Non-repayment of loan advanced to subsidiary company is allowable business loss

Banpal Oilchem Pvt. Ltd. Vs ACIT (ITAT Ahmedabad)

ITAT Ahmedabad held that loss on account of non-repayment of loan advanced to subsidiary company for the purpose of incorporation of business is an allowable business loss.

Facts- The assessee company is engaged in the business of non-edible castor oil. The assessee set up wholly owned subsidiary named Banpal Agro-Tech Pvt. Ltd. The assessee advanced a sum of Rs. 2,88,52,100/- to the subsidiary company incorporated for the above purpose. However, the business of the subsidiary company could not take off and it was unable to repay the aforesaid loan. Accordingly, the assessee company during the year under consideration, wrote off the above advance and claimed the same as bad debts in the return of income.

During the course of assessment, AO dismissed the claim of the assessee on the ground that the assessee claimed the deduction of the aforesaid loss u/s. 36(1)(vii) of the Act since the conditions for qualifying as bad debts have not been satisfied by the assessee, the same is not an allowable. Further, AO held that the above amount written off is not in the revenue field and was not a trade advance. The amount so lent by the assessee to its subsidiary company was not a trade advance but it was a capital advance. AO held that the loss of capital asset cannot be allowed as a bad debt under the provisions of section 36(1)(vii) of the Act.
The assessee filed appeal before CIT(A) who also dismissed the appeal of the assessee. Being aggrieved, the present appeal is filed.

Please become a Premium member. If you are already a Premium member, login here to access the full content.