Mumbai ITAT Allows ₹13.59 Cr Write-Off On Overseas Subsidiary Investment As Business Loss

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 17 April held that losses from investments and loans to a wholly owned foreign subsidiary, made for business expansion and commercial expediency, are deductible as business losses even if irrecoverable.

A Bench comprising Judicial Member Narender Kumar Choudhry and Accountant Member Prabhash Shankar further held that no proof of recovery efforts is required once the amount is written off in the books. It held:

“The investment was not made with an intention to earn dividend or create a capital asset, but to facilitate business operations overseas.”

The assessing officer had disallowed the company's write-off of Rs. 13.59 crore shown under “other expenses”, which included Rs. 12.67 crore invested in its Sri Lankan subsidiary and Rs. 92.08 lakh extended as loans for a real estate project in Sri Lanka. The officer held that the company failed to establish sufficient evidence of diminution in value and did not demonstrate recovery efforts.

The company, Shreepati Build Infra Investment Limited, submitted that it incorporated Shreepati's Edifice Private Limited in Sri Lanka as part of its overseas expansion strategy for developing the “1996 Iconic Tower Project”.

It stated that the project collapsed after the subsidiary's agreement with Wills Realtors Private Limited and Vivanta Associates was terminated in March 2016, following failure to deposit USD 1.2 million in an escrow account. It further contended that repeated attempts to revive the project failed, rendering the investment commercially unviable and necessitating a write-off.

During appellate proceedings, the company placed on record financial statements, agreements, fund utilisation details, bank statements, and correspondence relating to the project. The Commissioner of Income Tax (Appeals) admitted the additional evidence and called for a remand report, in which the assessing officer did not raise any adverse findings.

Rejecting the Revenue's contention that recovery efforts must be demonstrated, the Tribunal relied on the Supreme Court ruling in TRF Ltd v CIT and held that post 01.04.1989, it is sufficient if the debt is written off in the books of account.

The Tribunal also relied on the Bombay High Court ruling in CIT v Colgate Palmolive (India) Ltd., which recognised that losses arising from investments in wholly owned subsidiaries made for business purposes can constitute allowable business losses. It observed:

“it has become clear that investments made in wholly owned subsidiaries for business purposes, driven by commercial expediency, and integrally connected with the business of the Assessee, would result in allowable business loss, if such investments become irrecoverable. The ratio laid down in the aforesaid decisions clearly establishes that where the dominant purpose of investment is business expansion and not capital appreciation, the resultant loss assumes the character of revenue loss allowable under section 37(1) of the Act. Further the Assessee is not under obligation to establish the efforts made for recovery of write off amount.”

Accordingly, the ITAT held the write-off to be bona fide and supported by evidence and upheld the deletion of the Rs. 13.59 crore addition along with the Rs. 2.35 crore penalty.