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2017 (4) TMI 56 - AT - Income TaxDisallowance under the head advance and loans given by the assessee to its 100% subsidiary - CIT-A allowed claim - Held that - We find that two amounts were advanced to the WOS under the head loan and advances, that the MOA in Clause 10B clearly stipulated that assessee could run a subsidiary outside India, that the subsidiary was purchasing goods from the assessee only, that it suffered losses and finally the European business had to be discontinued, that the loan/advances made to the WOS were for running the business of the assessee in Germany. In our opinion, the nature of the transaction in the hand of the recipient cannot decide the allowability of expenditure in the hands of the lender. We are deciding the case of an entity which had advanced certain amount to its subsidiary for running its business. In such a case expenditure incurred by it has to be allowed as business loss or an expenditure incurred for running the business i.e. u/s. 28/37 of the Act. - Decided against the AO.
Issues Involved:
1. Deleting the disallowance of ?1.55 crore made by the AO under the head advance and loans given by the assessee to its 100% subsidiary. 2. Classification of the expenditure as a business loss or bad debt. 3. Applicability of sections 36(1)(vii)/36(2) and 37 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deleting the disallowance of ?1.55 crore made by the AO under the head advance and loans given by the assessee to its 100% subsidiary: The Assessing Officer (AO) disallowed the deduction of ?1.55 crore, which the assessee claimed as a business loss. The AO argued that the loans and advances given to the wholly-owned subsidiary (WOS), a foreign company, were of a capital nature and did not qualify for deduction under sections 36(1)(vii)/36(2) of the Income Tax Act. The AO referenced the judgment of Premier Industries (257 ITR 762) to support his stance, asserting that the loans bore the nature of quasi-equity and were capital investments. Consequently, he added the amount to the total income of the assessee. 2. Classification of the expenditure as a business loss or bad debt: The First Appellate Authority (FAA) reversed the AO's decision, holding that the advances were made in the course of business and should be allowed as a business loss under section 37 of the Act. The FAA referred to several cases, including Chenab Forest Co. (96 ITR 568), V.S. Dempo & Co. Ltd. (206 ITR 291), and Colgate Palmolive India Ltd. (2011/TIOL/758/ITAT/Mum), to conclude that the advances were necessary for the business operations of the assessee. The FAA emphasized that the advances were made to support the subsidiary's working capital, which was essential for the assessee's business. 3. Applicability of sections 36(1)(vii)/36(2) and 37 of the Income Tax Act: The Tribunal analyzed the applicability of sections 36 and 37 of the Act. It noted that the advances were made to the WOS for running the assessee's business in Germany and were reflected in the balance sheet. The Tribunal referred to the case of Chenab Forest Co., where the Hon’ble J & K High Court held that non-capital expenditure incurred for the purpose of business should be allowed under section 37. The Tribunal also cited the case of Mysore Sugar Co. Ltd. (46 ITR 649), where the Hon’ble Supreme Court distinguished between capital expenditure and revenue expenditure, emphasizing that losses incurred in the running of the business are revenue losses. The Tribunal further referenced the case of Colgate Palmolive (India) Limited (370 ITR 728), where the Hon’ble Bombay High Court upheld that losses arising from investments in a wholly-owned subsidiary for business purposes should be treated as business losses. The Tribunal concluded that the advances made by the assessee to its subsidiary were for business purposes and should be allowed as a business loss under sections 28/37 of the Act. Conclusion: The Tribunal upheld the FAA's decision, confirming that the advances made by the assessee to its subsidiary were for business purposes and should be allowed as a business loss under section 37 of the Act. The appeal filed by the AO was dismissed. The order was pronounced in the open court on 24th March 2017.
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