The division bench of the Bombay High Court, in a recent ruling, held that the loss on sale of actionable claim should be treated as a business loss and therefore, deduction is available in respect of such loss under the provisions of the Income Tax Act, 1961.
The assessee-company had a right to recover a sum of Rs.103 lakhs from Mr. Varun. Out of this, the assessee sold the right to recover Rs. 45 lakhs to M/s. Pearl Thread Mills Ltd. and the balance amount was written off by them as bad debt.While filing return, the assessee-company claimed deduction by treating the same as business loss. However, the Commissioner of Income Tax (Appeals)disallowed the same on ground that the said amount cannot be treated as business loss since the assessee is not in the business of advancing loans and the loans were advanced to Mr. Varunas a part of an investment program.
On appeal, the Tribunal found that the amount was advanced not by way of investment but purely in an attempt to prevent the State Bank Proceeding against the assessee, as a guarantor. Therefore, the Tribunal allowed the appeal and held that the guaranteeing by the assessee of the loan by the State Bank to Varun was only as part of the business activity of the assessee. Being aggrieved, the Revenue preferred an appeal before the High Court.
The division bench comprising of Justice M S Sanklecha and Justice A K Menon found that merely because normally the Assessee does not grant loans, the grant of advance to Mr. Varun cannot be considered to be a loan but has to be considered as an investment. The Court observed that,after the decision in G. Venkataswami Naidu & Co., v/s. CIT 35 ITR 594 and CIT v/s. Sutlej Cotton Mills 100 ITR 706,It is a settled position in law that even a single/ solitary transaction could by itself be classified as a business transaction.
The Court further observed that the assessee’s decision to grant loan in order to onaccount of business expediency so as to ensure that the State Bank of India does not adopt proceedings to enforce the guarantee given by the Assessee for the loan granted tothe Company of Mr. Varun is a possible course of action adopted by a business.According to the Court, such investment is reflected in its contribution to the share capital of M/s. Varun Shipping Company Ltd.,. This contribution can be considered to be an investment as any increase in profitability of M/s. Varun Shipping Company Ltd., would result individends and likely appreciation of the share price resulting in the investor earning more than the investment made. Therefore, in the opinion of the Court, such amount cannot be considered to be an investment in the present facts but appropriately a loan in the course of carrying on of business.
On the basis of the above findings, the Court, by rejecting the contentions of the Revenue, the Court held that the loss on sale of actionable claim was a business loss allowable as a deduction to compute its profits and gains from business.Consequently, any loss on account of non-recovery of Rs.103 lakhs or any part thereof, would necessarily be a business loss in computing the profits and gains from business.
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