Loss from Forfeiture of advance against Convertible Warrants held as stock in trade is Business Loss
Case Law Details
Lustre Merchants Pvt. Ltd. Vs DCIT (ITAT Delhi)
The only dispute in the instant appeal is regarding the treatment of the loss on account of forfeiture of share application money amounting to Rs. 41,61,000/- as business loss or capital loss. While the loss is not in dispute, according to the assessee it is a business loss whereas according to the Revenue it is a capital loss. Thus, the genuineness of the said loss is not doubted and the only question is whether it is a capital loss or business loss. As mentioned by the Assessing Officer in the assessment order itself, the assessee is a non-banking finance company engaged in the business of dealing in shares and securities. It had applied for 750000 convertible warrants @ 64 per warrant of a listed company on 16th January, 2006 and remitted the application money of Rs. 48 lakhs. We find, on 23rd March, 2006, the assessee company opted for conversion of 1 lakh share warrants into equity shares by making a payment of Rs.57,60,000/- being 90% value of share warrants and adjusting an amount of Rs.6,40,000/- out of the amount of Rs.48 lakhs paid earlier at the time of making the application for 750000 share warrants. The assessee did not remit the balance amount of Rs.41,60,000/- before the due date of 15th July, 2007 for which the said listed company forfeited the application money of Rs.41,60,000/-. According to the Assessing Officer, if the assessee would have remitted the amount it would have incurred a loss of Rs.5 lakh only and by not making the payment it incurred a loss of Rs.41,60,000/- and, therefore, it is not a commercial decision but is a colourable device to avoid its tax. Further, such a transaction would attract the provision of section 2(47) of the Act and the extinguishment of any right therein is a capital loss and cannot be held as a business loss. We do not find any merit in the action of the Revenue authorities especially in view of the direction of the Tribunal in the original proceedings while setting aside the issue to the file of the Assessing Officer. There is no finding by the Assessing Officer to the direction by the Tribunal that the lower authorities have not adverted to the crucial fact i.e., assessee’s investment in Surya Roshni Ltd., a group company by way of subscription to the convertible debentures being held as stock-in-trade not only in this year, but, in earlier year also. Once the shares are held as stock-in-trade as argued before the Tribunal on the earlier occasion for which the Tribunal had restored the issue to the file of the Assessing Officer for verification of this crucial fact and since there is no material to controvert the above submission of the assessee before the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal.
CBDT, vide Circular No. 6/2016 dated 29th February, 2016 had categorically held that ‘where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.
Respectfully following the decisions cited , we hold the loss amounting to Rs.41,60,000/- is a business loss.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order dated 21st September, 2015 of the CIT(A)-5, New Delhi, relating to assessment year 2008-09.
2. This is the second round of litigation before the Tribunal.
3. Facts of the case, in brief, are that the assessee is a company engaged in the business of dealing in shares and securities. It filed its return of income on 19th September, 2008, declaring a loss of Rs.64,34,736/-. The Assessing Officer, during the course of assessment proceedings, observed that the assessee company applied for 750000 convertible warrants @ Rs.64/- per warrant of a listed company on 16th January, 2006 and remitted the application money amounting to Rs.48 lakhs. On 23rd September, 2006, the assessee company opted for conversion of 1 lakh share warrants into equity shares by making a payment of Rs.57,60,000/-being 90% of the value of share warrants and adjusting an amount of Rs.6,40,000/-out of Rs.48 lakhs paid at the time of making application for 750000 share warrants. The balance amount of Rs.41,60,000/- was outstanding as on 31.03.2006 representing application money of 10% value of balance 650000 convertible warrants. As per the terms and conditions of the preferential issue of optional convertible warrants, the assessee was required to make payment for balance amount on or before 15th July, 2007 as per SEBI guidelines. Since the assessee company failed to remit the balance outstanding amount of allotment money for which the said listed company forfeited the application money amounting to Rs.41,60,000/-, the assessee claimed the same as a business loss. The Assessing Officer, in the order passed u/s 143(3) on 25th January, 2010, disallowed the said loss debited to the Profit & Loss Account and added to the total income of the assessee. While doing so, the Assessing Officer relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Mrs. Grace Collis (2001) 248 ITR 323, the decision of the Hon’ble Karnataka High Court in the case of DCIT vs. BPL Sanyo Finance Ltd., 312 ITR 63, the decision of the Hon’ble Delhi High Court in the case of CIT vs. Chand Ratan Bagri, 230 CTR 258 and the decision of the Hon’ble Supreme Court in the case of Vania Silk Mills Pvt. Ltd. vs. CIT, 98 CTR 153.
