The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) has held that the advance to the subsidiary company which was written off due to the non-repayment should be deductible under Section 37(1) of the Income Tax Act 1961.
The assessee company, Banpal Oilchem Pvt. Ltd was engaged in the business of non-edible castor oil. The assessee set up a wholly owned subsidiary named Banpal Agro-Tech Pvt. Ltd with the object to produce edible oils as the assessee had specialised technology namely “cold press technology” for the manufacture of mustard oil from mustard seeds. However, the product of the assessee was exported to Germany.
In order to insulate from market risk, the assessee decided to set up another manufacturing unit of virgin edible oil for export by employing the same “cold press technology”. For the above business, the assessee advanced a sum to the subsidiary company incorporated for the above purpose.
However, the business of the subsidiary company could not take off and it was unable to repay the aforesaid loan. Accordingly, the assessee wrote off the above advance and claimed the same as bad debts in return of income. The Assessing Officer dismissed the claim of the assessee as the assessee had not satisfied the bad debts.
Tushar Hemani, on behalf of the assessee submitted that the amount was advanced by the assessee company to its subsidiary, which was in a similar line of business and therefore, such advance was on account of purely commercial considerations and hence allowable as business loss.
He further submitted that, as the assessee had made advance for the expansion of its business and to diversify its existing business into the line of business which is quite similar to the assessee’s line of business with a view to insulate itself from the business vagaries, so this would be an allowable business loss in light of various judicial precedents on the subject.
N.J. Vyas, on behalf of the revenue, relied upon the observations made by the Assessing Officer.
The Division Bench of Waseem Ahmed, (Accountant Member) and Siddhartha Nautiyal, (Judicial Member) allowed the appeal referring to case laws and observed that
“From the facts it is evident that the purpose of the assessee to advance the loan to its subsidiary were two-fold, firstly, to extend into a similar line of business and secondly to insulate the business of the assessee from the vagaries of its existing business owing to dependency primarily on one client based out of Germany. Therefore, in the instant facts, we are of the considered view that the loss on account of non-payment of the advance of the subsidiary was a business loss in the assessee’s line of business and the same is allowable as a business reduction to the assessee.”
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