JAKHAU SALT COMPANY P LTD.,CHENNAI vs. DCIT, CORPORATE CIRCLE-1(1), CHENNAI

आदेश / O R D E R

PER. MANJUNATHA.G, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order of the

Principal Commissioner of Income Tax, Chennai-1, passed u/s 263 of the

Income Tax Act, 1961 dated 26.03.2022and pertains to assessment year

2017-18.

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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.

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,

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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 forming part of the accounts, it was stated that the company had

sold investments of 40 lakhs equity shares in the capital of M/s. Archaen

Chemical Industries Pvt. Ltd. (in short “M/s.ACIPL"), and incurred loss of

Rs.24.32 Crs. Although, the loss on investment is not allowable

expenditure, the assessee company had not been added back the above

capital loss in the statement of total income. The Assessing Officer, while

completing the assessment u/s.143(3) of the Act, not examined the issue

of loss on investment debited to P & L A/c. Since, above loss on sale of

investment is a capital loss, the same is required to be added back to the

business income, but the AO has failed to do so. Therefore, the PCIT

opined that the assessment order passed by the AO is erroneous in so far

as it is prejudicial to the interest of the Revenue and thus, called upon the

assessee to explain ‘as to why’ the assessment order passed by the AO

u/s.143(3) of the Act, dated 28.12.2019 shall not be revised u/s.263 of

the Act.

representative of the assessee appeared on 17.03.2022 and submitted

that to increase the capacity and augment the sales of industrial salt, the

assessee had acquired equity share interest of 40% in the capital of

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M/s.ACIPL during the FY 2011-12 by subscribing 40 lakhs equity shares

for a sum of Rs.43.68 Crs. Further, M/s.ACIPL was carrying on the

business of manufacturing and export of industrial salt, bromine,

sulphate, potash and other industrial chemicals from naturally available

brine in the Rann of Kutch, Gujarat. In order to capitalize on this planned

new facility of Composite Marine Plant of M/s.ACIPL, the assessee had

made investment. It was further submitted that later it was seen that

M/s.ACIPL was delaying the installation and commencement of the unit

and its business did not take off and thus, the assessee has sold its

investments in M/s.ACIPL and incurred loss of Rs.24.32 Crs. Since, loss

incurred on investment in group companies is in the nature of business

loss in line with AS-13 issued by the ICAI, the assessee has debited said

loss into P & L A/c. The AO after considering relevant facts has allowed

the claim of the assessee and thus, it cannot be said that the order

passed by the AO is erroneous in so far as it is prejudicial to the interest

of the Revenue.

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

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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:

" 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 Commissioner or Chief Commissioner or Principal Commissioner or Commissioner-

6.1 The present examination of the assessee's case is located within the scope of the failure to make necessary and relevant inquiries / verification. The case laws relied upon pertain to periods prior to the insertion of the above Explanation.

6.2 Coming to the claim of 'business loss' arising on sale of Shares, the assessee's argument is reproduced below:

"We submit that the investments made by us in ACIPL are inextricably linked and forms part of the business of our country. The said investment has been made for the purpose of attaining the business objectives of the company irrespective of the fact whether they have been accounted as non-current investment or as business assets of the company. The classification of the investments as non-current investments is in line with the requirements of Schedule III of the Companies Act, 2013, wherein the investments made in equity shares of a company needs to be classified as investments, irrespective of whether made for the purpose of augmenting the business or for regular investment purposes. Therefore, the classification of investments in the balance sheet does not indicate the intent of holding the said investments. We draw reference to the decision of the Apex Court in the case of Kedarnath Jute Mfg. Co. Ltd. Vs. CIT [1971] 82 ITR 36 (SC) wherein it was held that entry in books of account cannot be considered as conclusive and the entitlement of particular deduction depends upon the provisions of law relating thereto.

If the main reason for holding the investments is for deriving a business advantage to the company, then the said investment is held for the purpose of business and any gains/losses arising on the said investments should be dealt under the head 'Profits and Gains from the Business or Profession'. The well celebrated judgement of the Hon'ble Bombay High Court in the case of CIT vs. Colgate Palmolive (India) Limited [2015] 370 ITR 728 (Bom.) is relevant for our discussion."

