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TMI Blog2017 (11) TMI 1864X X X X Extracts X X X X X X X X Extracts X X X X ..... o incurred has been rightly claimed by the assessee company as deductible business loss. No substantial question of law arises. - D.B. Income Tax Appeal No. 291/2017 - - - Dated:- 20-11-2017 - Mr. K.S. Jhaveri And Mr. Vijay Kumar Vyas, JJ. For Appellant(s) : Mr. K.D. Mathur For Respondent(s) : Mr. R.B. Mathur Order 1. By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee reversing the order of CIT(A). 2. Counsel for the appellant has framed the following questions of law:- i) Whether in the facts and in circumstances of the case, the ITAT was justified in law and has not acted perversely in restricting the adjustment on account of interest free loans advanced to Aes to prevailing LIBOR +2% with addressing the evidence and facts brought on record by the TPO. ii) Whether in the facts and in circumstances of the case, the ITAT was justified in law and has not acted perversely in deleting the adjustment of ₹ 42847925/- made by the Assessing Officer on account of adjustment of Corporate Guarantee without appreciating the fact that as per amendment by Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal while considering the issue has observed as under:- The Ground No.1 raised by the assessee in its appeal is as under:- 2. Ground No. II - Non-allowability of deduction of ₹ 41,02,27,250 on account of investment in subsidiary company written off: 2.1 On the facts and in the circumstances of the case and in law, the learned Dispute Resolution Panel-I and Assistant Commissioner of Income tax, Circle 5, Jaipur (hereinafter referred to as DRP and AO respectively) have erred in not allowing write off of the investment in subsidiary company amounting to ₹ 41,02,27,250 without considering the commercial rationale/business expediency of making such investment. 2.2. On the facts and in the circumstances of the case and in law, the learned AO and the learned DRP has erred in not appreciating the fact that, the appellant has incurred actual loss on the investment made in the subsidiary company on account of liquidation of the company and no notional loss has been claimed as a revenue or business loss. 4.2 Brief facts of the case are that assessee company had made investment in its subsidiary companies in terms of share capital. During the year the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up brick and mortar retail stores at various tourist locations Alaska, West Indies and Mexico through its subsidiary. Investment of ₹ 41,02,27,250/- in Indo Mexico was made in trenches beginning from 2005-06 to 2008-09, in order to set up various brick and mortar retail stores at different tourists location in Mexico (a) Further because of various legal and regulatory compliances and considering commercial advantages, VGL decided to set up 100% subsidiary in Mexico through which these stores were established an the whole purpose of making investment in the Indo Mexico was to set up retail stores for furtherance of the business of VGL. (b) But due to well known worldwide recession subsequent to setting up these retail stores, the Indo Mexico started making losses and its net worth got eroded. Consequently, in the year 2008-09, provision was made in the books of VGL against the investment in Indo Mexico amounting ₹ 41,02,27,250/-. Copy of financials of Indo Mexico showing losses during the year is attached herewith as Annexure 1 2. Looking to the said market situation/condition the assessee company decided not to go further in huge losses and decided to exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the fact that such investment is made on the grounds of commercial expediency. Similarly, the head under which dividend income is assesssed to tax the shares are purchased on amount of commercial expediency or not, dividend income, whether the shares are held as investments or as any other assets, is always taxable under the head income from other sources . Relying upon SC decision in the case of Patnaik Co. Ltd. and S.A. Builders and the jurisdictional Tribunal s decision in the case of Gujarat Small Industries Corporation and considering that subsidiary company is engaged in the business of jewellery for the assessee, the Tribunal held that investment in Camelot is justified for pure commercial considerations. Therefore, loss on sale of such shares was admissible as business loss. The AO further noted that the above amount is an investment in shares which is still available with the company. He noted that assessee company has not sold the investment for loss but merely created a diminution reserve of investment as a bad debt u/s 36 is incorrect. The AO observed that the submission of the assessee must be considered in the light of the following facts. (I) The inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould arise in the course of the business of the assessee, and (c) It should become bad in the year of account It is apparent that none of the above conditions are fulfilled in the case of the assessee. Since the amount under consideration is an investment therefore, there was no debt owning to the assessee, the debt has not arisen during the course of the business and it has not become bad during the year under consideration. Further the amount has never inflated the profit of the assessee for any past years. Considering the facts and the judicial decision on similar facts, the decision of the AO is justified and is upheld. The ground is dismissed. Conclusively, the AO disallowed the amount of ₹ 41,02,27,250/-on account of investment written off by the assessee and added the same to the total income of the assessee. 