4. The assessee preferred an appeal, but, without any success. Subsequently, taxguru.in the Tribunal, vide ITA No.3836/Del/2011, order dated 13th February, 2012, restored the issue to the file of the Assessing Officer for fresh adjudication of the issue by observing as under:-
“5. We have heard rival contentions and gone through the entire material available on record. As the facts emerge, the lower authorities have not adverted to the crucial facts i.e. assessee’s investment in Surya Roshni Ltd., a group company, by way of subscription to convertible debentures being held as stock in trade not only in this year but earlier year also. These facts have a material bearing on taking a proper decision as to whether assessee’s investment was a business asset. Besides, the AO has heavily relied on the issue of lock in period as a determinate factor to hold the impugned investment as accrual of a right while denying the assessee’s claim. In our considered view the contentions raised by the assessee have not been duly considered by AO. The observations about the assessee’s convertible debentures/ warrants because of the lock in period becoming capital asset has also not been substantiated in a justified manner. In the entirety of facts and circumstances, we are inclined to set aside the issue back to the file of AO to consider the same afresh after giving the assessee an opportunity of being heard and keeping in mind the Bombay High Court judgment (supra).”
5. In the set aside proceedings, the Assessing Officer noted that the facts of the case are distinguishable from the case of CIT vs. Tainwala Trading & Investment Company Ltd. decided by the Hon’ble Bombay High Court. He observed that in the case of Tainwala Trading & Investment Co. Ltd., as against the agreed price of Rs. 72.70 at the time of debentures were quoted, the share price had gone down substantially to Rs.14 per share and, therefore, the decision to forego the amount invested in the convertible debentures was held to be a commercial decision to avoid higher loss and, therefore, the Hon’ble High Court held it to be an allowable business loss. However, in the instant case, the convertible debentures were agreed to be purchased at a price of Rs.64 per share. The assessee also exercised the option for conversion of 1 lakh convertible debentures on 22nd March, 2006 when the price of each share was Rs.65.85. He noted that at the time the decision was taken to forego the amount invested, the share price was more than Rs.60/-. Since the investment was made with a view to earn profit it would have been commercially expedient to utilize the option to renounce the share rather than acquiring the said shares which would have resulted in loss of Rs.5 lakhs approximately rather than Rs.41.60 lakh which the assessee incurred in the current year. The Assessing Officer further noted that the decision to invest in the shares of M/s Surya Roshni Ltd., was not a normal business transaction. The assessee was the promoter company of M/s Surya Roshni Ltd. and the impugned transactions showed that they were set up to avoid tax liability. He, therefore, was of the view that the corporate veil of the company can be lifted to examine the real character of transaction. Since according to the Assessing Officer the transaction was a colourable device, he held that the same could not be allowed as a business loss too, but, has to be treated as a capital loss. He accordingly rejected the claim of the assessee of the said loss of Rs.41,60,000/- on account of forfeiture of convertible debentures as business loss.
6. Before the CIT(A), the assessee submitted that it was consistently engaged in the business of dealing in shares and securities under stock-in-trade portfolio. The Assessing Officer failed to distinguish the facts in assessee’s case vis-a- vis the facts in the case of Tainwala Trading & Investment Company Ltd. It was argued that the Assessing Officer travelled beyond the scope of the directions issued by the Tribunal by going into the concept of commercial expediency under the misconceived notion that the assessee could have at best incurred a loss of Rs.5 lakhs if it had exercised the option of acquiring the shares. Relying on various decisions, it was submitted that the action of the Assessing Officer was illegal and not in accordance with law and, therefore, the disallowance made by the Assessing Officer should be deleted.
