Ace Designers Limited v. The Additional Commissioner of Income-tax (LTU), Bangalore
[Citation -2020-LL-0909-61]

Citation 2020-LL-0909-61
Appellant Name Ace Designers Limited
Respondent Name The Additional Commissioner of Income-tax (LTU), Bangalore
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 09/09/2020
Assessment Year 2004-05
Judgment View Judgment
Keyword Tags loss on sale of investment • transfer of capital asset • commercial expediency • allowable expenditure • value of investment • business activities • capital expenditure • capital investment • purchase of shares • enduring advantage • business purpose • question of law • business loss • revenue loss • capital loss
Bot Summary: The case of the assessee was selected for scrutiny and notice under Section 143(2) of the Act was issued to the assessee. The aforesaid order was challenged by the assessee before the Commissioner of Income Tax who by order dated 31.08.2009 dismissed the appeal of the assessee. The aforesaid decision has been upheld by the Supreme Court as has been noted by Income Tax Appellate Tribunal, New Delhi Bench in its order dated 31.12.2018 in COSMOS INDUSTRIES LTD vs. DCIT. In PATNAIK CO. LTD. supra, it was held that the assessee did not hold on the investment the loan indefinitely and there was no enduring advantage and the investment did not bring in an asset of a capital in 12 nature and the loss suffered by the assessee was a revenue loss and not a capital loss. In INVESTA INDUSTRIAL COPORATION LTD., supra, the division Bench of the High court dealt with a question whether the finances made by the assessee to manage the company were part of or incidental to carrying on a business by the assessee a and since, the managed company went into liquidation the advances became irrecoverable, the loss sustained by the assessee shall be regarded as trading loss. From the perusal of the note annexed to the income filed before the assessing officer, it is evident that assessee had set up an establishment in USA during Financial Year 1992-93 for the exclusive purpose of marketing assessee s products and for promoting its business in US and Latin America. The ratio of aforesaid decision is where the assessee makes investment in its 100 subsidiary for business purpose, loss or sale of investment has to be treated as business loss of the assessee. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee.


1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 9TH DAY OF SEPTEMBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.184 OF 2013 BETWEEN: M/S. ACE DESIGNERS LIMITED REPRESENTED BY ITS MANAGING DIRECTOR SHRINIVAS G. SHIRGURKR PLOT NO.7 & 8, II PHASE PEENYA INDUSTRIAL AREA BANGALORE-560058. ... APPELLANT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. M. LAVA, ADV.,) AND: ADDITIONAL COMMISSIONER OF INCOME TAX (LTU), JSS TOWERS 100 FEET RING ROAD BANASHANKARI III STAGE BANGALRE-560085. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 14.12.2012 PASSED IN ITA NO.1150/BANG/2009 FOR ASSESSMENT YEAR 2004-05, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. 2 (II) ALLOW APPEAL AND SET ASIDE FINDINGS TO EXTENT AGAINST APPELLANT IN ORDER PASSED BY TRIBUNAL IN ITA NO.1150/BANG/2009 DATED 14-12-2012. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by assessee. subject matter of appeal pertains to Assessment year 2004-05. appeal was admitted by bench of this Court vide order dated 08.10.2013 on following substantial question of law: (i) Whether Tribunal was justified in law in holding that amount written off by Appellant incurred towards M/s. Ace International Inc., during Financial Year 2003-04 amounting to Rs.3,41,23,200/- is in nature of capital loss but not business loss under facts and circumstances of case? (ii) Whether Tribunal was justified in law in not appreciating that 3 investments in M/s. Ace International Inc., were made purely on account of commercial expediency for enhancing business activities of Appellant and such investment subsequently written off during Financial Year 2003-04 in substance represented business loss allowable under provision of section 28 of Act under facts and circumstances of case? (iii) Without prejudice whether Tribunal was justified in law and in facts in not holding that amount of 8,37,500 $ paid as additional amount which is other than as common stock in subsidiary company ought to have been allowed as revenue expenses under facts and circumstances of case? (iv) Whether Tribunal was justified in law in not appreciating that appellant in compliance of Accounting standard 13 i.e., Accounting for Investments has written off permanent fall in value of investment 4 made in M/s. Ace International Inc., by debiting profit and loss account for financial year 2003-04 under facts and circumstances of case?. 2. Facts giving rise to filing of this appeal briefly stated are that assessee is company registered