TaxTMI 
TaxTMI 
2024 (12) TMI 551
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....tion 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, 72,600/- on account of corporate guarantee charges 5.Erred in making transfer pricing adjustment @ 0.5....
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....om 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. Here question before us is whether this written off of loan given to subsidiary at Indonesia is an allowable expense or not u/s. 37 of the Act. For sake of clarity and ready reference we are reproducing herein belo....
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....tion 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 quantification of the same. The only issue to be examined is whether the same is wholly and exclusively for the purposes of business of the assessee. The issue as discussed by the authorities below is reproduced as under: 6.1.1 During F.Y. 2006-07, the assessee entered into coal mining bu....
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....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 relevant part of the order of the AO is extract below for convenience: 9...The assessee has claimed that the losses allowable under section 37 of the IT act as it was advanced for business expediency. The claim the assessee does was passed the test of allowability under section 37 of the IT act. To define, t....
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.... 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 PT Equity Commodities (PEC'), the balance 45% shares were held by two individuals, Mr. Rajiv Behal (who was then a non-resident Indian) and Mr. Vinay Hariani (an Indonesian resident). It is stated that PEC is a start-up company formed for coal trading and consultancy. 6.2.2 The assessee has further stated that as per the Indo....
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....NR 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 liquidate the entire financial commitment and accordingly, to disinvest their holding in PEC, the assessee entered into a share purchase agreement to sell the shares of PEC to an Indonesian party viz. PT Prema KencanaMitra Sejahtera at USD 5,000 and also assigned the outstanding loan to aforesaid Indonesian party for USD 12,000. Pursuant to which, the net outstanding loan of....
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....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 advanced interest free loan to its subsidiary for business / strategic consideration and the expenditure was incurred for preserving the asset by way of investment in the subsidiary due to its interest in the business. 6.2.9 In addition to the above, the Assessee has submitted that losses of any business carried on by the assessee would be allowable as loss under the head "Profits and gains of business or profession" under section 28 of the Act as long as it is a trading l....
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....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) of the Act. Gulf Oil Corporation Ltd v. ACIT (Supra) (Hyderabad Tribunal) Where the holding company and subsidiary were in the same line of business and their activities were inter-connected. The purpose of giving advances was in the course of and for the purpose of protecting the interests of business of the taxpayer. The advance made by the taxpayer was incidental to carrying on the business by the taxpayer itself and borrowed money should be considered to be utilized for the purpose of the business of the taxpayer. The advance been....
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....fered 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 Commodities" Number: 29 concerning decrease of authorised capital from previously 75,200,000,000 Rupiahs (Rs. 75, 200, 000, 000) or 8 million United States of American dollar (US $ 8, 000, 000) to 28,200,000,000 Rupiahs ( Rs. 28, 200, 000, 000) 3 million United States of American dollars (US $ 3, 000,000) divided into 3 million (3, 000, 000) shares, each share has nominal value of 9400 Rupiahs ( Rs. 9,400) or one United States of American dollar (US $ 1) II. Comprehensive Mining Plan for South Block, Muara Bongo, Jambi, Indonesia of PT Equity Commodities, Indonesia prepared to fulfil the following objectives: 1. To evaluate the reserve Extech table....
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.... 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 assessee diversified its business by entering into power sector and accordingly, the MOA was suitably amended and that promoters of the assessee company through their group entities decided to venture into thermal power plant generation along with renewable power generation too. It is claimed 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. However, we find that though the assessee has alleged that a firm M/s. Design Indure Pvt. Ltd. was entrusted with the task of preparing project report for the thermal power plant, there is not even an iota of evidence which may support the claim of assessee that it has ventured ....
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.... 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 never said so in any of its submissions. Rather, vide para 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 an....
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....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 its present business of infrastructure projects to manufacture and supply of train locomotives, etc., it is held that "The assessee company has amended the object clause in MOA during the relevant previous year and contemplates to enter into an entirely different line of business which is an altogether different source of income vis-a-vis existing business of the assessee company of rendering sourcing services to GE Global Sourcing LLC USA, by proposing to set up a manufacturing facilities for manufacturing and supplying locomotives to Indian Railways at Marhowra, Bihar. This was entirely a new line of business whereby new source of income would emerge and there was no connection with the existing business and source of the income of the assessee-company and....
