The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the deduction is allowable on the loss on account of compensation on enforcement of security paid by the Company to its subsidiary companies.
The assessee has claimed loss incurred by two subsidiary companies M/s Mishapar Investment Ltd & Vibhadeep Investment & Trading Ltd on the ground that the said loss has been incurred wholly and exclusively in connection with its business for borrowing loan from ILFS. The AO disallowed loss claimed by the assessee on account of compensation paid to two subsidiary companies on the ground that the said loss is in the nature of capital expenditure which is incurred in connection with the repayment of loan borrowed from two subsidiaries, therefore, the said loss cannot be allowed as expenditure.
On the second appeal, the Tribunal held that “we do not find any merit in the findings of the AO for the reason that the AO has not denied the fact that the assessee has borrowed loan from M/s ILFS for the purpose of its business. In the process, the assessee has pledged NOCIL shares held by two of its subsidiary companies with the lender for the security of the loan. As per the contractual agreement between the parties, the assessee has reimbursed loss incurred by two subsidiary companies. Therefore, we are of the considered view that the said loss is incurred wholly and exclusively in connection with the business of the assessee and accordingly, the AO was incorrect in disallowing loss on account of compensation on enforcement of security.”
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