TaxTMI 
TaxTMI 
2024 (12) TMI 551
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....rsuance of the directions issued by Dispute Resolution Panel - I ('DRP'), Mumbai on the following grounds: On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP has: General 1. erred in assessing total income of the Appellant at INR 11,35,61,343/- as against returned income of INR 2,37,09,958/-; Disallowance of write off of loan of INR 8, 91, 78,685/- advanced to step-down subsidiary in Indonesia 2. Erred in holding that write off of loan advanced to step-down subsidiary in Indonesia is not allowable as revenue expenditure on the ground that the loan is not given for Appellant's business purpose; 3. Erred in holding that the write off of such loan advanced to step-down subsidiary in Indonesia is not an allowable loss even as per section 28 of the Income-tax Act, 1961; 4 should have appreciated that such loss was incurred purely from commercial reason, which was in overall business interest of the Appellant and therefore, allowable expense under section 37(1) or allowable business loss under section 28 of the Act; Transfer pricing adjustment of INR 6....
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....issues as under: i. Squared up loans; ii. Expenses incurred for earning exempt income; iii. Custom duty paid; iv. Income from house property; v. Capital Gain/Loss from house property and vi. International transaction(s) Since the case of the assessee was selected with "Specific Risk Parameter" a reference was made to the Transfer Pricing Officer (TPO) also, who in turn proposed an adjustment of Rs. 13, 60,000/- in his order passed u/s. 92CA of the Act. Ultimately, the assessment of the assessee was concluded by making addition of Rs. 6, 72,000/- based on TPO report read with Ld. DRP's direction and Rs. 8,91,78,685/- being amount of loan given to subsidiary at Indonesia involved in the business of coal mining written off. The assessee being aggrieved with the directions of Ld. DRP read with the assessment order preferred the present appeal before us. 4. We have gone through the draft assessment order of the AO passed u/s. 144C of the Act, Order of the TPO passed u/s. 92CA of the Act, Order/directions of the Ld. DRP passed u/s. 144C (5) of the Act and final assessment order passed by the AO u/s. 143(3) r.w.s. 144C (13) of the Act. He....
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.... (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] With a bare reading of section 37 of the Act it is crystal clear that expenses not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee or the expenses falling u/s. 37(2B) of the Act can only be disallowed. In the matter before us we need to examine the claim of the assessee under the aegis of section 37 of the Act with various conditions embodied in it and to examine the same a close analysis of the facts of the matter as recorded by the authorities below has to be discussed. It is observed that nowhere it is alleged by the authorities below that the expense claimed by the assessee is personal in nature, non-genuine or capital in nature. There is no question raised by the authorities below that there is any illegal expense or diversion of income or suppression of income by the assessee or there is no question of identity or quantificati....
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..... 36(1) (vii) and 36(2) of the Act. Whereas, the assessee is claiming the same u/s. 37(1) of the Act. Here we found that the facts of the case were misunderstood by the authorities below and findings in this para are a clear reflection of their misconception/ confusion about the facts of the matter. These days entering/venturing into other core areas of economy is quite common and rather the assessee entered the same in the financial year 2006-07 and faced a long gestation period to get the same matured, so after such a long period of investment, efforts and gestation the question of the revenue that the same is not the part of the assessee's business is ruled out. The assessing officer is duty bound to update him with the present business scenario going on, while framing an assessment order. These days every big corporate house is entering into the power sector as the same is the most essential cash commodity and with a growth in economy demand is also robust. Rather, to be relevant in present scenario Entrepreneurs has to think about their vertical diversification as the traditional business and business model may not be that relevant in growing competition. 6.1.3The rel....
