2019 (6) TMI 827 - AT - Income Tax

Addition on account of advance to subsidiary written off - Allowable business loss - claim disallowed by the AO on the ground that the same is capital in nature and is not allowable u/s 37(1) - HELD THAT - Assessee has a subsidiary in the name of PINC Mauritius to whom the assessee provided unsecured interest free advances for incurring necessary expenses such as incorporation expenses, statutory payments and annual maintenance expenses. The business of the subsidiary company becomes unviable due to incurring of huge losses over the years and therefore company was wound up resulting into loss advanced by the assessee as interest free unsecured advances to the said subsidiary. In our opinion the said advance was given by the assessee out of commercial consideration and expediency and therefore we are in agreement with the conclusion drawn by the Ld. CIT(A) that the said loss has to be allowed as business loss. As decided in CIT vs. Amalgamation (P) Ltd. 1997 (4) TMI 8 - SUPREME COURT loss incurred by the assessee on account of honouring the guarantee given to the bank on behalf of subsidiary is a business loss and therefore allowable. Also see VASSANJI SONS CO. P. LTD. VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY CITY I 1977 (11) TMI 7 - BOMBAY HIGH COURT wherein held that debt which became irrecoverable which was advanced by the assessee to the subsidiary company has to be treated as directly stringing from its business activity and therefore loss of debt amount was deductable as business loss. - Decided in favour of assessee.

Summary

Issues:
- Deletion of addition of ?72,88,510/- on account of advance to subsidiary written off disallowed by AO as capital in nature under section 37(1) of the Act.

Analysis:
The Revenue appealed against the Commissioner of Income Tax (Appeals) order concerning the deletion of the addition of ?72,88,510/- on account of advance to subsidiary written off. The AO disallowed the amount as capital in nature under section 37(1) of the Act. The assessee explained that the loss comprised of capital loss on winding up of subsidiary and advances to subsidiary written off, as the subsidiary could not repay the advances due to incurring huge losses. The AO added the amount to the income of the assessee. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee based on a previous order in the assessee's own case for A.Y. 2012-13.

During the appeal, the Ld. D.R. argued for restoring the issue to the file of the AO, citing a similar case in AY 2012-13. Conversely, the Ld. A.R. highlighted that the subsidiary was wound up after being unable to recover from losses, justifying the write-off. The Tribunal noted that the advance was given for commercial expediency, agreeing with the Ld. CIT(A) that the loss should be allowed as a business loss. The Tribunal referenced the decision in CIT vs. Amalgamation (P) Ltd. where the Supreme Court allowed a similar loss as a business loss. Additionally, the Tribunal cited Vassanji Sons & Co. (P) Ltd. vs. CIT, where the Bombay High Court treated a loss from a subsidiary going into liquidation as a business loss.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s order, dismissing the Revenue's appeal based on the commercial considerations and legal precedents supporting the treatment of the loss as a business loss.

Order pronounced on 05.02.2019.