Compensation paid to subsidiaries to recover business losses allowed u/s 37: HC

Case Details: Principal Commissioner of Income-tax v. Industrial Development Corporation of Odisha Ltd. - [2023] 147 taxmann.com 298 (Orissa)

Judiciary and Counsel Details

• • Dr S. Muralidhar, C.J. & M.S. Raman, J.
  • Tushar Kanti Satapathy, Sr. Standing Counsel for the Appellant.
  • Sidhartha Ray, Adv. & Mrs Pami Rath, Advs. for the Respondent.

Facts of the Case

Assessee, a corporation, was owner of two mines which was used by assessee’s subsidiaries for captive consumption. During the relevant assessment year, the iron ores obtained from the mines were not suitable for the use of subsidiaries. Since the mines were owned to ensure long-term viability of supply of iron ores, the non-suitability of such ores resulted in the financial loss to the subsidiaries. On finding, assessee compensated the loss amount incurred by the subsidiaries and claimed such expenses as deduction while filing the return of income.

During the assessment proceedings, the Assessing Officer (AO) based on the explanation provided, considered such expenses as not incurred wholly and exclusively for the business, denied the expenses, and computed the income accordingly.

On appeal, CIT(A) deleted the additions made by the AO which was subsequently affirmed by the Tribunal. Aggrieved by the order, the AO preferred an instant appeal to the Orissa High Court.

High Court Held

The High Court held that financing or aiding or assisting any promotional activities of the industrial undertaking is part of the business of the assessee. In the instant case, compensation paid by the Assessee to the subsidiaries was to recoup the business losses of the subsidiaries, which was irrecoverable as far as the assessee was concerned.

Considering that the expenditure was in the nature of money advanced to the subsidiaries, it cannot be said that there is no intimate connection between the Assessee and the two subsidiaries as far as the business activities are concerned.

Therefore, the court concluded that the expenditure incurred by the assessee was not only incidental to the business of the Assessee but also necessitated or justified by commercial expediency.

List of Cases Reviewed

• • Order of ITAT, Cuttack in IT Appeal nos. 449/CTK/2010, 493/CTK/2011, 585/CTK/2012, 558/CTK/2013 and 98/CTK/2010, dated 26-4-2017 (para 15) affirmed.

List of Cases Referred to

• • Travancore Titanium Products Ltd. v. CIT [1966] 60 ITR 277 (SC) (para 7)
  • CIT Amalgamation (P.) Ltd. [1997] 92 Taxman 132/226 ITR 188 (SC) (para 13)
  • Essen (P.) Ltd. v. CIT [1967] 65 ITR 625 (SC) (para 13)
  • CIT v. Gillanders Arbuthnot & Co. Ltd. [1982] 9 Taxman 76/138 ITR 763 (Cal.) (para 13).