Case Law Details
Jakhau Salt Co. P. Ltd. Vs DCIT (ITAT Chennai)
ITAT Chennai held that revisional power u/s 263 of the Income Tax Act exercisable only in case of lack of enquiry and not in case of inadequate enquiry.
Facts- Post completion of scrutiny assessment, the case of the assessee was taken up for revision proceedings and accordingly, show cause notice u/s.263 of the Act was issued.
In the said show cause notice, the PCIT observed that on perusal of annual accounts for FY 2016-17 relevant to AY 2017-18, it is seen that a sum of Rs.24.32 Crs. was debited to profit and loss account under the head loss on sale of investments. It was further observed that Note No.33 of Notes annexed to and forming part of the accounts, it was stated that the company had sold investments of 40 lakhs equity shares in the capital of M/s. Archaen Chemical Industries Pvt. Ltd. (M/s.ACIPL), and incurred loss of Rs.24.32 Crs. Although, the loss on investment is not allowable expenditure, the assessee company had not been added back the above capital loss in the statement of total income. AO, while completing the assessment u/s.143(3) of the Act, not examined the issue of loss on investment debited to P & L A/c. Since, above loss on sale of investment is a capital loss, the same is required to be added back to the business income, but the AO has failed to do so. Therefore, the PCIT opined that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, called upon the assessee to explain ‘as to why’ the assessment order passed by the AO u/s.143(3) of the Act, dated 28.12.2019 shall not be revised u/s.263 of the Act.
PCIT after considering the submissions, set aside the assessment order u/s 263 with a direction to AO to examine the issue and pass a fresh order.
Conclusion- In this case, as held by us, it is not a case of lack of enquiry, but it can be at best considered as inadequate enquiry and for this purpose, the powers u/s.263 of the Act, cannot be exercised. Therefore, we are of the considered view that the case law relied upon by the Revenue does not applies to the facts of the present case.
In this view of the matter and considering the facts and circumstances of the case and also by following the ratio of case laws considered herein above, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and thus, we quashed the order passed by the PCIT u/s.263 of the Act.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Chennai-1, passed u/s 263 of the Income Tax Act, 1961 dated 26.03.2022and pertains to assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:
1. The order of the Principal Commissioner of Income Tax, Chennai – 1, Chennai – 600034 dated 26.03.2022 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The PCIT erred in assuming jurisdiction u/s 263 of the Act and consequently erred in passing the revision order in setting aside the assessment order dated 28.12.2019 without assigning proper reasons and justification.
3. The PCIT failed to appreciate that the assumption of jurisdiction u/s 263 of the Act was wrong and not sustainable in law and ought to have appreciated that the twin conditions of error in the assessment order which caused prejudice to the interest of the Revenue were not satisfied concurrently, thereby vitiating the revision order under consideration.
4. The PCIT failed to appreciate that the issue of loss on sale of investments was wrongly interfered with in the revision order and ought to have appreciated that the issue taken up for revision was already considered in the scrutiny assessment thereby ousting the revisional jurisdiction completely.
5. The PCIT failed to appreciate that in any event the loss on sale of investment was correctly claimed as a revenue outgo based on the facts furnished in the assessment as well as in the revisional jurisdiction and hence ought to have appreciated that the findings from para 6.3 of the impugned order were wrong, incorrect, invalid, unjustified, erroneous and not sustainable both on facts and in law.
6. The PCIT failed to appreciate that the replies filed in the assessment as well as in the revisional proceedings even though noticed in the revision order, were completely overlooked and brushed aside and ought to have appreciated that the decision to set aside the assessment to revisit the said issue would be outside the scope of section 263 of the Act, thereby vitiating the impugned order completely.
7. The PCIT failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.
8. The Appellant craves leave to file additional grounds/arguments at the time of hearing.
3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of high grade industrial chemicals. The assessee had filed its return of income for the AY 2017-18 on 31.10.2017 declaring a net loss of Rs.72,46,32,821/-. The case was selected for scrutiny and the assessment has been completed u/s.143(3) of the Income Tax Act, 1961 on 28.12.2019 and assessed total income of Rs.NIL by making additions towards disallowance of advances written off and capital loss.
4. The case has been subsequently taken up for revision proceedings and accordingly, show cause notice u/s.263 of the Act, dated 12.03.2022 was issued and served on the assessee. In the said show cause notice, the PCIT observed that on perusal of annual accounts for FY 2016-17 relevant to AY 2017-18, it is seen that a sum of Rs.24.32 Crs. was debited to profit and loss account under the head loss on sale of investments. It was further observed that Note No.33 of Notes annexed to and forming part of the accounts, it was stated that the company had sold investments of 40 lakhs equity shares in the capital of M/s. Archaen Chemical Industries Pvt. Ltd. (in short “M/s. ACIPL”), and incurred loss of Rs.24.32 Crs. Although, the loss on investment is not allowable expenditure, the assessee company had not been added back the above capital loss in the statement of total income. The Assessing Officer, while completing the assessment u/s.143(3) of the Act, not examined the issue of loss on investment debited to P & L A/c. Since, above loss on sale of investment is a capital loss, the same is required to be added back to the business income, but the AO has failed to do so. Therefore, the PCIT opined that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, called upon the assessee to explain ‘as to why’ the assessment order passed by the AO u/s.143(3) of the Act, dated 28.12.2019 shall not be revised u/s.263 of the Act.
