COSMOS INDUSTRIES LTD.,GHAZIABAD vs. DCIT, NEW DELHI

BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER Assessment Year: 2010-11 Cosmos Industries Ltd., Vs. DCIT, C/o Garg R. Kumar & Associates, CAs, Circle-3(1), 7, Advocate Chambers, New Delhi. Raj Nagar District Centre, Above Dominos Pizza, Ghaziabad. PAN: AAACC6682R (Appellant) (Respondent) Assessee by : Shri Akhilesh Kumar, Advocate Revenue by : Shri Anil Katoch, Sr.DR Date of Hearing : 17.12.2018 Date of Pronouncement : 31.12.2018 ORDER

PER R.K. PANDA, AM:

2. The company’s management decides to involve in these business through ‘SPV’ (special purpose vehicle). Thus two subsidiary companies were formed to implement such objects with the sole object of earning business profit thought such SPV.' 3. The entire investment is such companies was made by the assessee company only as measure of commercial expediency to further is business objectives and were related to the business operations of the assessee company.

4. Before the CIT(A) the assessee reiterated the same submissions as made before the Assessing Officer. Relying on various decisions, it was argued that the action of the Assessing Officer in treating the loss incurred on sale of shares of subsidiary company as long-term capital loss as against business loss treated by the assessee is unjustified and not as per law.

5. However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer by observing as under:-

declared by the appellant company. In regard to the same, it is not denied by the appellant that the shares held by the appellant in two subsidiary companies namely M/s. Cosmos Hydro Power Ltd. and M/s. Cosmos Hospitality and States Pvt. Ltd. had been shown as investment in the balance sheet. It has been stated that both these companies were subsidiaries of the appellant company under the Companies Act, 1956 since the appellant company held 97.5% shareholding of M/s. Cosmos Hydro Power Ltd. and 85% shareholding of M/s. Cosmos Hospitality and States Pvt. Ltd. It was submitted that both these investments in subsidiary companies were not made with an intention to realize any enhancement in value over a period of time and/or to earn dividend there from. It has been stated that such investments were with the business objectives to earn business profits through such special purpose vehicle. In support of the claim, the appellant has referred to the decision of Bombay Bench of Hon’ble ITAT in the case of DCIT vs. Coalgate Pamolive Pvt. Ltd. and it is therefore, submitted that mere disclosure requirement as investment in subsidiaries under Schedule VI of the Companies Act, 1956 should not be a ground to deny the eligibility of loss incurred on sale of investment. In case of Coalgate Pamolive Pvt. Ltd., the facts were that assessee claimed a loss on account of sale of shares held in Camolate Investment Pvt. Ltd. In the said case, it was contended that the assessee company had made investments in the fully owned subsidiary of the assessee company which was engaged in manufacturing activity exclusively for the assessee. On such facts, the I tribunal held that investment in subsidiary was only as a matter of commercial expediency to further its business objectives and were related to primary business operation of the assessee. In view thereof, Hon’ble Tribunal concluded that the head under which, investment in subsidiaries is shown does not and cannot negate the fact that such investments are made on the ground of commercial expediency. It was also held that head under which, dividend income has been assessed to tax does not affect the determination of the question whether shares are purchased on account of commercial expediency or not. It was concluded that so long as the shares are acquired on the grounds of business expediency, loss on sale of shares is treated as an admissible business deduction. A reference was made to the judgment of the Hon’ble Supreme Court in the case of Patnayak and Company and where too, the assessee had subscribed to certain government security but incurred a loss on sale of that security. In that regard, it has been noted as under:-

“The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view.

It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which "from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting" and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT(A) and decline to interfere in the matter. ” 5.1 In the above judgment, it is evident that Hon’ble Tribunal referred to decision of DCIT vs. Gujarat Small Industries Corporation 84 TTJ 22 where the Hon’ble Tribunal had approved the stand of the CIT(A) in following the judgments of the Apex Court in Brook Bond India Ltd. vs. CIT reported in 162 ITR 373 and Rajasthan High Court in the case of Rajasthan Financial Corporation vs. CIT reported in 65 ITR 117 wherein too it has been held that if the investments in shares and sale thereof are closely linked with the business of the assessee, the loss suffered would be trading loss. It was held in the above decisions as under: “5. We have considered the rival contentions of the parties, perused records and gone through the orders of the lower authorities. Some admitted facts noticed by us are that as per the memorandum of association of the assessee-corporation, the main object of the company was to promote the interest of SSI Units in Gujarat State. The main object of the corporation was to help industrial concerns in various ways and help industrial growth of the State. From the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting. From this facts, we find some force that investment in shares of Girnar Scooter Ltd. by the assessee-company was in the nature of trade investment. On perusal of the order of the CIT(A), we find that the CIT(A) has correctly followed the judgment of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (1986) 57CTR (SC) 25 : (1986) 162 ITR 373 (SC). The learned CIT(A) has also followed the judgment of Hon'ble Rajasthan High Court in the case of Rajasthan Financial Corporation vs. CIT (1967) 65 ITR 112 (Raj), wherein it was held that if the investment in shares and sale thereof is closely linked with the business of the assessee, the loss suffered on account of such sale would be a trading loss. ” 6.2 In light of the above, first principle that emerges is that disclosure by the assessee by itself cannot be a ground to determine the nature of the asset held by the assessee and consequently the loss incurred on sale of such an asset.

