Case Law Details
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.
Conclusion- In the instant facts we are of the considered view that the loss on account of non-payment of advance of subsidiary was a business loss in the assessee’s line of business and the same is allowable as a business reduction to the assessee.
Held that loss on account of non-repayment of loan advanced for the purpose of expansion of business is an allowable business loss. Accordingly, amount advanced to set up subsidiary and loss on account of non-payment of advance of subsidiary is a business loss.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-4, Ahmedabad, in proceeding u/s. 143(3) vide order dated 03/03/2016 passed for the assessment year 2011-12.
2. The assessee has taken the following grounds of appeal:-
“1. In law and in the facts and circumstances of the appellant’s case, the CIT(Appeals) has erred in upholding business loss of Rs.2,88,52,100 being business advances given to subsidiary company which has become irrecoverable and CIT(Appeals) ought to have appreciated that such loss is allowable as business under Section 28 or 37(1) of the Act.
2. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of above appeal either before or during the course of hearing of the appeal.”
3. The brief facts of the case are that 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 with the object to produce/manufacture/export or import of edible oils like groundnut, sesame and mustard etc. The reason behind incorporating the subsidiary was that the assessee has specialized technology namely “cold press technology” for manufacture of mustard oil from mustard seeds. However, the product of the assessee was exported to Germany and sales of the assessee were primarily dependent on one major buyer M/s. Alberdingk Boley, Germany. In order to insulate from market risk, the assessee decided another set up another manufacturing unit of virgin edible oil for export by employing the same “cold press technology”. For the above business, 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.
4. During the course of assessment, the Assessing Officer 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, the Assessing Officer 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. The Ld. Assessing Officer 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 Assessing Officer relied on the case of DCM Ltd vs. DCIT 123 TTJ 114 (Delhi) for the proposition that when the assessee is not in the business of advancing loan, the money advanced to its subsidiary is not in line with the normal business activity of the assessee. Thus, the amount of loan given to subsidiary cannot be termed as a money advanced during the course of normal business of the company and thereafter when there was no recovery of the same, the loss is a capital loss and cannot be allowed as deduction u/s. 28 r.w.s. 37 of the Act
5. The assessee filed appeal before CIT(A) who also dismissed the appeal of the assessee with the following observations:-
“DECISION:
5.3 I have carefully considered the Assessment Order and the submission filed by the Appellant. The appellant has written off advances given to its subsidiary company being Banpal Agrotech Pvt Limited for Rs 2,88,52,100 and Assessing Officer contended that such write off cannot be held to be incidental to business of appellant and cannot be allowed as deduction u/s 36(2) or 37(1) of the Act. On the other hand, appellant has argued that entire advances given to subsidiary company was for the business purpose and as appellant was unable to recover such advances , it has written off such advances as business loss in year under consideration and same is allowable as loss either u/s 28 or 37 of the Act.
5.3.1 On careful consideration of entire facts, it is observed that appellant has given general statement regarding advances given to subsidiary company stating that it was for the business purpose but nor established any commercial expediency of loan given to its subsidiary company. The appellant has even not established that there was any business transactions with such subsidiary company and even not proved which even has happened in year under consideration which lead to appellant to write of such advances on year under consideration. The appellant has not submitted treatment given in the hands of subsidiary companies on account of such write off of claim by it. Thus, it is proved that appellant has failed to prove business nexus of giving business advance to subsidiary company. The Hon’ble Hyderabad ITAT in the case of Krishna Drugs Limited V/s ACIT (ITA no 1091/Hyd/2012) vide its order dated 27/11/2012 has held as under:
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5.3.2 The appellant company is not engaged in the business of granting loans or not doing money lending business hence write off of advances given to subsidiary company cannot be allowed as business loss in view of decision referred supra along with decision of Hon’ble Delhi 1TAT in the case of DCM Limited Vs DCIT 123 TTJ 114 and Hon’ble Bombay High court in the case of Salem Mangnesite Pvt Limited V/s CIT 180 Taxman 545 relied upon by Assessing Officer. The appellant is unable to distinguish the facts referred in the above case with facts of its case. Considering the facts discussed herein above, addition made by Assessing Officer for Rs 2,88,52,100 is confirmed. This ground of appeal is dismissed.”
