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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
O R D E R
PER RAJESH KUMAR, AM
The appeal filed by the assessee is directed against the order dated 23.2.2015, passed by the Principal Commissioner of Income Tax, Mumbai u/s 263 of the Income Tax Act for the assessment year 2010-11 setting aside the assessing order and directing the AO to withdraw the deduction allowed by the AO in respect of advance to subsidiary written off and charged to the profit and loss account.
2 2. Brief facts of the case are that the assessee filed return of income on 25.11.2011 declaring a total income at Rs.89,94,00,245/-. Thereafter revised return was filed u/s 139(5) of the Act declaring a total income of Rs.89,74,89,327/-. The return processed u/s 143(1) and thereafter the case of the assessee was selected for scrutiny under the CASS and accordingly statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. Thereafter, the Commissioner of Income Tax issued notice under section 263 of the Act by observing that the order passed by the AO was erroneous and prejudicial to the interest of revenue as the AO has failed to examine the claim by way of writing off the advance to subsidiary of Rs. 74,13,000/- and hence the order of AO was erroneous and also prejudicial. The contents of show cause notice are reproduced as under: “NOTICE UNDER SECTION 2563 OF THE IT Act, 1961 To The Principal Officer, M/s Raptakos Brett & Co. l.td.. 21-A Mittal Tower.A-wing. Narirnan Point, Mumbai -400 021. Sir, Sub.: Proceedings for revision of order u/s 263 in your case for A.Y.2011-12 - 3 In this case, assessment order was passed u/s 143(3) of the Income- tax Act 1961 on 23/10/13 in which the total income was assessed at RS.92.57 crores as against the returned income of Rs.89.94 crores. Perusal of the assessment folder reveals that the assessee debited a sum of Rs.74,13,000/- as advance to subsidiary company written off. The deduction claimed was duly allowed by the AO. It appears that the AO has allowed the claim which is not in accordance with the provision of law. The deduction claimed does not appear in the nature of bad debt rather it is an advance to subsidiary company being in the nature of capital item which cannot be allowed as deduction. It is further, noted that assessee's claim of bad debts of Rs.2,34,7901- was verified and allowed by the AO. However. similar exercise does not appear to have been made in respect of the above advance written off. Apparently the deduction had been allowed without any verification or application of mind by the AO and therefore, I am of the opinion that the assessment order is erroneous and prejudicial to the interest of revenue as per provisions of Sec. 263 of the IT Act,” 1961. However, before cancelling/setting aside the assessment order with regard to the above expenses, you are allowed an opportunity of hearing before the undersigned by 20.1.2015” The Commissioner observed from the assessment records that the assessee has debited a sum of Rs.74,13,000/- in the profit and loss account on account of writing off of advances to the subsidiary company which was allowed by the AO during the course of assessment proceedings. The Commissioner also noted that the action of the AO in allowing the said write off was incorrect and against the law as the claim was not of trading nature and therefore could not be allowed to be written off. The show cause notice was replied by the assessee by submitting that the assessee was holding company of Raptakos Brett Limited (UK) which in turn held 100 per cent shares in Raptakos Brett South Africa. The primary purpose of establishing 4 and incorporating the subsidiary company was to open product of the assessee in order to expand the existing business by venturing into that market. In order to capture new market the in South Africa, heavy sale promotion expenses were needed to be incurred into order to promote the products of the company and it is only for this purpose the assessee had advanced loan to its subsidiary so as to meet the said promotional expenses over a period of time. The assessee submitted before the Commissioner that despite continuous efforts for 7 years, the assessee’s plan did not got through as the desired market could not be captured and consequently the assessee had to write off the advances given to the subsidiary company by claiming it as deduction in the profit and loss account when the capital of the subsidiary was depleted and eroded completely due to continuous losses from year to year. The assessee also argued that the advances written off were allowable and admissible as deduction under the Act as being given out of business exigencies and therefore the revisionary powers as provided by the provisions of section 263 of the Act were wrongly assumed to disturb the assessment. During the course of proceedings u/s 263 of the Act, the ld.AR submitted that the AO had called for the details as to the advances written off by the assessee and after examining all the relevant details allowed the same. The assessee, therefore, submitted that 5 the order of the AO was neither erroneous nor prejudicial to the interest of the revenue.
