2021 (12) TMI 1407 - HC - Income Tax

Allowable Revenue expenses u/s 37 - Business loss on account of permanent diminution in the value of the investment made in the equity shares in one of the subsidiaries of the assessee in USA - According to the AO this loss was not allowable u/s 37 since the expenditure could not have been considered as a revenue expenditure - HELD THAT - Tribunal relying on the decisions of the Supreme Court and High Courts noted that under similar circumstances the expenditure incurred by the company were allowed. This was on the basis that the assessee company in order to expand its business world wide had setup subsidiaries in other countries. The investment made in such companies was seen as revenue expenditure since the purpose behind making the investment was only for expansion of the business. Applying this logic to the assessee in the present case, the Tribunal was of the opinion that such investment being in the nature of revenue expenditure was to be allowed under Section 37 of the Act. Having perused the order passed by the AO and by the tribunal and having heard learned counsel for the revenue, we find no error in the view expressed by the tribunal. As noted, the assessee had made investment in its subsidiary company in order to expand its business with a view to earn higher profit. The investment was thus driven by business expediency. The tribunal therefore committed no error - No question of law arises.

Summary

Issues:
1. Adjustment of arm's length price of guarantee
2. Allowance of business loss on investment in subsidiary

Analysis:
1. The first issue revolves around the adjustment of arm's length price of guarantee by the Income Tax Appellate Tribunal (ITAT). The revenue challenged the ITAT's direction to re-compute the adjustment at 0.53% instead of 1.30% applied by the Transfer Pricing Officer (TPO). However, the High Court refused to entertain this question based on a previous order that upheld the ITAT's decision. The court emphasized that the reduction in the arm's length price determination does not give rise to a question of law. Therefore, the first issue was not entertained by the High Court.

2. The second issue concerns the allowance of a business loss amounting to Rs. 50.72 crores due to a permanent diminution in the value of investment made in a subsidiary company in the USA. The assessing officer disallowed this loss under Section 37 of the Income Tax Act, stating it was not a revenue expenditure or a case of bad debt under Section 36. The assessee appealed this decision, and the ITAT reversed the assessing officer's decision based on precedents and the purpose of the investment for business expansion. The High Court upheld the ITAT's decision, noting that the investment was made to expand the business and earn higher profits, making it a revenue expenditure under Section 37. The court found no error in the ITAT's decision, concluding that the investment was driven by business expediency, and hence, no question of law arose. Consequently, the appeal was dismissed by the High Court.