Court Rules Loan to Subsidiary Qualifies as Capital Asset, Allowing Tax Deduction

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Case Name:

Commissioner of Income Tax (IT) Vs M/s Siemens Nixdorf Information Systemse GMBH (High Court of Bombay)

Income Tax Appeal No.1366 of 2017

Date: 26th August 2019

Key Takeaways:

1. The definition of "capital asset" in income tax law is pretty broad and includes most types of property.

2. A loan given by a company to its subsidiary can be considered a capital asset.

3. This decision allows companies to claim tax deductions on losses from such loans when they're sold or transferred.

4. The court emphasized the importance of interpreting tax laws consistently across different acts.

Issue: 

The main question here was: Can a loan given by a foreign company to its Indian subsidiary be considered a "capital asset" under Section 2(14) (of Income Tax Act, 1961)?

Facts:

1. The Respondent (a foreign company) lent 90 lakh Euros to its Indian subsidiary, Siemens Nixdorf Information Systems Limited (SNISL).

2. SNISL hit some serious financial troubles and was on the verge of being wound up.

3. The Respondent then sold this debt to another company, Siemens AG, at a loss.

4. The Respondent tried to claim this loss as a short-term capital loss on their taxes.

5. The tax authorities said, "Hold up, you can't do that because this loan isn't a capital asset."

6. The case went through various levels of appeal before reaching the High Court.

Arguments:

The Revenue (tax department) argued:

1. The loan of 90 lakh Euros wasn't a capital asset under Section 2(14) (of Income Tax Act, 1961).

2. The court shouldn't rely on decisions made under other laws (like the Wealth Tax Act) to interpret the Income Tax Act.

The Respondent (the company) argued:

1. The loan falls under the broad definition of "property" in Section 2(14) (of Income Tax Act, 1961), which defines capital assets.

2. Previous court decisions support a wide interpretation of what counts as property or a capital asset.

Key Legal Precedents:

1. CWT v/s. Vidur V. Patel [1995] 215 ITR 30:

This case, under the Wealth Tax Act, held that "property" includes interests of every kind.

2. Bafna Charitable Trust v/s. CIT 230 ITR 846:

This case, directly under the Income Tax Act, confirmed that "property" in the definition of capital assets is to be interpreted very broadly.

3. Commissioner, Hindu Religious Endowments vs. Shri Lakshmirudra Tirtha Swami of Sri Shirur Mutt (1954) SCR 1005:

This Supreme Court case supported a liberal interpretation of "property".

Judgement:

The High Court sided with the Respondent. They said:

1. The definition of "capital asset" in Section 2(14) (of Income Tax Act, 1961) is super broad.

2. It includes pretty much any kind of property unless it's specifically excluded.

3. The loan doesn't fall under any of the exclusions mentioned in the Act.

4. Previous court decisions support this wide interpretation.

5. The Revenue couldn't give a good reason why the loan shouldn't be considered a capital asset.

So, the court dismissed the Revenue's appeal, effectively allowing the company to claim the loss on the loan as a capital loss for tax purposes.

FAQs:

1. Q: What does this mean for companies with foreign subsidiaries?

  A: It means they might be able to claim tax deductions on losses from loans to subsidiaries if those loans go bad.

2. Q: Does this apply to all types of loans?

  A: Not necessarily. The court emphasized that this loan wasn't part of the company's regular trading activity. Different rules might apply for different types of loans.

3. Q: Why did the court refer to the Wealth Tax Act in an Income Tax case?

  A: The court viewed these as "cognate" (related) acts and felt that consistent interpretation across tax laws was important.

4. Q: Could this decision be overturned?

  A: It's possible. The Revenue could potentially appeal to the Supreme Court if they believe there's a significant legal issue at stake.

5. Q: Does this mean all debts are now considered capital assets?

  A: Not automatically. Each case would likely be judged on its specific facts, but this decision does set a precedent for a broad interpretation of "capital asset".

This Appeal under Section 260-A (of Income Tax Act, 1961), 1961 (the Act), challenges the order dated 31st March, 2016 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order dated 31st March, 2016 is in respect of Assessment Year 2002-03.

2. Revenue urges only the following question of law, for our consideration:

“ Whether on the facts and in the circumstance of the case and in law, the Tribunal was justifed in law in holding that the loan given to its subsidiary in India, by the foreign company constitute capital asset within the meaning of section 2(14) (of Income Tax Act, 1961)?”

3. Briefly, the facts leading to this appeal are as under:-

(i) The Respondent has a subsidiary company by the name Siemens Nixdorf Information Systems Limited (SNISL). The Respondent had lent an amount of Rs.90 lakhs Euros to SNISL under an Agreement dated 21st September, 2000. SNISL ran into serious fnancial troubles and it was likely to be wound up. In this situation, Respondent sold this debt (Rs. 90 lakhs Euros) to one Siemens AG. This on the basis of valuation carried out by M/s. Infrastructure and Leasing Finance Ltd. The Respondent claimed the diference in the amount which was invested/ lent to SNISL and the consideration received when sold / assigned to Siemens AG as a short term capital loss. However, the Assessing Officer while completing the assessment on 30th March, 2005 disallowed the short term capital loss. This on the basis that the amount of Rs. 90 lakhs Euros lent by the Appellant to its subsidiary SNISL, was not a capital asset under Section 2(14) (of Income Tax Act, 1961) and also no transfer in terms of Section 2(47) (of Income Tax Act, 1961) took place on assignment of a loss;

(ii) Being aggrieved with the order dated 30th March, 2005, the Respondent carried the issue in appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. By an order dated 14th March, 2011, the CIT(A) did not accept the Respondent’s contention that the amount of Rs.90 lakhs Euros lent to SNILS was a capital asset and upheld the order of the Assessing Officer. However, held that although the assignment of a loss was a transfer under Section 2(47) (of Income Tax Act, 1961), but it is of no avail, as the loan being assigned/ transferred, is not a capital asset;

