.I.T. v. AMALGAMATION PVT. LTD. [S.C. AGGARWAL,J.)
1011
the prices foo:d by the Company Law Administration and Simpson and General A
Finance Company (Private) Ltd. sold part thereof to Simpson and Company
Ltd. The transaction between Simpson and General Finance Company (Private)
Ltd. and Simpson and Company Ltd. was also at the same prices.
In submitting its income tax return for the assessment year 1958-59,
the relevant previous year ending June 30, 1957, the assessee-company
claimed a capital loss of Rs. 4,37,703 in respect of the above transactions.
In arriving at this loss the assessee-company opted for the substitution of
the market value as on June 1, 1954 in respect of shares in (1) S.R.V.S.
(Private) Ltd., (2) Addison & Company Ltd., (3) George Oakes (Private)
Ltd., and (4) India Pistons (Private) Ltd. As regards the rest of the shares,
the assessee-company adopted the cost prices. The Income Tax Officer,
while making the assessment, proceeded on the basis that the price structure approved by the department of Company Law Administration for the
transfer of the aforesaid shares was pure and simple on an ad hoc basis
B
c
and meant to serve the limited purpose of approval to be given under
Section 372 of the Companies Act, 1956 and that the price at which the D
sales took place could not, therefore, be taken to represent the fair market
value of the shares. He took the break-up value as on January 1, 1954 for
the purpose of computation of capital gains and revised the sale prices and
arrived at Rs. 6,95,082 as 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 casc 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.
E
F
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 interest of revenue in so far
as he had wrongly allowed the capital loss amounting-to Rs. 14,46,955 on G
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 ComH
1012
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A pany Ltd., as on January 1, 1954, had been Rs. 24,38,578 S.R.V.S. (Private)
Ltd. would not have parted with these shares at cost on July 31, 1955. The
Commissioner revised the capital 10ss of Rs. 14,46,955 allowed by the
Income Tax Officer and considered that there was capital gain liable for
assessment of Rs. 3,91,579. This figure was directed to be substituted and
B the assessment of capital gains was revised accordingly.
The assessee-company appealed against the said order of the Commissioner to the Tribunal contending that the sale value fixed by the
Company Law Administration represented the correct value of the shares
and the transac~ions were without any motive to avoid capital gain and they
C had been necessitated by the various provisions of the Companies Act
which prohibited inter-company loans and that the method adopted by the
Income Tax Officer, viz., the secondary valuation, was proper. The said
appeal was allowed by the Tribunal and the order of the Commissioner of
Income Tax was set aside and the method adopted by the Income Tax
D Officer of secondary valuation was held to be proper. The Appellant
Assistant Commissioner took up the appeals of the assessee-company for
this and other years subsequent to the order of the Tribunal and following
the Tribunal's order he worked out the capital loss in respect of the other
shares under consideration and in effect accepted the assessee-company's
E claim of capital loss of Rs. 4,37,703. The said order led to appeals both by
the assessee-company and the Revenue to the Tribunal. The assesseecompany's appeal related to computation of the capital loss of Rs. 4,37,703
as emerging from the order of the Appellate Assistant Commissioner
instead of Rs. 4,90,244 which would be the correct figure. The Revenue
contested the acceptance of the claim of the assessee-company with referF ence to the capital loss of Rs. 4,37,703 as shown in the returns.
On the first occasion when the matter came before the Tribunal, it
remanded the case to the Appellate Assistant Commissioner and called for
a specific finding whether the sales under 'consideration were effected with
G the object of avoidance of tax or reduction of liability to tax and also
wanted the full value of consideration to be worked out, in case the first
proviso to Section 128(2) of the 1922 Act was held to be applicable. The
Appellate Assistant Commissioner observed that there was ample evidence
to show that the sale of shares was a forced one and that the assessee-comH pany had no option but to comply with the statutory provisions and that
C.I.T. v. AMALGAMATION PVf. LTD. (S.C. AGGARWAL,J.)
1013
the evidence produced clearly established the assessee-company's contenA
tion that the sale was not motivated by any desire to avoid capital gains
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
B
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 C
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 fixed by the Government of India. The two questions referred
in T.C. No. 160 of 1969 arise out of proceedings under Section 33B of the D
1922 Act, while questions Nos. 1 and 2 referred in T.C. No. 239 of 1971
arise out of the order of the Tribunal in the appeal against the order of
the Appellate Assistant Commissioner in respect of the assessment year
1958-59.
