Whether loss on sale of shares of subsidiary is allowed as a business expenditure?

The assessee claimed loss on sale of shares as business expenses. The issue came up before court was whether any loss on sale of the shares of a wholly-owned subsidiary is allowed as a business loss in case the investment was made for the commercial purposes. 

Facts of the case- Assesee claimed the loss on sale of shares as business expenses

The assessee showed a loss of INR 4,07,24,151 which it incurred on the sale of its 100 percent shareholding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyprus Pvt. Ltd. (ATC). This loss was claimed as business expenditure. While the assessment was underway, the appellant provided that ATAG was formed in the year 2007 as a 100 percent subsidiary of the appellant company for undertaking marketing and sales of the appellant company’s brand products and this investment was done in the subsidiary company for bringing commercial feasibility.

The Assessing Officer during the draft assessment order believed that this investment in the shares couldn’t be held as the business activity since the appellant was showing these shares in his books under the investment head. The Dispute Resolution Panel confirmed this draft assessment order on this issue.

Assessee Claimed that Investment in Shares and its subsequent sales was part of Business activity

The assessee submitted before the Tribunal that this investment in the shares by the appellant of ATAG and the consequent sale was totally and solely was in the nature of business of the appellant company, in other words, the fine-tuning of the overall company structure for attaining operational synergies. The investment was not made for the purposes of enhancing share value or for earning any dividends and hence, this business loss must be allowed to the assessee as an expense for the appellant company.

The Tribunal held- Assessing Officer did not rebut Assessee claim of regular dealing in shares:

(i) The petitioner has agreed during his assessment proceedings that the motive of the ATAG was to undertake activities related to marketing and sales for the appellant brand based out in Singapore. This factual declaration has not been denied by the Assessing Officer in the questioned assessment order. Nothing on record is there for showing that the respective subsidiary company did any activity totally unrelated and independent with respect to the activities which have been carried over by the litigant company. Hence, the appellant’s claim that this investment was done solely for the commercial purposes and was not done with any motive to create the investment couldn’t be rejected.

(ii) The primary thing which was needed to be examined in the current case was to understand whether the said expenditure was incurred as per business prudence for business purposes. In the case of S.A. Builders vs. CIT, 288 ITR 1, the Hon’ble Supreme Court held as under:-

“The term ‘commercial expediency’ is an expression which includes such expenditure which a prudent entrepreneur incurs for business purposes. This expenditure might not have been made under legal obligation; however, the same is permitted as a business expense in case it has been incurred on the grounds of commercial expediency.”

(iii) The unanimity of the objectives of the petitioner company and his subsidiary company evidently shows that the said investment was made solely as a trade investment. The choice of investing in its subsidiary was not such that any sensible businessman might have not done. In a very similar case of DCIT Vs. Gujarat Small Industries Corporation (4 SOT 239), the ITAT Ahmedabad Bench held as under:-

“According to the MOU (memorandum of association) of the assessee, the prime motive of the assessee had been to stimulate the interest of SSI units in the State. The chief objective of the assessee had been to assist the industrial concerns in several ways and promote industrial development in the State. Clearly, the company G had been floated for this purpose as a subsidiary and was then sold off when it started mounting losses. With this view, it had been found that the investment in the shares of the company by the assessee was a trade investment. The commissioner (Appeals) was correct in following the judgment of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. \/s. CIT [1986] 162 ITR 373. The Commissioner (Appeals) also took into consideration the judgment of the Rajasthan High Court in the case of Rajasthan Financial Corpn. Vs. CIT [1967] where it had been held that in case the investment in the shares and sale later thereon is linked closely with assessee’s business, any loss suffered due to such sale shall be treated as a trading loss.”

(iv) Hence, the Hon’ble Court held that the business loss which was claimed by the appellant was in accordance with the law.

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