S. 37(1): The loss on sale of shares of a wholly-owned subsidiary is allowable as a business loss if the investment in the subsidiary was made for commercial purposes

The assessee has shown a loss of Rs. 4,07,24,151 on the sale its 100% share holding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyprus Pvt. Ltd. (ATC). The said loss has been claimed as business expenditure. During the course of assessment, the appellant submitted that the ATAG was set up in 2007 as 100% subsidiary of the appellant company with an objective of undertaking sales and marketing of the products of the brand of the appellant company and the investment was made in the subsidiary company as a measure of commercial expediency. The AO in the draft assessment order was of the view that the said investment in shares cannot be held as business activity as the appellant was itself showing the said shares under the head investment. The DRP confirmed the draft assessment order in this regard. Before the Tribunal the assessee submitted that the investment by the appellant in the shares of ATAG and the subsequent sale thereof was for the business purpose of the appellant company i.e. refinement of overall structure of the appellant company with a view of obtaining synergies of operations. The said investment was not for the purpose of enhancement of the value of shares nor for earning dividends and therefore, the business loss should be allowed as expenditure to the appellant company. HELD by the Tribunal allowing the appeal:

(i) The appellant has submitted during the course of assessment proceedings, that the objective of ATAG was undertaking sales and marketing related activities for the brand of the appellant in Singapore. The said factual assertion has not been rebutted by the AO in the impugned assessment order. There is nothing on record to show that the said subsidiary company was doing any activity completely independent and unrelated to the activities carried out by the appellant company. Thus, the claim of the appellant that the investment was made for commercial purposes and not for purpose of accretion of investment cannot be rejected.

(ii) The only thing that was required to be examine in the present case was whether the expenditure was made as a prudent businessman for the purpose of business. In the case of S.A. Builders vs. CIT, 288 ITR 1, the Hon’ble Supreme Court held as under:-

“The expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”

(iii) The unity of objectives of the appellant company and the subsidiary company clearly shows that the investment was in the nature of a trade investment only. The decision to invest in the subsidiary was not such that a prudent business man would not have made it. In a similar case of DCIT Vs. Gujarat Small Industries Corporation (4 SOT 239), the ITAT Ahmedabad Bench held as under:-

“As per the memorandum of association of the assessee, the main object of the assessee was to promote the interest of SSI units in the State. The main object of the assessee was to help industrial concerns in various ways and help industrial growth of the State. Obviously, the company G was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting. In view of that fact, it was found that investment in shares of company by the assessee was in the nature of trade investment. The commissioner (Appeals) had correctly followed the judgment of the Supreme Court in the case of Brooke Bond India Ltd. /s. CIT [1986] 162 ITR 373. The Commissioner (Appeals) had also followed the judgment of the Rajasthan High Court in the case of Rajasthan Financial Corpn. Vs. CIT [1967] wherein it was held that if the investment in shares and sale thereof is closely linked with the business of the assessee, the loss suffered on account of such sale would be a trading loss.”

(iv) We therefore, hold that the business loss claimed by the appellant is in accordance with law.