LexCOMMISSIONER OF INCOME TAX, MADRAS versus M/S. AMALGAMATION PVT. LTD.
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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-As- E 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 sub- sidiaries-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 sub- sidiary companies and to render certain common-services to its sub- sidiaries 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-as- sessment of the assessee Company arose before this court for considera- tion: 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 direc- tors 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
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