5. In response to the show cause notice, Mr. Mohandass, CA, representative of the assessee appeared on 17.03.2022 and submitted that to increase the capacity and augment the sales of industrial salt, the assessee had acquired equity share interest of 40% in the capital of M/s. ACIPL during the FY 2011-12 by subscribing 40 lakhs equity shares for a sum of Rs.43.68 Crs. Further, M/s.ACIPL was carrying on the business of manufacturing and export of industrial salt, bromine, sulphate, potash and other industrial chemicals from naturally available brine in the Rann of Kutch, Gujarat. In order to capitalize on this planned new facility of Composite Marine Plant of M/s.ACIPL, the assessee had made investment. It was further submitted that later it was seen that M/s.ACIPL was delaying the installation and commencement of the unit and its business did not take off and thus, the assessee has sold its investments in M/s.ACIPL and incurred loss of Rs.24.32 Crs. Since, lossincurred on investment in group companies is in the nature of business loss in line with AS-13 issued by the ICAI, the assessee has debited said loss into P & L A/c. The AO after considering relevant facts has allowed the claim of the assessee and thus, it cannot be said that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue.
6. The PCIT after considering relevant submissions of the assessee and also taken note of various facts opined that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, because, the AO has failed to make a complete verification with respect to loss on investment debited to P & L A/c in right perspective of law, although, the said loss is in the nature of capital loss, which cannot be allowed as deduction while computing profits and gains from business or profession. Therefore, set aside the assessment order u/s.263 of the Act, with a direction to the AO to examine the issue and to pass a fresh order after granting opportunity to the assessee. The relevant findings of the PCIT are as under:
6. The submissions as above are found to be at variance with the scope of Sec. 263 after the Explanation 2(a) was introduced by the Finance Act 2015. W.e.f. 01.06.2015. The relevant portion is reproduced below:
“For the purposes of this section, it is hereby ordered that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner-
1. The order is passed without making inquiries or verification which should have been made;”
6.1 The present examination of the assessee’s case is located within the scope of the failure to make necessary and relevant inquiries/ verification. The case laws relied upon pertain to periods prior to the insertion of the above Explanation.
6.2 Coming to the claim of ‘business loss’ arising on sale of Shares, the assessee’s argument is reproduced below:
“We submit that the investments made by us in ACIPL are inextricably linked and forms part of the business of our country. The said investment has been made for the purpose of attaining the business objectives of the company irrespective of the fact whether they have been accounted as non-current investment or as business assets of the company. The classification of the investments as non-current investments is in line with the requirements of Schedule III of the Companies Act, 2013, wherein the investments made in equity shares of a company needs to be classified as investments, irrespective of whether made for the purpose of augmenting the business or for regular investment purposes. Therefore, the classification of investments in the balance sheet does not indicate the intent of holding the said investments. We draw reference to the decision of the Apex Court in the case of Kedarnath Jute Mfg. Co. Ltd. Vs. CIT [1971] 82 ITR 36 (SC) wherein it was held that entry in books of account cannot be considered as conclusive and the entitlement of particular deduction depends upon the provisions of law relating thereto.
If the main reason for holding the investments is for deriving a business advantage to the company, then the said investment is held for the purpose of business and any gains/losses arising on the said investments should be dealt under the head ‘Profits and Gains from the Business or Profession’. The well celebrated judgement of the Hon’ble Bombay High Court in the case of CIT vs. Colgate Palmolive (India) Limited [2015] 370 ITR 728 (Bom.) is relevant for our discussion.”
6.3 The assessee’s submissions have been considered. It is established in law thatthe treatment as per Company Law or Accounting Standards cannot determine the treatment under the Income Tax Act. To that extent the decision of the Apex Court in the case of Kedarnath Jute Mfg. Co. LTd Vs. CIT (1971) 82 ITR 36 (SC), relied upon by the assessee, is relevant. It supports the conclusion that just because such entries were made as per some accounting standards, in this case AS-13 relating to ‘disposal of investment’, the implication under the IT. Act was not to be concluded from such entries. The notion of ‘heads of income’ into which an assessee’s financial activities need to be slotted is specific to the IT. Act, 1961. Expenditure is allowable u/s 37, if it is a revenue expense for business purpose.