7. However, the ld. CIT(A) was not satisfied with the arguments advanced by the assessee. Relying on various decisions, she held that the treatment by an assessee in its books of account is not determinative of the real nature of any commercial transaction. According to her, the existence of an entry in the books of account of the assessee cannot be the decisive or conclusive factor in determining whether the deduction claimed is a revenue expenditure or not. She noted that the assessee company in the instant case has clarified before the Assessing Officer, vide letter dated 01.11.2010 that all the shares had been purchased out of its own funds and not from any borrowed funds. The only trading transaction carried out by the assessee during the year was the intended purchase of 24 lakh shares in IPO Reliance Power Ltd., which was financed primarily from a loan taken from India Bulls Finance Company Pvt. Ltd., to the tune of Rs.25.68 crores. She noted that while the trading in the shares of Reliance Power Ltd. was funded by way of borrowed funds on which interest of Rs.20,05,151/- was also claimed, and which was allowed in the assessment proceedings as business expenditure, however, the investment in the shares of Surya Roshni Ltd., was out of own funds. This, according to her, lends credence to the fact that the assessee intended to hold the shares as a capital asset/investment. Relying on various decisions, she held that a right to invest in preference share is a capital asset. So far as the decision of the Hon’ble Bombay High Court in the case of Tainwala Trading & Investment Company Ltd. (supra) is concerned, she held that the same cannot be applied to the facts of the present case since, according to her, facts of that case was distinguishable from the facts of the present case. Further, there has been a deviation of Accounting Standard-13 since the shares have been forfeited in advance of the lock in period and the assessee had utilized its own funds to make investment in the equity in the company and the decision to forfeit the shares has not been intended for commercial consideration. She accordingly upheld the action of the Assessing Officer in disallowing the claim of expenditure of Rs.41,61,000/- on account of forfeiture of shares as a business expenditure.
8. Aggrieved with such order of the CIT(A) the assessee is in appeal by raising the following grounds:-
“Classification of loss arising from forfeiture of advance paid on convertible warrants (business or capital field)
1. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in affirming the order of Assessing Officer (AO) treating the subject loss amounting to Rs 41,60,000 as capital loss in nature.
2. That on the facts and in the circumstancesof the case and in law, learned CIT-A erred in affirming the order of Assessing Officer (AO) treating the subject loss amounting to Rs 41,60,000 as capital loss in nature in gross non appreciation of:
a. AS-13 of ICAI do not apply to stock in trade as clarified in our detailed reply available on records;
b. Misinterpreted the facts about fluctuation in price of shares of Surya Roshni Ltd/SRL leading to perverse findings;
c. Price of shares of SRL on cut off date was lower than original subscription price justifying appellant’s prudent action for bearing of subject loss;
d. Loss claimed was as per SEBI guidelines (point no. 12.1.2.3(c)) pointed in our reply available on records (letter dt. 16/7/2007);
e. Assessee is trader being registered NBFC and having sole trade portfolio;
f. Applicable order of Bombay high court in Tainwalla case directed by ITAT to be considered expressly is wrongly distinguished;
g. In worst case, difference of Rs 4.50 with reference to 650000 warrants should be considered to be allowed as business loss
h. No cited case by CIT-A is with reference to NBFC
3. That the appellant craves leave to add, to, amend, modify, rescind, supplement or alter any of the grounds stated herein above, either before or at the time of hearing of this appeal.”
9. The ld. counsel for the assessee strongly challenged the order of the CIT(A) in confirming the action of the Assessing Officer in disallowing the claim of business loss. Referring to CBDT Circular No.6/2016 dated 29th February, 2016, he drew the attention of the Bench to para 3 a) of the Circular where it has been clarified by the CBDT that ‘where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. He submitted that the Assessing Officer nowhere has doubted the entries in the books of account or called into question regarding the entries in the books of account. Referring to a series of decisions, he submitted that bona fide of the decision taken by the assessee cannot be questioned by the Revenue authorities and the Assessing Officer cannot sit on the arm chair of the assessee to decide how the assessee should do its business. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of Tanvi Financial Services Private Limited vs. ITO, vide ITA No.893/Hyd/2017, order dated 13th April, 2018, he drew the attention of the Bench to para 10 of the order which reads as under:-
“10. We find that there is no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of the shares. The distinguishing factor from the case of BPL Sanyo Finance Ltd (cited Supra) and the assessee before us is that BPL Sanyo Finance Ltd was an investor while the assessee before us is a trader in shares and not an investor and was also justified in not making the payment of the balance of the share application money. If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expenditure and the loss incurred by the assessee on forfeiture of the initial payment already made by the assessee is capital in nature. But if the assessee is trading in shares and in the course of such business, if it has incurred loss, it would be revenue expenditure. The assessee has filed the copies of the balance sheets along with the relevant schedules to prove that the assessee has been trading in shares and has been treating the shares as current assets all along. Even before the AO, the assessee had stated to be a trader in shares and therefore, the treatment of the loss on forfeiture of shares is correctly accepted by the AO as revenue loss. Thus, the AO has accepted one of the possible views and there is no erroneous application of law, making the assessment order erroneous and prejudicial to the interest of revenue. We find that the CIT has not considered this issue. We accordingly set aside the order of CIT u/s 263 and restore the order of the AO dated 30.03.2015.”