6. The assessee is in appeal before us against the aforesaid order passed by CIT(A) dismissing the appeal of the assessee. At the outset, the counsel for the assessee submitted that the amount was advanced by the assessee company to its subsidiary, which is in a similar line of business and therefore, such advance was on account of purely commercial considerations and hence allowable as business loss. The counsel for the assessee drew our attention to objects of the assessee as per its memorandum of association, which are reproduced as under:-
“The following are the objects of the assessee as per its Memorandum of Association: – Main Object:
1. To carry on business as manufacturers, processors, cultivators, importers, exporters, dealers, sellers, buyers, consignors, consignees, agents, stockiest, suppliers of castor seeds and castor oil in any grade or form, non-edible oil seeds and oils, edible oil seeds and oils all derivatives, intermediates and chemicals oil cakes oiled or deoiled, pharmaceutical, drug and medicinal chemicals, pesticides, fertilizers, manures, and all kinds of articles in the manufacture of which any form of above oil seeds or oil or its intermediates or derivatives is used. (pg. 1 of Addl. P/B)
Incidental/Ancillary Objects:
20. To lend money to…any company, firm or person in any case in which such loan…may be considered likely directly or indirectly to further the objects of this Company… (pg. 4 of Addl. P/B)
40. To pay all preliminary expenses of any company promoted by the Company or any company in which the Company is or may contemplate being interested and preliminary expenses may include all or any part of the costs and expenses of owners of any business or property acquired by the Company, (pg.6 of Addl. P/B)
47. To carry on any branch of business whether in India or outside India which this Company is authorised to carry on by means or through the agency of any subsidiary company or companies and to enter into any arrangement with such subsidiary company… for finance any such subsidiary, guaranteeing Us liabilities or to make any other arrangement which seem desirable with reference to any business or branch so carried on including the power and provision at any time either temporarily or permanently to close any such branch or business, (pg.7 of Addl. P/B) – Other Objects:
12. To carry on the business of a finance company and to finance industrial enterprises and to promote companies engaged in industrial manufacturing and trading business whether in India or out of India and subject to provisions of law, receive and give short term/long term loans with and/or without security and interest, (pg. 11 of Addl. P/B)
> In pursuance of such objects of the assessee, it incorporated a Wholly Owned Subsidiary – Banpal Agrotech Pvt. Ltd. and also made advances to it. The main object of Banpal Agrotech Pvt. Ltd. is:
> 1. To carry on the business as manufacturers, processors, cultivators, importers, exporters, dealers, sellers, buyers, consignors, consignee, agents, stockist, of edible and non edible oil in any grade or form, edible oilseeds non-edible oilseeds any agro produce which contains oils or any other agro produce and all derivatives, manures, and all kinds of articles in the manufacture of which any form of above oils or oil containing agro produce or any other agro produce or its cakes or its intermediaries, residues or derivatives is used. (P/B pg. No.6)”
6.1 The counsel for the assessee submitted that since the assessee has made advance for expansion of its business and to diversify its existing business into line of business which is quite similar to the assessee’s line of business with a view to insulate itself from the business vagaries, this is an allowable business loss in light of various judicial precedents on the subject. The counsel for the assessee also drew our attention to the MOA of the subsidiary company and submitted that both the assessee and subsidiary were primarily engaged in the similar line of business and such advance was given by the assessee to its subsidiary company purely out of commercial reasons. Accordingly, in view of the various judicial precedents on the subject such business loss is allowable in the assessee’s line of business and considering the facts of the assessee’s case, the same is allowable as a business loss. In response, the ld. Departmental Representative relied upon the observations made by the Assessing Officer and the CIT(A) in their respective orders.
