2023 (2) TMI 117 - AT - Income Tax

Bad Debts / loss u/s. 36(1)(vii) - business advances given to subsidiary company which has become irrecoverable - AO held that the above amount written off is not in the revenue field and was not a trade advance - as argued amount was advanced by the assessee company to its subsidiary, which is in a similar line of business and therefore, such advance was on account of purely commercial considerations and hence allowable as business loss - HELD THAT - Assessee company was seeking to extend into line of edible oil business like groundnut seeds, mustard etc for exporting purposes using the same cold press technology which was being currently used by the assessee company for non-edible oils. A perusal of the terms memorandum of understanding of the assessee company and its subsidiary shows that the assessee and its subsidiary were primarily engaged in the similar line of business and that the purpose of advancing such loan was further expansion/diversification into similar/associate line using the cold press technology . From the facts it is evident that the purpose of assessee to advance the loan to its subsidiary were two fold, firstly, to extend into a similar line of business and secondly to insulate business of the assessee from the vagaries of its existing business owing to dependency primarily on one client based out of Germany. Therefore, in the instant facts we are of the considered view that the loss on account of non-payment of advance of subsidiary was a business loss in the assessee s line of business and the same is allowable as a business reduction to the assessee. Thus we are of the considered view that the above amount is allowable as a business loss in the hands of the assessee. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in upholding the disallowance of business loss of Rs. 2,88,52,100 claimed by the assessee as irrecoverable business advances given to a subsidiary company.
2. Whether such loss is allowable as business loss under Section 28 or 37(1) of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance of Business Loss of Rs. 2,88,52,100
The assessee, engaged in the business of non-edible castor oil, set up a wholly-owned subsidiary to produce edible oils using a specialized "cold press technology". The subsidiary, however, failed to commence business, and the advances given (Rs. 2,88,52,100) became irrecoverable. The assessee wrote off this amount as bad debts in the return of income for the assessment year 2011-12.

During assessment, the Assessing Officer (AO) disallowed the claim on the grounds that the conditions under Section 36(1)(vii) for qualifying as bad debts were not met. The AO argued that the advances were capital in nature and not trade advances, thus not allowable as bad debts. The AO relied on the case of DCM Ltd vs. DCIT, asserting that the assessee was not in the business of advancing loans, and hence the loss was a capital loss.

Upon appeal, the CIT(A) upheld the AO's decision, stating that the assessee failed to establish the commercial expediency of the loan and did not demonstrate any business transactions with the subsidiary. The CIT(A) also referenced decisions from the Hyderabad ITAT and other courts to support the disallowance, emphasizing that the assessee was not engaged in money lending business.

Issue 2: Allowability of Loss under Section 28 or 37(1)
The assessee contended that the advances were made for business expansion and diversification into a similar line of business, thus allowable as business loss. The assessee's memorandum of association supported this claim, listing objectives that included lending money for business purposes and financing subsidiaries.

The tribunal noted that the subsidiary was set up to mitigate market risks and diversify into edible oils using the same technology. The tribunal found that the advances were for commercial reasons, aimed at business expansion and risk insulation. The tribunal cited judicial precedents where losses from non-repayment of loans for business expansion were allowed as business losses. Notable cases included Vaibhav Global Ltd, Vassanji Sons & Co. (P.) Ltd., Spencers and Co. Ltd. (No.1), Gulf Oil Corpn. Ltd., W.S. Industries (India) Ltd., and Jackie Shroff, which supported the assessee's claim.

Conclusion:
The tribunal concluded that the loss on account of non-payment of advances to the subsidiary was indeed a business loss and allowable as a business deduction. The appeal of the assessee was allowed, and the order pronounced in the open court on 31-01-2023.