This has also been stated by the Hon’ble Supreme Court in the case of CIT vs. Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 wherein it has been held as under: "We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. ” 5.3 Similar view was also expressed in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.vs. CIT 227 ITR 172 whereby it has been held as under: "It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B . S. C. Footwear Ltd. ( 1970 ) 77 ITR 857, 860 ( CA ), the income-tax law does not march step by step in the footprints of the accountancy profession. ” 5.4. In view of the above binding precedents, it is evident that the disclosure by itself cannot be a ground to regard the nature of loss claimed as capital loss. However, what is necessary and essential for determination of loss is that investment must be made by the assessee for the purpose of business of the assessee. Thus, there has to be commercial expediency in incurring such expenditure. In the instant case, in my opinion, the aforesaid test has not been satisfied. It has not been established in what manner and on what basis these two companies were set up as a measure of commercial expediency. M/s. Cosmos Hydro Power Ltd. and M/s. Cosmos Hospitality and States Pvt. Ltd. were not in the nature of business carried on by the appellant. On the contrary, they were engaged in distinct line of business of generation of power and real estate respectively which are not in any way related to the existing business of manufacturing and trading of sugar. In view thereof, the claim of loss by the appellant on sale of such investment cannot be regarded as business loss. In arriving at the above conclusion, I am also supported by the judgment of the Hon’ble High Court of Karnataka in the case of United Breweries Ltd. vs. ACIT reported in 229 Taxman 113. In the said case, assessee carried on business activities and sale of power and regular. It established a subsidiary company namely UB Resort Ltd. with a view to extend the business of the assessee company which was to put up resorts at important tourist destinations. The Assessing Officer held that expenditure on investment of said company was not incurred wholly and exclusively for the purpose of business and therefore, disallowed the claim despite the fact that subsidiary company had become defunct under section 560 of the Companies Act, 1956. The CIT(A) dismissed the appeal by holding that expenditure related to setting up of an altogether new business which was separate and distinct from existing business and therefore, loss was a capital loss and not business loss. The Tribunal also affirmed the conclusion of the authorities below. On further appeal, Hon’ble High Court also rejected the claim by holding as under:- “therefore, when the assessee is in the business of manufacture and sale of beer and liquor, if they have lent money to a sister concern, may be a subsidiary, for the purpose of setting up a new line of business, it cannot be said that the money lent by them to the subsidiary company as an assistance could be characterized as an expenditure laid down and expanded wholly and exclusively for the purpose of business of the assessee. In fact, the material on record discloses that the subsidiary company was in existence from 1994 to 2001. The entire money is lent and spent only towards payment of salary and travelling expenses over a period of four to five years and no deductions were claimed in each year when such payments were made. On the contrary, for the first time the claim was put forth as bad debts. After writing off the same when they could not substantiate the said claim, then as an alternative, a claim was put forth under Section 37 of the Act. Though mere mentioning of a wrong provision would not deprive the assessee of the benefit of deductions or exemptions, in trying to find out the real nature of transaction, intention of the parties at an undisputed point of time, clearly go to show that this expenditure was not incurred wholly and exclusively for the purpose of business of the assessee. The said claim is only made after the claim was not accepted under Section 36(1)(vii) of the Act. If the argument of the assessee is to be accepted, whenever a holding company lends money to a subsidiary company, then the holding company would be entitled to the said benefit. That is not the intent of the law. Though there is no prohibition in law for starting subsidiary company, to get the benefit of Section 37, the money lent should be laid out and expended only for the purpose of business of the assessee. There should be a direct nexus between the assessee and the business for which the money is lent. If that connection is not there, merely because the money was lent to a sister concern or to a subsidiary company would not enable the assessee to claim such deduction. The Assessing Officer and the appellate authorities on careful consideration of the material on record have recorded the finding of fact. In the circumstances, we do not see any justification to interfere with the said concurrent finding of fact recorded. ”

5.5. In view of the above, I agree with the conclusion of the Assessing Officer that the loss incurred on sale of shares is a capital loss and not a business loss as the same has no proximity much less close proximity to the business so as to regard the same to be either integral or essential part of carrying on the business or incidental to the business of the appellant. The Hon’ble Supreme Court in the case of A.V. Thomas & Company Ltd. vs. CIT 48 ITR 67 held that when the assessee is neither a banker nor a money lender, the advance made by assessee to a private company to purchase a share could not be said to be incidental to the trading activity of the assessee. 5.6 In view thereof, for the reasons aforesaid, the loss is held to be long term capital loss and as such, grounds raised by the appellant are rejected.”

