Expenditure Allowance on Compensation Paid to Subsidiary Companies : SC Dismisses Income Tax Dept’s SLP Filed after Gross Delay of 340 Days [Read Order]

The Supreme Court dismissed the Special Leave Petition ( SLP ) filed by the income Tax Department along with a condonation application of 340 days regarding the matter on expenditure allowance on compensation paid by holding company to its subsidiary companies.

The bench of Justice B V Nagarathna and Justice Augustine George Masih, in its verdict stated that “There is a gross delay of 340 days in filing the special leave petition. We are not satisfied with the explanation offered for condonation of delay. Hence, the application seeking condonation of delay is dismissed. Consequently, the special leave petition is also dismissed keeping open the question of law, if any.”

The case at hand involves the Assessee debiting a certain sum to its profit and loss account for compensation paid to its subsidiaries, M/s. IDCOL Kalinga Iron Works Ltd. ( IKIWL ) and M/s. IDCOL Ferro Chrome and Alloys Ltd. ( IFCAL ), pertaining to differences in the price of ores purchased by these subsidiaries from the Assessee and others.

During the assessment process, the Assessee provided an explanation for the compensation payment, stating that two mines operated by the Assessee were taken for captive use to ensure a cheap raw material supply for the subsidiaries. However, as the ores available in these mines were unsuitable for the production of high carbon Ferro Chrome, they were sold in the open market, resulting in significant financial losses to the subsidiaries. Consequently, the compensation was intended to mitigate these losses.

Despite the explanation provided, the Assessing Officer ( AO ) disallowed the claim of expenditure, asserting that it was not incurred “wholly and exclusively for the purposes of the business” of the Assessee. The Department filed an affidavit contending that the issue in the present case, involving compensation for business losses of subsidiaries, was distinguishable from previous cases involving loans and advances written off.

Mr. Satapathy, the Senior Standing Counsel for the Appellant- Revenue dept, argued that the facts of the present case differed from those of previous cases and urged the Court to dismiss the appeal.

Upon careful examination of the ITAT’s order, the Orissa High Court found that while the nomenclature of the expenditure differed, the nature of the expenditure remained similar to previous cases. The Court concluded that the expenditure incurred by the Assessee was not only incidental to its business but also justified by commercial expediency, as it aimed to mitigate the losses incurred by its subsidiaries. Thus, the High Court dismissed the appeals.

Following this, the income tax department lodged a SLP and a Condonation Application before the apex court, experiencing a delay of 340 days, only to have it promptly dismissed, with the question of any legal issues left open for consideration.

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