6.4 The assessee has relied on Accounting Standard 13 (AS-13) (Accounting for Investments) and referred to Para 21 & 22 of the same. The same is reproduced below:
“…. …Disposal of Investments
2.1 On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognized in the profit and loss statement.
2.2 When disposing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total olding of the investment.”
6.5 It is to be mentioned that Accounting Standards are meant to comply with the corporate reporting practices to ensure that financial statements from multiple companies are comparable. They aim to ensure transparency, reliability, consistency and comparability of the financial statements. But when it comes to treatment under the Income Tax Act, they cannot provide the rationale for consideration for taxation. Even the Income Computation and Disclosure Standard (ICDS) introduced by the Government of India does not prevail over the Income Tax Act when there is a conflict between the provisions of the IT. Act and ICDS.
6.6 The assessee’s argument that the investment in ACIPL was “nothing but a measure of expediency to further the business objectives” is accepted with the simple meaning that measures of expediency can involve both revenue and capital expenses. The foundational fact in the present case is that the assessee had invested in shares which is, by all definitions, a capital asset unless the assessee was an investment company which, admittedly, it is not. The shares, therefore, could not have been treated as stock in trade. Whatever be the intent of investment, strategic or otherwise, for a non-investment company the investment in shares represents a capital asset. Sale of such asset would, therefore, be expected to lead only to capital gain or loss. The argument advanced by the assessee relying upon the case of Colgate Palmolive stands on no legs. The facts of the assessee’s case are very different from that of Colgate Palmolive where the company being invested in was a 100% subsidiary which was manufacturing tooth brushes exclusively for sale by the investing company.
6.7 In any case, post the decision of the Apex Court in the case of Vodofone International Holdings B.V. Vs Union of India, in order dated 20.01.2012 (Civil Appeal No.733 of 2012) it has now been evidently established that companies are entirely separate entities,even if they are hundred percent owned subsidiary companies. In the case of the assessee, therefore, the investment in another company’s shares cannot be treated in any other way other than as a capital investment. Transactions involving the capital asset could only lead to capital gain or loss. The other case laws relied upon by the assessee either stand on decision in the case of Colgate Palmolive or are distinguishable in facts.
6.8 The assessee has mentioned that 84% of its domestic sales was to ACIPL. Out of the total turnover of Rs.80.64 Cr., for F.Y. 2016-17, the domestic sales are only Rs.15.42 Cr. i.e. only 19%. Its main export sales is stated to have been done with Japan. By the assessee’s logic, as discussed supra, if it had done investment in the shares of customer companies in Japan, and later sold such shares for a gain, the same would have been considered by it as a business profit. Such a logic is unsustainable, since investments in shares of customer companies would still retain the character of capital asset.
6.9 It is pertinent to mention that the Expenditure that acquires a capital asset is a capital expenditure. A capital asset is one that is used in or for the purposes of the business and not meant for sale in the ordinary course of business of the enterprise. Further, when an expenditure is made with a view to bringing into existence an asset or advantage for the enduring benefit of trade, it is a capital expenditure in the absence of special circumstances leading to the opposite conclusion. An asset or advantage of enduring nature means that it must not be fully consumed or used up in the accounting period in which it is incurred. Capital expenditure increases the earning capacity or reduces the operating expenses of a business.
6.10 In the instant case, as submitted by the assessee, the impugned expenditure was invested to capitalize on the facility of proposed Composite Marine Plant of ACIPL, to acquire 40% stake in the said company, which itself shows that the same was made for an advantage of enduring benefit and to increase the earning capacity. Hence, its subsequent transfer cannot be accepted as a revenue loss.
CONCLUSION:
7. Based on the facts and submissions made by the assessee, it is seen that the Assessing Officer has failed to make a complete verification with respect to the aspects discussed supra and had passed the Assessment Order u/s 143(3) of the Act without proper, diligent application of mind and enquiry. In my considered opinion, therefore, the assessment order so passed is erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, the assessment order is hereby set aside u/s 263 of the Act, with a direction to the Assessing Officer to examine the issue, as discussed supra, and all other issues and to pass a fresh order within the stipulated time, after granting opportunity to the assessee.
It is ordered accordingly.
7. The Ld. Counsel for the assessee submitted that the PCIT erred in setting aside the assessment order passed by the AO by exercising his power conferred u/s.263 of the Act, without appreciating the fact that assumption of jurisdiction u/s.263 of the Act was wrong and not sustainable in law. The Ld. Counsel for the assessee further submitted that in order to assume jurisdiction u/s.263 of the Act, twin conditions embedded therein must be satisfied. In this case, none of the conditions are satisfied, because, the AO has verified the issue of loss on investments by issuing a specific notice u/s.143(2) &u/s.142(1) of the Act, on various dates, for which, the assessee has filed its reply on 24.12.2022 and explained how loss on investment in group company is business loss which can be allowed as deduction. The Ld. Counsel for the assessee further submitted that the AO has issued various noticesu/s.143(2) of the act, for which, the assessee has filed detailed reply on the issue. The AO had also issued notice u/s.142(1) of the Act, on various occasions, for which, the assessee has filed his reply and explained how loss incurred on sale of investment is a Revenue loss. The Ld. Counsel for the assessee referring to Memorandum and Articles of Association of the assessee submitted that one of the main objects of the assessee company is lend and advance money to its holding company and subsidiary company, group companies, associate and sister companies. Further, in line with its main object, it has purchased shares of group companies in order to augment its business. Since, investment made in group companies does not yield required result, the assessee decided to sell its investment which resulted in loss and said loss is in the nature of business loss. In this regard, he relied upon the decision of the Hon’ble Madras High Court in the case of Electronic Corporation of Tamil Nadu Ltd. v. DCIT reported in [2019] 417 ITR 283 (Madras). The assessee had also relied upon the decision of the Hon’ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd. reported in [2015] 370 ITR 728 (Bom.).
