Refex Industries Limited Vs DCIT (ITAT Chennai)
From the factual matrix as enumerated in preceding paragraphs, it could be gathered that the assessee was engaged in refrigerant gases which are used mostly in Air Conditioners, refrigerators and refrigerating equipments. With a view to expand its business and with a view to facilitate import of gases, the assessee decided to acquire a Singapore entity i.e. KERPL. Since the statutory framework did not permit the assessee to make direct investment, the assessee floated another wholly owned subsidiary i.e. STPL to facilitate the acquisition. The acquisition of KERPL would have enabled the assessee to carry on its business more smoothly and in a more profitable manner since it would have provided assessee a strong foothold in the international market and would have served larger business interest of the assessee. The same is supported by the fact that M/s KERPL was engaged in the same line of business as that of assessee. To facilitate such an acquisition, necessary permissions from statutory authorities viz. RBI, SEBI etc. were taken and due compliance was made with the requirement of the Companies Act, 1956. For the same, the assessee took steps to conduct due diligence and thorough background check of KERPL and its promoters before the deal could be finally concluded. Since STPL was wholly owned subsidiary of the assessee, it had no independent source of income and fully dependent upon assessee to fund the acquisition and to incur related expenditure. The expenditure of Rs.770.16 Lacs was spent by the assessee towards professional fee, legal fee, travelling etc. Such expenditure was grouped under the head ‘Loans and Advances’ in the Balance Sheet with an intention to recover the same from STPL. However, unfortunately, the assessee could not acquire 90% stake in KERPL as planned but stopped at 51% which resulted into disagreement between the assessee and KERPL. Consequently, entire transaction was reversed and in the process, the assessee suffered losses. The amount of Rs.770.16 Lacs as due from STPL became irrecoverable and the assessee had no option but to write-off of the same. Similarly, the assessee had advanced bank guarantee on behalf of STPL so as to fund the acquisition. But since the acquisition did not happen and STPL was unable to pay the Bank Loan, the guarantee against the assessee was invoked and the assessee had to pay an amount of Rs.508 Lacs on account of bank guarantee. The last write-off of Rs.675.26 Lacs arises on account of assessee’s inability to acquire KERPL, the shares were re-transferred to KERPL. As a result, STPL was reduced to a shell company as the objective of the entire exercise was terminated midway. The value of the investment made by the assessee was reduced substantially and the loss thus suffered by the assessee was claimed as write-off in the Profit & Loss Account.
We find that all the three write-off were part and parcel of the same transaction and arose in the course of assessee’s efforts to run its business more smoothly and in a more profitable manner. Had the acquisition been materialized, the assessee would have benefitted by way of increase in business and better trading results. Therefore, it could be well said that the acquisition was in the normal course of assessee’s business with a view to improve trading results. Any loss arising therefore, thus, was to be viewed as loss in the revenue field and not in capital field as erroneously held by lower authorities. All the above stated facts would lead to a conclusion that the investments were in furtherance of business interest of the assessee and were made out of commercial expediency. The main purpose of investment was not to acquire any manufacturing capacity or any infrastructural capacity but the main purpose was to boost assessee’s sales. Therefore, the investments could not be said to be in capital field rather the same were meant to improve the top line of the business by way of higher revenue profits.
We find that the issue on similar factual matrix is squarely covered by the cited decision of Hon’ble Bombay High Court in CIT V/s Colgate Palmolive India Ltd. (370 ITR 728) wherein it was held that loss in investment out of commercial expediency would be an allowable deduction. This decision of Hon’ble Bombay High Court has been followed by Hon’ble Karnataka High Court in ACE Designers Ltd. V/s ADIT (120 Taxmann.com 321) wherein the assessee was engaged in the business of manufacture and export of computerized numerical controlled machines. It made investment in equity of its wholly owned subsidiary company situated in USA. However, the said subsidiary could not perform and was wound up. The loss so suffered was claimed as ‘business loss’ on the ground that investment was made for purpose of business. The Hon’ble Court held that since the investment was made for enhancement of business activity of assessee in global market which primarily related to business operation of assessee and the investment was not made with a view to create capital asset in the form of holding shares, the said loss would be a business loss allowable u/s 28(i).
