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TMI Blog2016 (5) TMI 1530X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax (Appeals) has allowed the claim of the assessee. Diminution of value of investments - Whether assessee is not entitled for claim of diminution in value of investments as Revenue expenditure by debiting to profit and loss account which takes the characteristic of capital in nature? - HELD THAT:- If debts are written off u/s.36(i)(vii) than it should be considered as Business loss. On the other hand, the investment is written off it should be treated as Capital loss. The ld. Commissioner of Income Tax (Appeals) has confused the facts and treated investment as debt in the normal course of business. We are not in a position to appreciate the reasons given by CIT(A) and also the facts brought on record by the lower authorities are not sufficient to adjudicate the disputed issue. Therefore, we set aside the order of Commissioner of Income Tax (Appeals) to the file of Assessing Officer for fresh consideration. Disallowance of administrative and interest expenses - no income has been generated by way of business operations - HELD THAT:- Contention of assessee on the claim of expenditure that the ld. AO has not allowed any claim of expenditure though there was some act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as good business principle. Otherwise the financial result will show distress implication on liquidity. AR submissions cannot be accepted without any bonafide evidence. CIT (Appeals) has restricted to 3% of charging of interest on closing balance, we are of the opinion considering the genuineness of transaction payments and usage of funds, the matter has to be examined on the financial implication of the company. Therefore, we set aside the issue for re-examination to the file of Assessing Officer and the ground of the assessee is allowed for statistical purpose. - I.T.A. Nos. 23 & 24/Mds/2015, I.T.A. Nos. 144, 145, 146 & 147/Mds/2015 - - - Dated:- 20-5-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For the Assessee : Shri. S.T. Prabhu, Director For the Department : Shri. A.V. Sreekanth, IRS, JCIT. ORDER PER G. PAVAN KUMAR, JUDICIAL MEMBER: The appeals filed by the assessee and Revenue are directed against different orders of the Commissioner of Income-tax (Appeals)-I, Chennai for the above assessment years u/s.143(3) r.w.s.147 and 250 of the Income Tax Act, 1961 (herein after referred to as the Act ). Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving interest on the loan given. (e) The assessee company and its subsidiary are public limited companies and therefore, the provisions of section 2(22)(e) are not applicable . The ld. Assessing Officer based on the submissions and facts of the case placed reliance on the orders of High Court including jurisdictional High Court made a exhaustive analysis and treated the transactions as deemed dividend u/s.2(22)(e) and observed at para 3.4.3 of his order as under:- 3.4.3 The submission of the assessee that the payment has been made during the normal course of business of the assessee and therefore, should not be brought within the ambit of provisions of section 2(22)(e) cannot be accepted. The payment has not been made in consideration for any goods supplied or services rendered. The amount given, as admitted by the assessee is refundable and is also carrying interest. Such being the case, it cannot be said that it has been paid as consideration for supply of any goods or services. That being the case, the plea of the assessee that the transaction has happened in .the normal course of business is untenable. 3.4.4 The assessee has also submitted that itself and its sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvances or deposits will be directly benefitting to the holding company. The legislatures have brought in this provision to arrest the indirect ways of benefitting the holding company without declaring dividends in the hands of holding company and without paying dividend tax by such companies. Such transactions were treated to be deemed dividends which were given in the garb of loans and deposits. However, it was clarified by several Courts that these provisions cannot be applied indiscriminately especially when such advances were given out of business contingency. In the instant case, the facts are different. Firstly, the advances I deposit were kept by the subsidiary company with the appellant company as a security since it stood guarantee with its own assets to the bank (ICICI Bank) which has advanced loans to the subsidiary company. Therefore, it is a business requirement. Secondly, the subsidiary company has declared dividends and paid ₹325.97 lakhs to the appellant company during the year. The details of such payments over a period of time are as under: Accounting Year Dividend % Dividend (Rs. Lacs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urity by the appellant company for providing the corporate guarantee and the equitable mortgage of its immovable property, especially after the dilution of its stake in the subsidiary company from 100% to 61.24%. Naturally, when outsiders have also become stakeholders in the subsidiary company, the appellant has every right to protect its interest by seeking such security deposit. Without that corporate guarantee and equitable mortgage, the subsidiary company would not have got bank loan/credit facility. Hence, it was the business requirement which necessitated that the appellant company should give the requisite guarantee against the security deposit which is also interest-bearing with a rate which is 1% higher than the bank rate. Hence, it cannot be treated as deemed dividend given under the garb of loan. Similar is the case with reimbursement of expenses and the advances provided by the subsidiary companies in the regular course of business as explained by the AR as discussed above. Hence, I do not find that the action of the AO is justified and direct him to delete the addition made u/s 2(22)(e). For the same reason, his request for enhancement is also rejected. On appeal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05 in assessee s own case. The assessee also filed written submissions, paper book and Tribunal order for earlier assessment year and alongwith sanction order of bankers and correspondence between both the companies in respect of providing security deposits and offering of collateral securities and pleaded for dismissal of Revenue appeal. 