8. The Ld. DR, on the other hand, supporting the order of the Ld. CIT(A) submitted that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue for the simple reason that the AO did not make any proper enquiry while making assessment, but simply accepted the explanation of the assessee in so far as loss on investment debited to P & L A/c, even though, the said loss is a capital in nature. The PCIT has elaborated the reasons for revision of assessment order in terms of provisions of Sec.263 of the Act. The AO without appreciating the said facts simply accepted the claim of the assessee which rendered the assessment order to be erroneous in so far as it is prejudicial to the interest of the Revenue and thus, the PCIT has rightly invoked the jurisdiction and set aside the assessment order.
9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of Sec.263 of the Act, conferred suo moto revisional powers to the PCIT, if the PCIT satisfies that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue. In order to assume jurisdiction u/s.263 of the Act, twin conditions must be satisfied viz., (i) the order of the AO must be erroneous and (ii) further, it should be prejudicial to the interest of the Revenue. Unless, twin conditions embedded therein, are satisfied, the PCIT cannot revise the assessment order u/s.263 of the Act. In this case, the PCIT has set aside the assessment order passed by the AO on the issue of loss on sale of investment with sister company. According to the PCIT, the assessee has debited loss on sale of investment into P & L A/c, even though, such loss is a capital loss, but the AO has allowed the claim of the assessee without making proper enquiry. The PCIT further noted that as per Explanation-2 to Section 263 of the Act, assessment order can be treated as erroneous in so far as it is prejudicial to the interest of the Revenue, if the order is passed without making enquiries or verification which should have been made and the order is passed allowing any relief without inquiring into the claim. In this case, although, it seems that the AO has called for certain information by issuing notice u/s. 142(1) of the Act, and the assessee has replied on the issue, but the AO has failed to apply his mind to relevant facts in right perspective of law, which resulted in erroneous order passed by the AO which caused prejudice to the interest of the Revenue.
10. In this legal and factual back ground, if you examine the facts of the present case, we find that the assessment order passed by the Assessing Officer u/s.143(3) of the Act, is neither erroneous nor prejudicial to the interest of the Revenue, for a simple reason that the issue questioned by the PCIT in the show cause notice dated 12.03.2022 has been thoroughly examined by the AO in assessment proceedings, which is evident from the fact that AO had issued various notices u/s.143(2) of the Act, on 19.08.2018 and 26.10.2018, for which, the assessee has submitted all details including financial statement for relevant AY, computation of income, Form 3CD, etc. The AO had also issued notice u/s.142(1) of the Act, on various dates like 20.05.2019, 31.05.2019, 23.09.2019, 09.10.2019, for which, the assessee has filed reply on 17.12.2017 and 24.12.2022 and explained how loss incurred on sale of investment with group companies is allowable as business loss. The assessee has filed a detailed reply along with certain judicial precedents, Including the decision of the Hon’ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd.(supra) and argued that loss on investment with subsidiary company for the purpose of its business is held to be a business loss as investment made was nothing but a measure of commercial expediency to further the business objectives. The AO after considering relevant submissions of the assessee has chosen not to make any additions. From the above, it is very clear that the issue of loss on sale of investment is subject matter of examination and inquiry by the AO during the course of assessment proceedings. No doubt, there is no specific discussion in the assessment order on the issue, but fact remains that when the AO has called for specific information on the issue and the assessee has submitted required details, it is presumed that the AO has considered all details with regard to the issue and has applied his mind to relevant facts in right perspective of law. Therefore, we are of the considered view that merely for the reasons that the AO has not discussed the issue in his assessment order, it does not call for interference from the PCIT by exercising his powers conferred u/s.263 of the Act, because, assessment order passed by the AO is definitely not erroneous. This view is fortified by the decision the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT reported in [2000] 243 ITR 83 (SC), where it has been clearly held that the PCIT cannot assume jurisdiction and revise the assessment order, unless the PCIT satisfies that assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue.
