2022 (11) TMI 1487 - AT - Income Tax

Disallowance of bad debts u/s 36(1)(vii) - amount advanced to its subsidiary company which was written off as bad debts - HELD THAT - From the fact it emerges that the assessee has claimed bad debts u/s 36(1)(vii) which has been denied on the ground that the conditions of Sec.36(2) were not fulfilled by the assessee. We find that certainly the conditions of Sec. 36(2) were not fulfilled since the amount represents value of goods sent to subsidiary entity and expenses incurred on behalf of subsidiary entity. Therefore the deduction u/s 36(1)(vii) has rightly been denied. Assessee has made alternative argument that the subsidiary was promoted to promote the brand CGH Earth and to bring more tourism and business to the assessee by opening a restaurant and a marketing wing for the hotel chain in Germany - We find strength in the alternative argument of the assessee that the loss was in normal course of business with a view to boost assessee s profitability. The amount thus expanded by the assessee has been shown under the head Loans and Advances and the assessee s claim hinges more on the provisions of Sec. 28 or Sec. 37(1) and not on Sec.36(1)(vii). The lower authorities have failed to consider this aspect of assessee s argument. Considering the purpose for which the subsidiary entity was floated it could be concluded that the whole purpose of the investment was to improve business profitability and not to acquire any manufacturing facility. Therefore considering the cited decision of Chennai Tribunal this claim is to be accepted as revenue loss and hence an allowable deduction. We order so. This ground stand allowed. This issue arises in AY 2009-10 also and accordingly our adjudication as above shall mutatis mutandis apply therein also. Loss incurred in investment in subsidiary company - assessee promoted a subsidiary company in Germany and made equity investment - AO disallowed the same on the ground that it was capital item - CIT(A) confirmed the same but directed Ld. AO to treat the loss as long-term capital loss which would be allowed to be carried forward - HELD THAT - We find that Ld. CIT(A) has clinched the issue in correct perspective. The loss of equity investment could not be allowed as revenue expenditure. The same is in capital field for which adequate directions have been issued by Ld. CIT(A). The same do not require any interference on our part. This issue stand dismissed. The appeal stands partly allowed in terms of our above order. Nature of expenditure - Disallowance of Current Repairs - Assessee claimed it as revenue expenditure which is addition to building and electrical fittings on leasehold premises - AO held that capital expenditure incurred on a leased building was to be capitalized and depreciation would be allowed - HELD THAT - From the facts it emerges that the assessee has incurred expenditure on existing building which is erected on leased land. This being so Explanation-1 would apply since the nature of expenditure is capital expenditure. Therefore the expenditure is to be capitalized and depreciation would be allowable to the assessee. The Ld. AO is directed to allow depreciation on this expenditure. The assessee is directed to provide requisite details. This ground stand partly allowed. Assessment of Income Tax Refund - CIT(A) held that the amount would be taxable on cash basis i.e. whenever the same is received by the assessee - HELD THAT - The only grievance of the assessee is that interest should be assessed to tax only on the respective assessment reaching finality. We find that this argument run contrary to the afore-said decision of Smt. K. Devayani Amma 2009 (10) TMI 555 - KERALA HIGH COURT and therefore the same is not to be accepted. This ground stand dismissed.

Summary

Issues involved: Disallowance of Rs. 19.71 Lacs; Disallowance of Rs. 5.11 Lacs; Disallowance of current repairs; Assessment of Income Tax Refund.

Disallowance of Rs. 19.71 Lacs: The appellant claimed bad debts under Sec. 36(1)(vii) due to an amount advanced to its subsidiary company, which was written off as bad debts. The claim was denied as the conditions of Sec. 36(2) were not fulfilled. The appellant argued that the subsidiary was formed to promote its brand and improve profitability, making the loss a revenue loss. The Tribunal accepted this argument, considering the purpose of the investment, and allowed the deduction as a revenue loss.

Disallowance of Rs. 5.11 Lacs: The appellant claimed loss on investment in a subsidiary company as an expenditure, which was disallowed as a capital item. The Tribunal upheld the decision that the loss of equity investment was a capital loss, allowing it to be carried forward.

Assessment Year 2009-10: Disallowance of Current Repairs: The appellant claimed revenue expenditure for repairs on leased premises, but the AO disallowed it as capital expenditure. The Tribunal directed the AO to allow depreciation on the capital component of the expenditure, partially allowing the ground.

Assessment of Income Tax Refund: The AO treated interest on Income Tax Refund as income, while the CIT(A) held it should be taxable when received. The Tribunal followed a decision of the Kerala High Court and directed the AO to examine if the interest was already assessed in a previous year, allowing the ground partially and dismissing the argument that interest should only be taxed when the assessment reaches finality.

In conclusion, both appeals were partly allowed based on the Tribunal's orders.