6. We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Departmental Representative contention that the Commissioner of Income Tax (Appeals) has erred in deleting the deeming dividend without considering the facts that the assessee company has share holding and substantial interest in the financial aspects of the company. The only disputed issue that the Commissioner of Income Tax (Appeals) has dealt based on the thorough financial analysis of the earlier years were the assessee is having regular business transactions on commercial expediency and dealt with subsidiary company and the payments, on terms of commercial transactions, The ld. Commissioner of Income Tax (Appeals) relied on the Tribunal decision on assessee s own case for the assessment year 2004-05 in ITA No.1825/Mds/2008, dated 11.09.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en assets are held as investment, question of diminution in value arises only in the case of assets held by an assessee in the form of stock in trade. 10. The grounds raised on sole disputed issue that the Commissioner of Income Tax (Appeals) has directed the Assessing Officer to verify the diminution of value of investments. The assessee company has filed return of income for the assessment year 20072008 on 30.10.2007 with declaring loss of ₹ 1,64,01,645/-. Subsequently was processed u/s.143(1) of the Act and the case was selected for scrutiny and notice u/s.143(2) of the Act was issued. In compliance to notice, the ld. Authorised Representative of assessee appeared and filed details. The Assessing Officer in the assessment proceedings found that assessee has claimed ₹ 2,39,87,314/- as diminution in value of investments made in subsidiary M/s. Accel Systems Group Inc. (USD 50 million to USD 26 million) as the assessee being a investment company claimed loss in diminution of value were operations are with subsidiary and associate companies. The company holds 21,66,000 equity shares of M/s. Accel Systems Group and were reflected in the financial statements under sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under:- 5.2 I have gone through the facts and circumstances of the case. The AO has disallowed an amount of RS.2,39,87,314 under normal computation and computation u/s 115JB holding that the amount is a provision debited to P L under the head 'diminution in the value of investments . Since the provisions are unascertained liabilities they are not allowed to be claimed as expenditure either in normal computation or in the computation u/s 115JB. However, in the instant case, the facts are different. As per balance-sheet, the provisions were shown at Schedule 10 as under: Provisions Sch.10 ₹1,02,310 On the other hand, the amount debited in the P L is as under:- Advances not recoverable written off/ Diminution In value of investments ₹2,39,87,314/- The above details show that the claim made by appellant is not out of provisions but the amount which is actually written off in its P L a/c. As per the decision of the Hon'ble Supreme Court in the case of TRF Limited (323 ITR 397) (SC) w.e.f. 1.4.89 the moment the bad debts are written off in the books of the appellant they should be allowed as such. As per the provisions of s.36(1 )(vii) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Small Industries Development Corporation Ltd vs. CIT 270 ITR 452 and prayed for setting aside the Commissioner of Income Tax (Appeals) order. 13. On the other hand, the ld. Authorised Representative relied n the order of Commissioner of Income Tax (Appeals) and argued that assessee is a investment company and carrying out its operations through its subsidiary and associate companies and claimed the reduction in value of investments as allowable expenditure and prayed for dismissing the Revenue appeal. 14. We heard the rival submissions, perused the material on record and judicial decisions cited. The only substantial ground alleged by the Revenue that the assessee is not entitled for claim of diminution in value of investments as Revenue expenditure by debiting to profit and loss account which takes the characteristic of capital in nature. Further, the ld. Commissioner of Income Tax (Appeals) assumed treating on par with Sundry Debtors and written off as Bad debts in the books of account. The decisions relied are applicable to the bad debts and not for investments. The ld. Authorised Representative supported the orders of Commissioner of Income Tax (Appeals) and drew our at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeared from time to time and filed details. The ld. Assessing Officer found that assessee is in the business of providing authorized services for IT products and also a investment company. During the financial year the assessee has not generated any income from business operations but derived rental income from property ₹ 69,26,658/-. The ld. Assessing Officer has not allowed the claim of expenditure against the rental income as no business operations were carried but computed the rental income and allowed standard deduction u/sec. 24 of the Act and made other addition and determined assessed income of ₹ 1,40,95,061/-. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). 20. In the appellate proceedings, the ld. Authorised Representative has raised five grounds on the issue of duplication of treatment of long term capital gains by Assessing Officer and Municipal taxes payment. The assessee has filed petition u/sec. 154 of the Act and was allowed by the Assessing Officer vide order dated 3rd February, 2012. Hence the assessee has not pressed two grounds. The ld. Commissioner of Income Tax (Appeals) observed on the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven to the subsidiary company of ₹ 46,96,537/- in assessment year 2005-06 was not allowed and know claimed on account of sale of company and prayed for allowing the appeal. 22. On the other hand, the ld. Departmental Representative relied on the order of Commissioner of Income Tax (Appeals) and findings of the Assessing Officer and strongly opposed to the new grounds raised, does not arise out of assessment order and prayed for dismissing the appeal. 