11. Having said so, let us examine whether the assessment order passed by the Assessing Officer is prejudicial to the interest of the Revenue. It is a well settled principle of law by the decision of various courts that in order to invoke jurisdiction u/s.263 of the Act, twin conditions embedded therein must be satisfied. As per said section, the assessment order passed by the AO must not only be erroneous but should be prejudicial to the interest of the Revenue. In case, the assessment order passed by the AO is erroneous, but even not prejudicial to the interest of the Revenue, the PCIT cannot assume his jurisdiction and set aside the assessment order. The term ‘prejudicial to the interest of the Revenue’ has been analyzed by various courts and as per which, each and every loss of Revenue in consequence of erroneous order is considered to be prejudicial to the interest of the Revenue. In other words, on account of erroneous order passed by the AO, if Revenue lost rightful taxes payable to the government, then, it can be said that prejudice is caused to the Revenue. In such circumstances, the powers conferred u/s.263 of the Act, can be invoked. In this case, as we have already held that the assessment order passed by the AO cannot be termed as erroneous in so far as it is prejudicial to the interest of the Revenue for the reasons given in the preceding Paragraphs.
12. Be that as it may. Let us examine whether assessment order passed by the AO is prejudicial to the interest of the Revenue. According to the PCIT, the Revenue loses lawful taxes payable to the government on account of wrong interpretation or application of facts in right perspective of law. The PCIT had given their own reasons to come to the conclusion that the order passed by the AO is prejudicial to the interest of the Revenue on account of allowing loss on sale of investment with group companies. We find that the assessee has claimed loss on investments with group companies as business loss. We further noted that the assessee has given reasons for claiming said loss as business loss. As per the reasons given by the assessee, the assessee has made investment with M/s.ACIPL during the FY 2011-12 to increase the capacity and augment of sale of industrial salt, because, the group companies were engaged in the business of manufacturing and export of industrial salt, bromine, sulphate and other industrial chemicals from the naturally available brine in the Rann of Kutch, Gujarat, and in order to capitalize on this planned new facility, the assessee had acquired 40% stake in the said company. From the above, it is very clear that the said investment purely aimed at attaining its objectives of the assessee company, although, there is no dispute with regard to the fact that investment was a capital asset. Further, when the group companies were delaying installation and commencement of the unit and its business did not take off as initially projected, the assessee decided to upload investment in M/s.ACIPL as the same was not worthwhile any more due to the prevailing conditions.Therefore, the assessee has sold its investments which resulted in loss of Rs.23.32 Crs. Since, the main reason for holding the investment in group company is to derive business advantage and further said investment is held for the purpose of business, any gain/loss arising on sale of said investment should be treated as ‘profits and gains’ from the business or profession. This view is supported by the decision of the Hon’ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd.(supra), where it has been clearly held that when investment in subsidiarycompany is for the purpose of its business and the loss on sale of shares has to be held to be a business loss as the investment was made nothing but a measure of commercial expediency to further the business objectives. The SLP filed by the Department against the said judgment has been dismissed by the Apex Courts. The sum and substance of the ratio laid down by the Hon’ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd. and upheld by the Hon’ble Supreme Court is that if some investments in subsidiary company is for the augment its business of the assessee, then, loss on sale of said investment would be treated as business loss.
13. In this case, there is no dispute with regard to the fact that one of the objectives of the assessee’s company is to lend and advance money to its subsidiary, group and associate and sister concerns and in line with its objects, the assessee has made investment in the shares of group companies to augment its business. Therefore, we are of the considered view that investment made by the assessee in the group companies is in The nature of loans and advances, although, the said investment has been classified as capital, but the real character of the transaction was those akin to loans in a normal course of the business, and thus, any loss on sale of said investment should be treated as business loss but not capital loss and this view is supported by the decision of the Hon’ble Madras High Court in the case of Electronic Corporation of Tamil Nadu Ltd. v. DCIT (supra) where it has been clearly held that where revenue authorities held that claim of loss accruing or assigning as a result on sale of shares was a capital loss not eligible for deduction in computation of business income. In view of the above facts that amount advanced by the assessee to various industries were towards working capital and real character of transaction was those akin to loan and not equity investment, impugned order deserved to be set aside.