7. We have heard the rival contention and perused the material on record. We observe that in the instant set of facts, the assessee has set up its subsidiary in order to extend into the line of edible oils (the assessee company was engaged primarily in the business of non-edible oils and its sales were mainly dependent upon a single buyer which was based out of Germany). Therefore, the assessee company was seeking to extend into line of edible oil business like groundnut seeds, mustard etc for exporting purposes using the same “cold press technology” which was being currently used by the assessee company for non-edible oils. A perusal of the terms memorandum of understanding of the assessee company and its subsidiary shows that the assessee and its subsidiary were primarily engaged in the similar line of business and that the purpose of advancing such loan was further expansion/diversification into similar/associate line using the “cold press technology”. From the facts it is evident that the purpose of assessee to advance the loan to its subsidiary were two fold, firstly, to extend into a similar line of business and secondly to insulate business of the assessee from the vagaries of its existing business owing to dependency primarily on one client based out of Germany. Therefore, in the instant facts we are of the considered view that the loss on account of non-payment of advance of subsidiary was a business loss in the assessee’s line of business and the same is allowable as a business reduction to the assessee.
7.1 It would be useful to refer to some judicial precedents which have held that loss on account of non-repayment of loan advanced for the purpose of expansion of business is an allowable business loss. In the case of Vaibhav Global Ltd [2022] 138 taxmann.com 506 (Rajasthan), the High Court held that investment made in subsidiary company in order to expand business with view to earn higher profit, being driven by business expediency, merited deduction under section 37 of the Act. In the case of Vassanji Sons & Co. (P.) Ltd. [1980] 125 ITR 462 (Bombay), the High Court held that in view of fact that money lent by assessee to company under liquidation was with object of providing finances for a company in which assessee was substantially interested, debt was to be regarded as directly springing from its business activity and therefore, loss of debt amount was deductible as business loss. In the case of Spencers and Co. Ltd. (No.1) [2014] 47 taxmann.com 55 (Madras), the High Court held that where subsequent to invocation of guarantee clause, assessee made payment of guarantee on behalf of its subsidiary company, since amount in question was paid for business expediency of wholly owned subsidiary company, it was to be regarded as directly relatable to business of assessee and, thus, eligible for deduction as business expenditure. In the case of Gulf Oil Corpn. Ltd. [2012] 24 taxmann.com 325 (Hyd.), the ITAT held that where JVC promoted by assessee was declared sick and advance given by assessee was written off by assessee, same was to be allowed as bad debt or business loss. In the case of W.S. Industries (India) Ltd. 128ITD98 (Chennai), the assessee-company was engaged in business of manufacturing electro porcelain products. A subsidiary company of assessee had been executing certain contracts on behalf of assessee for supply of electronic equipment – Assessee had given corporate guarantee to various banks for its subsidiary company. Consequent to subsidiary company becoming sick, assessee entered into settlements with banks by effecting one time payment and got corporate guarantees discharged. The assessee wrote off amount so paid in its books and claimed deduction for same. The Assessing Officer rejected assessee’s claim. The ITAT observed that the subsidiary company of assessee was supplying materials which were important for assessee’s business and, thus, giving corporate guarantee was incidental to business of assessee-company. The ITAT also noticed that as per Articles and Memorandum of Association of assessee-company, it could give corporate guarantee to any person either on behalf of company or on behalf of others on such terms and conditions as company shall determine. On these facts, ITAT held that it was clear that giving corporate guarantee was not only one of objects of assessee-company but same was given for its subsidiary company and it was in interest of assessee-company and, hence, commercially expedient decision. Therefore, assessee’s claim in respect of corporate guarantee was to be allowed. In the case of Jackie Shroff 101 taxmann.com 455 (Mumbai), ITAT held that where assessee actor advanced money to a production house run by his wife to produce films in which he acted as hero so as to boost his career, however, films were not successful and his wife suffered loss and advances given by assessee could not be recovered, money advanced by assessee was in nature of business expediency and same was to be allowed as deduction either under section 37(1) or under section 28(i) as business loss.
7.2 In view of the facts of the present case, as highlighted above and the judicial precedents on the subject, we are of the considered view that the above amount is allowable as a business loss in the hands of the assessee.
8. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 31-01-2023
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