THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(1),, AHMEDABAD vs. GUJARAT APOLLO INDUSTRIES LIMITED,, MEHSANA

4. Whether on facts and circumstances and in law, the Ld.CIT(A) has erred in deleting the disallowance of Rs. 4,32,91,717/- made in book profit u/s 115JB of the Act without appreciating the facts o the case.

i. Disallowance u/s 14A r.w. Rule 8D – Rs.56,42,738/- ii. Disallowance of claim of business loss – Rs.4,12,18,805/- iii. Disallowance while computing book profit u/s 115JB – Rs.4,32,91,717/-

i. Restricting disallowance under section 14A to Rs.10,00,000/- ii. Deleting the disallowance of business loss of Rs.4,12,18,805/- iii. Deleting the disallowance of Rs.4,32,91,717/- made in the computation of book profit under section 115JB.

I. Ground Nos. 1 & 2 – Disallowance u/s 14A of the Act

Appeal of the Revenue on this ground is dismissed.

II. Ground No. 3 – Disallowance of Rs.4,12,18,805 on account of loan write-off / business loss

7.1 The brief history and development with regard to this issue are that, • The assessee received an offer from a German local Co, K S Holding Ltd forgiving the necessary technical assistance against the fees as well as to assist to have a local manufacturing facility there. • Looking to that, the assessee has taken one unit on rent cum ownership basis at their premises having the required existing facility. • It was decided by the assessee that all the assembly/parts which involve high labour-intensive cost, will be manufactured in India and will be sold to the German subsidiary. • The German Subsidiary takes the order of such machines there and do rest of the work with the assembly and finishing of these and invoiced from there to ultimate foreign customers.

7.2 The assessee has produced the copy of accounts of the various years wherein they have sold the components to that unit and also the copy of account for purchases of critical components from there. For few years, the assessee did business with the 100% subsidiary and promoted business in foreign market through this subsidiary. Owing to continuous losses, the assessee has financed from India by giving loans, and efforted continuously for the new market. After a period of 5 years, when it was not possible to finance more, it was decided to close and shut down the business of that Unit and sold the unit to local person. The assessee has made the provision of this amount of outstanding loan in the previous year in the expectation to get the amounts since there was no way to claim as loss incidental to business in the year under consideration, the amount was paid as inter-corporate loan due to business and commercial reasons as stated above has been written off. It is established that the assessee has given loan to establish 100% foreign Subsidiary looking to the future business expansion which was possible only through having the similar type of assessee’s own associate/ subsidiary abroad.

