Case Law Details

Case Name : Mafatlal Industries Limited Vs ITO (ITAT Mumbai)
Appeal Number : I.T.A No.5288/Mum/2011
Date of Judgement/Order : 17/10/2018
Related Assessment Year : 2002-03
Courts : All ITAT (7623) ITAT Mumbai (2174)

Mafatlal Industries Limited Vs ITO (ITAT Mumbai)

Loss on Account of Compensation on Enforcement of Security Paid to Subsidiary Companies is allowable as same was in the course of business

The assessee has claimed loss incurred by two subsidiary companies M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd on the ground that the said loss has been incurred wholly and exclusively in connection with its business for borrowing loan from ILFS. The AO disallowed loss claimed by the assessee on account of compensation paid to two subsidiary companies on the ground that the said loss is in the nature of capital expenditure which is incurred in connection with repayment of loan borrowed from two subsidiaries, therefore, the said loss cannot be allowed as expenditure. The AO has analysed the facts in the light of evidences filed by the assessee to come to the conclusion that the said expenditure is not incurred wholly and exclusively in connection with the business, therefore, merely for the reason that there is a contractual obligation between the parties, compensation paid to reimburse loss incurred by two subsidiaries on account of enforcement of security cannot be allowed as deduction. The AO has not disputed the fact that the assessee has incurred loss on account of enforcement of security by ILFS. In fact, M/s ILFS has sold shares belonging to two subsidiary companies and recovered loss of Rs.12,60,000 and Rs.1,58,40,000. It is also an admitted fact that there is a contractual obligation in terms of agreement between the parties that in case any loss incurred on account of enforcement of security by the lender for non repayment of loans, then such loss shall be indemnified and reimbursed to two subsidiary companies. These facts are not disputed by the lower authorities. The AO is only on the point that the said expenditure is a capital expenditure because it arises out of a loan transaction between the assessee and the bank and the assessaee has reimbursed loss incurred by subsidiary companies in the process of enforcement of security being shares pledged with the lender.

Having heard both the sides, we do not find any merit in the findings of the AO for the reason that the AO has not denied the fact that the assessee has borrowed loan from M/s ILFS for the purpose of its business. In the process, the assessee has pledged NOCIL shares held by two of its subsidiary companies with the lender for security of loan. As per the contractual agreement between the parties, the assessee has reimbursed loss incurred by two subsidiary companies. Therefore, we are of the considered view that the said loss is incurred wholly and exclusively in connection with the business of the assessee and accordingly, the AO was incorrect in disallowing loss on account of compensation on enforcement of security.

FULL TEXT OF THE ITAT JUDGMENT

This appeal filed by the assessee is directed against order of the CIT(A)-12, Mumbai dated 30-03-2011 and it pertains to AY 2002-03. The assessee has raised the following grounds of appeal:-

The appellant objects to the order dated 30 March 2011 passed by the Commissioner of Income-tax (Appeals)-12, on the following among other grounds:

Interest in respect of advances to companies / other concerns:

1. The learned Commissioner (Appeals) erred in confirming the disallowance of interest amounting to Rs. 2,25,14,307 being estimated interest at the rate of 15 per cent on the following amounts:

Sr. No. Parties Amount R.S.
(a) Ibiza Industries Limited 25,50,000
 (b) Mafatlal S A Intex Ltd. 1,38,01,210
(c) Mafatlal V K Intex Ltd. 38,00,000
(d) Repal Apparel P. Ltd. 75,76,557
(e) Silvia Apparel Ltd. 80,00,000
(0 Sushmita Holdings Ltd. 4,75,02,610
(g) Mafatlal Engineering Industries Limited (MEIL) 3,91,15,000
00 MEIL by Mafatlal Fine Spg. and Mfg, Co.Ltd 2,77,50,000
Total: 15,00,95,377

2. The learned Commissioner (Appeals) ought to have appreciated that the Assessing Officer was not justified in charging to tax notional interest of Rs. 2,25,14,307 which had not at all accrued to the appellant.

3. The learned Commissioner Appeals) ought to have appreciated that the advances to the above parties were for the purpose of business of the appellant.

4. The learned Commissioner (Appeals) erred in not appreciating that the above amounts were advanced in the course of the appellant’s business of entrepreneurship and project promotion. The learned Commissioner (Appeals) failed to appreciate that the appellant had not borrowed from Banks/Financial Institutions for financing these companies.