Since the second question in T.C. No. 160of1%9 and questions Nos. E
1 and 2 in T.C. No. 239 of 1971 raised more or less the same issue, they
were taken up together by the High Court. After referring to the provisions
of Section 12B(2) and more particularly the first proviso to the said
sub-section, the High Court has observed that the first requisite for the
application of the said proviso, namely, that the person to whom the sale
F
is made should be a person with whom the assessee is directly or indirectly
connected, was satisfied in the present case because the sale of shares to
a subsidiary of a subsidiary is one to a person with whom the assessee-company is directly or indirectly connected. As regards the second requirement
of the proviso, as to whether the sale was effected with the object of
avoidance or reduction of the liability of the assessee-company under that G
Section, the High Court has pointed out that the Income Tax Officer had
not given a finding that the object with which the transaction was put
through was the avoidance or reduction of the liability to capital gains tax
and the only observation that he had made in his order was that there was
a reduction of liability to capital gains. According to the High Court, such H
1014
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A a finding of taking the result as if it was the object would not satisfy the
requirement of the first proviso to Section 12B(2) of the 1922 Act. The
High Court was of the view that the Tribunal had rightly called for a finding
on this point specifically from the Appellate Assistant Commissioner. After
referring to the finding recorded by the Appellate Assistant Commissioner,
B which was accepted by the Tribunal, that the object of the transaction was
not to avoid or reduce such liability to capital gains tax, that the sale was
a forced sale since the assessee-company had no option and that the prices
had been fixed by the Company Law Administration, the High Court held
that the first proviso to Section 12B(2) cannot be attracted to the present
case. The High Court did not accept the contention urged on behalf of the
C 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 of 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
D 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.
E
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
F
High Court has, however, considered the said question and has indicated
the answer to that question also. The High Court has expressed the view
that this is a case of substantial holding and that there is textual backing
to the method adopted by the Income Tax Officer and that the Commissioner had found fault with it without any valid reason. The High Court,
therefore, answered the first question in T.C. No. 160 of 1969 in affirmative
G and in favour of the assessee-company.
As regards the first question in T.C. No. 239of1971, the High Court
felt that it did not require any independent treatment in view of the answer
given with regard to second question in T.C. No. 160 of 1969 which would
H answer that question also. Therefore, that question also was answered in
C.l.T. v. AMALGAMATION PVT. LTD. [S.C. AGGARWAL, J.)
1015
the affirmative and in favour of the assessee-company.
A
We have heard Shri K.N. Shukla, the learned senior counsel appearing for the Revenue in support of the appeals in respect of the answers
given by the High Court to these questions. Having considered the submissions of the learned counse~ we are of the view that the High Court has
rightly construed the provisions contained in the proviso to Section 12B(2)
of the 1922 Act and, in view of the finding recorded by the Appellate
Assistant Commissioner, which finding was accepted by the Tribunal, that
the object of the transaction was not to avoid or reduce the liability to
capital gains, the said proviso was not attracted. In our opinion, the said
finding of the High Court does not suffer from any legal infirmity and there
is no ground to interfere with the judgment of the High Court on this
aspect of the case.
We may now take up the appeals of the Revenue in respect of
questions Nos. 4, 5 and 6 in T.C. No. 239 of 1971.
The said questions were as follows :
"( 4) Whether, on the facts and in the circumstances of the case,
B
c
D
the Appellate Tribunal was right in law in holding that the loss
sustained by the assessee on account of standing guarantee to E
Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should
be allowed in 1962-63 assessment after taking into account the
amounts received from the liquidators during the years 1959-60 to
1962-63?
(5) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in law in deleting the receipts of Rs. 1,41,000,
Rs. 2,29,627, Rs. 1,10,500 and Rs. 4,381 from the liquidators of
Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation), from
F
the assessments for 1959-60, 1960-61, 1961-62 and 1962-63 respec-.
tively?
G
( 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) H
1016
SUPREME COURT REPORTS
(1997] 3 S.C.R.