under Companies Act, 1956 and is engaged in business of manufacture and export of computerized numerically controlled machines. assessee for assessment year 2004-05 filed return of income on 29.10.2004 declaring total income of Rs.13,47,18,080/-. assessee along with return also filed detailed note in respect of claim of investment written off towards its solely owned foreign subsidiary viz., ACE International Inc. for sum of Rs.3,41,23,200/-. case of assessee was selected for scrutiny and notice under Section 143(2) of Act was issued to assessee. assessee duly complied with notice and furnished requisite details, as sought for by assessing officer. assessing 5 officer vide order dated 13.12.2016 determined total income of assessee at Rs.18,01,52,340/- by disallowing claim of business loss of Rs.3,41,23,200/- and concluded assessment. aforesaid order was challenged by assessee before Commissioner of Income Tax (Appeals) who by order dated 31.08.2009 dismissed appeal of assessee. assessee thereupon approached Income Tax Appellate Tribunal. tribunal by order dated 14.12.2012 dismissed appeal of assessee. In aforesaid factual background, assessee has filed this appeal. 3. Learned Senior counsel for assessee submitted that loss arising from investment made in Wholly Owned Subsidiary (hereinafter referred to as WOS for short) set up for business purposes is business loss. It is further submitted that assessee has incurred expenditure wholly and exclusively for purpose of business and loss arising from WOS 6 outside India being expenditure made by assessee for purpose of business is entitled for write off under Section 37(1) of Act. It is further submitted that authorities failed to appreciate that expenditure incurred was in nature of business activity and actual business carried on by assessee and assessee had set up its WOS in USA only for purposes of marketing, business, promotion and sales of computerized numerically controlled machines in export market, which assessee could not have entered directly without setting up its associated enterprise. authorities ought to have appreciated that business operations were undertaken by assessee and investment was made only to cover operational expenses. It is also urged that once there was nexus established between activities carried on by assessee and expenditure incurred, such expenditure was allowable as business expenditure. It is also urged that common stock of share capital of 7 assesse in foreign WOS was only to extent of $10000 and balance of $8,37,500 was paid up amount, which could not be treated as share capital and tribunal ought to have atleast considered such portion as allowable expenditure on facts of case. It is also pointed out that Reserve Bank of India had permitted assessee on 22.04.2004 and 23.06.2004 to wind up WOS in USA and also write off exports receivable. In support of aforesaid submissions, reliance has been placed in CIT VS. M/S COLGATE PALMOLIVE (INDIA) LTD , 370 ITR 718 (BOM.), PATNAIK AND CO LTD. VS. CIT , 161 ITR 365 (SC), CIT VS. INVESTA INDUSTRIAL CORPN. LTD , (1979) 119 ITR 380, ADDL. CIT VS. BMS (P) LTD , 119 ITR 321 (MAD.), CIT VS. DHANDAYUTHAPATI FOUNDRY (PRIVATE) LIMITED , 123 ITR 709 (MAD.), INDIAN COMMERCIAL AND INDSUTRIES CO. (P) LTD. VS. CIT , 213 ITR 533 (MAD.), CIT VS. INDUSTRY AND COMMERCE ENTERPRISES (P) 8 LTD , 118 ITR 606 (ORISSA), RAJASHTHAN FINANCIAL CORPORATION VS. CIT , 65 ITR 112 (RAJ), BRIGHT ENTERPRISES PVT. LTD. VS. CIT IN ITA NO.224/2013 DATED 24.07.2015 (PUNJAB AND HARYANA), SAHARA GLOBAL VISIION PVT LTD VS. ACIT IN ITA NO.2514/DEL/2014 DATED 30.08.2018 (DELHI-TRIB) and COSMOS INDUSTRIES LTD VS. DCIT IN ITA NO.3730/DEL/2015 DATED 31.12.2018 (DELHI- TRIB). 4. On other hand, learned counsel for revenue submitted that assessee had made capital investment i.e. purchase of shares and therefore, same could not be treated as incidental to business of assessee. It is submitted that any expenditure incurred for acquisition of capital asset is capital expenditure and cannot be treated as business expenditure. It is also submitted that Tribunal has rightly disallowed claim of assessee as business 9 loss. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in KARAM CHAND THAPAR AND BROS. (P.) LTD. VS. COMMISSIONER OF INCOME-TAX , (1971) 80 ITR 167 (SC), OBEROI HOTEL (P.) LTD. VS. COMISSIONER OF INCOME-TAX , (1999) 103 TAXMAN 236 (SC), HASIMARA INDUSTRIES LTD. VS. COMMISSIONER OF INCOME-TAX , (1998) 98 TAXMAN 303 (SC) and COMMISSIONER OF INCOME-TAX VS. GILLANDERS ARBUTHNOT & CO. LTD. , (1982) 9 TAXMAN 76 (Cal). 