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....xpenditure. Once it is established that funds in the form of loan provided to subsidiary is out of business expediency how is it possible that interest is in the nature of business expense but in case of bad debt, the principle amount is not allowable u/s. 37(1) of the Act. 6.2 Assessee's Submissions 6.2.1 The assessee has submitted that the assessee company is engaged in the business of manufacturing and trading in pharmaceuticals and other products. During the Financial Year 2005-06, it diversified its business by entering into power sector and its promoters through their group entities decided to venture into thermal power plant generation along with renewable power generation too and hence decided to make investment in Indonesia. It is stated that the primary motive of venturing into Indonesia was to scout for additional "high grade" coal reserves to power the thermal plant that was proposed to be set up in India. Accordingly, during the F.Y. 2006-07, the assessee expanded overseas and acquired a controlling 55% equity stake in a coal mine located at Muara Bungo, Sumatra held by a company PT Bumi Bara Perkasa ('PT BBP') through a foreign JV called ....
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....ithin which it had to develop the mine, operate it and return the entire credit facility along with due interest to the lender. However, the cash flows generated by PEC were found to be inadequate to meet the high monthly debt requirements of bank loan, the assessee therefore, entered into an agreement with PEC to provide interest free loan to PEC to the extent of INR 8, 99, 55,565/- from the Financial year 2007-2015 for meeting its funding requirements i.e. to facilitate the PEC's liability to honour its repayment liabilities against the loan availed by it from Bank of India, Singapore Branch. However, immediately after the term loan was squared off by the PEC, the shareholders and Indonesian citizens of Nominee Company PT DMJ, namely Mr. Akhirudin and Mr. Haloman Wahyudi Pasaribu denied every claim of PEC over the assets and profits of PT BBP and PT DMJ. 6.2.4The assessee has contended that as the operations of PEC were not satisfactory and was estimated to be not viable even in the immediate future and also the fact that investment made were not fetching returns and due to the fraud conducted, Siddhayu Aayurvedic decided to exit from the Joint Venture company and li....
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....to the subsidiary due to commercial expediency, the holding company was entitled to deduction of the interest on the said loan and argued that the expression for the purpose of business' includes any expenditure voluntarily incurred for commercial expediency though the expenditure may not have been incurred under any legal obligation, and that it is allowable as business expenditure, if it was incurred on grounds of commercial expediency 6.2.7 The assessee has further placed reliance on the following judicial precedents wherein it is held corporate guarantees are in the nature of commercial expediency and therefore loss on account of corporate guarantee given to subsidiaries is allowable business loss: * Essen (P) Ltd vs. CIT (65 (TR 625), Hon'ble SC. * CIT vs. Delhi Safe Deposit Co. Ltd (133 (TR 756), Hon'ble SC * CIT vs. Khambhata Family Trust (34 Taxman.com 36) Gujarat HC, * J.R. Patel & Sons (P) Ltd. vs. CIT (69 ITR 782), Gujarat HC * CIT vs. Rao Construction (P) Ltd. (33 Taxman.com 61 3), Gujarat HC * CIT vs. Williamson Magor & Co Ltd. (117 (TR 858), Cal. 6.2.8 Thus argued that the assessee has....
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....out interest is a common incidence of business, to contend that it is not a pre-set condition that the company shall be engaged necessarily in the business of borrowing and lending for the purposes of deduction. 6.2.12 additionally the assessee has also placed reliance on following judicial precedents: CIT vs. Gillanders Arbuthnot and Co. Ltd (Supra) (Calcutta High Court) Even if an amount cannot be treated as a bad debt in the sense that it was not in the course of money lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of business. T.J. Lalwani vs. CIT (Supra) (Bombay High Court) It is not necessary that in order that the expenditure should be in connection with the carrying out of a business or incidental to it, it must be necessarily referable to any specific or direct transaction in the course of the carrying on of the business. Jackie Shroff vs. ACIT (Supra) (Mumbai Tribunal) When the moneys are advanced as measure of commercial expediency such advances are in the nature of business advances and the write off of such advances by the assessee under section 37(1) or section 28(i) o....
