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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 9TH DAY OF SEPTEMBER 2020
PRESENT
THE HON’BLE MR. JUSTICE ALOK ARADHE
AND
THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD
I.T.A. NO.184 OF 2013 BETWEEN:
M/S. ACE DESIGNERS LIMITED REPRESENTED BY ITS MANAGING DIRECTOR SHRINIVAS G. SHIRGURKR PLOT NO.7 & 8, II PHASE PEENYA INDUSTRIAL AREA BANGALORE-560058. ... APPELLANT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. M. LAVA, ADV.,)
AND:
THE ADDITIONAL COMMISSIONER OF INCOME TAX (LTU), JSS TOWERS 100 FEET RING ROAD BANASHANKARI III STAGE BANGALRE-560085. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - -
THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 14.12.2012 PASSED IN ITA NO.1150/BANG/2009 FOR THE ASSESSMENT YEAR 2004-05, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN.
(II) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN ITA NO.1150/BANG/2009 DATED 14-12-2012.
THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2004-05. The appeal was admitted by a bench of this Court vide order dated 08.10.2013 on the following substantial question of law:
(i) Whether the Tribunal was justified in law in holding that the amount written off by the Appellant incurred towards M/s. Ace International Inc., during the Financial Year 2003-04 amounting to Rs.3,41,23,200/- is in the nature of capital loss but not business loss under the facts and circumstances of the case?
(ii) Whether the Tribunal was justified in law in not appreciating that the
investments in M/s. Ace International Inc., were made purely on account of commercial expediency for enhancing the business activities of the Appellant and such investment subsequently written off during the Financial Year 2003-04 in substance represented business loss allowable under the provision of section 28 of the Act under the facts and circumstances of the case?
(iii) Without prejudice whether the Tribunal was justified in law and in facts in not holding that the amount of 8,37,500 $ paid as additional amount which is other than as common stock in the subsidiary company ought to have been allowed as revenue expenses under the facts and circumstances of the case?
(iv) Whether the Tribunal was justified in law in not appreciating that the appellant in compliance of the Accounting standard – 13 i.e., “Accounting for Investments” has written off the permanent fall in the value of investment
made in M/s. Ace International Inc., by debiting the profit and loss account for the financial year 2003-04 under the facts and circumstances of the case?.”
Facts giving rise to filing of this appeal briefly stated are that the assessee is a company registered under the Companies Act, 1956 and is engaged in the business of manufacture and export of computerized numerically controlled machines. The assessee for the assessment year 2004-05 filed the return of income on 29.10.2004 declaring the total income of Rs.13,47,18,080/-. The assessee along with the return also filed a detailed note in respect of claim of investment written off towards its solely owned foreign subsidiary viz., ACE International Inc. for a sum of Rs.3,41,23,200/-. The case of the assessee was selected for scrutiny and notice under Section 143(2) of the Act was issued to the assessee. The assessee duly complied with the notice and furnished requisite details, as sought for by the assessing officer. The assessing
officer vide order dated 13.12.2016 determined the total income of the assessee at Rs.18,01,52,340/- by disallowing the claim of business loss of Rs.3,41,23,200/- and concluded the assessment. The aforesaid order was challenged by the assessee before the Commissioner of Income Tax (Appeals) who by order dated 31.08.2009 dismissed the appeal of the assessee. The assessee thereupon approached the Income Tax Appellate Tribunal. The tribunal by an order dated 14.12.2012 dismissed the appeal of the assessee. In the aforesaid factual background, the assessee has filed this appeal.
Learned Senior counsel for the assessee submitted that the loss arising from investment made in Wholly Owned Subsidiary (hereinafter referred to as ‘WOS’ for short) set up for the business purposes is a business loss. It is further submitted that the assessee has incurred expenditure wholly and exclusively for the purpose of business and the loss arising from WOS
outside India being an expenditure made by the assessee for the purpose of business is entitled for write off under Section 37(1) of the Act. It is further submitted that the authorities failed to appreciate that expenditure incurred was in the nature of business activity and the actual business carried on by the assessee and the assessee had set up its WOS in USA only for the purposes of marketing, business, promotion and sales of computerized numerically controlled machines in an export market, which the assessee could not have entered directly without setting up its associated enterprise. The authorities ought to have appreciated that business operations were undertaken by the assessee and investment was made only to cover operational expenses. It is also urged that once there was a nexus established between the activities carried on by the assessee and the expenditure incurred, such expenditure was allowable as business expenditure. It is also urged that common stock of share capital of the
assesse in foreign WOS was only to the extent of $10000 and the balance of $8,37,500 was paid up amount, which could not be treated as share capital and the tribunal ought to have atleast considered such portion as allowable expenditure on the facts of the case. It is also pointed out that the Reserve Bank of India had permitted the assessee on 22.04.2004 and 23.06.2004 to wind up WOS in USA and also write off exports receivable. In support of aforesaid submissions, reliance has been placed in ‘CIT VS. M/S COLGATE PALMOLIVE (INDIA) LTD’, 370 ITR 718 (BOM.), ‘PATNAIK AND CO LTD. VS. CIT’, 161 ITR 365 (SC), ‘CIT VS. INVESTA INDUSTRIAL CORPN. LTD’, (1979) 119 ITR 380, ‘ADDL. CIT VS. BMS (P) LTD’, 119 ITR 321 (MAD.), ‘CIT VS. DHANDAYUTHAPATI FOUNDRY (PRIVATE) LIMITED’, 123 ITR 709 (MAD.), ‘INDIAN COMMERCIAL AND INDSUTRIES CO. (P) LTD. VS. CIT’, 213 ITR 533 (MAD.), ‘CIT VS. INDUSTRY AND COMMERCE ENTERPRISES (P)
LTD’, 118 ITR 606 (ORISSA), ‘RAJASHTHAN FINANCIAL CORPORATION VS. CIT’, 65 ITR 112 (RAJ), ‘BRIGHT ENTERPRISES PVT. LTD. VS. CIT IN ITA NO.224/2013 DATED 24.07.2015 (PUNJAB AND HARYANA), ‘SAHARA GLOBAL VISIION PVT LTD VS. ACIT IN ITA NO.2514/DEL/2014 DATED 30.08.2018 (DELHI-TRIB) and ‘COSMOS INDUSTRIES LTD VS. DCIT IN ITA NO.3730/DEL/2015 DATED 31.12.2018 (DELHI- TRIB).
