Section 2(14) – a non-resident company, gavea loan to its wholly owned subsidiary which constituted property – in sense it is was an assetwhich a person could hold and enjoyand not covered by exclusion clauses set out in section 2(14), it was required to be treated as a ‘capital asset’ and consequently any loss arising on sale of said asset, would be treated as short term capital loss.
FACTS
The assessee, a non-resident company, had given loan to its wholly owned subsidiary in India as its subsidiary had run into serious financial troubles and there was also a proposal to wind up the said subsidiary. The assessee sold the debt, that it had given to its subsidiary, Siemens AG, for a less consideration and claimed the short term capital loss on this transaction of sale of book debt.
The AO disallowed the deduction of capital loss on the basis of the reasoning that
a. the assessee’s right to recover the loan of Euro 90,00,000 from its subsidiary was not a capital asset u/s. 2(14);
b. the assignment of this debt, or the right to recover the money from subsidiary, was not a transfer u/s. 2(47);
c. even going by the valuation report, what was recoverable was part of said sum i.e. Euro 7,31,000 only and what was not recoverable could not be transferred either; and
d. it was a sham transaction only with the tax motives since the advance to the subsidiary was in the capital field and a capital loss was not allowed as deduction.
The CIT-(A) confirmed the order of the AO.
On second appeal before the Tribunal.
HELD
The advance given by the assessee to its subsidiary was a property, in the sense it was an interest which a person could hold and enjoy. Section 2(14) defines a ‘capital asset’ as ‘property of any kind held by an assessee, whether or not connected with his business or profession’ except as specifically excluded in the said section. So far as business assets are concerned, the exclusion is only for ‘(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession’.
Thus the said advance was required to be treated as a ‘capital asset’.
Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so, that the debt was not a capital asset. As regards CIT-(A)’s observation to the effect that ‘a loan is a current asset and not a capital asset’, it was pointed out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression u/s. 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains.
As regards the CIT-(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, there is no relevance or basis in these observations. The capital asset was the money recoverable from an Indian entity which was thus essentially required to be treated as in India, and, as was mandate of section 9(1)(i) any income, inter alia, ‘through the capital asset situated in India’ is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset u/s. (14), swayed by the considerations which were not germane in this context
Section 2(47)(i) provides that ‘transfer, in relation to a capital asset, includes: sale, exchange or relinquishment of the asset’. Therewas no dispute that all the rights to recover the money from the Indian entity, which was what the capital asset was in this case, was sold to Siemens AG for a consideration of Euro 7,31,000. The sale of trade debts, or even loans, is a part of day to day trade and commerce. The CIT-(A) has not even raised any issues on this aspect of the matter.
As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bona fides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored.
There is also no dispute that if the capital loss was to be allowed, the loss had to be short-term capital loss.
In view of the above discussions, as also bearing in mind entirety of the case, the AO was directed to allow the shortterm capital loss.
