2014 (5) TMI 805 - AT - Income Tax

Deletion of advances to subsidiary company Allowability as bad debt Held that - M/s. AIR Engineering Co. is a 100% subsidiary of the assessee - a holding company has a deep interest in its subsidiary therefore if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, money has been advanced to sister concern for commercial expediency - The AO has not doubted the genuineness of the loss but has simply disallowed holding that it is not an allowable revenue expenditure as well as bad debt Relying upon Turner Morrison And Co. Ltd. Versus Commissioner Of Income-Tax 2000 (3) TMI 34 - CALCUTTA High Court - claim of advance given on interest on being written off has been allowed as a bad debt u/s. 36 of the Act - the loss of advance by the assessee company to its 100% subsidiary company is to be allowed as a business loss there was no error or infirmity in the order of the CIT(A) Decided against Revenue. Deletion of interest Held that - The AO has not demonstrated that the assessee has advanced money out of its borrowed capital - the assessee was having its own capital with Reserves and Surplus aggregating to Rs. 656.42 lakhs - The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - the assessee was charging interest on advance to AIR Engineering Co. in past year which was assessed as business income in the hands of the assessee which has been brought to our notice that similar additions were deleted by the CIT(A) in A.Y. 2009-10 and the Revenue has accepted the order of the CIT(A) - the advances are coming from earlier years revenue could not show sum advance which was given fresh during the year under consideration nor it has been mentioned in the assessment order there was no reason to interfere with the findings of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of addition of Rs. 59.09 lakhs as bad debt for advances to subsidiary company.
2. Deletion of addition on account of interest of Rs. 49.69 lakhs.

Analysis:

Issue 1: Deletion of Bad Debt Addition
The Revenue appealed against the deletion of the addition of Rs. 59.09 lakhs as bad debt for advances made to its subsidiary company. The Assessing Officer (AO) disallowed the claim of write-off, stating it did not fulfill the conditions under the Income Tax Act. However, before the Commissioner of Income Tax Appeals (CIT(A)), it was argued that the advances were in the nature of financial assistance and were entirely in the normal course of business. The CIT(A) referred to relevant case laws and allowed the claim, stating that the loss of advance to the subsidiary should be treated as a business loss. The Tribunal upheld the CIT(A)'s decision, emphasizing the commercial expediency of the advances and the interest charged on them in previous years.

Issue 2: Deletion of Interest Addition
The second grievance related to the deletion of the addition of Rs. 49.69 lakhs on account of interest. The AO disallowed the interest paid on certain advances, claiming they were not utilized for the business and hence not allowable as a business expenditure. The CIT(A) disagreed, citing the Supreme Court's decision and the company's financial position to support that the advances were indeed for business purposes. The Tribunal concurred, noting the absence of evidence showing the advances were not from the company's own capital and highlighting the interest charged on similar advances in past years. The Tribunal found no reason to interfere with the CIT(A)'s decision, ultimately dismissing the Revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decisions in both issues, dismissing the Revenue's appeal in its entirety.