Loss On Investment In Subsidiary, Made To Boost Sales, Deductible As Revenue Expenditure, Rules ITAT

The Assessee, an Indian corporate resident, floated a wholly owned subsidiary in Singapore to acquire a Singapore based company carrying similar business. Due to failure in acquiring a stake in the target company, Assessee claimed write-offs for losses suffered by it on investment in its subsidiary company. Additionally, advances made by the Assessee to its subsidiary, including expenses on conducting due diligence of the target company, and invocation of corporate guarantee against the Assessee for loans advanced to the subsidiary, which later became irrevocable, were sought to be written off by the Assessee as business loss and revenue expenditure. The Assessing Officer (AO), disallowed deduction of above expenses as business loss, holding that since they were incurred for acquiring another entity they were capital expenses. The Commissioner of Income Tax (Appeals) (CIT (A)) upheld the order of AO. Assailing the order of lower authorities, the Assesse filed an appeal before the ITAT.

The Assessee contended that the losses sought to be written off were incidental to business and were incurred to expand existing business in international market. The CIT (A), however, claimed that the sole purpose of investment in subsidiary being to acquire shares of another company, the advances could not be considered to be in the regular course of business. The losses were therefore capital losses, as per the CIT(A).

The ITAT observed that the main purpose of investment, in the present case, was to boost Assessee's sales and not to acquire any manufacturing or infrastructural capacity. Therefore, the ITAT concluded, that any loss arising thereof must be viewed as a revenue expenditure and not as a capital expenditure, since the acquisition was made in the normal course of business to improve trading results.

"We find 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."

Allowing the appeal, the ITAT directed the AO to allow the write-offs as deduction for business loss and revenue expenditure.

Case Title: Refex Industries Limited Versus DCIT

Order Dated: 07.02.2022 (ITAT Chennai)