2018 (12) TMI 47 - HC - Income Tax

Disallowance of investment write off claimed as a deduction in the computation of taxable total income - sustaining the loss incurred in the activity of promoting establishing running and supporting state owned electronic industries as a capital loss even though the said activity was the main business activity - whether the Tribunal was right in holding that the shares are stock-in-trade of the assessee company? - Held that - The Division Bench took note of the Memorandum and Articles of Association which spelt out the main activities of the assessee (TIIC Limited) and held that the assessee was incorporated solely for the purpose of ensuring and facilitating growth and development of industries in the State of Tamilnadu and investments by way of subscription of shares is solely on account of the under writing operations. Further it held that the investments are in the nature of stock-in-trade and cannot be held otherwise. In our considered opinion the decision in the case of TIIC Limited (2017 (7) TMI 1048 - MADRAS HIGH COURT) would squarely cover the case on hand and the question framed for consideration is required to be answered in favour of the assessee. As pointed out by us earlier the objects for which the assessee company had been established by the Government of Tamil Nadu is no different from the purpose for which TIIC and TIDCO were established. Therefore the CIT(A) was fully justified in relying upon the decision in the case of TIDCO. The Tribunal relied on a decision in the case of R.Chidambaranatha Mudaliar (1998 (4) TMI 77 - MADRAS HIGH COURT). We find that the reliance placed on the decision is thoroughly misconceived as in the said case the loss was under different connotation namely with regard to Section 45 of the Act. Furthermore in the said case the head of income was never in dispute. Therefore the Tribunal erred in relying upon the decision in the case of R.Chidambaranatha Mudaliar. Thus for all the above reasons the order passed by the Tribunal reversing the order passed by the CIT(A) is not sustainable. In the result the appeal filed by the assessee is allowed.

Summary

Issues:
1. Disallowance of investment write off claimed as a deduction.
2. Sustaining loss incurred in promoting state-owned electronic industries as a capital loss.

Issue 1: Disallowance of Investment Write Off Claimed as a Deduction:

The appeal challenges the order passed by the Income Tax Appellate Tribunal regarding the disallowance of investment write off claimed as a deduction for the assessment year. The Assessing Officer initially held that the claim of loss from the sale of shares was a capital loss and not eligible for deduction in computing business income. However, the Commissioner of Income Tax (Appeals) allowed the appeal, stating that the amounts written off were akin to loans and not equity investments. The Tribunal, relying on a previous court decision, allowed the Revenue's appeal. The High Court examined the objects of the assessee and concluded that the investments were made towards working capital, akin to loans, and not as fixed investments. The Court referenced a Supreme Court decision and a similar case to support the assessee's position. The Court found the Tribunal's decision not sustainable and allowed the appeal.

Issue 2: Sustaining Loss Incurred in Promoting State-Owned Electronic Industries as a Capital Loss:

The second substantial question of law involved the sustenance of a loss incurred in promoting state-owned electronic industries as a capital loss, despite being the main business activity. The Assessing Officer argued that the investments made were not part of the main business activity of the assessee, which was not involved in manufacturing electronic goods or share trading. However, the High Court, after examining the Memorandum and Articles of Association of the assessee, found that the main objects of the company included promoting and financing electronic-based industries in the State. The Court held that the investments made were in the nature of stock-in-trade and aligned with the company's objectives. By referencing previous decisions and distinguishing the Revenue's reliance on a specific case, the Court supported the assessee's position. Ultimately, the Court allowed the appeal, setting aside the Tribunal's order and restoring the CIT(A)'s decision in favor of the assessee.

In conclusion, the High Court of Madras addressed the issues raised by the appellant regarding the disallowance of investment write-offs and sustaining losses incurred in promoting state-owned electronic industries. Through a detailed analysis of the company's objectives and legal precedents, the Court found in favor of the assessee, overturning the Tribunal's decision and upholding the CIT(A)'s ruling. The judgment provides clarity on the treatment of investments and losses in the context of business activities, emphasizing the importance of aligning such transactions with the company's core objectives and activities.