2013 (5) TMI 475 - HC - Income Tax

Loans and advances to the Subsidiary Companies - whether be termed Revenue Nature on account of Business Exigency and Commercial Expediency? - Tribunal returned a finding that the amounts advanced have been written off after the said companies have been closed and the employees retrenched thus are clearly capital loss - Held that - No merit in the present appeal as the appellant has advanced loan to its subsidiary companies, the same has to be treated as capital loss. The assessee has not shown any increase in the previous years, therefore, the assessee has been rightly found not entitled to claim such written off amount as revenue expenses. No error in the findings recorded by the authorities under the Act. In respect of the interest and the other expenses, the matter has been remanded back to the AO to examine the nature of transaction claimed by the assessee as revenue loss. Since the facts are yet to be examined, therefore, no argument can be examined at this stage. No substantial question of law arises for consideration of this Court.

Summary

Issues:
1. Classification of loans written off by the assessee as revenue expenses or capital loss.
2. Treatment of interest on loan and dividend income in relation to the written off amounts.
3. Examination of whether the written off amounts can be considered as revenue expenditure under Section 37(1) of the Income Tax Act.

Analysis:
The case involved an appeal under Section 260-A of the Income Tax Act, 1961 against an order passed by the Income Tax Appellate Tribunal regarding the assessment year 2005-06. The assessee company had advanced loans to its wholly owned subsidiary companies, which were later written off as bad debts. The primary issue was whether these written off amounts should be treated as revenue expenses or capital loss. The Commissioner of Income Tax initially treated the written off amounts as capital loss, stating that since no income had been shown in earlier years from these bad debts, the claim to treat them as revenue expenses was not valid. The Tribunal concurred, ruling that the written off amounts constituted capital loss and were not allowable as revenue expenditure.

Regarding the interest on loan and dividend income derived from the amounts advanced, the Tribunal directed the Assessing Officer to allow these as deductions under specific provisions of the Income Tax Act. The Tribunal further instructed the Assessing Officer to examine whether the advanced amounts, written off due to being irrecoverable, could be considered as revenue expenditure under Section 37(1) of the Act. The High Court upheld the Tribunal's decision, emphasizing that the loans advanced by the appellant were to be treated as capital loss. The Court noted the absence of any previous increase in income related to these bad debts, justifying the denial of treating the written off amounts as revenue expenses. The matter concerning interest and other expenses was remanded to the Assessing Officer for further examination of the transaction claimed by the assessee as revenue loss.

In conclusion, the High Court found no merit in the appeal, affirming the treatment of the written off amounts as capital loss. The Court dismissed the appeal, stating that no substantial question of law arose for consideration. The decision highlighted the need for a detailed examination of the nature of the transactions claimed as revenue loss, indicating that further arguments could only be entertained after such examination.