A
Ltd. (in voluntary liquidation) should be allowed in the assessment
year 1962-63?"
There was a company by name Sembiam Saw Mills (Private) Ltd.
(for short 'SSM'), which was originally a subsidiary of Addison & Company
B (Private) Ltd. On and from February 1, 1954 the assessee-company purchased all the shares of SSM from M/s. Addison & Company (Private) Ltd.
and SSM thus became the direct subsidiary of the assessee-company. SSM
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. SSM went into liquidation some time in 1955. For the purpose of
C 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 guarantee letter in favour of the Bank. When SSM
went into liquidation, the assessee-company, as guarantor, was required to
clear those overdrafts in accordance with the terms of the guarantee. After,
D adjusting the amount recovered from the liquidators, the sum due to the
assessee-company from the liquidated company on account of the said
overdraft was Rs. 9,08,764. The assessee-company claimed this amount as
a loss which arose in the course of and incidental to its business in the
assessment for the year 1958-59. There were receipts by the assessee-company in the course of the liquidation of SSM in the later years. The total
E amount received came to Rs. 4,85,508.28 spread over the relevant accounting years for the assessment years 1959-60 to 1962-63. The assessee-company relied on the clause in the memorandum of association authorising it
to be the guarantor for the loans and contended that the transactions in
question sprang out of normal business transactions and hence the loss was
F
an allowable deduction in the assessment for 1958 59. The Income Tax
Officer held that the loss in question did not arise during the course of or
incidental to the business of the assessee-company and in his view it was
at best a capital loss which did not come within the scope of Section 12B
of the 1922 Act. In making the assessments for the years 1959-60 to 1962-63
the Income Tax Officer treated the receipts from the liquidator as income
G as a protective measure. In appeal the Appellate Assistant Commissioner
did not accept the claim of the assessee-company for allowance of the Joss
in 1958-59 as he was of the view that it was not a loss which arose during
the course of or was incidental to its business. But the appeals for the years
1959-60 to 1962-63 were allowed in so far as they related to the question
H of the receipts in the respective years from the liquidator. As the guarantee
C.l.T. v. AMALGAMATION PVT. LTD. (S.C. AGGARWAL,J.]
1017
---
loss had not been allowed as a deduction in 1958-59, the Appellate AssisA
tant Commissioner held that the subsequent recoveries could not be included in the total income in the later years. The assessee-company as well
..
as the Revenue preferred appeals against the said order of the Appellate
Assistant Commissioner before the Tribunal. The Tribunal held that the
assessee-company had guaranteed the loan in the course of carrying on its
own business and that the loss was clearly admissible as a deduction. 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
B
c
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 D
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.
Commissioner of Income Tax, (1969) 73 ITR 380, 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 guarantee to debts borrowed by subsidiary companies. The High Court
has held that the said finding given in that case is clearly applicable to the
questions under consideration before it and that the assessee-company had
incurred the loss in carrying on its own business which includes furnishing
guarantees to debts borrowed by its subsidiary companies. According to
the High Court, the loss was allowable as a deduction in the year in which
it came to be ascertained and in the instant case the High Court held that
the assessee-company could have ascertained whether there was loss in the
transaction of guarantee only at the stage of final payment by the liquidators which was received in the relevant previous year for the assessment
E
F
year 1962-63 and that the Tribunal was right in allowing it in that year. The G
High Court, therefore, answered questions Nos. 4, 5 and 6 in the affirmative and against the Revenue.
After hearing Shri Shukla on the appeals fileJ by the Revenue in
respect of these questions, we are unable to hold that the judgment of the H
1018
SUPREME COURT REPORTS
(1997) 3 S.C.R.
A
High Court in respect of these questions suffers from any legal infirmity.
B
c
D
We, therefore, affirm the answer given by the High Court to questions Nos.
4, 5 and 6 referred to it. In the circumstances, it must be held that Civil
Appeal Nos. 139-142 of 1980 filed by the Revenue are liable to be dismissed.
We would now come to Civil Appeals Nos. 7-11of1980 filed by the
assessee-company in relation to question No. 3 in T.C. No. 239 of 1971,
which was as under :
"(3) Whether, on the facts and in the circumstances of the case,
the Appellate Tribunal was right in law in holding that the
sums of Rs. 4,37,066, Rs. 90,896, Rs. 1,08,978, Rs. 1,18,102 and
Rs. 1, 11, 740 are admissible as a deduction in the assessments
of the assessee for the assessment years 1958-59 to 1962-63
respectively ?"
