2016 (12) TMI 1348 - AT - Income Tax

Revision u/s 263 - Assessee had advanced money to subsidiary company in South Africa in order to establish its products in that market - Held that - The money advanced by the assessee to the subsidiary company which was incorporated with sole object of marketing the products of the assessee and any advances given to the said subsidiary were out of business consideration and in order to promote the interest of the assessee and thus were given out of commercial consideration and business interest of the assessee. In our opinion, during the year the writing of such advances owing to non recovery was a admissible deduction and therefore, the said advance was rightly claimed as deduction by the assessee company. Therefore, to invoke the provisions of section 263 by exercising the revisionary power by the Commissioner is not justified and cannot be sustained. Accordingly, we set aside the order of Commissioner and restore that of AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the deduction claimed by the assessee for the write-off of advances to a subsidiary.
2. Validity of the Principal Commissioner of Income Tax (PCIT) invoking revisionary powers under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of the deduction claimed by the assessee for the write-off of advances to a subsidiary:

The assessee filed a return of income declaring a total income of ?89,94,00,245, later revised to ?89,74,89,327. During the assessment, the AO allowed a deduction of ?74,13,000 for advances written off to a subsidiary. The PCIT observed that this allowance was erroneous and prejudicial to the interest of revenue, as the advance was not of a trading nature but a capital item, thus not allowable as a deduction. The assessee argued that the advances were made to promote business in South Africa through its subsidiary, which ultimately failed, justifying the write-off. The Tribunal found merit in the assessee's contention, noting that the advances were given out of commercial expediency to establish products in South Africa. The Tribunal referenced the case of Colgate Palmolive (India) Ltd, where similar advances for business purposes were allowed as deductions. Thus, the Tribunal concluded that the write-off was an admissible deduction, supporting the assessee's claim.

2. Validity of the Principal Commissioner of Income Tax (PCIT) invoking revisionary powers under Section 263 of the Income Tax Act:

The PCIT issued a notice under Section 263, stating that the AO's order was erroneous and prejudicial to the revenue because it allowed the deduction without proper verification. The PCIT rejected the assessee's explanation, holding that the advances were capital in nature and not admissible as deductions under Sections 28, 36(1)(vii), or 37(1). The Tribunal, however, found that the AO had indeed examined the details and allowed the deduction correctly, as the advances were made out of commercial expediency. The Tribunal cited judicial precedents, including the Supreme Court's decision in Patnaik & Co, affirming that investments made for business interests justify the deduction of related losses. Consequently, the Tribunal ruled that the PCIT's invocation of Section 263 was unjustified, as the AO's order was neither erroneous nor prejudicial to the revenue.

Conclusion:

The Tribunal allowed the assessee's appeal, setting aside the PCIT's order and restoring the AO's decision. The Tribunal emphasized that the advances were given out of commercial expediency and thus rightly claimed as deductions, invalidating the PCIT's revisionary action under Section 263.