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TMI Blog2023 (4) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... s in a normal course of the business, and thus, any loss on sale of said investment should be treated as business loss but not capital loss and this view is supported by the decision of Electronic Corporation of Tamil Nadu Ltd.[ 2018 (12) TMI 47 - MADRAS HIGH COURT] where it has been clearly held that where Revenue authorities held that claim of loss accruing or assigning as a result on sale of shares was a capital loss not eligible for deduction in computation of business income Amount advanced by the assessee to various industries were towards working capital and real character of transaction was those akin to loan and not equity investment, impugned order deserved to be set aside. In this case, as held by us, it is not a case of lack of enquiry, but it can be at best considered as inadequate enquiry and for this purpose, the powers u/s.263 cannot be exercised. Therefore, assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and thus, we quashed the order passed by the PCIT u/s.263 - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order and any order passed in violation of the principles of natural justice is nullity in law. 8. The Appellant craves leave to file additional grounds/arguments at the time of hearing. 3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of high grade industrial chemicals. The assessee had filed its return of income for the AY 2017-18 on 31.10.2017 declaring a net loss of Rs.72,46,32,821/-. The case was selected for scrutiny and the assessment has been completed u/s.143(3) of the Income Tax Act, 1961 on 28.12.2019 and assessed total income of Rs.NIL by making additions towards disallowance of advances written off and capital loss. 4. The case has been subsequently taken up for revision proceedings and accordingly, show cause notice u/s.263 of the Act, dated 12.03.2022 was issued and served on the assessee. In the said show cause notice, the PCIT observed that on perusal of annual accounts for FY 2016-17 relevant to AY 2017-18, it is seen that a sum of Rs.24.32 Crs. was debited to profit and loss account under the head loss on sale of investments. It was further observed that Note No.33 of Notes annexed to and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng relevant submissions of the assessee and also taken note of various facts opined that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, because, the AO has failed to make a complete verification with respect to loss on investment debited to P & L A/c in right perspective of law, although, the said loss is in the nature of capital loss, which cannot be allowed as deduction while computing profits and gains from business or profession. Therefore, set aside the assessment order u/s.263 of the Act, with a direction to the AO to examine the issue and to pass a fresh order after granting opportunity to the assessee. The relevant findings of the PCIT are as under: 6. The submissions as above are found to be at variance with the scope of Sec. 263 after the Explanation 2(a) was introduced by the Finance Act 2015. W.e.f. 01.06.2015. The relevant portion is reproduced below: " For the purposes of this section, it is hereby ordered that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of revenue, if, in the opinion of the Principal Chief Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Apex Court in the case of Kedarnath Jute Mfg. Co. LTd Vs. CIT (1971) 82 ITR 36 (SC), relied upon by the assessee, is relevant. It supports the conclusion that just because such entries were made as per some accounting standards, in this case AS-13 relating to 'disposal of investment', the implication under the IT. Act was not to be concluded from such entries. The notion of 'heads of income' into which an assessee's financial activities need to be slotted is specific to the IT. Act, 1961. Expenditure is allowable u/s 37, if it is a revenue expense for business purpose. 6.4 The assessee has relied on Accounting Standard 13 (AS-13) (Accounting for Investments) and referred to Para 21 & 22 of the same. The same is reproduced below: ".... ...Disposal of Investments 21. On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognized in the profit and loss statement. 22. When disposing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Colgate Palmolive or are distinguishable in facts. 6.8 The assessee has mentioned that 84% of its domestic sales was to ACIPL. Out of the total turnover of Rs.80.64 Cr., for F.Y. 2016-17, the domestic sales are only Rs.15.42 Cr. i.e. only 19%. Its main export sales is stated to have been done with Japan. By the assessee's logic, as discussed supra, if it had done investment in the shares of customer companies in Japan, and later sold such shares for a gain, the same would have been considered by it as a business profit. Such a logic is unsustainable, since investments in shares of customer companies would still retain the character of capital asset. 6.9 It is pertinent to mention that the Expenditure that acquires a capital asset is a capital expenditure. A capital asset is one that is used in or for the purposes of the business and not meant for sale in the ordinary course of business of the enterprise. Further, when an expenditure is made with a view to bringing into existence an asset or advantage for the enduring benefit of trade, it is a capital expenditure in the absence of special circumstances leading to the opposite conclusion. An asset or advantage of en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce u/s.142(1) of the Act, on various occasions, for which, the assessee has filed his reply and explained how loss incurred on sale of investment is a Revenue loss. The Ld. Counsel for the assessee referring to Memorandum and Articles of Association of the assessee submitted that one of the main objects of the assessee company is lend and advance money to its holding company and subsidiary company, group companies, associate and sister companies. Further, in line with its main object, it has purchased shares of group companies in order to augment its business. Since, investment made in group companies does not yield required result, the assessee decided to sell its investment which resulted in loss and said loss is in the nature of business loss. In this regard, he relied upon the decision of the Hon'ble Madras High Court in the case of Electronic Corporation of Tamil Nadu Ltd. v. DCIT reported in [2019] 417 ITR 283 (Madras). The assessee had also relied upon the decision of the Hon'ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd. reported in [2015] 370 ITR 728 (Bom.). 