14. At this stage, it is also pertinent to refer to the decision of coordinate Bench, ITAT Chennai in the case of Southern Petrochemical Industries Corporation Ltd. v. ITO in ITA No.232/Chny/2022 order dated 23.09.2022, where the Tribunal had considered an identical issue of loss on sale of investment and after considering relevant facts and by following the decision of the Hon’ble Bombay High Court in the case of CIT v. Colgate Palmolive (India) Ltd.(supra) held that write off investment in subsidiary company made for the purpose of business is allowable as Revenue expenditure. The relevant findings of the Tribunal are as under:
9. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The PCIT has assumed jurisdiction u/s.263 of the Act, and set aside the assessment order passed by the Assessing Officer u/s.143(3) of the Act, dated 28.12.2019 on three issues. The first three issuespertain to the same point namely write off of the investment in subsidiary of Rs.184,53,62,000/- under the Normal provisions and Rs.138,40,21,000/- under the computation of Book Profits u/s 115JB of the Act. The facts of the case are that the Appellant had made investment in SFCL, Dubai, UAE for the purpose of manufacture and supply of Ammonia and Urea to the Appellant to be used by the Appellant in their business of manufacture of Fertilizer. The AR submitted that as there was shortage of Urea in India and the Company was permitted to import the same, the company concluded that it would be more beneficial if a manufacturing unit was set up in Dubai, where the raw material of natural gas was easily available, for manufacture of Ammonia and Urea for the exclusive use of the Appellant. The shareholders of the Company approved promotion of wholly owned subsidiary in Dubai in the AGM of the Company. There was an agreement dated 13.11.1998 (Page 10 of the paper Book) between the Dubai Company and the Appellant for the off take by the Appellant of the entire production of the Dubai unit at arm’s length price. This agreement was also approved by the Government of India vide their letter dated 8.12.1998. (Page 11 of the Paper Book) Thus, the investment was in the course of and for the purpose of the Business of the Assessee. Necessary approval for promoting and investing in a wholly owned subsidiary company in Dubai, UAE was obtained from RBI vide their letter dated 5.3.1997 (page 13 of paper Book). Later on due to statutory requirement of UAE, the investment of the Appellant in the UAE subsidiary was routed through wholly owned subsidiary in Mauritius. This restructuring had the approval of RBI vide their letter dated 25.3.1998 (Page 20 of the paper Book). The Company in Mauritiushad only investment in the Dubai Company as its asset. Subsequently, when the Dubai entity was not able to obtain Natural gas, required for the manufacture of Ammonia and urea, the Dubai Company had no other alternative but to wind up its operation. The Appellant had provided for the entire investment in Dubai through the Investment in Mauritius in the Assessment years 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhsand Rs.13840.21 lakhs respectively and the same was disallowed in computing the taxable income for the Assessment Years 2008-09 and AY 2009-10. The Memo of computation of income was submitted before the Assessing officer. As the company at Dubai was wound up, during the year the investments made by the Appellant in that company through itssubsidiary in Mauritius was written off. As the Investment was in the course of and for the purpose of the business of the Assessee, the amount written off was claimed as a deduction from the business income. The Assessee did not claim the write off in their first return of income but claimed it in the revised return.
10. During original assessment proceedings, the Assessing officer in the notice u/s 142(1) dated 5.10.2019 and 28.11.2019, inter alia, wanted the assessee the particulars and the reason for filing revised return. The main reason for filing of the revised return was the claim of the write off of business investment. In response to the query raised under Notice u/s 142(1) dated 5.10.2019 the Appellant in their reply dated 27.11.1019 had explained the reason for filing a revised return as under:
Point No: 1(iv) :- Copy of return of income — Original or revised, if any, for AY 2017 18. Please state the reason for filling revised return (if applicable) with proper evidence for substantiating the changes
Please find enclosed herewith revised return vide Annexure 3. Company made provision for diminution in the value of investment during the Assessment year 2008-09 and 2009-10 to the tune of Rs.4613.40 lakhs and Rs.13840.21 Lakhs respectively and the same was disallowed by us in the respective year memo computation of income enclosed vide Annexure 4 and 5. We made the said investments to set up Urea and Ammonia Plant at Dubai which is supported by EGM minute’s approval enclosed vide Annexure 6. During the current assessment year the investment was written off in Statement of Profit and Joss and claimed as deduction under memo computation of income (Copy of the relevant extract of Board Resolution enclosed vide Annexure 7). There is a direct nexus between the said investment and the business of the assessee which was also confirmed in our own case by /TAT for the assessment year 2000-01 vide IT.A. NO.2252/Mds/2003 copy enclosed vide Annexure 8 allowed with respect to interest on advance given to SFCL allowable as business expenditure under section 37 of Income Tax Act.
Further we are enclosing vide Annexure 9 herewith ITAT Delhi order on Sahara Global Vision Private Limited Vs ACIT, allowing loss due to write off of investments in joint venture is allowable business expenditure.
The above said disallowance was properly claimed under MAT computation DUE not considered in regular computation hence filed revised return to consider the same.
11. Thus, the entire background of investment in the Subsidiary in Dubai through the pass through subsidiary in Mauritius as well as the reason for writing off was fully explained in the reply dated 27.11.2019. The assessee had also explained its case with help of decision of the Delhi tribunal where it was held that loss on account of divestment of investment made in subsidiary for the purpose of business is allowable as a business loss. The Assessing Officer after considering relevant submissions, had completed assessment and accepted write off of loss on account of investment in subsidiary.
