2019 (2) TMI 289 - AT - Income Tax

Addition on account of disallowance of foreign exchange fluctuation loss - proof of commencement of business - Held that - The fact remains that in assessment year 2009-10, the Revenue, in the order passed u/s 143(3), accepted the business loss declared by the assessee, in 2010-11, accepted the order of the CIT(A) on merits where he has given clear finding that the assessee has commenced business through its subsidiary in Mauritius for bidding up of power projects in foreign countries. After these facts, in our opinion, in assessment year 2011-12, the Assessing Officer was not justified in holding that the assessee company did not start any business either during the year or prior to the year under consideration. Whether the advancement of money to the subsidiary can be said to be for the purpose of business? - commercial expediency - Held that - The assessee is in the business of establishing, commissioning, setting up, operating and maintaining power projects. That its subsidiary GVL had also similar objects. The assessee tried to pursue its objects through its subsidiary GVL and submitted a bid for a power project abroad. Therefore the ratio of the above decision of Hon ble Jurisdictional High Court in the case of Modi Entertainment Ltd. would be squarely applicable. In the case of S.A. Builders Ltd. (2006 (12) TMI 82 - SUPREME COURT) held that the expression commercial expediency is one of wide import and includes such business expenditure as a prudent businessman incurs for the purpose of business. After considering the facts of the case, we are of the opinion that the advancing of money to GVL for setting up of the power project was driven by commercial expediency and therefore, was for the purpose of business. - Decided against revenue.

Summary

Issues Involved:
1. Whether the assessee has commenced the business.
2. Whether the advancement of money to the subsidiary can be said to be for the purpose of business.

Detailed Analysis:

1. Whether the assessee has commenced the business:

The Assessing Officer (AO) contended that the assessee had not started any business activities during or prior to the assessment year 2011-12. However, the assessee argued that the business commenced in the financial year 2008-09. The CIT(A) had previously accepted that the business commenced on 23rd July 2008, which was not appealed by the Revenue for the assessment year 2010-11 due to low tax effect and on merits. The Tribunal noted that for the assessment year 2009-10, the AO accepted a business loss, indicating the commencement of business. The Tribunal also referenced decisions from the Hon'ble Jurisdictional High Court, which stated that business activities do not need to be simultaneous and that essential activities signify the commencement of business. Thus, the Tribunal upheld that the business had commenced in the financial year 2008-09.

2. Whether the advancement of money to the subsidiary can be said to be for the purpose of business:

The assessee advanced money to its subsidiary, GVL, for setting up a power project, which was refunded due to the project's failure, resulting in a foreign exchange fluctuation loss. The AO disallowed this loss, arguing it was not for business purposes. However, the Tribunal found that the advancement was driven by commercial expediency, aligning with the business objectives of the assessee. The Tribunal cited the Hon'ble Supreme Court's decision in S.A. Builders Ltd., which held that expenditures for commercial expediency are allowable as business expenses. The Tribunal also referenced the Hon'ble Jurisdictional High Court’s decision in Modi Entertainment Ltd., which supported the idea that advancing money to subsidiaries as part of a corporate strategy is commercially expedient. Consequently, the Tribunal upheld the CIT(A)'s decision that the foreign exchange fluctuation loss was incurred wholly and exclusively for business purposes.

Conclusion:

The Tribunal concluded that the assessee had commenced its business in the financial year 2008-09 and that the advancement of money to the subsidiary was for business purposes. Therefore, the foreign exchange fluctuation loss was allowable as a business expenditure. The appeal by the Revenue was dismissed.