7.3 In this background, we have examined the ratio of the Ld. CIT(A), which is as under:- “6.2 DECISION: I have gone through the assessment order, submissions of appellant and facts of the case. The detailed discussion and finding on this issue is given hereunder. It is an admitted fact on record that the assessee gave loan to the German Company to establish the 100% subsidiary in: Germany to expand its existing business of manufacturing of Crushing, screening and mining equipment in Europe. As the assessee was having the expertise in the heavy equipment manufacturing in India since last more than 30 years, it received an offer from a German local Co, K S Holding Ltd for giving the necessary technical assistance against the fees as well as to assist to have a local manufacturing facility there in the same line of business as that of the assessee. Hence, the assessee took one unit on rent cum ownership basis at their premises having the required existing facility as required by assessee. In Europe there was a lack of confidence of Indian manufactured products, hence all the assembly/parts which involve high labour intensive cost were manufactured in India and were sold to this German subsidiary. This German Subsidiary took the orders of such machines there and did the rest of the work with the assembly and finishing of these and invoiced from there to ultimate foreign customers. By promoting the Foreign Subsidiary, the company aimed at increasing the business prospect of Indian Company and its expansion of business and opportunity in other part of the world. It is also on record that the assessee sold various products to this subsidiary in the past years and also bought various imported machinery parts from the said subsidiary. The chart furnished by the assessee clearly establishes the close business connection between the assessee and its foreign subsidiary. But, unfortunately for the assessee companies that even after putting much effort in establishing the business scope in European countries, the viability in the business could not be gained and the foreign subsidiary kept incurring losses. |t is also evident that after trying for some good years, the losses kept rising and could not be recovered. Based on years of experience and in view of the losses which arose in the course of the business, the assessee as prudent businessman and out of commercial expediency, it decided to written off the outstanding amount of loans given to subsidiary as business loss and claimed it as deduction as loss arising/ incidental to business. Further, as seen from the submissions and records, the assessee in past also has given loans to other parties and taken working capital loan from Banks on which interest is paid/ received. The interest paid is allowed deduction as a business expenditure and even during the current year there is net interest income of Rs. 12,11,08,057/- shown in Note-21 of audited accounts which is offered as Business Income and is also taxed as Business income by the AO. These facts establish that interest is forming major part of the total business income. This is normal and regular business practice for various previous assessment years in the case of the assessee. In view of this, the write off of loan to subsidiary is clearly allowable as business expenditure covered u/s 28/37 of the IT Act. Also, in view of the close business connection of the assessee and the foreign subsidiary as narrated above, the assessee has clearly established that this subsidiary was selling goods of the assessee in other countries and in this way it was promoting the business of the assessee company. Therefore, the loans & advances given by the assessee to this German subsidiary were for the purpose of the ^advancement of its own business. The business of German Company was directly linked with Indian company which only wanted to promote the business in other countries. The Germany is hub of various manufacturing process and the assessee also tries to tap into that market for its potential. These facts combined with various data related to history of transaction with subsidiary company establish that the advancement of loans was inextricably linked/ incidental to the business of the assesses. Further the fact that the loans were advanced during Ilie course c business to help subsidiary to tide over its financial crisis, reveals that the said loans were not for capital purposes. Write off of the same, was. clearly therefore business loss to the assessee, which it was entitled in law to claim under section 28 read with section 29 of the Act. It is settled law that loans advanced in the course of or incidental to the business of the assessee are allowable when they become irrecoverable. Coming to the legal aspect of the; case, the judgment relied by the AO on page- 7 of the assessment order in the case of Hasimara Industries Limited/ CIT (1998) 147 CTR 70 (SC) is clearly distinguishable on facts. In the said judgment, the amount was advanced in connection with a totally new line of business, not at all connected to assessee business and that too for acquiring new machinery & apparatus. Hence it was held that the amount given was not in the nature of a loan transaction or a money lending transaction and on these facts it was held that the irrecoverable amount was a capital loss and not allowable as business loss. However, in the present appeal, as discussed above, the nature of advance is a loan and the business connection is also clearly established as discussed in detail herein above. The present assessee case is squarely covered by the ratio and principle laid down by the Judgments cited by the appellant in its submissions quoted in this order. For ready reference, the ratio of each judgment as given-in assessee’s submissions is reproduced below: (1981) 6 Taxman 346 (Guj)ClT / Abdul Razak & Co Section 28(i) of the Income-tax act, 1961 [as it stood at the relevant time]— Business loss/deduction—Assesses-firm carried on business as commission agents and dealers in grocery articles—Claimed as bad debt amount of Rs. 78,824 standing in its books as debit balance against its principal firm— MPM—Said debit balance had arisen mainly because of payment made by assessee to third party at MPM's request to liquidate latter's debt to said party—Whether tribunal justified in holding that impugned advance was not made in ordinary course of assessee’s business but was merely incidental to it—Held, on facts, no—Whether tribunal right in allowing impugned loss as deduction under section 28(i)—Held, on facts, yes. (1994) 209 ITR 131 (Guj) CIT/ Pure Beverages Ltd. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of -Assessment year 1975-76 - Assessee-company, a dealer in soft drinks, made arrangement with a bank to make advances to its dealers for purchase of electronic coolers which were necessary for chilling soft drinks – Assessee reimbursed to bank losses on account of non-recovery of amounts from dealers - - Whether liability to bank was incurred in course of carrying on assessee’s business and was in nature of allowable revenue expenditure - Held, Yes.

(2007) 158 TAXMAN 74 (SC)S. A. BUILDERS LTD In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, the Supreme Court held that the expression 'for the purpose of business' occurring under the provision of section 36(1 )(iii) is wider in scope than the expression 'for the purpose of earning income, profits or gains', and this has been the consistent view of the Supreme Court. [Para 20] The High Court in the impugned judgment as well as the Tribunal and the income- tax authorities had approached the matter from an erroneous angle. In the instant case, the assessee borrowed the fund from the bank and lent part of it to its sister concern (a subsidiary) as interest-free loan. The test in such a case was really whether this was done as a measure of commercial expediency. [Para 21] The decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of business'. It has been consistently held in decisions relating to section 37 that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. [Para 22] In Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on of the business. [Para 23] The expression ’commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. [Para 25]