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....s given in the course of business and to address the business need of the company. In as the funds were utilized by the resultant entity for the purpose of its coal mine. i.e. * Loan was given by Siddhayu Aayurvedic to PEC to avoid legal obligations from Bank and any ensuing threat of this account becoming a non-performing asset in a foreign jurisdiction heavily regulated by MAS (Monetary authority of Singapore). * In case, where Siddhayu Aayurvedic wouldn't have infused funds via loan, the Bank was threatening to invoke the corporate guarantee, personal guarantees of the promoters and the collateral that was offered as part of the security package to the Bank. * Since, Siddhayu Aayurvedic had given guarantee to the agreement between PEC and bank, it became the primary responsibility of Siddhayu Aayurvedic to ensure that PEC complies with its obligations and undertakings under the said agreement. 6.3.2 In order to justify the write off the loan of INR 8, 91, 78,685/- advanced to subsidiary in Indonesia, the assessee has placed on record various documents as discussed below I. Statement of meeting shareholders resolution of "PT Equity....
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.... dated 1st March 2017 conveying 1,65,0000 shares to the purchaser for a lump sum consideration of USD 5,000/- (USD Five Thousand). VIII. deed of assignment of business Debts between Siddhayu Aayurvedic Research Foundation Private Limited (Assignor) and PT Prema Kencana Mitra Sejahetra (Assignee) and PT Equity commodities (PTEC / Confirming Party) dated 15t March 2017 assigning an amount of USD 20, 24, 173.09 (Actual amount of Debt) being the business Debt appearing in the financials of PTEC / Confirming Party to the assignee for a consideration of USD 12,000/- (Debt Purchase Consideration). 6.3.3 The various arguments advanced by the assessee are now examined in the light of the above documents placed on record by the assessee. 6.3.4 At the outset the assessee has submitted that the loan was given in the course of business and to address the business need of the company. It is contended that a close business nexus exists between the assessee and PEC and the loan has been extended to PEC out of commercial expediency and is incidental to the business of the assessee. The assessee has also argued that during the Financial Year ('FY') 2005-06, the ass....
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....see had set up subsidiary in Indonesia for the sole purpose of carrying out its power generation operations more economically and for the purposes of expansion. For identical reasons, we also do not find any merit in the claim of the assesse that the assessee company and its overseas subsidiary were in the same line of business and their activities were inter-connected, more so when it is assessee's own admission that PEC is a start-up company formed for coal trading and consultancy, which in our view is an altogether different line of business. 6.3.5 Moreover, the activity of the thermal power plant generation is an altogether new source of income could not be allowed as revenue expenditure, more so when Wind Mill Project itself was itself altogether new source of income, the commissioning of the wind mill project is w.e.f. 30.09.2005 itself, hence the expenses claimed by the cannot allowed as revenue expenditure as it is not a case of expansion of business as claimed by the assessee. Observation of Bench: The observations of the Ld. DRP is self-contradictory in nature as the same is based on their evaluation of the facts of the matter, whereas the assessee neve....
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....ion 37, the moneys lent should be laid out and expended only for the purpose of business of the assessee. There should be a direct nexus between the assessee and the business for which the money is lent. If that connection is not there merely because the money was lent to a sister-concern or to a subsidiary company would not enable the assessee to claim such deduction. 6.3.7 It would also apropos to refer to the judgment of the jurisdictional High Court of Bombay in Trade Wings Ltd. v. Commissioner of Income-tax [1990] 185 ITR 267 (BOM.) wherein the assessee was engaged in business of travel agency and in the relevant assessment year it claimed deduction in respect of expenditure incurred on feasibility of a hotel project and the Hon'ble Tribunal held that the expenditure incurred in connection with the feasibility of a new business was not an admissible deduction, and the Hon'ble High Court affirmed the order of the order. It would also be apropos to refer to the order of the jurisdictional tribunal in Ge Global Sourcing India (P.) Ltd. v. Income-tax Officer Range 3(1) (4) [2017] 83 taxmann.com 39 (Mumbai- Trib.) wherein the assessee-company expanded the scope of ....
