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TMI Blog2019 (1) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... This appeal by the assessee is directed against the order dated 18th March, 2015 of the CIT(A)-14, New Delhi, relating to Assessment Year 2010-11. 2. The facts of the case, in brief, are that the assessee is a company and is engaged in the business of manufacturing and trading of sugar. It filed its return of income on 31st March, 2011 declaring total income of ₹ 3,36,93,430/- and income u/s 115JB at ₹ 4,01,70,500/-. This case was selected for scrutiny by issue of statutory notices. During the course of assessment proceedings, the Assessing Officer observed from the P L Account of the assessee that the assessee company has claimed a sum of ₹ 71,69,290/- as loss on sale of investment. On being asked by the Assessing Officer to explain as to why the loss as claimed on sale of investment be not disallowed being capital in nature and added back to the taxable income, the assessee replied as under:- 1. The assessee company has made investment in shares of two subsidiary companies which are engaged in the business of generation of power in real estate respectively. 2. The company s management decides to involve in these business through SPV (special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erated the same submissions as made before the Assessing Officer. Relying on various decisions, it was argued that the action of the Assessing Officer in treating the loss incurred on sale of shares of subsidiary company as long-term capital loss as against business loss treated by the assessee is unjustified and not as per law. 5. However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer by observing as under:- 6. I have carefully considered the submissions made by the Ld.AR and have gone through the assessment order. It is noticed that the Assessing Officer has made a disallowance of ₹ 71.69.290/- on account of loss on sale of investments for setting off against the business income declared by the appellant. However, capital loss of ₹ 71,69,290/- as per the provisions of Income Tax Act, 1961. Thus, the genuineness and incurring of the loss by the appellant company has not declared by the appellant company. In regard to the same, it is not denied by namely M/s. Cosmos Hydro Power Ltd. and M/s. Cosmos Hospitality and States Pvt. Ltd. had been shown as investment in the balance sheet. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consequently the loss incurred on sale of such an asset. This has also been stated by the Hon ble Supreme Court in the case of CIT vs. Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 wherein it has been held as under: We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. 5.3 Similar view was also expressed in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.vs. CIT 227 ITR 172 whereby it has been held as under: It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. In fact, the material on record discloses that the subsidiary company was in existence from 1994 to 2001. The entire money is lent and spent only towards payment of salary and travelling expenses over a period of four to five years and no deductions were claimed in each year when such payments were made. On the contrary, for the first time the claim was put forth as bad debts. After writing off the same when they could not substantiate the said claim, then as an alternative, a claim was put forth under Section 37 of the Act. Though mere mentioning of a wrong provision would not deprive the assessee of the benefit of deductions or exemptions, in trying to find out the real nature of transaction, intention of the parties at an undisputed point of time, clearly go to show that this expenditure was not incurred wholly and exclusively for the purpose of business of the assessee. The said claim is only made after the claim was not accepted under Section 36(1)(vii) of the Act. If the argument of the assessee is to be accepted, whenever a holding company lends money to a subsidiary company, then the holding company would be entitled to the said benefit. That is not the intent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also accepted the plea of the assessee of revenue loss by holding that the disclosure by itself (as investment) cannot be a ground to regard the nature of loss as capital loss by relying on the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Ltd., 82 ITR 363 and Tuticorin Alkali Chemicals, 227 ITR 172 (SC). However, he sustained the disallowance of loss on the basis that the test of commercial expediency was not satisfied. 8. The ld. counsel for the assessee submitted that the assessee has taken a decision of investment in subsidiary companies only as a measure of commercial expediency to do the business of power generation and hospitality/real estate by way of two special purpose vehicle with the sole object of earning profit, that too in furtherance of objects of company which is related to business operations under separate entities. Referring to the main objects to be pursued by the company on incorporation and the objects ancillary or incidental to the attainment of main objects, the ld. counsel for the assessee drew the attention of the Bench to various clauses of the Memorandum of Association. Referring to the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 9. Referring to the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. Colgate Palmolive India Ltd., ITA No.5485/Mum/2009, order dated 25th October, 2011, he submitted that the Tribunal in the said decision has allowed the loss of ₹ 5.5 crore incurred upon sale of shares of Camelot as business loss. It was held that as long as investment is justified on the grounds of commercial expediency, the loss of sale of such investment is to be considered as business loss. It was further held that the nature of business expediency could vary from case to case, but, what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. He submitted that the above decision of the Tribunal has been upheld by the Hon'ble Bombay High Court reported in 370 ITR 728 and the SLP filed by the Revenue was dismissed by the Hon'ble Supreme Court vide SLP No.25987/2015 dated 21.12.2017. He also relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tests stipulated by the Division Bench. In fact, it meets a higher test. When a holding company invests amounts for the purpose of the business of its subsidiary, it must of necessity be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amounts advanced to it by the holding company would not merely indirectly but directly benefit its holding company. In the case before us, the subsidiary had to be funded to a large extent for otherwise it would not have survived. If it had not survived and had gone into liquidation, the appellant would have suffered directly on account of an erosion of its entire investment in the subsidiary. In this case, the financial assistance was not only prudent but of utmost necessity for without it the subsidiary would have suffered grave financial prejudice. 15. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee's own business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot's only customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interests. When the grant of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business deduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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