Profit/Loss arising out of Investment in Equity Participation is ‘Revenue’ in nature: Delhi HC [Read Order]

In Principal CIT v. Industrial Finance Corporation of India Ltd, the division bench of the Delhi High Court held that the profit or loss arising out of investment in equity participation is ‘Revenue’ in nature

The assessee- Company, engaged in financing companies and ventures- lent finances through rupee loans, foreign currency loans, under writ in, direct subscription (of equity), issuing guarantees and equipment leasing services to various borrowers. In accordance with the provisions of the Companies Act, these fall under the outgoings given to its clients/borrowers and are broadly shown as “investments as assistance” to industrial concerns in the form of equity shares, preference shares, convertible debentures and non-convertible debentures. Assessee also maintained a separate investment portfolio in respect of 17 of its financial assistance transactions and reported losses which it sought to write off as bad debts. However, the AO rejected the contentions and held that loss arising out such investments cannot be treated as bad debt and are not deductible from the total income of the assessee since the same are capital loss.

The bench relied on the decision of the Apex Court in Badridas Daga Vs. Commissioner of Income Tax and held that“the above decision instructs that where monies were advanced through the mechanism of equity participation, the intention of the lender – in the present case, the assessee, was to derive income rather than to increase its investment on the capital side. Such being the case, if there were profits, with the assessee/lender from the investment, it would properly lie in the Revenue side of income and conversely, if there were losses – as in the present case – it properly would have fallen, as was correctly claimed, as bad debts in the present instance.”

Read the full text of the Order below.

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