6.3The assessee's submissions have been considered. It is established in law thatthe treatment as per Company Law or Accounting Standards cannot determine the treatment under the Income Tax Act. To that extent the decision of the Apex Court in

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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

6.5 It is to be mentioned that Accounting Standards are meant to comply with the corporate reporting practices to ensure that financial statements from multiple companies are comparable. They aim to ensure transparency, reliability, consistency and comparability of the financial statements. But when it comes to treatment under the Income Tax Act, they cannot provide the rationale for consideration for taxation. Even the Income Computation and Disclosure Standard (ICDS) introduced by the Government of India does not prevail over the Income Tax Act when there is a conflict between the provisions of the IT. Act and ICDS.

6.6 The assessee's argument that the investment in ACIPL was "nothing but a measure of expediency to further the business objectives" is accepted with the simple meaning that measures of expediency can involve both revenue and capital expenses. The foundational fact in the present case is that the assessee had invested in shares which is, by all definitions, a capital asset unless the assessee was an investment company which, admittedly, it is not. The shares, therefore, could not have been treated as stock in trade. Whatever be the intent of investment, strategic or otherwise, for a non-investment company the investment in shares represents a capital asset. Sale of such asset would, therefore, be expected to lead only to capital gain or loss. The argument advanced by the assessee relying upon the case of Colgate Palmolive stands on no legs. The facts of the assessee's case are very different from that of Colgate Palmolive where the company being invested in was a 100% subsidiary which was manufacturing tooth brushes exclusively for sale by the investing company.

6.7 In any case, post the decision of the Apex Court in the case of Vodofone International Holdings B.V. Vs Union of India, in order dated 20.01.2012 (Civil Appeal No.733 of 2012) it has now been evidently established that companies are entirely separate entities,even if they are hundred percent owned subsidiary companies. In the case of the assessee, therefore, the investment in another company's shares cannot be treated in any other way other than as a capital investment. Transactions involving the capital asset could only lead to capital gain or loss. The other case laws relied upon by the assessee either stand on decision in the 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

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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 enduring nature means that it must not be fully consumed or used up in the accounting period in which it is incurred. Capital expenditure increases the earning capacity or reduces the operating expenses of a business.

6.10 In the instant case, as submitted by the assessee, the impugned expenditure was invested to capitalize on the facility of proposed Composite Marine Plant of ACIPL, to acquire 40% stake in the said company, which itself shows that the same was made for an advantage of enduring benefit and to increase the earning capacity. Hence, its subsequent transfer cannot be accepted as a revenue loss.

CONCLUSION:

It is ordered accordingly.

setting aside the assessment order passed by the AO by exercising his

power conferred u/s.263 of the Act, without appreciating the fact that

assumption of jurisdiction u/s.263 of the Act was wrong and not

sustainable in law. The Ld. Counsel for the assessee further submitted

that in order to assume jurisdiction u/s.263 of the Act, twin conditions

embedded therein must be satisfied. In this case, none of the conditions

are satisfied, because, the AO has verified the issue of loss on

investments by issuing a specific notice u/s.143(2) &u/s.142(1) of the

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Act, on various dates, for which, the assessee has filed its reply on

24.12.2022 and explained how loss on investment in group company is

business loss which can be allowed as deduction. The Ld. Counsel for the

assessee further submitted that the AO has issued various notices

u/s.143(2) of the act, for which, the assessee has filed detailed reply on

the issue. The AO had also issued notice 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.).

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CIT(A) submitted that the assessment order passed by the AO is

erroneous in so far as it is prejudicial to the interest of the Revenue for

the simple reason that the AO did not make any proper enquiry while

making assessment, but simply accepted the explanation of the assessee

in so far as loss on investment debited to P & L A/c, even though, the said

loss is a capital in nature. The PCIT has elaborated the reasons for

revision of assessment order in terms of provisions of Sec.263 of the Act.