5. The learned Commissioner (Appeals) ought to have appreciated that advances advances made to MEIL were out of own resources of the appellant from dividend, interest, sales realisation and realisation of assets. As the loans on which interest has been paid were borrowed for the purpose of business of the appellant, the interest paid should have been fully allowed as a deduction.

6. Without prejudice, the learned Commissioner (Appeals) ought to have appreciated the fact that as per the rehabilitation scheme of MEIL, the interest on loans provided to MEIL was to accrue only after all the dues of the financial institutions had been paid and that the question of comparing the interest paid with the interest received did not arise in the present year.

7. In any event and without prejudice, as the amounts due from MEIL had been written off by the appellant as on March 31, 1991, the said amounts were not outstanding during the relevant previous year 2001-02 and accordingly no disallowance ought to have been made on account of interest.

8. Alternatively and without prejudice, as the funds utilised for the advances to MEIL had been subsequently recouped out of internal accruals, no interest ought to have been disallowed.

9. The learned Commissioner (Appeals) erred in not appreciating the fact that the principal amount of loan of Rs.25,50,000 given to the subsidiary company Ibiza Industries Limited itself had become doubtful of recovery. In view of the same, the appellant had not provided interest on loan given to the Ibiza Industries Limited.

10. The learned Commissioner (Appeals) erred in not appreciating the fact that the loans advanced to Mafatlal S.A. Intex and Mafatlal V.K. Intex were for the purposes of the business of the appellant.

11. Without prejudice to the above, the appellant submits that the disallowance of the interest ought to be reduced substantially.

12. The learned Commissioner (Appeals) erred in relying on the decision of the Commissioner (Appeals) in the earlier years.

Valuation of Closing Stock

13. The learned Commissioner (Appeals) erred in confirming addition of estimated amount to excise duty of Rs. 25,00,000 on account of valuation of closing stock of finished goods.

Disallowance of Pooja expenses

14. The learned Commissioner (Appeals) erred in confirming disallowance in respect of Pooja expenses of Rs. 1,63,210.

Disallowance of payments to relatives of deceased employees

15. The learned Commissioner (Appeals) erred in not specifically allowing the payments made to relatives of deceased employees of Rs. 49,260.

Disallowance under section 14A

16. The learned Commissioner (Appeals) erred in confirming disallowance of interest expenses of Rs. 6,79,30,000 on an estimate basis under section 14A for earning income not forming part of total income.

17. The learned Commissioner (Appeals) ought to have appreciated that the learned Assessing Officer estimated and disallowed interest expenses of Rs. 6,79,30,000 without establishing any nexus between investments generating tax-free income and borrowed funds.

18. The learned Commissioner (Appeals) ought to have appreciated that no specific borrowings had been made for the purpose of making investments.

19. Without prejudice to the above, the learned Commissioner (Appeals) erred in not appreciating that the disallowance of Rs. 6,79,30,000 under section 14A was excessive and unreasonable and ought to have directed the learned Assessing Officer to reduce the disallowance substantially.

Non exclusion of CFC Grant from Total Income

20. The learned Commissioner (Appeals) erred in confirming the action of Assessing Officer in not excluding from the total income of the appellant, the CFC grant of Rs. 8,57,75,798 received pursuant to the Montreal Protocol for phasing out production of refrigerant gases.

Disallowance of loss on compensation on enforcement of security

21. The learned Commissioner (Appeals) erred in confirming the disallowance of loss on account of compensation on enforcement of security of Rs. 7,15,39,300 treating the same as capital in nature.

22. The learned Commissioner (Appeals) erred in not allowing loss on compensation on enforcement of security of Rs. 7,15,39,300 under section 28/29 or section 37 of the Income tax Act as a loss or expense incidental to the business.

Penalty and Fine

23. The learned Commissioner (Appeals) erred in confirming the disallowance of Rs. 8,000 on account of penalty and fine.

Interest under section 244A

24. The learned Commissioner (Appeals) erred in not specifically directing the Assessing Officer to not restrict interest under section 244A to Rs, 11,487

Grounds not decided/adjudicated

Ground 17

“The learned Income-tax Officer erred in not quantifying and in not specifically allowing carry forward of the unabsorbed business losses and unabsorbed depreciation of earlier assessment years for set off in the subsequent assessment years.”