The assessee-company was a bulk shareholder in several companies
and in the relevant year there were sixteen companies. The assessee-company was rendering certain common services to i'ts subsidiaries by having
(1) a finance committee; (2) a liaison office in Delhi (3) an export promotion department; and ( 4) an internal audit department. The expenditure on
E account of maintenance of liaison office in Delhi1 and the departments of
export promotion and internal audit was borne by the assessee-company
and was recovered from the subsidiaries. The finance committee was
working in an advisory capacity to the various subsidiary companies to help
them to carry on their business more efficiently. All purchase requisitions
F 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
G 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 assesseecompany were also directors/managers in the subsidiary companies. As per
the service agreements between them and the concerned subsidiary comH pany they were entitled to payment of remuneration and also a certain
C.I.T. v. AMALGAMATION PVf. LTD. [S.C. AGGARWAL, J.]
1019
percentage of the profits as commission. Similar service agreements
had been entered 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 overall managerial remuneration at 11 % of the net profits of
the company, it was not possible
1 for the subsidiary companies to pay the
contracted remuneration to the persons concerned. On April 4, 1959 the
Board of Directors of the assessee-company passed a resolution whereby
it was resolved that the remuneration payable to nine directors of the
subsidiary companies would be paid to them in full in accordance with the
terms of the contract respectively entered into by them and the amount in
excess of the maximum amount permissible under-the Companies Act, 1956
would be met by the assessee-company. Out of these nine directors three
were directors of the assessee-company and out of these three directors
two were members of the finance committee. None of the other six directors of the subsidiary companies was a member of the finance committee.
A
B
c
In accordance with the said resolution the assessee-company paid diverse D
amounts to the said directors. The total amounts so paid to the several
persons for the different years are mentioned in question No. 3. The
assessee-company claimed the said amounts as deduction under Section
10(2)(xv) of the 1922 Act for the assessment years 1958-59 to 1961-62 and
under Section 37 of the 1961 Act for the assessment year 1962-63. Before E
the Income Tax Officer it was not disouted that these payments were in
respect of services rendered by respective persons to the various subsidiary
companies of which they were directors/managers and that no part of the
payment could be related to any service directly rendered by them to the
assessee-company. It was submitted that though the services were
rendered by them to other companies, they should be deemed to have
rendered the service to the assessee-company in view of the nexus
between the holding company and its subsidiaries. The Income Tax
Officer did not accept this submission and held that the excess
remuneration over and above what was admissible under Section 198
F
of the Companies Act, which was not borne by the respective comG
parries, could not be allowed as deduction under Section 10(2)(xv) of the
1922 Act and Section 37 of the 1961 Act as expenditure wholly and
exclusively incurred for the purpose of the business of the assessee-company. It was also stressed that the resolution of the Board of directors of
the assessee-company was passed on April 4, 1959, after the previous years H
1020
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A 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 report on the points mentioned in the
order of remand. The Appellate Assistant Commissioner after taking
B
c
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 uf a number of
subsidiary companies and that it was looking after the interest and
welfare of those companies with a view to earn dividc:nds, the whole of
D the expenditure referable to the remuneration paid by the assessee-company was admissible as a deduction.
Rejecting the contention urged on behalf of the Revenue thM the
assessee-company was not carrying on any business because merely holding
of investments would not constitute business, the High Court has held that
E in view of Section 23A of the 1922 Act holding of investments, in appropriate cases, would equally be a business a.~ dealing in them and what
is required is that there must be a real substantial and systematic or
organised course of activity or conduct with the set purpose of earning
profit which is the test for a business. The High Court has observed that
F
the assesce-company is not a mere investor in a single company but has
investment.. in sixteen companies and had taken active interest in the
business of these companies as is clear from the services that had been
rendered in the shape of export promotion, liaison office at Delhi and
internal audit and it also rendered consultation in respect of finance by its
directors meeting every day with reference to the needs and requirements
G of each company and that it is not a case where the assessee-company
contented itself with merely making an investment and looking for the
· dividend.