8. The Ld. DR, on the other hand, supporting the order of the Ld. CIT(A) submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of law, which resulted in erroneous order passed by the AO which caused prejudice to the interest of the Revenue. 10. In this legal and factual back ground, if you examine the facts of the present case, we find that the assessment order passed by the Assessing Officer u/s.143(3) of the Act, is neither erroneous nor prejudicial to the interest of the Revenue, for a simple reason that the issue questioned by the PCIT in the show cause notice dated 12.03.2022 has been thoroughly examined by the AO in assessment proceedings, which is evident from the fact that AO had issued various notices u/s.143(2) of the Act, on 19.08.2018 and 26.10.2018, for which, the assessee has submitted all details including financial statement for relevant AY, computation of income, Form 3CD, etc. The AO had also issued notice u/s.142(1) of the Act, on various dates like 20.05.2019, 31.05.2019, 23.09.2019, 09.10.2019, for which, the assessee has filed reply on 17.12.2017 and 24.12.2022 and explained how loss incurred on sale of investment with group companies is allowable as business loss. The assessee has filed a detailed reply along with certain judicial precedents, including the decision of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... courts and as per which, each and every loss of Revenue in consequence of erroneous order is considered to be prejudicial to the interest of the Revenue. In other words, on account of erroneous order passed by the AO, if Revenue lost rightful taxes payable to the government, then, it can be said that prejudice is caused to the Revenue. In such circumstances, the powers conferred u/s.263 of the Act, can be invoked. In this case, as we have already held that the assessment order passed by the AO cannot be termed as erroneous in so far as it is prejudicial to the interest of the Revenue for the reasons given in the preceding paragraphs. 12. Be that as it may. Let us examine whether assessment order passed by the AO is prejudicial to the interest of the Revenue. According to the PCIT, the Revenue loses lawful taxes payable to the government on account of wrong interpretation or application of facts in right perspective of law. The PCIT had given their own reasons to come to the conclusion that the order passed by the AO is prejudicial to the interest of the Revenue on account of allowing loss on sale of investment with group companies. We find that the assessee has claimed loss on in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no dispute with regard to the fact that one of the objectives of the assessee's company is to lend and advance money to its subsidiary, group and associate and sister concerns and in line with its objects, the assessee has made investment in the shares of group companies to augment its business. Therefore, we are of the considered view that investment made by the assessee in the group companies is in the nature of loans and advances, although, the said investment has been classified as capital, but the real character of the transaction was those akin to loans in a normal course of the business, and thus, any loss on sale of said investment should be treated as business loss but not capital loss and this view is supported by the decision of the Hon'ble Madras High Court in the case of Electronic Corporation of Tamil Nadu Ltd. v. DCIT (supra) where it has been clearly held that where Revenue authorities held that claim of loss accruing or assigning as a result on sale of shares was a capital loss not eligible for deduction in computation of business income. In view of the above facts that amount advanced by the assessee to various industries were towards working capital an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the Business of the Assessee. Necessary approval for promoting and investing in a wholly owned subsidiary company in Dubai, UAE was obtained from RBI vide their letter dated 5.3.1997 (page 13 of paper Book). Later on due to statutory requirement of UAE, the investment of the Appellant in the UAE subsidiary was routed through wholly owned subsidiary in Mauritius. This restructuring had the approval of RBI vide their letter dated 25.3.1998 (Page 20 of the paper Book). The Company in Mauritius had only investment in the Dubai Company as its asset. Subsequently, when the Dubai entity was not able to obtain Natural gas, required for the manufacture of Ammonia and urea, the Dubai Company had no other alternative but to wind up its operation. The Appellant had provided for the entire investment in Dubai through the Investment in Mauritius in the Assessment years 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhs and Rs.13840.21 lakhs respectively and the same was disallowed in computing the taxable income for the Assessment Years 2008-09 and AY 2009-10. The Memo of computation of income was submitted before the Assessing officer. As the company at Dubai was wound up, during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure. The above said disallowance was properly claimed under MAT computation DUE not considered in regular computation hence filed revised return to consider the same. 11. Thus, the entire background of investment in the Subsidiary in Dubai through the pass through subsidiary in Mauritius as well as the reason for writing off was fully explained in the reply dated 27.11.2019. The assessee had also explained its case with help of decision of the Delhi tribunal where it was held that loss on account of divestment of investment made in subsidiary for the purpose of business is allowable as a business loss. The Assessing Officer after considering relevant submissions, had completed assessment and accepted write off of loss on account of investment in subsidiary. 