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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 ..... ating the fact that as per amendment by Finance Act 2012, insertion of explanation (i)(c) to section 92B, clarifies that corporate guarantee comes within the scope and ambit of international transaction. iii) Whether in the facts and in circumstances of the case, the ITAT was justified in law and has not acted perversely in allowing the write off of loss of Rs. 410227250/- on account of investment made in equity shares of one of its subsidiary Indo Medico Co. S. De. R.L. De. V.V.s. Mexico without appreciating the fact that the amount is not an expense, loan or advance of any kind that is required to be debited from the profit and loss statement of the assessee and the amount even when it was an investment was never debited from the P & L statement of the company as required by accounting principles. Whether investment is not in the nature of a capital loss. iv) Whether in the facts and in circumstances of case, the ITAT was justified in law in allowing the write off of investment of Rs. 410227250/- for the purpose of computing "book profit" u/s 115JB, the book profit of the assessee is to be increased by the amount or amounts set aside to provisions made for meeting liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company has written off investment in equity shares of one of its subsidiary Indo Medico Co. S. De. R. L. De. C V., Mexico amounting to Rs. 41,02,27,250/-. The AO observed that the assessee had stated in its balance sheet that " An equivalent amount of provision for permanent diminution in such investment made in earlier years have been written back "The AO further noted that the assessee company had reduced its profit from business and profession by the above said amount of its investment written off by it. The AO observed that the above amount is not an expense, loan or advance of any kind which is required to be debited and loss account of the assessee. The AO observed that the above amount even when it was an investment was never debited from the profit and loss account of the company as required by the accounting principles. The AO vide entry sheet dated 22.02.2016 show caused the assessee requiring the assessee to complete explanation of investments or bad debts written off along with proof of being income in previous year. The AO vide entry sheet dated 25.02.2016 asked the assessee to provide proof and justification of investment and bad debts written off. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of selling its product through retail stores. The various stores in Alaska, West Indies and Mexico were closed down. The concern M/s. Mexico was taken under liquidation and formally liquidated by appropriate authority on 12.02.2011. Liquidation document duly notorized by competent authority is attached herewith as Annexure 2. Accordingly, the assessee company during the year has written off its investment in equity shares of subsidiary M/s. Indo Mexico amounting to Rs. 41,02,27,250/- and equivalent amount of provision of permanent diminution in such investment made in earlier years out of its income have been written back. Copy of the written back transaction entry passed in books of assessee company is enclosed. ' 3. From the above submission, it is apparently verifiable that the investment in Indo-Mexico was made for furtherance of its business operations/business presence in the overseas market though its subsidiaries. The decision to make investment in Indo Mexico was not for the purpose of earning dividend or capital gain but was to expand the VGL business activity under strategic planning to establish brick and mortar retail stores at various exotic tourists destinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a revenue expenses as required by the provisions of Section 36(1)(vii) which is quoted below:- "36. (1) the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- .....(vi) subject to the provisions of Sub-section (2) the amount of [ any bad debit or part there of which is written off as irrecoverable in the accounts of the assessee for the previous year]: The AO thus observed that by definition, the bad debt is made as a revenue expenses and is in the nature of a trade debt. Investment loss is not a revenue expenses of any kind. According to the AO, there is absolutely no case for any possibility of the above amount being considered a bad debt u/s 36 of the Act and the same is squarely required to be disallowed. Hence, the AO disallowed the amount and made an addition of Rs. 41,02,27,250/- to the income of the assessee. Against the appeal of the assessee, the Hon'ble DRP has also confirmed the action of the AO by observing as under:- "The Panel has carefully considered the facts of the case and the submission of the assessee. The claim of the assessee is that that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming its 100% subsidiaries. It is submitted by the ld. AR that looking to various legal and regulatory compliance of business investments in the said countries, it was advantageous to establish a 100% subsidiary company to promote its business by increasing the export sales. The assessee company made investment in its 100% subsidiary company during the financial years 2005-06 to 2006-07 but after setting up of these stores the world market came in the well-known recession especially in the jewellery market and the said stores started making huge losses and consequently in the year 2008-09, a provision was made in the books of assessee VGL against the investment in Indo-Mexico amounting to Rs. 41,02,27,250. (AO order pg 34(iv)) & pg 29) The investment and the provision made are duly declared in the balance sheet of the assessee company. Later on 100% subsidiary concern M/s Indo Mexico was taken under liquidation and formally liquidated in the FY 2011-12. Accordingly, the assessee company during the year under appeal written of its investment in equity shares of 100% subsidiary M/s Indo Mexico amounting Rs. 41,02,27,250/- consequently and equivalent amount of provision of permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 sel the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for 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 liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is that there must be an underlying motive to serve business interests of the assesssee