The AO without appreciating the said facts simply accepted the claim of

the assessee which rendered the assessment order to be erroneous in so

far as it is prejudicial to the interest of the Revenue and thus, the PCIT

has rightly invoked the jurisdiction and set aside the assessment order.

record and gone through orders of the authorities below. The provisions

of Sec.263 of the Act, conferred suo moto revisional powers to the PCIT, if

the PCIT satisfies that the assessment order passed by the AO is

erroneous in so far as it is prejudicial to the interest of the Revenue. In

order to assume jurisdiction u/s.263 of the Act, twin conditions must be

satisfied viz., (i) the order of the AO must be erroneous and (ii) further, it

should be prejudicial to the interest of the Revenue. Unless, twin

conditions embedded therein, are satisfied, the PCIT cannot revise the

assessment order u/s.263 of the Act. In this case, the PCIT has set aside

the assessment order passed by the AO on the issue of loss on sale of

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investment with sister company. According to the PCIT, the assessee has

debited loss on sale of investment into P & L A/c, even though, such loss

is a capital loss, but the AO has allowed the claim of the assessee without

making proper enquiry. The PCIT further noted that as per Explanation-2

to Section 263 of the Act, assessment order can be treated as erroneous

in so far as it is prejudicial to the interest of the Revenue, if the order is

passed without making enquiries or verification which should have been

made and the order is passed allowing any relief without inquiring into the

claim. In this case, although, it seems that the AO has called for certain

information by issuing notice u/s. 142(1) of the Act, and the assessee has

replied on the issue, but the AO has failed to apply his mind to relevant

facts in right perspective of law, which resulted in erroneous order passed

by the AO which caused prejudice to the interest of the Revenue.

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

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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’ble Bombay High Court in the case of CIT v. Colgate Palmolive

(India) Ltd.(supra) and argued that loss on investment with subsidiary

company for the purpose of its business is held to be a business loss as

investment made was nothing but a measure of commercial expediency

to further the business objectives. The AO after considering relevant

submissions of the assessee has chosen not to make any additions. From

the above, it is very clear that the issue of loss on sale of investment is

subject matter of examination and inquiry by the AO during the course of

assessment proceedings. No doubt, there is no specific discussion in the

assessment order on the issue, but fact remains that when the AO has

called for specific information on the issue and the assessee has

submitted required details, it is presumed that the AO has considered all

details with regard to the issue and has applied his mind to relevant facts

in right perspective of law. Therefore, we are of the considered view that

merely for the reasons that the AO has not discussed the issue in his

assessment order, it does not call for interference from the PCIT by

exercising his powers conferred u/s.263 of the Act, because, assessment

order passed by the AO is definitely not erroneous. This view is fortified

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by the decision the Hon’ble Supreme Court in the case of Malabar

Industrial Co. Ltd. v. CIT reported in [2000] 243 ITR 83 (SC), where it

has been clearly held that the PCIT cannot assume jurisdiction and revise

the assessment order, unless the PCIT satisfies that assessment order

passed by the AO is erroneous in so far as it is prejudicial to the interest

of the Revenue.

passed by the Assessing Officer is prejudicial to the interest of the

Revenue. It is a well settled principle of law by the decision of various

courts that in order to invoke jurisdiction u/s.263 of the Act, twin

conditions embedded therein must be satisfied. As per said section, the

assessment order passed by the AO must not only be erroneous but

should be prejudicial to the interest of the Revenue. In case, the

assessment order passed by the AO is erroneous, but even not prejudicial

to the interest of the Revenue, the PCIT cannot assume his jurisdiction

and set aside the assessment order. The term ‘prejudicial to the interest

of the Revenue’ has been analyzed by various 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

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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.

