2022 (2) TMI 390 - AT - Income Tax

Tribunal grants relief to assessee for AY 2011-12 and partly for AY 2013-14

REFEX Industries Limited (formerly known as REFEX Refrigerants Ltd.) Versus DCIT, Corporate Circle -5 (3) / 5 (4) Chennai.

The Tribunal allowed the appeal for AY 2011-12 in favor of the assessee, directing the AO to allow the write-offs and depreciation claims. For AY 2013-14, ... Disallowance of the write off of the advance made to subsidiary company - Whether acquisition was in the normal course of assessee’s business with a view to improve trading results? - HELD THAT:- All the three write-off were part and parcel of the same transaction and arose in the course of assessee’s efforts to run its business more smoothly and in a more profitable manner. Had the acquisition been materialized, the assessee would have benefitted by way of increase in business and better trading results. Therefore, it could be well said that the acquisition was in the normal course of assessee’s business with a view to improve trading results. Any loss arising therefore, thus, was to be viewed as loss in the revenue field and not in capital field as erroneously held by lower authorities. All the above stated facts would lead to a conclusion that the investments were in furtherance of business interest of the assessee and were made out of commercial expediency. The main purpose of investment was not to acquire any manufacturing capacity or any infrastructural capacity but the main purpose was to boost assessee’s sales. Therefore, the investments could not be said to be in capital field rather the same were meant to improve the top line of the business by way of higher revenue profits. We find that the issue on similar factual matrix is squarely covered by the cited decision of Hon’ble Bombay High Court in CIT V/s Colgate Palmolive India Ltd. [2014 (12) TMI 846 - BOMBAY HIGH COURT] wherein it was held that loss in investment out of commercial expediency would be an allowable deduction - Also in M/S. ACE DESIGNERS LIMITED [2020 (9) TMI 970 - KARNATAKA HIGH COURT]since the investment was made for enhancement of business activity of assessee in global market which primarily related to business operation of assessee and the investment was not made with a view to create capital asset in the form of holding shares, the said loss would be a business loss allowable u/s 28(i). The Hon’ble Supreme Court in Patnaik & Co. Ltd. V/s CIT [1986 (7) TMI 6 - SUPREME COURT] held that where the government bonds or securities were purchased by the assessee with a view to increase its business, the loss incurred on the sale of such bonds or securities was allowable as ‘business loss’ We concur with the submissions of Ld. AR that the investments in subsidiaries were made in the normal course of assessee’s business to make business more profitable. Therefore, the resultant loss suffered by the assessee was rightly claimed as revenue expenditure / business loss by way of write-off in the Profit Loss Account. We order so. Accordingly, we direct Ld. AO to allow these three write-offs as deduction as claimed by the assessee. The grounds thus raised stand allowed. Claim of depreciation on cylinder - AO has denied the depreciation on the ground that the same represent sales return - HELD THAT:- The assessee had raised excise invoices and also charged applicable VAT on sale of cylinders. However, these cylinders have subsequently been returned on 15.06.2010 by these two parties which is quite evident from the copies of credit notes issued by the assessee to both these parties. Consequently, the block for this year has been increased to that extent and depreciation, as applicable, has been claimed on the same by the assessee. These transactions are duly evidenced by Tax Audit Report and Extracts of financial statements as placed on record. - .AO reasoning could not result into denial of depreciation to the assessee since upon sale of cylinders, the block of asset was reduced whereas on receipt of the same back by the assessee, the gross block was increased accordingly. Therefore, we find no infirmity in the claim of the assessee. If the logic of Ld. AO was to be accepted that the same was merely sales return, the loss thus suffered would be allowed in full as trading loss. Therefore, we direct Ld. AO to allow the depreciation on cylinders as per assessee’s claim. This ground stand allowed. The appeal stand allowed in terms of our above order. Disallowance of interest on tax deducted at source - CIT(A) confirmed the disallowance by observing that interest on TDS was akin to Income Tax Payment. Aggrieved, the assessee is in further appeal before us - HELD THAT:- We find that this issue stood against the assessee by the decision of Hon’ble High Court of Madras in CIT V/s Chennai Properties & Inv. Ltd.[1998 (4) TMI 89 - MADRAS HIGH COURT] wherein it was held that interest takes color from nature of principal amount required to be paid but not paid in time and this principal amount being income-tax, interest is in nature of a direct tax and settlement of income-tax payable under Act and, therefore, same cannot be regarded as compensatory payment. Therefore, the same could not be allowed as business expenditure. Respectfully following the same, we confirm the disallowance and dismiss this ground of appeal Issues Involved:1. Disallowance of write-off of advance to subsidiary company.2. Disallowance of write-off of investment in subsidiary.3. Disallowance of loss on account of corporate guarantee given to subsidiary.4. Disallowance of depreciation on cylinders.5. Disallowance of interest on tax deducted at source (TDS).Issue-wise Detailed Analysis:1. Disallowance of Write-off of Advance to Subsidiary Company:The assessee claimed an administrative expense of Rs. 770.16 Lacs as a write-off for an advance given to its wholly owned subsidiary (WOS) for acquiring shares in another company, KERPL, in Singapore. The acquisition was intended to expand the assessee's business. However, due to disagreements, the acquisition was reversed, and the amount became irrecoverable. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the claim, categorizing it as a capital loss. The Tribunal, however, found that the expenditure was made to facilitate the assessee’s business and enhance trading results, thus qualifying as a revenue expenditure and allowed the deduction.2. Disallowance of Write-off of Investment in Subsidiary:The assessee wrote off an investment of Rs. 675.26 Lacs in STPL, which became a shell company after the failed acquisition of KERPL. The AO and CIT(A) treated this as a capital loss. The Tribunal, citing similar cases and judicial precedents, concluded that the investment was made out of commercial expediency to enhance business operations, and thus, the loss was a revenue expenditure. The Tribunal directed the AO to allow the write-off as claimed by the assessee.3. Disallowance of Loss on Account of Corporate Guarantee Given to Subsidiary:The assessee had given a corporate guarantee for loans taken by STPL, which was invoked by the bank when STPL could not repay the loan, resulting in a loss of Rs. 508 Lacs. The AO and CIT(A) disallowed the claim, considering it a capital expenditure. The Tribunal, however, found that the guarantee was given to facilitate the acquisition for business expansion, making it a revenue expenditure. The Tribunal allowed the deduction as a business loss.4. Disallowance of Depreciation on Cylinders:The assessee claimed depreciation on cylinders that were sold and later returned. The AO disallowed the claim, treating the transaction as a sales return and not as an addition to the block of assets. The Tribunal found that the cylinders were added back to the block of assets upon return and depreciation was claimed accordingly. The Tribunal directed the AO to allow the depreciation as claimed by the assessee.5. Disallowance of Interest on Tax Deducted at Source (TDS):The assessee claimed interest on TDS amounting to Rs. 3.04 Lacs, which was disallowed by the AO and upheld by the CIT(A), considering it akin to income tax payment. The Tribunal, following the decision of the Hon’ble High Court of Madras, confirmed the disallowance, stating that interest on TDS is in the nature of a direct tax and cannot be allowed as a business expenditure.Conclusion:The Tribunal allowed the appeal for AY 2011-12 in favor of the assessee, directing the AO to allow the write-offs and depreciation claims. For AY 2013-14, the Tribunal partly allowed the appeal, directing the AO to allow depreciation on cylinders but upheld the disallowance of interest on TDS.