10. Referring to the decision of the Hon’ble Gujarat High Court in the case of Sakar Lal Balabai vs. ITO, 100 ITR 97, he submitted that the Hon’ble High Court has distinguished between the tax avoidance and tax evasion. He submitted that his case may be a legitimate tax avoidance, but cannot be called as a tax evasion.
11. Referring to the decision of the coordinate Bench of the Tribunal in the case of Cosmos Industries Ltd. vs. DCIT, vide ITA No.3730/Del/2015, order dated 31st December, 2018, he submitted that the Tribunal in the said decision has held that the loss incurred on sale of shares of subsidiary companies is a business loss and not a capital loss as held by the CIT(A). Accordingly, the appeal filed by the assessee was allowed.
12. Referring to the decision of the Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd. vs. CIT, reported in 379 ITR 347 (SC), he drew the attention of the bench to para 13 of the order which reads as under:-
“In the process, the Court also agreed that the view taken by the Delhi High Court in ‘CIT v. Dalmia Cement (B.) Ltd.’ [2002] 254 ITR 377 (Delhi) wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of 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. It further held that no businessman can be compelled to maximize his profit and that 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.”
13. He accordingly submitted that the order of the CIT(A) being not in accordance with the law should be set aside and the loss claimed by the assessee should be allowed as normal business loss.
14. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). She submitted that the Assessing Officer has followed the direction of the Tribunal and has distinguished the decision in the case of Tainwala Trading & Investment Company Ltd. (supra). So far as the CBDT Circular No. 6/2016 relied on by the ld. counsel for the assessee, she submitted that the said Circular is prospective. She accordingly submitted that since the ld.CIT(A) has passed a very speaking order on this issue, therefore, the same should be upheld and the grounds raised by the assessee should be dismissed.
15. The ld. counsel for the assessee, in his rejoinder, submitted that the said Circular being clarificatory in nature is retrospective and cannot be said to be prospective.
16. We have considered the rival arguments advanced by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also gone through the various decisions cited before us. The only dispute in the instant appeal is regarding the treatment of the loss on account of forfeiture of share application money amounting to Rs.41,61,000/- as business loss or capital loss. While the loss is not in dispute, according to the assessee it is a business loss whereas according to the Revenue it is a capital loss. Thus, the genuineness of the said loss is not doubted and the only question is whether it is a capital loss or business loss. As mentioned by the Assessing Officer in the assessment order itself, the assessee is a non-banking finance company engaged in the business of dealing in shares and securities. It had applied for 750000 convertible warrants @ 64 per warrant of a listed company on 16th January, 2006 and remitted the application money of Rs. 48 lakhs. We find, on 23rd March, 2006, the assessee company opted for conversion of 1 lakh share warrants into equity shares by making a payment of Rs.57,60,000/- being 90% value of share warrants and adjusting an amount of Rs.6,40,000/- out of the amount of Rs.48 lakhs paid earlier at the time of making the application for 750000 share warrants. The assessee did not remit the balance amount of Rs.41,60,000/- before the due date of 15th July, 2007 for which the said listed company forfeited the application money of Rs.41,60,000/-. According to the Assessing Officer, if the assessee would have remitted the amount it would have incurred a loss of Rs.5 lakh only and by not making the payment it incurred a loss of Rs.41,60,000/- and, therefore, it is not a commercial decision but is a colourable device to avoid its tax. Further, such a transaction would attract the provision of section 2(47) of the Act and the extinguishment of any right therein is a capital loss and cannot be held as a business loss. We do not find any merit in the action of the Revenue authorities especially in view of the direction of the Tribunal in the original proceedings while setting aside the issue to the file of the Assessing Officer. There is no finding by the Assessing Officer to the direction by the Tribunal that the lower authorities have not adverted to the crucial fact i.e., assessee’s investment in Surya Roshni Ltd., a group company by way of subscription to the convertible debentures being held as stock-in-trade not only in this year, but, in earlier year also. Once the shares are held as stock-in-trade as argued before the Tribunal on the earlier occasion for which the Tribunal had restored the issue to the file of the Assessing Officer for verification of this crucial fact and since there is no material to controvert the above submission of the assessee before the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal.