5. We have considered submissions made by learned counsel for parties and have perused record. core issue, which arises for consideration in this appeal is with regard to disallowance of business loss written off on account of loss arising out of business investment from WOS in USA. It is well settled legal proposition that while deciding question whether receipt is capital or income, it is not possible to lay 10 down any single test as infallible or any single criteria as decisive. question must ultimately depend on fact of particular case and authorities bearing on question are valuable only as indicating matters that have to be taken into account in reaching decision. It has further been held that for determining question of capital and incomes, trading profit or non trading profit are questions do involve question of law to be drawn from facts. [See: COMMISSIONER OF INCOME- TAX vs. RAI BAHADUR JAIRAM VALJI , (1955) 35 ITR 148 (SC), P.H.DIVECHA VS. COMMISSIONER OF INCOME-TAX (1963) 48 ITR 222 (SC), KETTLEWELL BULLEN & CO. LTD. VS. COMMISSIONER OF INCOME-TAX (1964) 53 ITR 261 (SC), GILLANDERS ARBUTHNOT AND CO. LTD. VS. COMMISSIONER OF INCOME TAX , (1964) 53 ITR 283 (SC) and COMMISSIONER OF INCOME- TAX VS. BEST & CO. (P,) LTD. , (1966) 60 ITR 11 (SC)]. aforesaid tests laid down by Supreme 11 Court in aforesaid decisions were referred to with approval in KARAMCHAND THAPPER AND Bros. (P.) LTD. AND OBEROI HOTEL (P) LTD. supra. 6. Bombay High Court dealt with issue viz., where assessee made investment in its 100% subsidiary for business purpose, loss on sale of investment would be treated as business loss. aforesaid issue was answered in affirmative by Bombay High Court in COMMISSIONER OF INCOME-TAX VS. COLGATE PALM OLIVE (INDIA) LTD. supra and it was held that investment was made for commercial expediency. aforesaid decision has been upheld by Supreme Court as has been noted by Income Tax Appellate Tribunal, New Delhi Bench in its order dated 31.12.2018 in COSMOS INDUSTRIES LTD vs. DCIT. In PATNAIK & CO. LTD. supra, it was held that assessee did not hold on investment loan indefinitely and there was no enduring advantage and investment did not bring in asset of capital in 12 nature and loss suffered by assessee was revenue loss and not capital loss. In INVESTA INDUSTRIAL COPORATION LTD., supra, division Bench of High court dealt with question whether finances made by assessee to manage company were part of or incidental to carrying on business by assessee and since, managed company went into liquidation advances became irrecoverable, loss sustained by assessee shall be regarded as trading loss. 7. In backdrop of aforesaid well settled legal position, facts of case in hand may be adverted to. From perusal of note annexed to income filed before assessing officer, it is evident that assessee had set up establishment in USA during Financial Year 1992-93 for exclusive purpose of marketing assessee s products and for promoting its business in US and Latin America. It has further been stated in note that looking to stringent norms of 13 product liability in US market, assessee decided to have separate Wholly Owned Entity in US having limited liability. approval for aforesaid purpose was obtained from Reserve Bank of India. assessee therefore, invested funds in equity for meeting revenue expenses of Wholly Owned Subsidiary Company s balance sheet. However, WOS could not perform upto company s expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of WOS, RBI permitted company to write off whole of investment made in WOS and unrealized export receivables. assessee therefore, made claim to write off loss of Rs.3,41,23,200/- as revenue expenses allowable under provisions of Act. 8. Thus, from perusal of aforesaid facts, it is evident that issue involved in this appeal is covered by decision of Bombay High Court in Colgate Palm Olive (India) Ltd. supra, which has been upheld by 14 Supreme Court. ratio of aforesaid decision is where assessee makes investment in its 100% subsidiary for business purpose, loss or sale of investment has to be treated as business loss of assessee. In instant case, assessee made investment in shares of WOS for business purpose i.e., for enhancement of business activity of assessee in global market which primarily related to business operation of assessee. WOS suffered losses and therefore assessee wrote off assessment of Rs.3,41,23,200/- as business loss. investment was made for purpose of extension of business activity and not with view to creating capital asset in form of holding shares. It is also pertinent to note that assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party. In view of preceding analysis, first substantial 15 question of law is answered in negative and in favour of assessee. It is not necessary for us to answer remaining substantial questions of law in view of our answer to first substantial question of law. In result, order of Tribunal dated 14.12.2012 to extent of findings contained against assessee is quashed. Accordingly, appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss Ace Designers Limited v. Additional Commissioner of Income-tax (LTU), Bangalore
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