2. The brief facts of the case are that the assessee is a limited company engaged in the business of manufacturing and trading in fabrics and other industrial activities, filed its return of income for AY 2002-03 on 31-10-2002 declaring total loss of Rs.27,64,36,740. The case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) of the Act on 14-03-2005 determining the total loss at Rs.9,54,36,061 by making various additions / disallowances towards interest in respect of advances to companies / other concerns, revaluation of closing stock of finished goods, disallowance of pooja expenses, disallowance of payments to relatives of deceased employees, disallowance of expenditure incurred in relation to exempt income u/s 14A, non exclusion of CPC grant from total income, disallowance of loss on compensation on enforcement of security and disallowance of penalty and fine and also disallowance of forex loss.

3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged additions made by the AO towards various disallowances and filed elaborate written submissions. The Ld.CIT(A), after considering relevant submissions of the assessee partly allowed appeal filed by the assessee wherein he has deleted addition made by the AO towards disallowance of forex loss; however, confirmed remaining additions including interest in respect of advances to companies, disallowance of expenditure in relation to exempt income, addition towards revaluation of closing stock, disallowance of pooja expenses, payment to relatives of deceased employees, non exclusion of CPC grant and disallowance of loss on compensation on enforcement of security and also disallowance of penalty and fine. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us.

4. The first issue that came up for our consideration from grounds 1 to 12 is disallowance of interest in respect of advances to companies / other concerns of Rs.2,25,14,307. The Ld.AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “I” in assessee’s own case for AY 2001-02 in ITA No.4598/Mum/2005, where, the ITAT, by following its earlier order in assessee’s own case for AY 1993-94 to 1999-2000, has set aside the issue to the file of the AO for fresh consideration in the light of the decision of Hon’ble Supreme Court in the case of S.A. Builders vs CIT 288 ITR 1 (SC).

5. The Ld.DR, on the other hand, fairly accepted that the issue is covered in favour of the assessee by the decision of ITAT for earlier years and for similar reasons, the issue may be set aside to the file of the AO, for this year also.

6. We have heard both the parties and perused the material available on record. The issue of disallowance of interest in respect of advances to companies / other concerns has been subject matter of deliberation from AYs 1993-94 to 2001-02 where the ITAT, after considering relevant submissions and by following the judgement of Hon’ble Supreme Court in the case of S.A. Builders vs CIT(supra) has restored the matter to the file of the AO for fresh consideration. The relevant observations of the ITAT are extracted below:-

“5. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the Tribunal consistently set aside the issue to follow the precedent laid down by Hon’ble Supreme Court in the case of S.A. Builders 288 ITR 1 (SC). On same reasoning, we set aside this issue to the file of the AO. This issue is allowed for statistical purposes.”

7. In this view of the matter and consistent with the view taken by the co-ordinate bench, we set aside the issue to the file of the AO and direct him to follow the directions given by the ITAT for AY. 2001-02, we set aside the issue to the file of the AO to be considered afresh in the light of judgement of Hon’ble Supreme Court in the case of S.A. Builders vs CIT(supra).

8. The next issue that came up for our consideration is adjustment to closing stock of finished goods. The Ld.AR for the assessee submitted that this issue is covered against the assessee by the decision of ITAT in assessee’s own case for AY 2001-02 in ITA No.4598/Mum/2005 where the co-ordinate bench, by following its earlier order held that adjustment made by the AO towards inclusion of excise duty for valuation of closing stock of finished goods is in accordance with law. However, further stated that once adjustment is made to closing stock, the AO is bound to make adjustment to give effect to the opening stock. Otherwise it gives a distorted figure. The relevant observations of the ITAT is extracted below:-

“7. We are of the view that this issue has to be allowed in favour of assessee by giving direction in regard to alternative claim that the addition to closing stock of finished goods made by the AO should be given consequential effect to the opening stock of next year also. We find that the Tribunal in ITA No.4029/Mum/2009 for assessment year 2003-04 vide order dated 29.4.2011 has given some direction vide para Nos.5 & 6 as under:

“5. Ground No .2 is on the issue of valuation of closing stock of finished goods, s) confirmed the addition of estimated amount of excise duty of s on account of valuation of closing stocks of finished goods. The. the assesses’s own case from the assessment years 1994-95 to 1997-98 has decided the ground against the assessee. Respectfully following the same, we dismiss this ground of the assessee.

6. The assessee made an alternative claim that the addition should also be made for the opening stock. This alternative claim was allowed by the Tribunal. Consistent with the view taken by the Tribunal, we allow the alternative claim of the assessee for addition to opening stock.”

