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TMI Blog2019 (11) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1 lakh share warrants into equity shares by making a payment of Rs. 57,60,000/- being 90% of the value of share warrants and adjusting an amount of Rs. 6,40,000/- out of Rs. 48 lakhs paid at the time of making application for 750000 share warrants. The balance amount of Rs. 41,60,000/- was outstanding as on 31.03.2006 representing application money of 10% value of balance 650000 convertible warrants. As per the terms and conditions of the preferential issue of optional convertible warrants, the assessee was required to make payment for balance amount on or before 15th July, 2007 as per SEBI guidelines. Since the assessee company failed to remit the balance outstanding amount of allotment money for which the said listed company forfeited the application money amounting to Rs. 41,60,000/-, the assessee claimed the same as a business loss. The Assessing Officer, in the order passed u/s 143(3) on 25th January, 2010, disallowed the said loss debited to the Profit & Loss Account and added to the total income of the assessee. While doing so, the Assessing Officer relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Mrs. Grace Collis (2001) 248 ITR 323, the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the Hon'ble High Court held it to be an allowable business loss. However, in the instant case, the convertible debentures were agreed to be purchased at a price of Rs. 64 per share. The assessee also exercised the option for conversion of 1 lakh convertible debentures on 22nd March, 2006 when the price of each share was Rs. 65.85. He noted that at the time the decision was taken to forego the amount invested, the share price was more than Rs. 60/-. Since the investment was made with a view to earn profit it would have been commercially expedient to utilize the option to renounce the share rather than acquiring the said shares which would have resulted in loss of Rs. 5 lakhs approximately rather than Rs. 41.60 lakh which the assessee incurred in the current year. The Assessing Officer further noted that the decision to invest in the shares of M/s Surya Roshni Ltd., was not a normal business transaction. The assessee was the promoter company of M/s Surya Roshni Ltd. and the impugned transactions showed that they were set up to avoid tax liability. He, therefore, was of the view that the corporate veil of the company can be lifted to examine the real character of transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment in the shares of Surya Roshni Ltd., was out of own funds. This, according to her, lends credence to the fact that the assessee intended to hold the shares as a capital asset/investment. Relying on various decisions, she held that a right to invest in preference share is a capital asset. So far as the decision of the Hon'ble Bombay High Court in the case of Tainwala Trading & Investment Company Ltd. (supra) is concerned, she held that the same cannot be applied to the facts of the present case since, according to her, facts of that case was distinguishable from the facts of the present case. Further, there has been a deviation of Accounting Standard-13 since the shares have been forfeited in advance of the lock in period and the assessee had utilized its own funds to make investment in the equity in the company and the decision to forfeit the shares has not been intended for commercial consideration. She accordingly upheld the action of the Assessing Officer in disallowing the claim of expenditure of Rs. 41,61,000/- on account of forfeiture of shares as a business expenditure. 8. Aggrieved with such order of the CIT(A) the assessee is in appeal by raising the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on regarding the entries in the books of account. Referring to a series of decisions, he submitted that bona fide of the decision taken by the assessee cannot be questioned by the Revenue authorities and the Assessing Officer cannot sit on the arm chair of the assessee to decide how the assessee should do its business. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of Tanvi Financial Services Private Limited vs. ITO, vide ITA No.893/Hyd/2017, order dated 13th April, 2018, he drew the attention of the Bench to para 10 of the order which reads as under:- "10. We find that there is no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of the shares. The distinguishing factor from the case of BPL Sanyo Finance Ltd (cited Supra) and the assessee before us is that BPL Sanyo Finance Ltd was an investor while the assessee before us is a trader in shares and not an investor and was also justified in not making the payment of the balance of the share application money. If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." 13. He accordingly submitted that the order of the CIT(A) being not in accordance with the law should be set aside and the loss claimed by the assessee should be allowed as normal business loss. 14. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that the Assessing Officer has followed the direction of the Tribunal and has distinguished the decision in the case of Tainwala Trading & Investment Company Ltd. (supra). So far as the CBDT Circular No.6/2016 relied on by the ld. counsel for the assessee, she submitted that the said Circular is prospective. She accordingly submitted that since the ld.CIT(A) has passed a very speaking order on this issue, therefore, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the original proceedings while setting aside the issue to the file of the Assessing Officer. There is no finding by the Assessing Officer to the direction by the Tribunal that the lower authorities have not adverted to the crucial fact i.e., assessee's investment in Surya Roshni Ltd., a group company by way of subscription to the convertible debentures being held as stock-in-trade not only in this year, but, in earlier year also. Once the shares are held as stock-in-trade as argued before the Tribunal on the earlier occasion for which the Tribunal had restored the issue to the file of the Assessing Officer for verification of this crucial fact and since there is no material to controvert the above submission of the assessee before the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal. 17. We find the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that 'where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such tran sactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary, 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 (Appeals) and another (supra). 16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escapable 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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