The Commissioner Of Income-Tax, Patiala v. H.p. State Industrial Development Corporation Ltd

IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA I.T.R. No.1 of 1996. Judgment reserved on: 31.12.2007. Date of Judgment: 2.1.2008 The Commissioner of Income-tax, Patiala ....Petitioner -Versus- H.P. State Industrial Development Corporation Ltd. ….Respondent Coram: The Hon’ble Mr.Justice Deepak Gupta, Judge. The Hon’ble Mr.Justice V.K.Ahuja, Judge. Whether approved for reporting? No For the Petitioner: Mr.Vinay Kuthiala & Ms.Vandana Kuthiala, Advocates. For Respondent: Mr.Vishal Mohan & Mr.Rajneesh K.Lal, Advocates Deepak Gupta, J. The following questions of law have been referred for the opinion of this Court under Section 256(2) of the Income Tax Act: “1.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the assessee’s claim regarding bad debts at Rs.48,99,990/-, treating it as a trading loss? 2.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the loss of Rs.1,41,404/- on account of destruction of furniture and fixtures in a fire, was a revenue loss and not a capital loss? 3.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.4,44,586/- made on account of interest chargeable from the subsidiary companies on the advances made to them, thought it was not specifically waived by the assessee?” Question No.1: The assessee held shares in its subsidiary companies. It was dealing in the shares and all the authorities below have held that in the previous assessment years the assessee was showing profits from the sale of shares and paying tax on the said profit. Thereafter, the subsidiary company i.e. Himachal Worsted Private Ltd. was wound up in the year 1985. The assessee is a Government owned company and the subsidiary company was also a government owned company. The subsidiary company was wound up under the orders of the State Government since it had incurred heavy debts and had accumulated losses of more than Rs.3 crores. The winding up petition was allowed by a Company Judge of this Court on 19.5.1993. The assessee decided to write off the value of the shares held by it in the subsidiary company which was wound up. The Commissioner, Income Tax held that it was not feasible to revive the subsidiary company and the assessee had no other option but to write off the amount invested in the shares of the Company. In fact a decision to waive off the interest recoverable from the subsidiary company had already been taken on 27.7.1981. The Tribunal treated the shares of the assessee Corporation as stock in trade and held that since the subsidiary company has gone into liquidation there was no question of selling off the shares. Shri Kuthiala urged that in fact there was no trading in the shares and therefore this amount could not have been allowed as a deduction. We are not in agreement with this contention. Once a Company has been ordered to be wound up there is no question of any party dealing in the shares of the said Company. The Tribunal has come to a finding of fact that the shares were stock in trade and has therefore allowed the loss. The loss in our opinion has to be treated as a trading loss. The mere fact that the shares were not sold is of no significance since in fact the shares could not have been sold and had become worthless. The question is accordingly answered in favour of the assessee. QUESTION No.2: Shri Kuthiala urged that in fact there was no trading in the shares and therefore this amount could not have been allowed as a deduction. We are not in agreement with this contention. Once a Company has been ordered to be wound up there is no question of any party dealing in the shares of the said Company. The Tribunal has come to a finding of fact that the shares were stock in trade and has therefore allowed the loss. The loss in our opinion has to be treated as a trading loss. The mere fact that the shares were not sold is of no significance since in fact the shares could not have been sold and had become worthless. The question is accordingly answered in favour of the assessee. QUESTION No.2: This question, in our opinion, has been wrongly decided in favour of the assessee. There can be no manner of doubt that furniture and fixtures are capital assets. Reference in this behalf may be made to Sections 2(14), 32 and 50 of the Income Tax Act. Furniture and fixtures are capital assets in terms of Section 2(14). Depreciation is permitted in respect of furnitures and fixtures in terms of Section 32 and Section 50 provides for the provision of computation of capital gains in respect of depreciable assets. There can be no dispute that furnitures and fixtures are depreciable assets. Therefore, the loss of furniture and fixtures in a fire cannot be treated as a revenue loss and has to be treated as a capital loss. Therefore, this question is answered in favour of the revenue and against the assessee. QUESTION NO.3: We are not giving all the facts in detail since most of the facts have already been mentioned in respect of question No.1 above. The argument on behalf of the revenue is that since the assessee was maintaining accounts on mercantile basis the interest was accruable and therefore the same could not have been written off as a bad debt. This contention of the revenue cannot be accepted. All the authorities including the Tribunal have come to a finding of fact that the subsidiary companies, namely, M/s. Himachal Worsted Private Ltd. and M/s.Himalaya Fertilizers Ltd. were running in losses. Accordingly no interest was charged from these Companies. In fact a Resolution had been passed by the Board of Directors of the assessee on 27.7.1981 whereby it had been resolved not to charge interest from the subsidiary companies because of the fact that they had suffered heavy losses. The question before us relate to the assessment year 1985-86. The decision not to charge interest had been taken as far back as on 27.7.1981. This decision was taken in accordance with the well established commercial practice. There is no material to show that this decision was a tainted decision or had been taken for extraneous consideration. The authorities below rightly disallowed the addition of interest. This question is accordingly answered in favour of the assessee and against the revenue. In view of the above discussion questions 1&3 referred to this Court are decided in favour of the assessee and against the Revenue and question No.2 is decided in favour of the Revenue and against the assessee. The Registrar General of this Court is directed to send a copy of this order to the Income Tax Appellate Tribunal. ( Deepak Gupta ), Judge January 2, 2008. PV ( V.K. Ahuja ),Judge