Case Law Details
Mafatlal Industries Limited Vs ITO (ITAT Mumbai)
Loss on Account of Compensation on Enforcement of Security Paid to Subsidiary Companies is allowable as same was in the course of business
The assessee has claimed loss incurred by two subsidiary companies M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd on the ground that the said loss has been incurred wholly and exclusively in connection with its business for borrowing loan from ILFS. The AO disallowed loss claimed by the assessee on account of compensation paid to two subsidiary companies on the ground that the said loss is in the nature of capital expenditure which is incurred in connection with repayment of loan borrowed from two subsidiaries, therefore, the said loss cannot be allowed as expenditure. The AO has analysed the facts in the light of evidences filed by the assessee to come to the conclusion that the said expenditure is not incurred wholly and exclusively in connection with the business, therefore, merely for the reason that there is a contractual obligation between the parties, compensation paid to reimburse loss incurred by two subsidiaries on account of enforcement of security cannot be allowed as deduction. The AO has not disputed the fact that the assessee has incurred loss on account of enforcement of security by ILFS. In fact, M/s ILFS has sold shares belonging to two subsidiary companies and recovered loss of Rs.12,60,000 and Rs.1,58,40,000. It is also an admitted fact that there is a contractual obligation in terms of agreement between the parties that in case any loss incurred on account of enforcement of security by the lender for non repayment of loans, then such loss shall be indemnified and reimbursed to two subsidiary companies. These facts are not disputed by the lower authorities. The AO is only on the point that the said expenditure is a capital expenditure because it arises out of a loan transaction between the assessee and the bank and the assessaee has reimbursed loss incurred by subsidiary companies in the process of enforcement of security being shares pledged with the lender.
Having heard both the sides, we do not find any merit in the findings of the AO for the reason that the AO has not denied the fact that the assessee has borrowed loan from M/s ILFS for the purpose of its business. In the process, the assessee has pledged NOCIL shares held by two of its subsidiary companies with the lender for security of loan. As per the contractual agreement between the parties, the assessee has reimbursed loss incurred by two subsidiary companies. Therefore, we are of the considered view that the said loss is incurred wholly and exclusively in connection with the business of the assessee and accordingly, the AO was incorrect in disallowing loss on account of compensation on enforcement of security.
FULL TEXT OF THE ITAT JUDGMENT
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