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.... 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 rejected. 6.3.7 The assessee has next contended that the Loan was given by the assessee to subsidiary 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). 6.3.8 In this regard we consider it apropos to examine the various letters issued by Bank of India for Sanction of Banking Facilities to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $ 2.90 mn, i.e. I. Terms and Conditions communicated by Bank of India vide letter dated09.06.2008 addressed to M/s. P T Equity Commodities for Additional Term Loan of US $ 8.00 mn and Working Capital by way of revolving loan for US $2.90 mn sanctioned in terms and conditions as....
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....modities 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 at Nagpur Corporate Banking Branch, was as under [Page 468 of Paper Book]: Sl.No. Owners as per Sale Deed Property Details Area M.V.Value of Property Rs. in lacs (USD Mn.) (i) Joint names of Mr. Siddhesh Suresh Kumar Sharma and M/s. Update Marketing Pvt. Ltd Plot No.4 at Mouje TakliSim, Jatiala Road, Nagpur Mtrs 1260 Sq. 339(USD 0.737Mn.) (ii) Joint names of Ms. Kalpana Suresh Kumar Sharma and Mr. Suresh Kumar Ramnarayan Sharma Plot No.2 at Mouje TakliSim, Jatiala Road, Nagpur 1408.07Sq. Mtrs 378(USD 0.821Mn.) (iii) Joint names of Mr. Pranav Suresh Kumar Sharma and M/s. Nova Marketing Pvt. Ltd Plot No. 1 at Mouje TakliSim, Jatiala Road, Nagpur 1471.00Sq. Mtrs 395(USD 0.859Mn.) (iv) Mrs. Kalpana wife of Shri Suresh Sharma House No.300, B/A, WardNo.66, City Survey No. 1548/1, Street No.17/56, Henessey Road, Civil Lines, Mouje, Stiabuldi, Nagpur 2380.00 Sq.ft....
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....any 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 wants to quit the same once for all, one has to understand their obligations and compulsions also keeping in mind the prevailing market/business practices. Based on above, we are not in agreement with the half cooked view taken by the revenue. 5. To further strengthen the facts of matter in favour of the assessee we placed our reliance on following judicial pronouncements by the Hon'ble Supreme Court as under: [2024] 166 taxmann.com 319 (SC) PCIT v. Industrial Development Corporation of Orissa Ltd. This Court has perused the order of the ITAT dated 25th September, 1997 in ITA No. 69 and 70/CTK/1994. The said appeals were filed indeed by the very same Assessee and the issue concerned expenditure incurred by the Assessee in the form of loans and advances to its subsidiaries which were subsequently written off. There again the issue was whether such amount could be legitimately claimed as business expenditure within the purview of section 37 of the Act? After the A....
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....ommercial 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 a software platform for the Desktops. It is also not disputed that due to rapid change in the technology, the application sought to be developed by assessee had become obsolete and the assessee abandoned further development. In substance, assessee has incurred expenditure in these two years to develop software but due to change in technology, it had to abandon the product. In effect, it had lost money spent on this product. The product having been abandoned, the assessee shall not get any endure in benefit. The Tribunal has correctly analysed the facts in the impugned judgment and allowed the appeals. There is no ground to interfere with the findings recorded by the Tribunal. [Para 10] [2024] 162 taxmann.com 237 (SC) CIT v. Nirma Ltd. 13. At this stage, it is necessary to make a mention of the submissions made by learned senior standing counsel Shri Mehta that the Question in Tax Appeal No. 811 of 2013 pertains to interest on disallowance of Soda Ash Project whereas as far as the instant case is concerned, it ....
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....cuments on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, inter-lacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called 'lab' for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assess....