8. As the issue is squarely covered, we also direct the AO to give to the opening stock of the next year. This issue of the assessee is allowed accordingly.”

9. In this view of the matter and being consistent with the view taken by the co-ordinate bench, we direct the AO to make suitable adjustments towards opening stock in respect of Modvat adjustment made to closing stock of finished goods.

10. The next issue that came up for our consideration is disallowance of pooja expenses. The Ld.AR for the assessee submitted that the ITAT had considered similar issue for earlier assessment years in ITA No.4598/Mum/2005 where by following its earlier decision for AY 1998-99, decided the issue in favour of the assessee allowing the claim of pooja expenses.

11. Having heard both the sides, we find that the co-ordinate bench of ITAT has considered disallowance of pooja expenses for AY 2001-02 and after considering relevant facts and also by following its own order for AY 1998-99 in ITA No.4598/Mum/2005 has decided the issue in favour of the assessee. Since, the facts involved in this year are identical to the facts which have been considered by the ITAT for earlier assessment years, by following the Tribunal’s order in assessee’s own case, we decide the issue in favour of the assessee and direct the AO to delete disallowance made towards disallowance of pooja expenses.

12. The next issue that came up for our consideration is payments to relatives of deceased employees. The Ld.AR for the assessee submitted that this issue is also covered in favour of the assessee by the decision of ITAT, Mumbai Bench “I” in assessee’s own case for AY 2001-02 in ITA No.4598/Mum/2005 wherein under similar set of facts, the ITAT has allowed the claim of payments made to relatives of deceased employees. The relevant observations of the ITAT is extracted below:-

20. The next issue in this appeal of assessee is against the order of the CIT(A) disallowing the claim of payment made to relatives of deceased employees. For this, assessee has raised following ground Nos. 14, 15 & 16 :

“Payment to relatives of deceased employees

The learned Commissioner (Appeals) erred in not specifically allow the appellant’s claim in respect of amount of Rs. 57,684 being payment made to relatives of deceased employees.

The learned Commissioner (Appeals) erred in holding that the claim of the appellant of Rs. 57,684 in respect of payment to relatives of deceased employees was allowable if the payments have been made in pursuance of written agreements with the employees.

The learned Commissioner (Appeals) ought to have appreciated that the Commissioner (Appeals) in the assessment years 1987-88, 1988-89, 1991-92 and the Income-tax Appellate Tribunal in the appellant’s own case for the assessment years 1985-86 and 1986-87 had in fact deleted the disallowance in respect of payment to relatives of deceased employees.”

21. As the facts circumstances are exactly identical in this year, respectfully following the Tribunal’s order in earlier years, we direct the AO to allow the claim of payment made to relatives of deceased employees. This issue of the assessee’s appeal is accordingly allowed.”

13. In this view of the matter and being consistent with the decision of co-ordinate bench, we direct the AO to allow payments made to relatives of deceased employees.

14. The next issue that came up for our consideration is disallowance of expenditure in relation to exempt income u/s 14A of the Income-tax Act, 1961. The Ld.AR for the assessee, at the time of hearing, submitted that this issue was also subject matter of deliberations of ITAT for AY 2001-02 wherein the ITAT, by following the ratio laid down by the Hon’ble Bombay High Court in the case of CIT vs Godrej & Boyce Mfg Co Ltd (2010) 320 ITR 81 (Bom) set aside the issue to the file of the AO to ascertain correct facts to determine the exact expenditure incurred by the assessee in relation to exempt income. Since facts are identical to the facts which are already considered by ITAT, for similar reasons, the issue may be set aside to the file of the AO for fresh consideration.

15. Having considered both the sides, we find that the co-ordinate bench has considered similar issue for AY 2001-02 in ITA No.4598/Mum/2015 wherein by following the decision of Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg Co Ltd (supra) has restored the matter back to the file of the AO for fresh consideration. The relevant observation of the Tribunal is extracted below:-

23. At the outset, the learned Counsel for the assessee stated that the Tribunal in ITA No.4597/Mum/2005 for assessment year 1999-2000 in assessee’s own case vide order dated 21.10.2015 has set aside the issue to the file of the AO to decide a reasonable disallowance by following the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited Vs. DCIT (2010) 328 ITR 81 (Bom). The Tribunal observed in para 42 under:

