CIT v. Amalgamation (P) Ltd.:

M/s Amalgamation Private Limited (hereinafter referred to as “the assessee Company”) is a company incorporated on 22-12-1938 as a private limited company. The assessee Company held shares in several companies, such as Simpson and Company Ltd., Addison & Company Pvt. Ltd., George Oakes (Private) Ltd., Addison Paints & Chemicals Private 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 hire-purchase transactions to outsiders and by way of loans and advances to the companies of this group. As on 1-7-1956 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 1-4-1956, no company could, without obtaining the previous approval of the Central Government in that behalf, 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 a lending company and outstanding at 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 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 affected by the aforesaid 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 assessee 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 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 Finance Company (Private) Ltd. (sic) The assessee Company as well as Simpson and General Finance Company (Private) Ltd. proposed to sell the shares at a certain specified price per share 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 assessee 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 General Finance Company (Private) Ltd. with effect from 13-6-1957 at the prices fixed by the Company Law Administration and Simpson and General 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.

The High Court, while dealing with said questions, has observed that 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 assessee Company, was done in the course of its own business. The High Court has referred to its earlier judgment wherein the nature of the business of the assessee Company has been considered and it has been held that the provisions of Section 23-A 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 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.

The alternative claim by the assessee Company for deduction in respect of the expenditure incurred by the assessee Company in respect of amounts paid to its own directors who were also the members of the finance committee has been rightly rejected by the High Court in view of the resolution passed by the assessee Company wherein the directors, whether they be the members of the finance committee or not, have been treated as a class and with reference to all of them the assessee Company incurred the expenditure only because they could not be remunerated to that extent by the subsidiary companies. The fact that they were directors of the assessee Company and members of the finance committee was not taken into account in taking over the remuneration payable to them. In the circumstances, Civil Appeals Nos. 7-11 of 1980 filed by the assessee Company are also liable to be dismissed.