2017 (11) TMI 1864 - HC - Income Tax

Non-allowability of deduction on account of investment in subsidiary company written off - HELD THAT - Assessee company in order to expand its business world-wide had set up the Brick and Mortar retail store at different tourist location in Mexico through its 100 subsidiary. The investment was not to earn dividend but to expand its business and expenditure was purely for business expansion of assessee s product. Thus the investment made by the assessee into the 100% subsidiary company Indo Mexico was with the sole object of expanding its business and for marketing the products of the assessee company. The investment made to the 100% subsidiary company Indo Mexico was out of business considerations, in order to promot business interest of the assessee. Thus the investments made were out of commercial expediency and for business interest. In our opinion, the written off such investment in 100 % subsidiary which was not recoverable was an admissible business loss which is proximately relatable to assessee s business. Therefore, the said loss so incurred has been rightly claimed by the assessee company as deductible business loss. No substantial question of law arises.

Issues Involved:

1. Adjustment on account of interest-free loans advanced to AEs.
2. Adjustment on account of Corporate Guarantee.
3. Write-off of loss on account of investment in equity shares of a subsidiary.
4. Write-off of investment for the purpose of computing "book profit" under section 115JB.
5. Disallowance out of provision for doubtful loans to a subsidiary.
6. Disallowance out of bad debts provision claimed in MAT.

Issue-wise Detailed Analysis:

1. Adjustment on account of interest-free loans advanced to AEs:
The appellant questioned whether the ITAT was justified in restricting the adjustment on account of interest-free loans advanced to Associated Enterprises (AEs) to prevailing LIBOR +2%. The Tribunal did not address the evidence and facts brought on record by the Transfer Pricing Officer (TPO). The Tribunal’s decision to restrict the adjustment was challenged as being perverse and not in accordance with the law.

2. Adjustment on account of Corporate Guarantee:
The appellant contended that the ITAT acted perversely in deleting the adjustment of ?4,28,47,925/- made by the Assessing Officer (AO) on account of Corporate Guarantee. The Tribunal did not appreciate the fact that the amendment by the Finance Act 2012, inserting explanation (i)(c) to section 92B, clarified that corporate guarantees come within the scope and ambit of international transactions. The Tribunal’s decision to delete the adjustment was challenged based on the legislative amendment.

3. Write-off of loss on account of investment in equity shares of a subsidiary:
The appellant argued that the ITAT erred in allowing the write-off of ?41,02,27,250/- on account of investment in equity shares of its subsidiary, Indo Medico Co. S. De. R.L. De. V.V.s. Mexico. The Tribunal allowed the write-off without appreciating that the amount is not an expense, loan, or advance required to be debited from the profit and loss statement of the assessee. The Tribunal’s decision was based on the commercial rationale and business expediency of making such investment, and the actual loss incurred on account of liquidation of the subsidiary.

4. Write-off of investment for the purpose of computing "book profit" under section 115JB:
The appellant questioned whether the ITAT was justified in allowing the write-off of investment of ?41,02,27,250/- for computing "book profit" under section 115JB. The Tribunal allowed the write-off without considering that the book profit of the assessee should be increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. The Tribunal’s decision was challenged as being incorrect in law.

5. Disallowance out of provision for doubtful loans to a subsidiary:
The appellant contended that the ITAT erred in remitting back the issue of disallowance out of provision for doubtful loans to the subsidiary to the file of the AO for verification. The Tribunal did not assign any reasons for this remittance, despite the fact that loans and advances are not revenue expenses and the details/information provided by the assessee had already been considered during the assessment proceedings. The Tribunal’s decision to remit the issue back was challenged as lacking justification.

6. Disallowance out of bad debts provision claimed in MAT:
The appellant argued that the ITAT erred in remitting back the issue of disallowance out of bad debts provision claimed in Minimum Alternate Tax (MAT) to the file of the AO for verification. The Tribunal did not provide any reasons for this remittance, despite the fact that the details/information provided by the assessee had already been considered during the assessment proceedings. The Tribunal’s decision to remit the issue back was challenged as unjustified.

Conclusion:
The Tribunal's decisions on various issues were challenged by the appellant on grounds of incorrect application of law, lack of consideration of evidence, and failure to appreciate legislative amendments. The Tribunal's decisions were based on commercial rationale, business expediency, and judicial precedents, but were contested by the appellant as being perverse and lacking justification. The High Court dismissed the appeal, finding no substantial question of law arising from the Tribunal's decisions.

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