2017 (3) TMI 904 - HC - Income Tax

Court characterizes investment write off as loss, not capital. Losses from equity participation deductible in business income.

The Pr. Commissioner of Income Tax-4 Versus Industrial Finance Corporation Of India Ltd.

The Court held that the investment write off should be characterized on the Revenue side as a loss rather than the Capital side. The losses, arising from ... Investment write off - whether could be characterised on the Revenue side or did it fall in the Capital side as loss? - Held that:- Where monies were advanced through the mechanism of equity participation, the intention of the lender – in the present case, the assessee, was to derive income rather than to increase its investment on the capital side. Such being the case, if there were profits, with the assessee/lender from the investment, it would properly lie in the Revenue side of income and conversely, if there were losses – as in the present case – it properly would have fallen, as was correctly claimed, as bad debts in the present instance. See Badridas Daga Versus Commissioner Of Income-Tax [1958 (4) TMI 2 - SUPREME Court ] Issues:1. Characterization of investment write off - Revenue side or Capital sideAnalysis:The case involved the question of whether an investment write off of Rs. 2,56,35,395 should be characterized on the Revenue side or the Capital side as a loss. The appellant, a statutory Corporation engaged in financing companies and ventures, sought to write off losses reported as bad debts. The Assessing Officer and the Commissioner of Income Tax rejected the appellant's contentions, but the Income Tax Appellate Tribunal (ITAT) accepted the plea. The ITAT found that the losses, arising from equity participation in the form of financial assistance to borrowers, were allowable as deductions in computing the appellant's business income. The ITAT also referred to the circular dated 24.11.1965 issued by CBDT and relevant case laws to support its decision.The ITAT relied on the judgment of Badridas Daga Vs. Commissioner of Income Tax [1958] 34 ITR 10, emphasizing that deductions must be allowed if they arise from the carrying on of the business and are incidental to it. In the present case, where funds were advanced through equity participation, the losses were considered bad debts and allowable as deductions. The Court agreed with the ITAT's reasoning that the losses properly fell under bad debts in this instance, as the intention behind the investments was to derive income rather than increase capital on the Revenue side.In conclusion, the Court held that no substantial question of law arose in the case and dismissed the application along with any pending applications. The judgment highlighted the distinction between losses arising directly from the business and losses connected to the business, emphasizing the deductibility of losses incidental to business operations.