(iii) On further appeal, the Tribunal by the impugned order dated 31st March, 2016 allowed the Respondent’s appeal. It examined the defnition of capital assets under Section 2(14) (of Income Tax Act, 1961). It held that it defnes the term 'capital asset' as 'property of any kind held by an assessee, whether or not connected with his business or profession' ,except those which are specifcally excluded in the said section. It further records the exclusion is only for stock in trade, consumables or raw materials held for purposes of business. It thereafter examined the meaning of the word 'property' to conclude that it has a wide connotation to include interest of any kind. It places reliance upon the decision of this Court in the case of CWT v/s. Vidur V. Patel [1995] 215 ITR 30 rendered in the context of Wealth Tax Act, 1957 which while considering the defnition of ‘asset’ had occasion to construe the meaning of the word ‘property’ . It held the word ‘property’ to include interest of every kind. On the aforesaid basis, the Tribunal held that in the absence of loan being specifcally excluded from the defnition of capital assets under the Act, the loan of Rs.90 lakhs Euros would stand covered by the meaning of the word ‘capital asset’ as defned under Section 2(14) (of Income Tax Act, 1961). It also held that the transfer of the loan i.e. capital asset will be covered by Section 2(47) (of Income Tax Act, 1961). This as the Revenue had not fled any appeal on this issue. Thus, holding that the Respondent would be entitled to claim loss on capital account while assigning/ transferring the loan given to M/s. SNISL to one to M/s. Siemens AG.

4. Mr. Tejveer Singh, learned Counsel in support of the Appeal submits that the impugned order of the Tribunal is not sustainable for the loan of Rs.90 lakhs Euros was not a capital asset in terms of Section 2(14) (of Income Tax Act, 1961). It is further submitted that, reliance placed upon the decision of this Court in Vidur V. Patel (supra) was not proper for the reason it was rendered in the context of a diferent Act viz.- the Wealth Tax Act, 1957. Thus, it can have no application while dealing with the Act. It is also his submission that the reliance upon decision of the Gujarat High Court in CIT v/s. Minor Bababhai 128 ITR 1 is inappropriate, as in that case, the Revenue has accepted that the amount due from the un-secured creditor were in the nature of capital assets. Thus, there was no dispute on the issue of 'capital asset' as in this case. Therefore, this appeal deserves admission.

5. We fnd that Section 2(14) (of Income Tax Act, 1961) has defned the word ‘capital asset’ very widely to mean property of any kind. However, it specifcally excludes certain properties from the defnition of 'capital asset'. The Revenue has not been able to point out any of the exclusion clauses being applicable to an advancement of a loan. It is also relevant to note that it is not the case of the Revenue before us that this amount of Rs.90 lakhs Euros was a loan/ advance income of its trading activity.

6. The impugned order of the Tribunal has considered the meaning of the word ‘property’ as given in the context of the defnition of asset in the Wealth Tax Act to hold ‘property’ to include the every interest which a person can enjoy. This was extended by the Tribunal to understand the meaning of the word ‘property’ as found in the context of capital asset under Section 2(14) (of Income Tax Act, 1961). The Revenue has not been able to point out any reasons to understand meaning of the word ‘property’ as given in the Section 2(14) (of Income Tax Act, 1961) diferently from the meaning given to it under Section 2(e) of the Wealth Tax Act, 1957. This Court in the case of Vidur Patel (supra) has observed as under:-

“ ... So far as the meaning of 'property' is concerned, it is well settled that it is a term of widest import and subject to any limitation which the context may require, it signifes every possible interest which a person can hold or enjoy. As observed by the Supreme Court in Commissioner, Hindu Religious Endowments vs. Shri Lakshmirudra Tirtha Swami of Sri Shirur Mutt (1954) SCR 1005, there is no reason why this word should not be given a liberal or wide connotation and should not be extended to those well-recognized types of interests which have the insignia or characteristic of property right.:

The only objection of the Revenue to the above decision being relied upon is that it is rendered under a diferent Act. We are unable to understand this distinction when both the Acts are cognate. However, this submission need not detain us, as this Court had occasion to consider the meaning of the word ‘capital asset’ as defned in Section 2(14) (of Income Tax Act, 1961) in Bafna Charitable Trust v/s. CIT 230 ITR 846. In the above case, this Court observed as under:-

“ ‘Capital asset has been defned in clause (14) of section 2 (of Income Tax Act, 1961) to mean property of any kind held by an assessee,whether or not connected with his business or profession, except those specifcally excluded. The exclusions are stock-in-trade, consumable stores or raw materials held for the business or profession, personal efects, agricultural land and certain bonds. It is clear from the above defnition that for the purposes of this clause, property is a word of widest import and signifes every possible interest which a person can hold or enjoy except those specifcally excluded.”

The Revenue has not been able to point out why the above decision of this Court rendered in the context of capital assets as defned in Section 2(14) (of Income Tax Act, 1961), is inapplicable to the present facts. Nor, why the loan given to M/s. SNISL would not, in the present facts, be covered by the meaning of ‘capital asset’ as given under Section 2(14) (of Income Tax Act, 1961).

7. In the above view, as the issue raised herein stands concluded by the decision of this Court in M/s. Bafna Charitable Trust (supra) and also by the self evident position as found in Section 2(14) (of Income Tax Act, 1961), the question as framed does not give rise to any substantial question of law. Thus, not entertained.

8. Accordingly, Appeal dismissed.

(NITIN JAMDAR,J.) (M.S.SANKLECHA,J.)