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....see as what the assessee was trying to start was a new business for the manufacture of a new product. The expenditure incurred therein was clearly capital expenditure and not revenue expenditure. B. Tube Investments of India Ltd. v. Joint Commissioner of Income Tax, Special Range-1, Chennai [2019] 107 taxmann.com 72 (Madras) wherein Assessee was engaged in manufacture of narrow width strips in its unit set up at Chennai - During relevant year, assessee had set up a different unit at Haryana to manufacture wide width strips and door frames - Assessee claimed deduction of interest paid on borrowing made for setting up of Haryana unit, it was held that even though assessee was one company and it had set up a different unit at Haryana, since interest paid on borrowings pertained to Haryana unit, which was a new unit set up by same company, it could not be construed as a mere expansion of business existing at Chennai. 6.3.6 Therefore, the claim of the assessee that the loan has been extended to subsidiary out of commercial expediency and is incidental to the business of the assessee as the funds were utilized by the resultant entity for the purpose of its coal mine, is....
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....y way of Revolving Loan for US $2.90 mn, one of the terms under the head Covenants of the security and Guarantee is as under: The Security created pursuant to the above clause shall be subject to, and shall rank after, any charge created or to be created over any of the Borrower's stocks of raw material, semi-finished and finished, goods and consumable stores in favour of any bank or financial institution for securing any working capital credit facility made available by the bank or finance in a situation to the Borrower. It clearly emerges from the combined reading of the above clauses that, what was under threat was the profit-making apparatus of the entity M/s. PT Equity Commodities, which continues to be in operation and at no point of time the profit making apparatus of the assessee company was under any threat since both the entities i.e M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target company, continue to be in operation and continue to hold assets as held under principal security for Sanction of Banking Facilities. 6.3.11 further, the collateral security for the credit facility, for which Equitable Mortgage was to be created a....
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....n can be drawn that no assets of the assessee company which could impact profit-making apparatus of the assessee were under threat for recovery of loan by Bank of India from the entity M/s. PT Equity Commodities. Therefore, the contention of the Assessee that the assessee company has advanced loan to subsidiary for carrying out its trading operations indirectly by serving off its debt and if such loan were not provided by Siddhayu Aayurvedic, it would have impeded its current operational Business and future business prospects too severely, is found to be untenable and hence is rejected. Observation of Bench: It is astonishing for us that the Ld. DRP and the AO observed the matter in isolation without applying any knowledge of banking industry. The reference of the communication by the bank taken by the authorities below are misplaced as the facility from the Bank of India, Singapore Branch were extended on the behest of strong credentials of the assessee company and its group leader Baidyanath Group and its promoters/shareholders and directors. M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target Company) has no value in the eyes of bankers and as the assessee wa....
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....it was 'loans and advances' which were subsequently written off, the fact remains that it was an irrecoverable expenditure as far as the Assessee was concerned. In the present AYs as well, what was paid as 'compensation' by the Assessee to the very same subsidiaries was to recoup the business losses of the subsidiaries, and was again irrecoverable as far as the Assessee is concerned. Considering that the expenditure was in the nature of moneys advanced to the subsidiaries, it cannot be said that there is no intimate connection between the Assessee and the two subsidiaries as far as the business activities are concerned. In that sense the decision of the ITAT to allow the expenditure cannot be said to be inconsistent with the dictum of the Supreme Court in Travancore Titanium Products Ltd. (supra).It must therefore be concluded that the expenditure incurred by the Assessee in the present cases is not only incidental to the business of the Assessee but also necessitated or justified by commercial expediency. [2024] 164 taxmann.com 304 (SC) PCIT/CIT (A) v. Adadyn Technologies (P.) Ltd. It is not disputed that the assessee had invested money to develop....
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....n this respect, which reads thus:- "The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of Rs. 3.33 crores (rounded off) and lab project interest of Rs. 12.27 crores (rounded off). The Assessing Officer questioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre-operative expenditure and secondly the assessee had capitalized such expenditure. The assessee carried the matter in appeal. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable. It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment. Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there wa....
