KOKUYO CAMLIN LTD,MUMBAI vs. ASST CIT 10(1)(2), MUMBAI

This appeal by assessee is directed against the order of ld. CIT(A)-17, Mumbai dated 06.07.2018 which in turn arises from the assessment order dated 31.08.2016 passed under section 143(3) for Assessment Year 2014-15. The assessee has raised the following grounds of appeal:

The Learned CIT(A) erred in upholding the observation of the AO that granting of advances to the wholly owned subsidiary has not directly sprung from the business of the appellant.

We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. Ground No.1 & 2 relates to disallowance of write off of advances made to subsidiary. The ld. AR 2 Mum 2018-Kokuyo Camlin Limited. of the assessee submits that assessee is one of the pioneer companies in stationary business in India. Initially the assessee-company started its business as a proprietorship firm namely Dandekar & Co. in 1946; Camlin Pvt. Ltd. acquired the business of Dandekar & Co. as on ongoing concern in 1998, the company listed in Bombay Stock Exchange. In 2009, the assessee has set up wholly owned subsidiary namely Camlin Alphakids Limited (CAL), which is in the business of pre-schooling activities. The incorporation of CAL in pre-schooling activities was expected to work as a forward integration of the assessee’s business. Therefore, the assessee-company made a support to its subsidiary in initial year. The advances given to CAL to find its working capital requirement, when seeking external financial aid was difficult for CAL. In 2011 Kokuyo S & T Company, a major Japaneses Stationary Corporation acquired majority step in the assessee and the name of assessee as on today came into existence. In A.Y. 2014-15, the assessee invested a total of Rs. 535.32 lakhs by way of equity capital, Rs. 230.00 lakhs by way of preference capital had given advance of Rs. 305.32 lakhs. In A.Y. 2004-05 after five year of incorporation of CAL, the assessee did not foresee any turn out of this business in near future and therefore, decided to disengage from business of CAL and wrote off of advances of Rs. 305.32 lakhs given to CAL. Mum 2018-Kokuyo Camlin Limited.

The ld. AR of the assessee further submits that the assessee is also engaged in the business of manufacturing and trading of stationary product in school going children. The incorporation of pre-schooling activities was expected to work as a forward integration for the assessee’s business. The cash advanced to CAL on account of commercial expediency for meeting working capital requirement. The decision to write off of the advances and disengage itself from the activities of CAL was taken by new management of the assessee as the new management/Board of Directors was of the view that making continuous loss year after year, there was no hope that the subsidiary can be revived which is evident from the financial position of the subsidiary.

The ld. AR of the assessee submits that the case law of Hon’ble Bombay High Court relied by Assessing Officer in Salem Magnesite Pvt. Ltd vs. CIT [(2009) 180 Taxman 545 (Bom)] is distinguishable on the fact. In the said case the money advanced to subsidiary was realized for purchase of capital asset, write off of capital asset, write off of those amount by holding companies are not allowed as revenue deduction.

On the other hand, the ld. DR for the revenue supported the order of lower authorities. The alleged advances cannot be allowed either under section 28, 29 & under section 37(1). The assessee has not given any evidence to prove that the advances are write off of by the assessee as no such evidence is placed on record. The assessee has not filed any resolution of Board of Director of assessee-company or any other evidence evidencing the decision to write off by the new management.

We have considered the rival submission of both the parties and gone through the orders of authorities below. We have also deliberated on various case law relied by lower authorities and by ld. AR of the assessee. During the assessment, the Assessing Officer on perusal of Profit & Loss A/c noted that assessee has written off of loans advances to its subsidiary of Rs. 305.32 lakhs. The assessee was issue show-cause notice and to explain the gist of its claim on write off. The assessee filed its reply dated 28.01.2016. The Assessing Officer has recorded that content of reply in paragraph-4.2 of his order. In the reply, the assessee in sum and substance stated that considering growth in the industry, the assessee expected with is subsidiary will reap the benefit of start of near future. However, during the Financial Year 2012-13 & 2013-14, the assessee’s performance was not encouraging and the assessee incurred 6 Mum 2018-Kokuyo Camlin Limited. losses and it became difficult to continue funding the CAL and it was also relied that losses in CAL were deteriorating the assessee’s financial position. Looking on the financial position of CAL and assessee, the assessee did not foresee any turn out of business near future. Therefore, the Board of Directors decided to disengage from the activity of advancing and write off of the advances of Rs. 305.32 lakhs. It was further stated that the assessee given advance to CAL for its business and therefore, the write off of such advance is incidental to the business and should be allowed as business loss of commercial expediency either under section 28 & 29. The reply of assessee was not accepted by Assessing Officer. The Assessing Officer concluded that the assessee has stated in its reply that the advances given to subsidiary to start new business. The business of subsidiary is different from the business of assessee. It was further concluded that advances were given to subsidiary to find its working capital required when external financial aid was difficult for subsidiary. The Assessing Officer further concluded that as per the version of assessee that Board of Director decided to disengage from the activities of subsidiary and decided to write off of as the assessee company is wanted to improve the EPS and shareholder value and to disengage itself from loss making subsidiary. Thus, the action of claiming allowable deduction as business expenditure either under section 28, 29 & 37(1) is not justified. The business of subsidiary 7 ITA No. 5190 Mum 2018-Kokuyo Camlin Limited. still going. The assessee company just to reduce the tax liability had claimed the write off of advances to subsidiary as revenue expenditure.