The ld. PCIT did not find any merit in the contentions of the assessee and rejected the same by cancelling /setting aside the order of the AO with a direction to withdraw the deduction allowed after providing fair and reasonable opportunity of hearing to the assessee by observing and holding as under : “4. I have carefully considered the above facts and do not find any merit in the contention of the assessee company. The advances made by the assessee to its foreign based subsidiary cannot be considered as admissible deduction either u/s.28, 36(i)(vii) or sec. 37(1) of the Act. It has been claimed that no investment was made but only interest free advance was made for business purposes only. However, the fact remains that the impugned sum is an advance whatever purpose may it involve. Assessee company is apparently not in the business of advancing loans. As such, no deduction could be allowed to an advance/loan which is subsequently written off as the said amount is a capital sum which can neither be claimed as admissible deduction either u/s. 28 or sec. 37(1) of the Act. As regards provision of 36(1 )(vii) read with Sec. 36(2), assessee has not, satisfied the condition laid therein. Reliance could also be placed on following judicial decisions: INDEOUIP Ltd Vs. CIT 202 ITR 417 (Bom) CIT Vs Epsilon Adversers P. Ltd. 208 Taxman,208(Kar) DCM Ltd Vs OCIT 317 ITR (AT) 261(Del) Since the AO has incorrectly allowed the deduction which is not in consonance with the provision of law, sec.263 can be correctly invoked on the facts of the case”
6 4. The ld. AR vehemently submitted before us that the provisions of section 263 have been wrongly invoked by the Commissioner by exercising his revisionary power under the Act as twin conditions proposed to be satisfied before exercising the jurisdiction under section 263 were not satisfied. The order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue. The ld.AR submitted that the advances to the subsidiary company were given over a period of time and out of commercial expediency. The ld. AR further argued that the assessee planned to establish its market through subsidiary company in South Africa for which the said subsidiary company was required to incur heavy promotional expenses and it was only in that connection, the assessee advanced money to the subsidiary company which proved beyond doubt that the advances were given out of commercial expediency and not otherwise and the observations of the Commissioner that the advances were not in the trading nature were incorrect and against the facts of the case. The ld.AR relied on the decision of Mumbai Bench of Tribunal in the case of DCIT V/s Colgate Palmolive (India) Ltd in (Mum) which is confirmed by the jurisdictional High Court and reported in 2015 (370 ITR 728) (Bom) wherein an identical issue has been decided in favour of the assessee.
7 5. On the other hand, the ld.DR submitted before us that the AO has not examined the details as observed by the Commissioner after examination of the case record and noted that the AO did not call for any advance details from the assessee and there was nothing on the assessment records or in the order sheet to this effect. Therefore, the contention of the ld.AR that the AO has called for all the details and applied his mind fully was incorrect and therefore the Commissioner has rightly held that the deduction of Rs.74,13,000/- was allowed without verification of facts and without application of mind by the AO. The ld. DR also relied on the decisions of the Hon’ble Apex Court in the cases of (a) CIT V Amitabh Bachchan [2016] 384 ITR 200 (SC) (b) Rampyari Devi Saraogi V/s CIT [1968] 67 ITR 84 (SC) (c) Decision of Full Bench of Hon’ble Gauhati High Court in the case of CIT V/s Jawahar Bhattachagee (341 ITR 434), (d) the decision of Hon’ble Karnatak High Court in the cae of CIT V/s Infosys Technologies Ltd reported in 17 Taxmann.com 203 (Kar) and (e) the Decision of the Special Bench of the Tribunal in the case of Rajyalakshmi Mill Ltd V/s ITO 313 ITR(AT) 182.
We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and the case laws relied upon by both the parties. We find from the record available 8 before us that the assessee had advanced money to subsidiary company in South Africa in order to establish its products in that market. For that purpose the subsidiary was required to incur huge expenses in promoting the products. According to the AR the money was advanced over a period of time amounting to Rs.74,13,000/- for the incurring expenses for promotion. We further find that the said subsidiary company tried to establish its market in South Africa to sell the product of the assessee but failed and consequently the assessee had to write off the advances given to the said subsidiary company after seven years and the same was written off in the profit and loss account. Now, the question before us is whether the said advance is admissible deduction or not? We would like to deal with the issue on the basis of merits. From the facts, hereinabove, it is apparent that the advances were given by the assessee to its subsidiary out of commercial expediency as the advance was given to establish its products in South Africa through its subsidiary company which was incorporated only with the said objective. The desired results could not be achieved and the subsidiary company was not in a position to repay the advances as whole capital was eroded and depleted. We therefore find merit in contentions of the ld. AR that the advance was given out of commercial expediency and should be allowed as deduction and accordingly, the assessee had rightly claimed the write off of said advances. In our opinion the assessment order as framed 9 by the AO was neither erroneous as the write off of an advance given out of business expediency and exigency was neither an allowable deduction nor any prejudice was caused to the revenue. The case of the assessee is further supported by the decision of the Co-ordinate Bench of the Tribunal rendered in the case of Colgate Palmolive (India) Ltd (supra) in which it has been held that where the subsidiary company under the name and style of Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer other than the assessee-company and assessee extended financial help to Camelot from time to time and the said financial help was clearly in assessee's own business interests. Therefore, the loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interest. Granting of loan itself is justified ground for commercial expediency and the decision only corroborative to writing off is incidental to business purpose. The operative part of the decision is reproduced below:
“7. We find that Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer than the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee's own 10 business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot's only customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and could not be treated in isolation of its legitimate business interests. When the grant of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business deduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial 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 11 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 ITA No. : 5485/Mum/2009 Assessment year: 2003-04 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.”
12 7. From the facts as discussed hereinabove and the ratio laid down by the Co-ordinate Bench of the Tribunal, we find that the money advanced by the assessee to the subsidiary company which was incorporated with sole object of marketing the products of the assessee and any advances given to the said subsidiary were out of business consideration and in order to promote the interest of the assessee and thus were given out of commercial consideration and business interest of the assessee. In our opinion, during the year the writing of such advances owing to non recovery was a admissible deduction and therefore, the said advance was rightly claimed as deduction by the assessee company. Therefore, to invoke the provisions of section 263 by exercising the revisionary power by the Commissioner is not justified and cannot be sustained. Accordingly, we set aside the order of Commissioner and restore that of AO.
In the result, appeal of assessee is allowed.