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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
Aforesaid appeal at the instance of assessee is directed against order dated 30th January 2015, passed by the learned Commissioner (Appeals)–3, Mumbai, for the assessment year 2009–10.
Solitary issue in dispute in the present appeal is disallowance of deduction claimed ` 29,20,618, being advances to subsidiary companies written–off during the year.
2 Quantum Advisors Pvt. Ltd.
Brief facts are, the assessee is engaged in the business of providing money management services, investment advisory, back office services, etc. For the assessment year under consideration, assessee had filed its return of income on 30th September 2009, declaring nil income. In the course of assessment proceedings, the Assessing Officer on verifying the details submitted before him noticed that assessee had debited an amount of ` 29,20,618 to Profit & Loss account. When called upon to explain the nature of such deduction, it was submitted by the assessee, looking at the huge potential of investment by non–residents in the Indian infrastructure, the assessee had floated a subsidiary company in the name and style of “Quantum Equity Advisors Pvt. Ltd.” (QEAPL) to tap the non–resident Indian by launching its India dedicated infrastructure fund. It was submitted, to meet the administrative expenditures as well as expenditures incurred in making presentation to potential over–seas clients, the assessee had advanced the amount of ` 29,20,618 to QEAPL. It was submitted, due to recession in the financial year 2008–09, the purpose for which QEAPL was floated did not fructify and ultimately having become defunct, its name was struck off from the records of ROC. As a result, the amount advanced to QEAPL to meet certain expenditure could not be recovered, hence, were written–off. It was submitted, as the expenditure incurred was wholly and exclusively for the business of 3 Quantum Advisors Pvt. Ltd.
the assessee, the same should be allowed. The Assessing Officer, however, was not convinced with the explanation of the assessee. He observed, the amount advanced to sister concern cannot be the business expenditure of the assessee under section 37 of the Act. On verifying the statement of accounts of QEAPL the Assessing Officer observed that the expenditure incurred by QEAPL with the amounts advanced by the assessee are in the nature of pre–operative and preliminary expenditure and not for day–to–day business activities, hence, are in nature of capital expenditure. He observed, the assessee is the creditor for the subsidiary company in the capital and share holding funds and not for day–to–day business transactions of the company for sales and purchase expenditure. Accordingly, he held that the amount claimed as deduction is not allowable under section 37 of the Act, hence, added back to the income of the assessee. Being aggrieved of such additions, assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), however, did not find merit in the submissions of the assessee. He also agreed with the Assessing Officer that the expenditure incurred by QEAPL is in the nature of preliminary expenses which had to be capitalised in its accounts. Relying upon certain judicial precedents, the learned Commissioner (Appeals) observed that the assessee company was not in the 4 Quantum Advisors Pvt. Ltd.
business of lending money and further money was advanced to subsidiary to enable it to set–up its business which is a capital asset of the subsidiary. Therefore, loan granted to the subsidiary did not arise directly from the business of the assessee or incidental to it, hence, write off of advance to subsidiary cannot be allowed as business loss.
Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the subsidiary company was set to promote the business of the assessee and the assessee is a majority stake holder in the subsidiary. Therefore, it cannot be said that money advanced to the subsidiary is not for the business purposes of the assessee. Refuting the allegation of the Departmental Authorities that the expenditure was in capital field, the learned Authorised Representative referring to the details submitted before the learned Commissioner (Appeals) contended, the expenditures were clearly in revenue field as they were towards day– to–day expenditure. He submitted, though, the expenditure was shown under the head “Pre–operative and Preliminary Expenses” by the subsidiary, however, the nature of expenditure incurred such as travelling expenditure for meeting potential clients / investors abroad, office expenditure, printing and stationary, etc., would show that they are revenue in nature. Learned Authorised Representative submitted, since the subsidiary was created to promote the business of the 5 Quantum Advisors Pvt. Ltd.
assessee, the amount advanced is wholly and exclusively for the business purposes of the assessee, therefore, allowable. In this context, he relied upon the following decisions:– i) S.A. Builders v/s CIT, [2007] 288 ITR 001 (SC); and ii) ACIT v/s Best and Crompton Engineering Ltd., [2013] 36 taxmann.com 555 (Chennai).
Learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied. The core issue arising for consideration is, whether the amount advanced to the subsidiary is allowable as deduction as well as business expenditure or business loss. The assessee’s claim has been disallowed by the Departmental Authorities primarily on the following two reasons – (i) expenditure incurred is not wholly or exclusively for the business of the assessee; and (ii) the expenditure incurred by the subsidiary being pre–operative and preliminary expenditure is capital in nature, hence, not allowable. There is no dispute that the assessee had advanced the amount of ` 29,20,617 to its subsidiary QEAPL to meet certain expenditure. It is also evident from the facts on record
6 Quantum Advisors Pvt. Ltd. assessee is 99% stake holder in QEAPL and it was created to tap non– resident Indians for investing in Indian infrastructure sector. Thus, there is no doubt that the object of promoting the subsidiary is to advance the business of the assessee. Therefore, the money advanced to the subsidiary is for the benefit of assessee’s business. As far as the nature of expenditure is concerned, going by nomenclature under which the subsidiary has shown the expenditure the Departmental Authorities have treated it as capital. However, as could be seen from the submissions made before the learned Commissioner (Appeals), the expenditure incurred was mostly on traveling and other incidental expenditure for meeting potential client / investor in connection with raising funds for investment in infrastructure sector in India. Thus, prima–facie, it appears the expenditure incurred is not connected to the capital field. The Hon'ble Supreme Court in S.A. Builders (supra) has held that the expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman would incur for the purpose of business. The expenditure may not have been incurred under any legal obligation, but, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Following the aforesaid decision, the Hon'ble Supreme Court in Hero Cycles Pvt. Ltd. v/s CIT, Civil Appeal no.514/2008, held that advance given to subsidiary for providing
7 Quantum Advisors Pvt. Ltd. additional margins to meet the working capital for meeting any cash losses is in business expediency, hence, allowable as business expenses. Applying the aforesaid ratio laid down by the Hon'ble Supreme Court to the facts of the present case, it is observed that the money advanced to the subsidiary is directly linked to the business of the assessee as the subsidiary was formed for promoting the business of the assessee. Further, it is evident that the expenditure incurred by the subsidiary is shown as pre–operative or preliminary expenses. However, it is not towards investment in capital field like shares of the subsidiary, as far as assessee is concerned, but for meeting the day– to–day business expenditures of the assessee as is evident from the details of expenditure submitted before the learned Commissioner (Appeals). As far as the decision of the Hon'ble Jurisdictional High Court in Salem Magnesite Pvt. Ltd. v/s CIT, [2010] 321 ITR 43 (Bom.) relied upon by the learned Commissioner (Appeals), we must observe that in the said case, the expenditure incurred was held to be capital in nature as it was for construction of a jetty. Whereas, in the case of the present assessee, the subsidiary has not created any capital asset out of the amount received from the assessee. Therefore, in our view, the amount advanced by the assessee to its subsidiary is allowable as deduction if not under section 37, but certainly as business loss. Accordingly, we delete the addition.
8 Quantum Advisors Pvt. Ltd.
In the result, appeal stands allowed. Order pronounced in the open Court on 20.12.2016