Before the ld CIT(A), the assessee mad similar submission as made before us and before the Assessing Officer. The ld. CIT(A) after considering the submission of assessee concluded that write off of advances to subsidiary company which has different business altogether has not directly sprung out from the business of assessee-company and as such cannot be allowed under section 28, 29 & 37(1). The ld. CIT(A) also concluded that the decision of Hon’ble Bombay High Court in Salem Magnesite Pvt. Ltd (supra) is applicable on the facts of the case.

Before us, the ld. AR of the assessee vehemently argued that the new management has decided to write off of the advances and disengage itself from the activities of the assessee. However, no documentary evidence in the form of any communication or resolution of Board of Director is placed on record. The ld. AR of the assessee though filed a number of decisions in support of his submission; however, the ld. AR of the assessee mainly relied upon the decision of Mumbai Tribunal in Jackie Shroff (supra) and Delhi Tribunal in ACIT vs. OSN Infrastructure & Projects Pvt. Ltd. (supra).

In our view, both the decision are distinguishable on the facts of the present case in Jackie Shroff (supra) case the money was advanced for business expediency, however in the case in hand the assessee funded the capital working requirement of CAL. Further, in ACIT vs. OSN Infrastructure & Projects Pvt. Ltd. (supra), the said assessee was engaged in the business of development of infrastructure, construction and real estate trading, advance/ money to various parties to buy land, the said parties failed to buy land and pay money, however in the case in hand the assessee funded the capital working requirement. Thus, the advance was made for business expediency. Thus, both the case is based on peculiar facts of those cases and is not applicable on the present case. 9 ITA No. 5190 Mum 2018-Kokuyo Camlin Limited.

In the result, Ground No.1 & 2 of the appeal is dismissed.

Ground No. 3 & 4 relates to addition of interest income of Rs. 2,56,442/-. The ld. AR of the assessee submits that the assessee offered the said interest income in subsequent A.Y. i.e. A.Y. 2015-16. The ld. AR of the assessee submits that interest reflected in Form 26-AS of A.Y. 2014-15 was received by assessee in subsequent years relevant to A.Y. 2015-16. Therefore, the said income was considered in the next A.Y. The assessee has not evaded the tax. Since the TDS certificate was received subsequently, therefore, the income was offered in subsequent A.Y. In the past, the assessee recognized the interest income as per TDS certificate and not as per Form 26-AS.

In alternative submission, the ld. AR of the assessee submits that there is no loss to the revenue whether the income is considered by the assessee in the year of reflection in Form 26-AS or receipt of TDS as the tax rate remained uniform over the said period in the books of account. Thus, the entire exercise of revenue is natural. The ld. AR of the assessee further submits that time limit for initial re-assessment proceeding for A.Y. 2015-16 has lapsed. Therefore, the ld. AR prayed to give direction Mum 2018-Kokuyo Camlin Limited. to the Assessing Officer and made the addition in the income for the year under consideration itself.

On the other hand, the ld. DR for the revenue supported the order of authorities below.

We have considered the submission of both the parties and perused the record. During the assessment, the assessee was asked to reconcile the entries in Form 26-AS. The assessee filed its reply dated 22.07.2016 wherein the assessee stated that accept the amount of Rs. 2,56,442/- as the TDS was received in subsequent F.Y. i.e. F.Y. 2014-15, the assessee offered the same on the basis of accrual basis due to non-availability of exact figure. The Assessing Officer on the basis of details of Form 26- AS made the addition of Rs. 2,56,442/-. The ld. CIT(A) upheld the action of Assessing Officer holding that the non-receipt of TDS does not holding any ground and confirmed the action of Assessing Officer.

Considering the facts and circumstances of the case, we direct the Assessing Officer to verify the fact, if the interest of Rs. 2,56,442/- is offered in the subsequent year then the same be deleted from the year under consideration. However, if any difference is found in offering the interest income, the same be taxed in the year under consideration and corresponding set of remaining amount offered in subsequent year be given to the assessee. Hence, Ground No. 3 & 4 are allowed for statistical purpose. 11 ITA No. 5190 Mum 2018-Kokuyo Camlin Limited.

In the result, appeal of the assessee is allowed for statistical purpose.