12. Further, the Chennai tribunal, in Appellant's own case for AY 2000-01, in its order dated 20.10.2004 in ITA No.2252/Mds/2003 (reported in 93 TTJ 161) has held in Para 18 of their order: 18. Now, coming to the second contention of the assessee, we find considerable force in the argument of the learned counsel for the assessee and the decision of the Hon'ble Madras High Court in the case of Indian Commerce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this aspect. The Assessing officer had in the order of Assessment u/s.143(3) of the Act, dated 28.12.2019 has observed that "Further Notices under sec.142(1) of the Act, were issued to the Assessee on dated 5.10.2019 and 28.11.2019 electronically". In response, the Assessee has submitted the details/ explanations called for digitally besides filing hard copy. The submissions of the Assessee-Company have been duly considered. Ongoing through the details and documents submitted by the Assessee -company, the assessment is completed by accepting the claim for write off of investments in subsidiaries. Further, when the entire gamut of investment in the subsidiary, the reason for the same, how it is for the business of the Appellant, necessary approvals from the Government/RBI for the same, the reason for winding up of the subsidiary and write off of investments have been explained to the Assessing Officer, who after examining the details and explanations did not disallow the claim for write off and as it is a plausible stand which is not unsustainable in law. Therefore, the PCIT cannot substitute his opinion on the same set of facts. 14. It is relevant to consider the Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant on the basis of the submissions and documents filed by the Appellant. When the AO has taken a decision based on the facts submitted and it is one of the permissible views, the PCIT erred in assuming jurisdiction and imposing his views over that of the AO. When two views are possible and the view taken by the AO is not unsustainable under law, the PCIT does not have the jurisdiction to revise that issue as it is not erroneous and prejudicial to the interest of the Revenue. 17. Further on merits, the AR had relied on in addition to the case of Sahara Global Vision P Ltd. v. ACIT (supra) cited before the Assessing officer in the course of the Assessment proceedings also relied on the following decisions in support of their claim for deduction of the write off of investments made for the purpose of the business. (i). ACE designers Ltd v ACIT 275 Taman 100 (Kar.) (ii). CIT v Colgate Palmolive (India) Ltd 370 ITR 728 Born. (iii). Indian Commerce and Industries Co P Ltd 213 ITR 533 Mad. (iv). Patnaik and Co Ltd. 161 ITR 365 SC. 18. On a perusal of these cases, the common ratio is that loss on investments made for the purpose of the business is allowable as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party". 21. The Jurisdictional High Court in the case of Indian Commerce and Industries Co P Ltd v CIT (213 ITR 533) has held that "In view of those findings, it is apparent that there is a nexus between the business of the company and the purchase of the shares. The business of the company would not have increased as it did actually but for these shares. There is no reason why the loss suffered by the assessee in this case should not be treated as a business loss". 22. In the case of decision in the Case of Bombay High Court in the case of Colgate Palmolive (India) Ltd (370 ITR 728) it was held as under:- "The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the Assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client namely the Assessee. Shares purchased of Camelot were also sold by the Assessee to one Ramesh Sukharam Vaidya for consideration of Rs.45,00,000/-. The Assessing Officer held that the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an inescapable view that the investment was made in order to furtherance the sales of the assessee and boost its business. Hence, the loss on sale of Government securities was a business loss. 24. The ratio of the above decisions would squarely cover the case on hand. The Appellant had proved that the investment in subsidiary was solely for the purpose of obtaining scarce raw material for being used in their business. The investment was written off when the subsidiary was wound up. Applying the ratio of the above decisions including those of jurisdictional High Court and the Apex Court, the claim of the Appellant that the write off of investment in the subsidiary made for the purpose of the business is allowable as revenue expenditure. When the ratio of the decision of the Apex Court and the Jurisdictional High Court support the claim of the Appellant and accepted by the AO, the order of assessment cannot be held to be erroneous and PCIT erred in assuming jurisdiction u/s 263 of the Income Tax Act, 1961. 15. In so far as case law relied upon by the Ld.DR in the case of Deniel Merchants (P) Ltd. v. ITO reported in [2018] 95 taxmann.com 366 (SC), we find that the Hon'ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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