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 investments

with group companies as business loss. We further noted that the

assessee has given reasons for claiming said loss as business loss. As per

the reasons given by the assessee, the assessee has made investment

with M/s.ACIPL during the FY 2011-12 to increase the capacity and

augment of sale of industrial salt, because, the group companies were

engaged in the business of manufacturing and export of industrial salt,

bromine, sulphate and other industrial chemicals from the naturally

available brine in the Rann of Kutch, Gujarat, and in order to capitalize on

this planned new facility, the assessee had acquired 40% stake in the said

company. From the above, it is very clear that the said investment purely

aimed at attaining its objectives of the assessee company, although,

there is no dispute with regard to the fact that investment was a capital

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asset. Further, when the group companies were delaying installation and

commencement of the unit and its business did not take off as initially

projected, the assessee decided to upload investment in M/s.ACIPL as the

same was not worthwhile any more due to the prevailing conditions.

Therefore, the assessee has sold its investments which resulted in loss of

Rs.23.32 Crs. Since, the main reason for holding the investment in group

company is to derive business advantage and further said investment is

held for the purpose of business, any gain/loss arising on sale of said

investment should be treated as ‘profits and gains’ from the business or

profession. This view is supported by the decision of the Hon’ble Bombay

High Court in the case of CIT v. Colgate Palmolive (India) Ltd.(supra),

where it has been clearly held that when investment in subsidiary

company is for the purpose of its business and the loss on sale of shares

has to be held to be a business loss as the investment was made nothing

but a measure of commercial expediency to further the business

objectives. The SLP filed by the Department against the said judgment

has been dismissed by the Apex Courts. The sum and substance of the

ratio laid down by the Hon’ble Bombay High Court in the case of CIT v.

Colgate Palmolive (India) Ltd. and upheld by the Hon’ble Supreme Court

is that if some investments in subsidiary company is for the augment its

business of the assessee, then, loss on sale of said investment would be

treated as business loss.

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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 and real

character of transaction was those akin to loan and not equity

investment, impugned order deserved to be set aside.

coordinate Bench, ITAT Chennai in the case of Southern Petrochemical

Industries Corporation Ltd. v. ITO in ITA No.232/Chny/2022 order dated

23.09.2022, where the Tribunal had considered an identical issue of loss

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on sale of investment and after considering relevant facts and by

following the decision of the Hon’ble Bombay High Court in the case of

CIT v. Colgate Palmolive (India) Ltd.(supra) held that write off investment

in subsidiary company made for the purpose of business is allowable as

Revenue expenditure. The relevant findings of the Tribunal are as under:

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Point No: 1(iv) :- Copy of return of income -- Original or revised, if any, for AY 2017 18. Please state the reason for filling revised return (if applicable) with proper evidence for substantiating the changes

Please find enclosed herewith revised return vide Annexure 3. Company made provision for diminution in the value of investment during the Assessment year 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhs and Rs.13840.21 Lakhs respectively and the same was disallowed by us in the respective year memo computation of income enclosed vide Annexure 4 and 5. We made the said investments to set up Urea and Ammonia Plant at Dubai which is supported by EGM minute's approval enclosed vide Annexure 6. During the current assessment year the investment was written off in Statement of Profit and Joss and claimed as deduction under memo computation of income (Copy of the relevant extract of Board Resolution enclosed vide Annexure 7). There is a direct nexus between the said investment and the business of the assessee which was also confirmed in our own case by /TAT for the assessment year 2000-01 vide IT.A. NO.2252/Mds/2003 copy enclosed vide Annexure 8 allowed with respect to interest on advance given to SFCL allowable as business expenditure under section 37 of Income Tax Act.

Further we are enclosing vide Annexure 9 herewith ITAT Delhi order on Sahara Global Vision Private Limited Vs ACIT, allowing loss due to write off of investments in joint venture is allowable business expenditure.

The above said disallowance was properly claimed under MAT computation DUE not considered in regular computation hence filed revised return to consider the same.