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....ain amount to a retired partner on the basis of the provisions made in the partnership deed. The deed provided that the partner whose share is determined on account of resignation, retirement or death, shall also be paid by the continuing partners of the firm, a sum equivalent to one and a half times the share of the profits and remuneration received by him in the last accounting year immediately preceding the date of determination of his share. This was primarily based on the premise that the partner of the firm during his tenure would render service to the clients for which bills may have been raised, but payments in full may not have been received and would be received after the partner retires, dies or resigns. The assessee claimed such payment by way of a deductible expenditure. The revenue objected the same. The tribunal by the impugned judgment by relying upon the judgment of this Court in case of CIT v. Crawford Bayley & Co. [1977] 106 ITR 884 (Bom.), held in favour of the assessee, upon which the present Appeal has been filed. 3. Learned Counsel for the revenue fairly pointed out that such an issue had come up before this Court on earlier occasions, where the reve....
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.... 4. We notice that similar questions have been considered by this Court on numerous occasions. In case of Commissioner of Income-tax v. Mulla and Mulla and Craigie, Blunt and Caroe reported in 190 ITR 198 the concept of diversion of income at source by overriding title was discussed at length under somewhat similar circumstances. The Court made the following observations:- "In the present case, the assessee-firm was under a legal obligation in terms of the deed of partnership dated September, 1, 1967, and the clauses in the two subsequent partnership deeds to pay out standing fees for the work done up to and during the period when the deceased partners were partners. This was also an instance of the source of income being subject to an obligation. We are in agreement with the Calcutta decision and hold that the amounts so paid by the assessee-firm to the heirs of the deceased partners cannot be assessed as the income of the firm." 5. The decision in the case of Mulla and Mulla and Craigie, Blunt and Caroe (supra) was followed by this Court in Income-tax Appeal No. 2277 of 2013 in the case of Commissioner of Income Tax-11, Mumbai v. M/s Kanga & Co. (ITXA 227....
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.... owners and trainers of horses which are run in the races. It is a matter of some importance to the respondent that there should be jockeys available to the owners with sufficient skill and experience because the success of races to a considerable extent depends upon the experience and skill of a jockey who rides a horse in a race. Because it was of the opinion that there was a risk of the jockeys becoming unavailable and that such unavailability would seriously affect its business which might result in its closing down the business, the respondent considered it expedient to remedy that defect. Therefore, in 1948, it established a school for the training of Indian boys as jockeys so that after their training they might be available for purposes of race meetings held under its auspices. The school, however, did not prove a success and after having been in existence for three years it was closed down. During the year ending March 31, 1949, the respondent spent a sum of Rs. 62,818 on the running of its school and claimed that amount as a deduction under section 10(2)(xv) of the Income-tax Act and also in the assessment under the Business Profits Tax Act, for the chargeable ac....
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....re of a capital expense, i.e., it should not bring into existence an asset of an enduring nature. As to the first question this court has held in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 that "though the question must be decided on the facts of each case, the final conclusion is one of law. "In Commissioner of Income-tax v. Chandulal Keshavlal & Co [1966] 38 ITR 601. This court said: "Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. Commissioner of Income-tax' [1951] 20 ITR 1 ). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessee's business and there is evidence to support this finding." But those observations must be read in the context. In that case the assessee firm was the managing agent of a company....
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.... support from decided cases. In Commissioner of Income-tax v. Chandulal Keshavlal& Co [1960] 38 ITR 601. This court held that in order to justify a deduction the disbursement must be for reasons of commercial expediency; it may be voluntary but incurred for the assessee's business; and if the expense is incurred for the purpose of the business of the assessee it does not matter that the payment also ensures to the benefit of a third party. Another test laid down was that if the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business it is immaterial that a third party also benefits thereby. In British Insulated and Helsby Cables v. Atherton [1926] AC 205 Viscount Cave, L.C, held that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade. In a case more recently decided, Morgan v. Tate & Lyle Ltd. [1954] 26 ITR 195, the assessee c....