2020 (9) TMI 970 - HC - Income Tax

Disallowance of business loss written off on account of loss arising out of business investment from WOS in USA - HELD THAT - It is well settled legal proposition that while deciding the question whether a receipt is a capital or income, it is not possible to lay down any single test as infallible or any single criteria as decisive. The question must ultimately depend on fact of particular case and authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision - for determining the question of capital and incomes, trading profit or non trading profit are questions do involve a question of law to be drawn from the facts. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee. WOS suffered losses and therefore the assessee wrote off the assessment as business loss. The investment was made for the purpose of extension of business activity and not with a view to creating capital asset in the form of holding shares. It is also pertinent to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party. In view of preceding analysis, the first substantial question of law is answered in the negative and in favour of the assessee.

Summary

Issues:
1. Determination of whether the amount written off by the appellant towards a subsidiary is a capital loss or a business loss.
2. Assessment of whether the investments made in the subsidiary were for commercial expediency and if the written-off amount represented business loss.
3. Evaluation of whether an additional amount paid as other than common stock in the subsidiary should be allowed as revenue expenses.
4. Consideration of compliance with Accounting Standard 13 for writing off the fall in the value of investment.

Detailed Analysis:

Issue 1:
The core issue in this appeal was the disallowance of business loss written off due to an investment in a wholly-owned subsidiary (WOS) in the USA. The appellant argued that the loss from the WOS investment was a business loss as it was incurred for business purposes. The appellant set up the WOS for marketing and promoting its products in the export market, which was essential for its business operations. The Bombay High Court's decision in a similar case supported the appellant's argument that such losses should be treated as business losses.

Issue 2:
The appellant contended that the investments in the WOS were made for commercial expediency to enhance its business activities. The appellant highlighted that the WOS operations were crucial for marketing and sales activities in the global market. The Reserve Bank of India had permitted the closure of the WOS and the write-off of investments, indicating the business nature of the expenses incurred. Legal precedents were cited to support the claim that such expenses should be considered allowable business expenditures.

Issue 3:
Regarding the additional amount paid as non-common stock in the subsidiary, the appellant argued that it should be considered as allowable expenditure. The appellant emphasized that the investment was primarily for operational expenses related to the business activities of the WOS. The appellant's compliance with RBI regulations and the purpose of the investment were key points in asserting the legitimacy of claiming this amount as revenue expenses.

Issue 4:
The appellant defended the write-off of the fall in the value of the investment in compliance with Accounting Standard 13. The appellant clarified that the investment was not intended to create a capital asset but was made to extend business activities. The Tribunal's decision to disallow the claim as a business loss was challenged based on the absence of enduring benefits or transfer of capital assets.

In conclusion, the High Court ruled in favor of the appellant, stating that the loss from the WOS investment should be treated as a business loss, following the precedent set by the Bombay High Court. The Court found that the investment was made for business purposes and not to create a capital asset, leading to the allowance of the claimed business loss. The Tribunal's decision was quashed, and the appeal was allowed in favor of the appellant.