“42. We have heard both the pasties and perused the record. We find that the assessee earned dividend income and claimed that the interest paid on borrowed funds for making investment is expenditure. We find that as per the provisions of section 14A the assessee cannot claim expenditure of interest for earning exempt income which is not forming part of the total income. Obviously, the assessee borrowed the funds from outside and invested it. The assessee also earned dividend income and claimed expenditure as deductible business expenditure. the decision rendered by the Hon’ble Jurisdictional High Court; the Hon’ble High Court observed and held that:

“Even prior to assessment year 2008-09, when rule 😯 was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

The proceedings for assessment year 2002-03 shall stand remanded back to the Assessing Officer, The Assessing Officer snail determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case ‘

In the present case, the assessee neither before the AO nor the Ld.ClT(A) or the Tribunal produced any documents how the assessee is eligible for deduction of the expenditures incurred for earning dividend income. We find that the Id, CIT(A) restricted the claim to 50%, Therefore; we are of the considered opinion, that this facts requires details investigation and verification at the level of AO to determine the exact expenditure incurred by the Assessee, The AO is directed to follow the decision rendered by the Hon’ble High Court in Godrej & Boyce Mfg. Co. Ltd (supra). Resultantly, Grounds No. 25 and 26 are allowed for statistical purposes.

24. We find that the Tribunal in earlier years also remanded the matter back to the file of the AO with certain directions. Accordingly, we also direct the AO to decide the issue in terms of the directions of Tribunal in 1999-2000. Accordingly, this issue is remanded back to the file of the AO.”

16. In this view of the matter and consistent with the view taken by the co-ordinate bench, we restore the issue to the file of the AO to consider the issue afresh in the light of earlier observations issued by the ITAT to ascertain the correct facts with regard to the expenditure incurred by the assessee in relation to exempt income for the year under consideration.

17. The next issue that came up for our consideration from grounds 21 & 22 is disallowance of loss on compensation of enforcement of security of Rs.7,15,39,300. The facts with regard to the impugned dispute are that the assessee has availed a term loan from ILFS by mortgaging shares of NOCIL held by its subsidiary companies, M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd as security. The assessee has entered into a memorandum of understanding with those two subsidiary companies for pledging shares held by them with ILFS, as per which, in case the subsidiary companies incurred loss on account of enforcement of security by ILFS, the assessee needs to compensate such loss and accordingly, a clause in memorandum of understanding has been provided to indemnify the subsidiary companies. Accordingly, a mortgage agreement has been executed between the assessee, subsidiary companies and the bank. Since the assessee could not repay the loan borrowed from ILFS, the lender has enforced the security of aforesaid NOCIL shares which was pledged by M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd. The lender, ILFS has sold shares of NOCIL held by M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd and recovered Rs.12,60,000 and Rs.1,58,40,000, respectively. The assessee has provided loss incurred by subsidiary companies on account of sale of shares by ILFS by taking into account cost of shares, as per books of account of subsidiary companies and sale proceeds received by ILFS from sale of shares and ascertained total loss to be reimbursed to two subsidiary companies at Rs.7,15,39,300. The assessee claims that since the loss incurred on account of enforcement of security by the lender, the assessee was liable to indemnify and reimburse loss incurred by M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd, as per terms of agreement between the parties. Since the said loss was incurred in connection with its business, the same needs to be allowed as business expenditure incurred and accordingly claimed deduction u/s 37(1) of the Income-tax Act, 1961.

18. The AO disallowed loss claimed on account of sale of share by ILFS on the ground that such loss is a capital loss as the assessee has incurred loss on account of compensation paid to two subsidiary companies as per the contractual agreement. The AO further observed that the assessee had taken a loan from ILFS and this loss has occurred in the course of repayment of loan and hence, natural corollary is that the loss has occurred in respect of transactions which are capital in nature and consequently, it is clearly in the nature of capital expenditure which cannot be allowed as deduction. The AO has taken support from the report of the tax auditors as per which, the tax auditors have quantified compensation on enforcement of security as a capital expenditure and reported in its tax audit report under para 17(a). The AO further observed that even otherwise, the said loss cannot be allowed while computing income from business as the assessee neither owned the shares in its name nor has incurred such loss wholly and exclusively for the purpose of business.

19. The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred in confirming disallowance of loss on compensation on enforcement of security without appreciating the fact that the said loss is incurred wholly and exclusively in connection with business of the assessee as the assessee has borrowed loan from ILFS for the purpose of business by pleding shares of NOCIL held by M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd. The assessee has entered into an agreement with the companies and indemnified the loss, if any, incurred on account of pledging of shares with ILFS, as per which in case of any loss is suffered on account of enforcement of security for non repayment of loan, the assessee is obliged to compensate such loss, therefore, there is no reason for the AO to disallow such loss by holding that the said loss was not incurred wholly and exclusively for the purpose of business. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of Badridas Daga vs CIT 34 ITR 10 (SC) and CIT vs Nainital Bank Ltd 54 ITR 109(SC).