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....uch an issue had come up before this Court on earlier occasions, where the revenue's Appeals have been dismissed. We may refer to one recent order dated 12/02/2019 passed by this Court in Income-tax Appeal No. 1696/16. While dismissing the revenue's Appeal, the Court made following observations; "2. The respondent assessee is a Partnership Firm engaged in providing legal services. During the course of scrutiny of the assessed return for the assessment year 2007- 2008, the Assessing Officer objected to the claimant for deduction of a sum of Rs. 3.68 Crores which was paid by the assessee firm to its retired partner. The assessee pointed out that the payment was made in terms of clause 23.5 contained in partnership agreement. By further elaborating the stand before the Assessing Officer, the assessee pointed out that the amount was paid by way of compensation to the outgoing partner towards the appreciation in the value of the immovable properties held by the assessee firm to the extent of his share of the partnership and also for the work done during the period of partnership, which was in progress on account of the fact that the work had not been completed and therefore th....
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.... Tax-11, Mumbai v. M/s Kanga & Co. (ITXA 2277/2013) decided on 1st February, 2016. The Court observed as under:- 3. "The only issue in this appeal is the exclusion from the income of the firm, the amounts relatable to the retired/deceased partner/s share by diversion on account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of the partnership deed. 4. we find that the impugned order of the Tribunal has dismissed the Revenue's appeal by inter alia recording the fact that in the order of the Commissioner of Income-tax (Appeals) (CIT A)) had only followed the consistent view of the Tribunal in the assessee's own case for the earlier Assessment years. In fact, the impugned order of the Tribunal has further placed reliance upon the decision of this Court in Income-tax Appeal No. 860 of 2009 dated 19/6/2009 rendered in the respondents-assessee's own case as well as decision of this Court in the case of CIT v. Mulla and Mulla and Craigie, Blunt and Caroe, (1991) 190 ITR 198 while dismissing the Revenue's appeal. 5. In view of impugned order of the Tribunal merely following the orders of this Court, we are of the view that the app....
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....ing period ending March 31, 1949. This claim was disallowed by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner and also by the Income-tax Appellate Tribunal. At the instance of the respondent the question already quoted was referred to the High Court and was answered in favour of the respondent. This appeal is brought by special leave against that judgment. The decision under the Business Profits Tax Act will be consequential upon the decision of the deduction under the Income-tax Act. The Tribunal found that it was not the business of the respondent to provide jockeys to owners and trainers, that the jockeys trained in the respondent's school were not bound to ride only in the races run by the respondent and that the benefit, if any, which accrued was of an enduring nature. It also found that the respondent had been conducting race meetings since long, that it was not the case of the assessee that if it did not train jockeys they would become unavailable and that the mere policy of producing efficient Indian jockeys was not a sufficient consideration for treating the expenditure as one incurred for the business of the respondent. For these reason....
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....ter agreed to accept a lesser commission for the year of account than it was entitled to. It was found by the Appellate Tribunal there that the amount was expended for reasons of commercial expediency and was not given as a bounty but to strengthen the managed company so that if its financial position became strong the assessee would benefit thereby, and on the evidence the Tribunal came to the conclusion that the amount was wholly and exclusively for the purpose of such business. It was on this evidence that the expense was held to be wholly and exclusively laid out for the purpose of the assessee's business and this was the finding referred to. In that case the Tribunal had not misdirected itself as to the true scope and meaning of the words "wholly and exclusively laid out for the purpose of the assessee's business." In the present case the Income-tax Appellate Tribunal had misdirected itself as to the true scope and meaning of these words. In our opinion, in the circumstances of this case, it cannot be said that the finding of the Tribunal was one of fact. The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking ....
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....ncurred expenses in a propaganda campaign to oppose the threatened nationalisation of the industry. It was held by the House of Lords by a majority that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on its business and earn profits, the expense was an admissible deduction being wholly and exclusively laid out for the purpose of the company's trade. Lord Morton of Henryton said: "Looking simply at the words of the rule I would ask: 'if money so spent is not spent for the purposes of the company's trade, for what purpose is it spent?' If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade." See also Strong & Co. v. Woodifield [1906] AC 448the observations of Lord Davey; and Smith v. Incorporated Council of Law Reporting [1914] 3 KB. 674. Counsel for the appellant relied upon the judgment of the Privy Council in Ward & Co. Ltd. v. Commissioner of Taxes [1923] AC 145, but that decision proceeds on a different statute where the words were of a very re....