In a recent decision, the Cochin bench of the ITAT ruled that the loss incurred on the sale of shares of a wholly-owned subsidiary is allowable as business loss under section 37(1) of the Income Tax Act, if the investment in the subsidiary was made for commercial purposes.
During the year under consideration, the assessee-company has shown loss on the sale its 100% share holding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyprus Pvt. Ltd. (ATC) and claimed the same as business expenditure. The assessee company claimed that the ATAG was set up in 2007 as 100% subsidiary of the appellant company with an objective of undertaking sales and marketing of the products of the brand of the appellant company and the investment was made in the subsidiary company as a measure of commercial expediency.The AO completed assessment by holding that the said investment in shares cannot be held as business activity as the appellant was itself showing the said shares under the head investment.The draft assessment order was confirmed by the DRP.
The division bench allowed the claim of the assessee-company that the investment was made for commercial purposes and not for purpose of accretion of investment by pointing out that there is no evidence to show that the said subsidiary company was doing any activity completely independent and unrelated to the activities carried out by the appellant company. “The only thing that was required to be examine in the present case was whether the expenditure was made as a prudent businessman for the purpose of business.”
“The unity of objectives of the appellant company and the subsidiary company clearly shows that the investment was in the nature of a trade investment only. The decision to invest in the subsidiary was not such that a prudent business man would not have made it.”
The bench noticed the decision in the case of DCIT Vs. Gujarat Small Industries Corporation wherein the ITAT Ahmedabad bench held that “As per the memorandum of association of the assessee, the main object of the assessee was to promote the interest of SSI units in the State. The main object of the assessee was to help industrial concerns in various ways and help industrial growth of the State. Obviously, the company G was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting. In view of that fact, it was found that investment in shares of company by the assessee was in the nature of trade investment.”
Read the full text of the order below.