23. We heard the rival submissions, perused the material on record. The ld. Authorised Representative contention on the claim of expenditure that the ld. Assessing Officer has not allowed any claim of expenditure though there was some activity in the company and the income being in the nature of rental income, income from capital gains and income from other sources and also raised grounds to allow claim of write off of investments made in the year 2005 as against the sale in current year and also for advances provided to subsidiary company by the assessee in the same year. The arguments of the ld. Authorised Representative are not convincing and further on perusal of assessment records these contentions never raised in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide advance to the subsidiary company for working capital requirements. The subsidiary company failed to take offand not carried out any business operations and the assessee company has claimed written off in the books of account. The ld. Assessing Officer observed at these investments and advances have been given from the 'capital fund of the assessee company. The loss arising from the non-recovery of the same will only result in a capital loss which cannot be allowed while computing the income of the assessee under the head 'Business'. The assessee is engaged in the business of trading in computer components, spares and accessories. The advances given by the assessee and written off cannot be allowed u/s.36(2) of the Act or under section 37 of the Act. As per the provisions of section 36(2), deduction with regard to bad debt would be allowed only if the said sum had boon recognised as income in any of the earlier years or it represented money lent in the ordinary course of banking or money lending business. In the instant case, the advances given are in the nature of a loan given to meet the working capital requirements of the assessee's subsidiary company. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business loss. I do not agree with this contention of the appellant. Even though the appellant is claiming it as an investment company in the statement of facts filed before me, it was mentioned that the appellant is carrying on business of trading in computer components, spares and accessories . For the same year business cannot be Changed. If it is an investment company the profit or loss from its investments should be offered for taxation under capital gain or capital loss. Only if there is any capital loss on transaction or sale of assets, the same can be set off against capital gain but there is no provision for write off of losses from the activity of investment company. Therefore, this possibility is ruled out. As per s.45 transfer of the capital asset is sine qua non for claiming capital gain or loss. Whatever may be nature of business, it is evident that the appellant has not incurred any loss on transaction made by it in the form of transfer or sale of its shares with its sister concern. Therefore, in my considered opinion, loss incurred due to investment in sister concern which went defunct cannot be allowed to be written off. With regard to, advances, if there is a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are provided to subsidiary company for working capital. The assessee being a investment company could not recover the value of investments in subsidiary company as operations are discontinued and values are negative. Further advances are doubtful for recovery and claimed deduction u/s.37 of the Act. The ld. Counsel filed written submissions, supported his arguments with judicial decisions and principles of accounting gave a note of write off in diminution of value of investment at page 4 of paper book and the Accounting standards of ICAI were the loss has to be charged to Profit and Loss account and discussed elaborately on the financial statements. The assessee has claimed write off of advances made to the subsidiary company referred at page 6 of paper book and relied on the decisions of jurisdictional High Court were advances are made in the normal course of business wholly and exclusively within the objects and investments are of commercial expediency and demonstrated before us with summary of Annual Accounts of the subsidiary companies referred at page 42 with statement of income generated by the assessee company in five years and profit on sale of shares and the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions and contents on the findings of the Assessing Officer. The ld. Commissioner of Income Tax (Appeals) considered the submissions and case law at page 6 of his order and the transactions between subsidiary company and assessee company are on commercial expediency and relied on the jurisdictional High Court decision of K. Somasundaram Bros 238 ITR 939 and dealt exhaustively at page 8 and 9 of order with the reasons for loans and advances provided to subsidiary and the assessee company paying interest to one of the subsidiary company which needs a bank guarantee from the assessee company on their advances. The ld. Commissioner of Income Tax (Appeals) considered the business establishment transactions, commercial expediency, Holding and subsidiary company relations directed the Assessing Officer to restrict disallowance at 3% of outstanding balance as on 31.03.2005 and partly allowed the appeal observed at para 5.2.4 of his order as under:- 5.2.4 In view of the above discussion, it is not ruled out that the appellant has borrowed funds bearing interest and has advanced them to its sister concerns which has nothing to do with its own business. However, it is noticed from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallenged. Prime facie the company is a investment company, charging of interest on subsidiary company should be considered as good business principle. Otherwise the financial result will show distress implication on liquidity. The ld. Authorised Representative submissions cannot be accepted without any bonafide evidence. The Commissioner of Income Tax (Appeals) has restricted to 3% of charging of interest on closing balance, we are of the opinion considering the genuineness of transaction payments and usage of funds, the matter has to be examined on the financial implication of the company. Therefore, we set aside the issue for re-examination to the file of Assessing Officer and the ground of the assessee is allowed for statistical purpose. 38. In the result, the appeal of the assessee is allowed for statistical purpose. 39. The Revenue has filed an appeal in ITA No.145/Mds/2015 forassessment year 2005-2006. The Department has challenged the order of CIT(A) on reducing the interest disallowance from 6.28 % to 3% on the outstanding balance of sister concern as on 31.03.2005 and the assessee has not submitted any peak credit details. The Commissioner of Income Tax (Appeals) co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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