in making such investment. Let us now ton 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the assessee, Shares purchased of Camelot were also sold by the assessee to one Ramesh Sukharam Vaidya for a consideration of Rs. 45,00,000. The Assessing Officer held that the sum of Rs. 5,50,00,000 which was invested by the assessee in the equity of Camelot on March 17, 2003, and which have been used to repay the loan to the assessee-company, amounting to Rs. 5.50 crores, before March 1, 2003, would demonstrate that the purpose of investment was to give a long-term enduring benefit to the assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long term investment. This conclusion of the Assessing Officer was challenged in the appeal before the first appellate authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the assessee. Since the assessee was relying on Camelot for manufacturing of tooth brushes to be traded by the assessee, the investment is nothing but a measure of commercial expediency to further business objectives and primarily related to the business operations of the assessee. At no point of time the investment in Camelot was made wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts, hereinabove, it is apparent that the advances were given by the assessee to its subsidiary out of commercial expediency as the advance was given to establish its products in South Africa through its subsidiary company which was incorporated only with the said objective. The desired results could not be achieved and the subsidiary company was not in a position to repay the advances as whole capital was eroded and depleted. We therefore find merit in contentions of the Id. AR that the advance was given out of commercial expediency and should be allowed as deduction and accordingly, the assessee had rightly claimed the write off of said advances. In our opinion the assessment order as framed by the AO was neither erroneous as the write off of an advance given out of business expediency and exigency was neither an allowable deduction nor any prejudice was caused to the revenue. The case of the assessee is further supported by the decision of the Co-ordinate Bench of the Tribunal rendered in the case of Colgate Palmolive (India) Ltd (Supra) in which it has been held that where the subsidiary company under the name and style of Camelot was set up to manufacture toothbrushes exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as 'investment' per so does not, and cannot, negate the fact that the such investments are made on the grounds of commercial expediency. Similarly, the head under which dividend income is assessed to tax does not also affect determination of question whether the shares are purchased on account of commercial expediency or not. It is only elementary 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 as investments in the balance sheet and that dividend income from these shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in which "from the facts on record, it is obvious that the Girnar Scooter Ltd. Was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting" and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT (A) and decline to interfere in the matter." 7. From the facts as discussed hereinabove and the ratio laid down by the Co- ordinate Bench of the Tribunal, we find that the money advanced by the assessee to the subsidiary company which was incorporated with sole object of marketing the products of the assessee and any advances given to the said subsidiary were out of business consideration and in order to promote the interest of the assessee and thus were given out of commercial consideration and business interest of the assessee. In our opinion, during in the year the writing of such advances owing to non recovery was a admissible deduction and therefore, the said advance was rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy of Palanpur Co., and taking over of the same by another concern did not bring about a change in the real character of the loan which since its inception was a loan incidental to the carrying on of the business and that the writing off of the loan by the assessee-company was neither premature nor belated. On a reference. Held, (i) that even where there was no contractual obligation, it was the usual practice obtaining in the country for the managing agents to make advances to the managed companies, and it was by way of following this general practice that the assessee-company made advances to Palanpur Co. Therefore, having regard to the conduct of the assessee in commencing its advances from January, 1948, to Palanpur Co. and having regard to the general practice obtaining in the country, the advances that were made by the assessee-company to Palanpur Co. were part of and were incidental to the carrying on of its business by the assessee-company as managing agents. (ii) The absence of security would not make any difference to the assessee's claim, for it was by way of commercial relationship that subsisted between the assessee-company on the one hand and the managed company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case the assessee, an automobile dealer, purchased Govt. Securities for obtaining a preferential treatment from the Govt.. The Apex Court held that this involvement was out of commercial expediency for betterment of business and hence the loss arising from the sale of the same would constitute a business loss. Again the Apex Court in the case of Srivenkata Sathyanaayana Rice Mill Contractors Co. (223 ITR 101) held that contribution made to District Welfare Fund, in the hope of getting a licence or permit is an expenditure incurred for the purpose of business out of commercial expediency. Applying the same yardsticks, the investment made by the assessee can be classified as an investment made out commercial expediency for betterment of his business. Hence, as per the ratio of the Apex Court (supra), the loss arising from sale of the same is to be allowed as a business loss. It is immaterial whether the assessee classified the same as investment. The reason for this investment is to gain the goodwill of the institution therefore, commercial expediency required this investment which was made with anticipation that the assessee may be appointed as a broker to that institution. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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