12. Further, the Chennai tribunal, in Appellant’s own case for AY 2000-01, in its order dated 20.10.2004 in ITA No.2252/Mds/2003 (reported in 93 TTJ 161) has held in Para 18 of their order:
18. Now, coming to the second contention of the assessee, we find considerable force in the argument of the learned counsel for the assessee and the decision of the Hon’ble Madras High Court in the case of Indian Commerce & Industries Co. (P) Ltd. vs. CIT (supra) squarely covers this issue. In that case, as noted by the learned CIT(A), it was held “that the shares were purchased because of coercion by the company and also with a view to increase the assessee’s business withthe company. Hence, there was a nexus between the business of the assessee and the purchase of shares.” In the present case also, we find that since the assessee had made the investment in a company which was to produce the basic raw material required by the assessee, it has to be held to be a case of the assessee’s expansion of business and, therefore, the funds were utilized for business purpose. The assessee in its written submissions has pointed out that both the companies were subsidiaries of the assessee. It is pointed out that IM/s Indo Jordan Chemical Co., Jordan, with which the assessee had entered into a joint venture, owned phosphate mines which was a basic raw material for manufacture of phosphoric acid. Similarly, SPIC Fertilizers and Chemicals, FZE, (SFCL), at Dubai was engaged in the manufacture of ammonia and urea which were raw aterials for the fertilizer business of the assessee. It is pointed out that both ammonia and phosphoric acid accounted for 44.27 per cent in value of the total raw material consumption. Thus, even if borrowed funds were utilized, still the assessee would be entitled for deduction under s. 36(1)(iii) of the Act, in view of the decision of the Hon’ble Madras High Court in the case of Sivakami Mills Ltd. (supra), affirmed by the Hon’ble Supreme Court in (1998) 144 CTR (sc) 172: (1997) 227 ITR 465 (SC) (supra), wherein it was held that interest on deferred payment for purchase of machinery was revenue expenditure. The decision in State of Madras G.J. Coelho (supra) also supports this view. In this case it was held that the payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation was viewed as an integrated whole, was so closely related to the plantation that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations. Therefore, the assessee, in any view of the matter, succeeds on the strength of its second contention.
13. The Department has accepted the same and has not filed any appeal on this aspect. The Assessing officer had in the order of Assessment u/s.143(3) of the Act, dated 28.12.2019 has observed that “Further Notices under sec.142(1) of the Act, were issued to the Assessee on dated 5.10.2019 and 28.11.2019 electronically”. In response, the Assessee has submitted the details/ explanations called for digitally besides filing hardcopy. The submissions of the Assessee-Company have been duly considered. Ongoing through the details and documents submitted by the Assessee -company, the assessment is completed by accepting the claim for write off of investments in subsidiaries. Further,when the entire gamut of investment in the subsidiary, the reason for the same, how it isfor the business of the Appellant, necessary approvals from the Government/RBI for the same, the reason for winding up of the subsidiary and write off of investments have been explained to the Assessing Officer, who after examining the details and explanations did not disallow the claim for write off and as it is a plausible stand which is not unsustainablein law. Therefore, the PCIT cannot substitute his opinion on the same set of facts.
14. It is relevant to consider the Apex Court in the case of Malabar Industrial Co. Ltd. vs. CIT (Reported in 243 ITR 83) where it was held as under:
A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suomotu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1) of the Act.
Again the court observed:
The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
15. The Apex High Court in the case of CIT v. Max India Ltd vs CIT reported in (295 ITR 282) has held as under:
At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase “prejudicial to the interest of the Revenue” under s. 263 has to be read in conjunction with the expression “erroneous” order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.
16. Thus, all the details in connection with the write off was claimed as a deduction was before the AO who had accepted the claim of the Appellant on the basis of the submissions and documents filed by the Appellant. When the AO has taken a decision based on the facts submitted and it is one of the permissible views, the PCIT erred in assuming jurisdiction and imposing his views over that of the AO. When two views are possible and the view taken by the AO is not unsustainable under law, the PCIT does not have the jurisdiction to revise that issue as it is not erroneous and prejudicial to the interest of the Revenue.
17. Further on merits, the AR had relied on in addition to the case of Sahara Global Vision P Ltd. v. ACIT (supra) cited before the Assessing officer in the course of the Assessment proceedings also relied on the following decisions in support of their claim for deduction of the write off of investments made for the purpose of the business.
(i) ACE designers Ltd v ACIT 275 Taman 100 (Kar.)
(ii) CIT v Colgate Palmolive (India) Ltd 370 ITR 728 Born.
(iii) Indian Commerce and Industries Co P Ltd 213 ITR 533 Mad.
(iv) Patnaik and Co Ltd. 161 ITR 365 SC.
18. On a perusal of these cases, the common ratio is that loss on investments made for the purpose of the business is allowable as a revenue loss.
19. In the case of ACE Designers Ltd. vs. ACIT (LTU) reported in 120 Taxman.com 321, the Hon’ble Karnataka High Court has held as under:-
“7. In the backdrop of aforesaid well settled legal position, the facts of the case in hand may be adverted to. From the perusal of the note annexed to the income filed before the assessing officer, it is evident that assessee had set up an establishment in USA during Financial Year 1992-93 for the exclusive purpose of marketing assessee’s products and for promoting its business in US and Latin America. It has further been stated in the note that looking to the stringent norms of product liability in US market, the assessee decided to have a separate Wholly Owned Entity in the US having limited liability. The approval for aforesaid purpose was obtained from the Reserve Bank of India. The assessee therefore, invested funds in equity for meeting the revenue expenses of Wholly Owned Subsidiary Company’s balance sheet. However, WOS could not perform up to company’s expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of was, RBI permitted the company to write off the whole of investment made in WOS and unrealized export receivables. The assessee therefore, made a claim to write off the loss of Rs.3,41,23,200/-as revenue expenses allowable under the provisions of the Act.