20.On the other hand, the Ld.DR strongly supported the order of the Ld.CIT(A).

21. We have heard both the parties, perused material available on record and gone through the orders of authorities below. The assessee has claimed loss incurred by two subsidiary companies M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd on the ground that the said loss has been incurred wholly and exclusively in connection with its business for borrowing loan from ILFS. The AO disallowed loss claimed by the assessee on account of compensation paid to two subsidiary companies on the ground that the said loss is in the nature of capital expenditure which is incurred in connection with repayment of loan borrowed from two subsidiaries, therefore, the said loss cannot be allowed as expenditure. The AO has analysed the facts in the light of evidences filed by the assessee to come to the conclusion that the said expenditure is not incurred wholly and exclusively in connection with the business, therefore, merely for the reason that there is a contractual obligation between the parties, compensation paid to reimburse loss incurred by two subsidiaries on account of enforcement of security cannot be allowed as deduction. The AO has not disputed the fact that the assessee has incurred loss on account of enforcement of security by ILFS. In fact, M/s ILFS has sold shares belonging to two subsidiary companies and recovered loss of Rs.12,60,000 and Rs.1,58,40,000. It is also an admitted fact that there is a contractual obligation in terms of agreement between the parties that in case any loss incurred on account of enforcement of security by the lender for non repayment of loans, then such loss shall be indemnified and reimbursed to two subsidiary companies. These facts are not disputed by the lower authorities. The AO is only on the point that the said expenditure is a capital expenditure because it arises out of a loan transaction between the assessee and the bank and the assessaee has reimbursed loss incurred by subsidiary companies in the process of enforcement of security being shares pledged with the lender.

22. Having heard both the sides, we do not find any merit in the findings of the AO for the reason that the AO has not denied the fact that the assessee has borrowed loan from M/s ILFS for the purpose of its business. In the process, the assessee has pledged NOCIL shares held by two of its subsidiary companies with the lender for security of loan. As per the contractual agreement between the parties, the assessee has reimbursed loss incurred by two subsidiary companies. Therefore, we are of the considered view that the said loss is incurred wholly and exclusively in connection with the business of the assessee and accordingly, the AO was incorrect in disallowing loss on account of compensation on enforcement of security.

23. Having said so, let us examine the quantum of loss claimed by the assessee. The assessee claims to have reimbursed loss of Rs.7,15,39,000 to two subsidiary companies. The assessee further claims that such loss has been claimed on the basis of cost of NOCIL shares held by two subsidiary companies, in their books of account. The assessee has arrived at loss by reducing cost of shares in the books of account of subsidiary companies from the sale proceeds received by ILFS on sale of shares. Therefore, whether loss claimed by the assessee is based on cost of shares held by two subsidiary companies from the date of acquisition of such shares or the cost as on the date of pledging the shares with ILFS for security of loan has to be ascertained. In case, the assessee has computed loss by taking into account cost of NOCIL shares as per its books of account and then applied the benefit of indexation to arrive at the loss as on the date of sale of shares of ILFS, then such claim cannot be allowed, because the benefit of indexation is only for the purpose of computation of capital gain, but not for the purpose of arriving at real loss incurred on account of sale of shares. In case, the assessee has arrived at a loss by taking into account the price of shares of NOCIL as on the date of pledging such shares with ILFS and reduced from the sale price of shares, then the total loss claimed by the assessee can be allowed in total. The facts are not clear. Though the assessee has filed copies of returns filed by two subsidiary companies for AY 2002-03, on perusal of statement of long term capital loss computed by the companies, it appears that the companies have applied the benefit of indexation to arrive at a loss. Therefore, we are of the considered view that the issue needs to be re-examined by the AO for the limited purpose of verification of facts with regard to computation of loss arrived at by the parties in terms of their agreement. Accordingly, we set aside the issue to the file of the AO and direct him to cause necessary enquiries in the light of our discussion hereinabove, after providing reasonable opportunity of hearing to the assessee.

24. In the result, appeal filed by the assessee is partly allowed, for statistical purpose.

Order pronounced in the open court on 17th October, 2018.

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