The case law of Hasimara Industries Ltd Vs CIT (230 ITR 927) (supra), as referred to by Ld. AO, deal with a loss of deposit made by the assessee to acquire a profit-making asset to carry on new business in cotton and accordingly, the loss was held to be capital loss. However, same is not the case here since in the present case the assessee intended to acquire another entity with a view of run business more profitability and the other entity was in the same line of business as that of assessee. Similarly, in the case law of Tribunal in Kwality Fun Foods & Restaurants (P) Ltd. (108 ITD 274), it was finding of the bench that the expenditure was incurred towards cost of acquiring profit earning apparatus and therefore, the expenditure was held to be in capital field. The same is not the case here.
Finally, on the given facts and circumstances, we concur with the submissions of Ld. AR that the investments in subsidiaries were made in the normal course of assessee’s business to make business more profitable. Therefore, the resultant loss suffered by the assessee was rightly claimed as revenue expenditure / business loss by way of write-off in the Profit Loss Account.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeals by assessee for Assessment Years (AY) 2011- 12 & 2013-14 arises out of separate orders of learned first appellate authority. However, one of the issue is common and therefore, the appeals were heard together and are now being disposed-off by way of this consolidated order for the sake of convenience & brevity. First we take up appeal for AY 2011-12 which arises out of the order of Ld. Commissioner of Income Tax (Appeals) -3, Chennai, [CIT(A)] dated 2909-2017 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 21-03-2014. The grounds raised by the assessee read as under:
1. For that the order of the Commissioner of Income Tax (Appeals) is contrary to the law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant and is opposed to the principles of equity, natural justice and fair play.
2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction.
3. For that the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of the write off of the advance of Rs.7,70,16,147/- made to subsidiary company.
4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the advance to the subsidiary company was towards expenditure incurred in the ordinary course of business of the subsidiary company.
5. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the advance to the subsidiary company written off was loss incidental to the business of the appellant.
6. For that the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of the investment made in subsidiary written off to the extent of Rs.6,75,26,999/-
7. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the write off of the investment made in subsidiary was loss incidental to the business of the appellant.
8. For that the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of loss on account of corporate guarantee given to its subsidiary of Rs.5,08,00,000/-
9. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the loss on account of corporate guarantee given to subsidiary was loss incidental to the business of the appellant.
10. For that the Commissioner of Income Tax (Appeals) erred in confirming the disallowance of depreciation of Rs.4,14,37,734/- on cylinders.
11. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the cylinder sold and returned to the appellant was an asset as per the books of accounts of the appellant and were eligible for depreciation u/s. 32.
12. For that the Commissioner of Income Tax (Appeals) erred in contending that the cylinder was returned by the buyer as defective.
13. For that the Commissioner of Income Tax (Appeals) erred in contending that the cylinder returned was not put to use in the business of the appellant.
2. The Ld. AR advanced arguments, written as well as oral, to assail the orders of lower authorities. Reliance has been placed on various judicial pronouncements, the copies of which have been placed on record. The Ld. CIT-DR advanced arguments in support of the impugned order and filed written submissions. Having heard rival submissions, oral as well as written and after going through the orders of lower authorities, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. The assessee being resident corporate assessee is stated to be engaged in refilling / processing of Refrigerant Hydro Fluorocarbons Gases which are used in Air Conditioners, refrigerators and refrigerating equipments.
Assessment Proceedings
3.1 During assessment proceedings, it transpired that the assessee claimed administrative expenses of Rs.1953.43 Lacs, as detailed below, as amounts written-off in the Profit & Loss Account: –