6. Aggrieved with such order of the CIT(A), the assessee has come in appeal before the Tribunal raising the following grounds:-

“1. That The Commissioner of Income Tax (Appeals) was not justified in holding that loss incurred on sale of shares of subsidiary companies is to be treated as capital loss. As these investment made only as a measure of commercial expediency and to further its business objectives, hence should be treated as business loss.

2. That CIT (Appeals) ignored the decision pronounced by various Courts wherein it was held that shares acquired on ground of commercial expediency, any loss on sale thereof is to be treated as admissible business loss, inspite of the fact that these shares were not converted into stock in trade and the fact that an asset shown as investment per se does not, and can not negate the fact that such investments are made on the ground of commercial expediency.”

7. The ld. Counsel for the assessee strongly challenged the order of the CIT(A).

Referring to para 5 of the order of the CIT(A), he submitted that he has accepted that genuineness of the incurring of the loss by the assessee company has not been denied by the Assessing Officer. He has also accepted the plea of the assessee of revenue loss by holding that the disclosure by itself (as investment) cannot be a ground to regard the nature of loss as capital loss by relying on the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Ltd., 82 ITR 363 and Tuticorin Alkali Chemicals, 227 ITR 172 (SC). However, he sustained the disallowance of loss on the basis that the test of commercial expediency was not satisfied.

“34. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”

Referring to the decision of the Mumbai Bench of the Tribunal in the case of 9. DCIT vs. Colgate Palmolive India Ltd., order dated 25th October, 2011, he submitted that the Tribunal in the said decision has allowed the loss of Rs.5.5 crore incurred upon sale of shares of Camelot as business loss. It was held that as long as investment is justified on the grounds of commercial expediency, the loss of sale of such investment is to be considered as business loss. It was further held that the nature of business expediency could vary from case to case, but, what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. He submitted that the above decision of the Tribunal has been upheld by the Hon'ble Bombay High Court reported in 370 ITR 728 and the SLP filed by the Revenue was dismissed by the Hon'ble Supreme Court vide SLP No.25987/2015 dated 21.12.2017. He also relied on the following decisions:-

(i) Apollo Tyres Ltd. vs. ACIT, order dt.10.01.2017; & (ii) DCIT vs. Gujarat Small Industries, 84 TTJ AHD 22.

The ld. DR, on the other hand, heavily relied on the order of the CIT(A). He 10. submitted that there is no proximate relationship between the nature of business and investment. The various decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case.

15. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). 16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs.10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. 17. The Assessing Officer's view that the advance was not for business purposes as the appellant had no business dealings with the sister company is erroneous. Commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits. In the present case, as we have already demonstrated, there would be a direct benefit on 12

account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient. 13. We find the Mumbai Bench of the Tribunal in the case of CIT vs. Colgate Palmolive (supra) has decided an identical issue where the loss incurred on sale of shares of the subsidiary company was disallowed as business loss. The CIT(A) allowed the claim of the assessee and on appeal by the Revenue, the Tribunal upheld the action of the Assessing Officer and dismissed the appeal filed by the Revenue by observing as under:-

help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as 'investment' per se does not, and cannot, negate the fact that the such investments are made on the grounds of commercial expediency. Similarly, the head under which dividend income is assessed to tax does not also affect determination of question whether the shares are purchased on account of commercial expediency or not. It is only elementary that dividend income, whether the shares are held as investments or as any other asset, is always taxable under the head 'income from other sources'. Therefore, nothing really turns on Assessing Officer's emphasis on the fact that the Camelot shares were shown as investments in the balance sheet and that dividend income from these shares is taxable as income from other sources. We have also noted that as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction. Hon'ble Supreme Court's judgment in the case of Patnaik & Co (supra) deals with a situation in which the assessee had subscribed to certain Government security but incurred a loss on sale of that security. The stand of the assessee was that the assessee had made the said investment with a view to promote its business interests and as subscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT Vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which " from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting" and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold the stand of the CIT(A) and decline to interfere in the matter. ............................................................................................................................. ...........................................................................................................................

14. We find the decision of the Tribunal was upheld by the Hon'ble Bombay High Court reported in 370 ITR 728. The relevant observations of the Hon'ble High Court at para 9 of the order reads as under:-

“9. Upon a perusal of this material, we are unable to agree with Mr. Pinto that question 5.1 reproduced above is a substantial question of law. Given the peculiar facts and circumstances and the nature of the investment so also being for commercial expediency, the view taken by the Commissioner and the Tribunal concurrently cannot be termed as perverse. That view being imminently possible in the given facts and circumstances. It does not raise any substantial question of law.”