20. Thus, from perusal of the aforesaid facts, it is evident that the issue involved inthis appeal is covered by decision of the Hon’ble Bombay High Court in the case of CT v. Colgate Palm Olive (India) Ltd. (supra), which has been upheld by the Supreme Court. The ratio of aforesaid decision is where the assessee makes investment in its 100% subsidiary for business purpose, loss on sale of investment has to be treated as business loss of the assessee. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee. The WOS suffered losses and therefore the assessee wrote off the investment of Rs.3,41,23,200/-as business loss. The investment was made for the purpose of extension of business activity and not with a view to creating capital asset in the form of holding shares. It is also pertinent to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party”.
21. The Jurisdictional High Court in the case of Indian Commerce and Industries Co P Ltd v CIT (213 ITR 533) has held that
“In view of those findings, it is apparent that there is a nexus between the business of the company and the purchase of the shares. The business of the company would not have increased as it did actually but for these shares. There is no reason why the loss suffered by the assessee in this case should not be treated as a business loss”.
22. In the case of decision in the Case of Bombay High Court in the case of Colgate Palmolive (India) Ltd (370 ITR 728) it was held as under:-
“The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the Assessee and engaged in the manufacturing of tooth brushes exclusively for the sole client namely the Assessee. Shares purchased of Camelot were also sold by the Assessee to one Ramesh Sukharam Vaidya for consideration of Rs.45,00,000/-. The Assessing Officer held that the sum of Rs.5,50,00,000/- which was invested by the Assessee in the equity of Camelot on 17 March 2003 and which have been used to repay the loan to the Assessee company, amounting to Rs.5.5 crores, before 1 March 2003 would demonstrate that the purpose of investment was to give a Long Term Enduring Benefit to the Assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long term investment. This conclusion of the Assessing Officer was challenged in the Appeal before the First Appellate Authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture tooth brushes exclusively for the Assessee. Since the Assessee was relying on Camelot for manufacturing of tooth brushes to be traded by the Assessee, the investment is nothing but a measure of commercial expediency to further business objectives and primarily related to the business operations of the Assessee. At no point of time the investment in Camelot was made with an intention to realize any enhancement value thereof or to earn dividend income. The investment was made to separately house the integral part of the business activity. In such circumstances, the Commissioner relied upon the above judgments and allowed the Appeal. He concluded that the loss of Rs.5.50 crores is a business loss in the hands of the Assessee. He set aside the order of the Assessing Officer.
8. The Revenue carried the matter in Appeal and the Tribunal has dealt with this issue extensively. In para 7 of its order, the Tribunal has upheld the conclusion of the Commissioner and by giving additional reason.
9. Upon 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.”
23. All the above cases relied on the ratio of the Apex Court in the case of Patnaik and Co Ltd v CIT (161 ITR 355 SC) where it was held that purchase of Government Securities and the close proximity of the investment with the receipt of the Government orders, would lead to an inescapable view that the investment was made in order to furtherance the sales of the assessee and boost its business. Hence, the loss on sale of Government securities was a business loss.
24. The ratio of the above decisions would squarely cover the case on hand. The Appellant had proved that the investment in subsidiary was solely for the purpose of obtaining scarce raw material for being used in their business. The investment was written off when the subsidiary was wound up. Applying the ratio of the above decisions including those of jurisdictional High Court and the Apex Court, the claim of the Appellant that the write off of investment in the subsidiary made for the purpose of the business is allowable as revenue expenditure. When the ratio of the decision of the Apex Court and the Jurisdictional High Court support the claim of the Appellant and accepted by the AO, the order of assessment cannot be held to be erroneous and PCIT erred in assuming jurisdiction u/s 263 of the Income Tax Act, 1961.
15. In so far as case law relied upon by the Ld.DR in the case of Deniel Merchants (P) Ltd. v. ITO reported in [2018] 95 taxmann.com 366 (SC), we find that the Hon’ble Supreme Court considered the issue of lack of enquiry by the AO while making assessment and under those facts, the Hon’ble Supreme Court held that if the AO did not make any proper enquiry while making assessment and simply accepted the explanation of the assessee in so far as receipt of share application money is concerned, then the powers exercised by the PCIT u/s.263 of the Act, deserved to be upheld. In this case, as held by us, it is not a case of lack of enquiry, but it can be at best considered as inadequate enquiry and for this purpose, the powers u/s.263 of the Act, cannot be exercised. Therefore, we are of the considered view that the case law relied upon by the Revenue does not applies to the facts of the present case.
16. In this view of the matter and considering the facts and circumstances of the case and also by following the ratio of case laws considered herein above, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and thus, we quashed the order passed by the PCIT u/s.263 of the Act.
17. In the result, appeal filed by the assessee is allowed.
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