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entered into a joint venture, owned phosphate mines which was a basic raw material for manufacture of phosphoric acid. Similarly, SPIC Fertilizers and Chemicals, FZE, (SFCL), at Dubai was engaged in the manufacture of ammonia and urea which were raw materials for the fertilizer business of the assessee. It is pointed out that both ammonia and phosphoric acid accounted for 44.27 per cent in value of the total raw material consumption. Thus, even if borrowed funds were utilized, still the assessee would be entitled for deduction under s. 36(1)(iii) of the Act, in view of the decision of the Hon'ble Madras High Court in the case of Sivakami Mills Ltd. (supra), affirmed by the Hon'ble Supreme Court in (1998) 144 CTR (sc) 172: (1997) 227 ITR 465 (SC) (supra), wherein it was held that interest on deferred payment for purchase of machinery was revenue expenditure. The decision in State of Madras vs. G.J. Coelho (supra) also supports this view. In this case it was held that the payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation was viewed as an integrated whole, was so closely related to the plantation that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. Therefore, the assessee, in any view of the matter, succeeds on the strength of its second contention.

A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suomotu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1) of the Act.

Again the court observed:

The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.

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At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase “prejudicial to the interest of the Revenue” under s. 263 has to be read in conjunction with the expression “erroneous” order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.

(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.

"7. In the backdrop of aforesaid well settled legal position, the facts of the case in hand may be adverted to. From the perusal of the note annexed to the income filed before the assessing officer, it is evident that assessee had set up an establishment in USA during Financial Year 1992-93 for the exclusive purpose of marketing assessee's products and for promoting its business in US and Latin America. It has further been stated in the note that looking to the stringent norms of product liability in US market, the assessee decided to have a separate Wholly Owned Entity in the US having limited liability. The approval for aforesaid purpose was obtained from the Reserve Bank of India. The assessee therefore, invested funds in equity for meeting the revenue expenses of Wholly Owned Subsidiary Company's balance sheet. However, WOS could not perform up to company's expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of was, RBI permitted the company to write off the whole of investment made in WOS and unrealized export receivables. The assessee therefore,

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made a claim to write off the loss of Rs.3,41,23,200/-as revenue expenses allowable under the provisions of the Act.

"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".

"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 of Rs.5,50,00,000/- which was invested by the Assessee in the equity of Camelot on 17 March 2003 and which have been used to repay the loan to the Assessee company, amounting to Rs.5.5 crores, before 1 March 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 with an intention to realize any enhancement value thereof or to earn dividend income. The investment was made to separately house the integral part of the business activity. In such circumstances, the Commissioner relied upon the above judgments and allowed the Appeal. He concluded that the loss of Rs.5.50 crores is a business loss in the hands of the Assessee. He set aside the order of the Assessing Officer.

ITA No.367/Chny/2022

:: 21 ::

upheld the conclusion of the Commissioner and by giving additional reason.

Merchants (P) Ltd. v. ITO reported in [2018] 95 taxmann.com 366 (SC),

we find that the Hon’ble Supreme Court considered the issue of lack of

enquiry by the AO while making assessment and under those facts, the

Hon’ble Supreme Court held that if the AO did not make any proper

enquiry while making assessment and simply accepted the explanation of

the assessee in so far as receipt of share application money is concerned,

then the powers exercised by the PCIT u/s.263 of the Act, deserved to be

upheld. 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 of the Act, cannot be exercised. Therefore, we are of

ITA No.367/Chny/2022 :: 22 ::

the considered view that the case law relied upon by the Revenue does

not applies to the facts of the present case.

circumstances of the case and also by following the ratio of case laws

considered herein above, we are of the considered view that the

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 of the Act.

Order pronounced on the 24th day of February, 2023, in Chennai.

Sd/- Sd/- (मंजूनाथा .जी) (महावीर िसंह) (MANJUNATHA.G) (MAHAVIR SINGH) उपा��/VICE PRESIDENT लेखासद�य/ACCOUNTANT MEMBER

चे�ई/Chennai, �दनांक/Dated: 24th February, 2023. TLN आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकरआयु�/PCIT 2. ��यथ�/Respondent 5. िवभागीय�ितिनिध/DR 3. आयकरआयु� (अपील)/CIT(A) 6. गाड�फाईल/GF