17. We find the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that ‘where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. For the sake of ready reference, we reproduce the CBDT Circular No.6/2016 dated 29th February, 2016 below:-
“Sub: Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business Income – Instructions in order to reduce litigation – reg.- Sub-section (14) of Section 2 of the Income-tax Act, 1961 (‘Act’) defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot ot uncertainty and litigation in the past.
2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes (‘CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations .
3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms ca.n be laid down to decide the character of income from sale of shares andsecurities (Le. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following.
a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
4. It is, however, clarified that the above shall not apply in respect of such tran sactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions.
5. It is reiterated that the above principles have been formulated with t he sale objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.
18. In our opinion, the above Circular being clarificatory in nature is retrospective and cannot be held as prospective as argued by the ld. DR. We further find the coordinate Bench of the Tribunal in the case of Cosmos Industries Ltd. (supra) while deciding somewhat identical issue has held that the loss incurred on sale of shares of a subsidiary company is a business loss. The relevant observation of the Tribunal from para 12 onwards reads as under:-
“12. We have considered the rival arguments and perused the orders of the Assessing Officer and CIT(A). We have also considered the various decisions cited before us. We find the Assessing Officer disallowed the amount of Rs. 71,69,290/- claimed by the assessee on account of loss on sale of investments by holding that such loss is a long-term capital loss and, therefore, is not eligible for setting off against the business income declared by the assessee. Treating the said loss as long-term capital loss, the Assessing Officer has allowed the carry forward of the same as per the provisions of the Income-tax Act. We find the ld.CIT(A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the ld. counsel for the assessee that loss on sale of shares held as investment in subsidiary companies is a revenue loss. It is also his argument that when holding company invests amounts for business of its subsidiary, it must be held for business expediency. We find merit in the arguments advanced by the ld. counsel for the assessee. We find the Hon’ble Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd. (supra), while deciding the issue of commercial expediency has observed as under:-
14. The appellant’s case meets each of the tests stipulated by the Division Bench. In fact, it meets a higher test. When a holding company invests amounts for the purpose of the business of its subsidiary, it must of necessity be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amounts advanced to it by the holding company would not merely indirectly but directly benefit its holding company. In the case before us, the subsidiary had to be funded to a large extent for otherwise it would not have survived. If it had not survived and had gone into liquidation, the appellant would have suffered directly on account of an erosion of its entire investment in the subsidiary. In this case, the financial assistance was not only prudent but of utmost necessity for without it the subsidiary would have suffered grave financial prejudice.
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 inA. 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 taxguru.in 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 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:-
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 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 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.
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24. Having heard the rival contentions, we find that the issue is covered in favour of the assessee by the decision of ITAT Delhi (SB) in the case of ITO v. Ekta Promoters (P)Ltd., (2008) 113 ITD 719 (Delhi)(SB), wherein, it has been held that section 223D will have application only w.e.f. A.Y. 2004-05 and cannot be applied to A.Y. 2003-04. The assessment year under consideration in this case is 2003-04. We also find that Hon’ble Jurisdictional High Court in the case CIT v. M/s. Bajaj Hindustan Ltd in Income Tax Appeal No.198 of 2009 , held that the provisions of section 234D inserted w.e.f. 1.6.2003 have no retrospective effect. Respectfully following the decision in the case of Ekta Promoters (supra), and also in the case of Bajaj Hindustan Ltd (supra), we uphold the action of the CIT(A) and decline to interfere.”
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.”
15. We find the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court. The various other decisions relied on by the ld. counsel for the assessee also support his case. Under these circumstances, we are of the considered opinion that the CIT(A) was not justified in holding that the loss incurred on sale of shares of subsidiary companies is a capital loss and not a business loss. The grounds raised by the assessee are accordingly allowed.”
19. Respectfully following the decisions cited supra, we hold the loss amounting to Rs.41,60,000/- is a business loss. The various decisions relied on by ld. CIT(A) are distinguishable and not applicable to the facts of the present case. In this view of the matter, the order of the CIT(A) is set aside and the grounds of the assessee are allowed.
20. In the result, the appeal filed by the assessee is allowed.
The decision was pronounced in the open court on 30.10.2019.