On the other hand, learned counsel for the revenue submitted that assessee had made a capital investment i.e. purchase of shares and therefore, the same could not be treated as incidental to the business of the assessee. It is submitted that any expenditure incurred for acquisition of a capital asset is a capital expenditure and cannot be treated as business expenditure. It is also submitted that the Tribunal has rightly disallowed the claim of the assessee as business
loss. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in ‘KARAM CHAND THAPAR AND BROS. (P.) LTD. VS. COMMISSIONER OF INCOME-TAX’, (1971) 80 ITR 167 (SC), ‘OBEROI HOTEL (P.) LTD. VS. COMISSIONER OF INCOME-TAX’, (1999) 103 TAXMAN 236 (SC), ‘HASIMARA INDUSTRIES LTD. VS. COMMISSIONER OF INCOME-TAX’, (1998) 98 TAXMAN 303 (SC) and ‘COMMISSIONER OF INCOME-TAX VS. GILLANDERS ARBUTHNOT & CO. LTD.’, (1982) 9 TAXMAN 76 (Cal).
We have considered the submissions made by learned counsel for the parties and have perused the record. The core issue, which arises for consideration in this appeal is with regard to disallowance of business loss written off on account of loss arising out of business investment from WOS in USA. It is well settled legal proposition that while deciding the question whether a receipt is a capital or income, it is not possible to lay
down any single test as infallible or any single criteria as decisive. The question must ultimately depend on fact of particular case and authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. It has further been held that for determining the question of capital and incomes, trading profit or non trading profit are questions do involve a question of law to be drawn from the facts. [See: ‘COMMISSIONER OF INCOME- TAX vs. RAI BAHADUR JAIRAM VALJI’, (1955) 35 ITR 148 (SC), ‘P.H.DIVECHA VS. COMMISSIONER OF INCOME-TAX (1963) 48 ITR 222 (SC), ‘KETTLEWELL BULLEN & CO. LTD. VS. COMMISSIONER OF INCOME-TAX (1964) 53 ITR 261 (SC), ‘GILLANDERS ARBUTHNOT AND CO. LTD. VS. COMMISSIONER OF INCOME TAX’, (1964) 53 ITR 283 (SC) and ‘COMMISSIONER OF INCOME- TAX VS. BEST & CO. (P,) LTD.’, (1966) 60 ITR 11 (SC)]. The aforesaid tests laid down by the Supreme
Court in the aforesaid decisions were referred to with approval in ‘KARAMCHAND THAPPER AND Bros. (P.) LTD. AND OBEROI HOTEL (P) LTD. supra.
The Bombay High Court dealt with the issue viz., where an assessee made an investment in its 100% subsidiary for business purpose, the loss on sale of investment would be treated as business loss. The aforesaid issue was answered in the affirmative by the Bombay High Court in COMMISSIONER OF INCOME-TAX VS. COLGATE PALM OLIVE (INDIA) LTD. supra and it was held that investment was made for commercial expediency. The aforesaid decision has been upheld by the Supreme Court as has been noted by Income Tax Appellate Tribunal, New Delhi Bench in its order dated 31.12.2018 in COSMOS INDUSTRIES LTD vs. DCIT. In PATNAIK & CO. LTD. supra, it was held that the assessee did not hold on the investment the loan indefinitely and there was no enduring advantage and the investment did not bring in an asset of a capital in
nature and the loss suffered by the assessee was a revenue loss and not a capital loss. In INVESTA INDUSTRIAL COPORATION LTD., supra, the division Bench of the High court dealt with a question whether the finances made by the assessee to manage the company were part of or incidental to carrying on a business by the assessee a and since, the managed company went into liquidation the advances became irrecoverable, the loss sustained by the assessee shall be regarded as trading loss.
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 upto company’s expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of WOS, RBI permitted the company to write off the whole of investment made in WOS and unrealized export receivables. The assessee therefore, made a claim to write off the loss of Rs.3,41,23,200/- as revenue expenses allowable under the provisions of the Act.
Thus, from perusal of the aforesaid facts, it is evident that the issue involved in this appeal is covered by decision of Bombay High Court in Colgate Palm Olive (India) Ltd. supra, which has been upheld by the
Supreme Court. The ratio of aforesaid decision is where the assessee makes investment in its 100% subsidiary for business purpose, loss or sale of investment has to be treated as business loss of the assessee. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee. The WOS suffered losses and therefore the assessee wrote off the assessment of Rs.3,41,23,200/- as business loss. The investment was made for the purpose of extension of business activity and not with a view to creating capital asset in the form of holding shares. It is also pertinent to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party. In view of preceding analysis, the first substantial
question of law is answered in the negative and in favour of the assessee. It is not necessary for us to answer the remaining substantial questions of law in view of our answer to the first substantial question of law. In the result, the order of the Tribunal dated 14.12.2012 to the extent of the findings contained against the assessee is quashed.
Accordingly, the appeal is allowed.
Sd/- JUDGE
Sd/- JUDGE ss