4.3 During the course of hearing, the ld. AR of the assessee submitted that material facts are verifiable from the records that the assessee is engaged in the manufacturing of jewellery and the entire sales are export. The assessee in order to expand its business worldwide started setting up the brick and mortar retail store at various tourist locatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shes exclusively for the assessee company and that it had no other coustomer that the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Come lot 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 there losses incurred by Camelot were essentially relatable to do 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 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lementary that dividend income, whether the shares are held as investments or as any other asset, is always taxable under the head income from other sources . Therefore, nothing really turns on Assessing Officer s emphasis on the fact that the Camelot shares were shown investments in the balance sheet and that dividend income from these shares is taxable as income from other sources. We have also noted as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction. Hon ble Supreme Court s judgment in the case of Patnaik Co( Supra) deals with a situation in which the assessee had subscribed to certain Government security but incurred a loss on sale of that security. The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arise in the course of the business, and the loss claimed by it. A coordinate bench of this Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but investment for obtaining an enduring benefit? 6. The facts necessary for that question are that the assessee is engaged in the business of manufacturing the trading of oral care products. In the course of the assessment proceedings, the Assessing Officer noted that the assessee claimed deduction on account of loss on sale of shares held in Camelot Investment Pvt. Ltd (Camelot , in short) amounting to ₹ 5,50,00,000/-. The assessee had made investment in 100 per cent owned subsidiary Camelot as claimed for purely business reasons. The stand of the assessee that the investment was made because and for the purposes of business, the loss on sale of such investment is required to be treated as business loss. The assessee placed reliance, inter alia, on a judgment of the Hon ble Supreme Court in the case of Patnaik Co. Ltd. v. CIT[1986] 161 ITR 365/27 Taxman 287 and on this court in the case of CIT v. Investa Industrial Corpn. Ltd. [1979] 119 ITR 380. The alternative argument and which was canvassed without prejudice need not detain us. 7. The commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the assessee and engaged in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. The reliance has also been placed in case ITAT Tribunal D Bench Mumbai in ITA No. 2251/Mum/2015 AY 2011-12 vide order dated 22.12.2016 in the case of Raptakos Brett Co Ltd v/s CIT, where the tribunal held as under- 6 We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and the case laws relied upon by both the parties. We find from the record available before us that the assessee had advanced money to subsidiary company in South Africa in order to establish its products in that market. For that purpose the subsidiary was required to incur huge expenses in promoting the products. According to the AR the money was advanced over a period of time amounting to ₹ 74,13,000/- for the incurring expenses for promotion. We further find that the said subsidiary company tried to establish its market in South Africa to sell the product of the assessee but failed and consequently the assessee had to write off the advances given to the said subsidiary company after seven years and the same was written off in the profit and loss account. Now, the question before us is whether the said advance is admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. 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 then sell the company. This explanation is in consonance with the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business losses. In the case of DCIT Vs Gujarat Small ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on the loan was forgone by the assessee-company during the years 1952-53 and 1953-54. Further, even the recovery of the principal amounts itself became doubtful, with the result, in the balance -sheet as on March 31, 1953, the loan was shown as doubtful, and no interest was charged during the subsequent accounting years 1954-55 to 1956-57. Attempts were made to restart the Palanpur co s business by change in management but, despite all efforts, the financial position of the company deteriorated and the company was wound up on March 12, 1963. The assessee-company wrote off in its books during the year ended March 31, 1963, the amount of Rs, 1,86,000, Which was outstanding as a bad debt or irrecoverable loan or business loan and claimed the same as a deduction determining its total profit for the assessment year 1963-64. The ITO held that the amount of ₹ 1,86,000 was a capital loss and could not be allowed either as bad debt or trading loss. On appeal, the AAC confirmed the order of the ITO. On Further appeal, the Tribunal allowed the loss as a trading loss under s. 28(i) of the Act on the grounds that the advances made by the assessee-company to Palanpur Co., were part or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the relevant assessment year. The ld. AR of the assessee also relied on the decision dated 09.03.2011 of ITAT Mumbai D Bench in the case of ACIT vs. M/s. S. S. Kanti Lal Inshwarlal Securities Ltd. in ITA NO. d2641/Mum/2002 for the assessment year 1997-98 wherein the Bench observed as under:- 14. We heard both the parties. As held by the ld. CIT(A), units cannot be considered as shares. The Apex Court in the case of Apollo Tyres Ltd. (255 ITR 273) have held that loss on sale of UTI units is not speculation loss as units are not shares of a company. Hence, the loss arising from sale of Canexpo units cannot be considered as speculation loss under proviso to Section 73. 15. the next question is whether the loss on sale of the Canexpo Units can be considered as a business loss. The ld. CIT(A) has brought out that investment in the canexpo units is closely linked to the assessee being appointed a s broker of M/s . Canbank investment Management services Ltd. and the conclusion that an be drawn is that the assessee had made the investment in anticipation of being appointed as abroker by that institution, from the assessee of being appointed as a broker by that institution, f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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