(2020) 120 Taxmann.com 321 (Karnataka) Ace Designers Ltd. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions - Allowable as (Investment in subsidiary) - Assessment year 2004-05 - Assessee- company was engaged in business of manufacture and export of computerized numerical controlled machines - Assessee made investment in equity of its wholly owned subsidiary company set up in USA - However, said subsidiary could not perform up to company's expectations and, therefore, it was wound up – Assessee claimed loss arising from investment made in its subsidiary as business loss on ground that investment was made for purpose of business -- Assessing Officer disallowed same - It was noted that assessee made investment in shares of its subsidiary company for enhancement of business activity of assessee in global market which primarily related to business operation of assessee - Investment was not made with a view to create capital asset in form of holding shares - Whether, on facts, business loss claimed by assessee was to be allowed - Held, yes [Paras 7 and 8], ELECON ENGINEERING CO. LTD. (Ahmedabad Tribunal)

Ahd/ 2017 Order Dated: 29/07/2022 “We have noted that the assessee had contended that its business was closely linked with that of its associate concerns to whom the amounts written off of Rs.8,23,60,154/- were advanced as loans. The assessee ‘s claim to close connection of its business with the associate concerns,) is on account of the said concerns being promoted by it for selling its products both directly and indirectly by way of procuring orders for the assesses products.; The assessee had even submitted a detail pointing out the direct and indirect sales of its products made through these concerns. The assessee had also contended that the amounts were advanced to the concerns during their normal business operations to tide over their cash crises. None of these averments of the assessed have been controverted by the Revenue authorities either before us or even by the Ld. CIT(A). In this backdrop, when the assessee had clearly established that these associate concerns were selling goods of the assessee in other countries, surely the associate concerns were promoting the business of the assessee only. Therefore, the loans & advances given by the assessee to these associate concerns was directly for the advancement of its own business. The business of the associate concerns were directly linked and hence effected the business of the assessee, since they were selling products manufactured by the assessee. There is.no doubt therefore that the advancement of loans to these associate concerns, was; incidental to the business of the assessee. Further the fact that the loans were advanced during the course of business to help the concerns tide over their financial crises, reveals that the said loans were not for capital purposes. Write off of the same, was clearly therefore business loss to the assessee, which it was entitled in law to claim under section 28 read with section 29 of the Act. It is settled law that loans advanced in the course of or incidental to the business of the assessee are ’allowable when they become irrecoverable."

“The Hon’ble apex court laid down the principles relating to allowance of business losses in its decision in the case of Badridas Daga Vs CIT 34 ITR 10(SC). Dealing with the issue in the context, of the Income Tax Act, 1922, in the backdrop of allowability of claim of loss by an assessee in money lending business, on account of embezzlement of money by employees, the Hon’ble court held that for allowability of business losses it should spring directly from the carrying on of business. The relevant portion of the order is as under: "6. The result is that when a claim is made for a deduction for which there is no specific provision in s. 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. if that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.” In the case of T.J. Lalvani Vs CIT (1970) 78 ITR 176 (Bom), the Hon’ble High Court of Bombay held that loans advanced to a party whose business was financed and controlled by the assessee in the course of his business activity could not be said to be unconnected with his business and irrecoverable amount was allowable as loss. The relevant portion of the order is as under: "Now, the main question to be considered in the present case is whether, on the facts and circumstances of the present case, the loan of Rs. 6 lakhs advanced by the assessee to Lookmanji could be said to have been advanced in the course of his business. There can be no doubt whatsoever that unless the deduction, which the assessee has claimed, can be treated as a loss, which is connected with his business and incidental to it, it will not be claimable as a revenue loss. As has been observed in Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) : TC14R.202 the loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and not any loss sustained by the assessee even if it has some connection with business. In that case the loss in question was Caused by the embezzlement by an agent of the assessee. It was held that the loss sustained by the assessee as a result of the misappropriation by the agent was one which was incidental to the carrying on of the business and, therefore, deductible in computing the profits of the assessee under s. 10(1) of the Act.’’ In view of the facts of the present appeal and the ratio of all the above Judgments of Hon’ble Supreme Court, High Courts and Jurisdictional Gujarat High Court and Jurisdictional Ahmedabad Tribunal, it is held that write off of Rs. 4,12,18,805/- is clearly allowable as a business deduction u/s 28/37 of the Act and the addition made by the AO is hereby deleted.”

7.4 Having gone through the entire facts of the case, ratio detailed by the Ld. CIT(A) and the case-laws relied upon, we decline to interfere with the order of the Ld. CIT(A). Appeal of the Revenue on this ground is dismissed.

III. Ground No. 4 – Addition to book profit u/s 115JB of Rs.4,32,91,717.

The order is pronounced in the open Court on 09.10.2025