Unrecovered debt from a Subsidiary Company is allowable as Deduction

The Amritsar bench of Income Tax Appellate Tribunal has recently rule that a Holding Company is entitled to get deduction in respect of the debt unrecovered from its subsidiary company under the provisions of the Income Tax Act, 1961. Coming to the facts of the case, the assessees, M/s Sarup Tanneries Ltd, is engaged in the business of manufacture and sale of leather goods, Shoe upper, soles etc. The Assessing Officer, while completing assessment for the relevant assessment year, has disallowed the claim made by the assessee in respect of loss written off due to its subsidiary company in US on ground that such losses claimed by assessee were not related to the business of assessee. On appeal, the Commissioner of Income Tax (Appeals) partly allowed the impugned order. The case was brought before the ITAT. The Revenue contended that reliance should be placed on the decision in Amalgamations Pvt. Ltd vs. CIT (1969) 226 ITR 188 (SC). The Tribunal found that the assessee had issued standby letter of guarantee on behalf of its subsidiary in U.S.A which the lenders had invoked and assessee company had to pay the guaranteed amount and therefore the amount had become recoverable from its subsidiary but which the subsidiary could not pay and therefore, the assessee had written it off in its P&L Account. The Tribunal noticed that in the case of Amalgamations Pvt. Ltd vs. CIT (1969) 226 ITR 188 (SC), the Supreme Court has observed that “the nature of the business of assessee company included furnishing of guarantee to debts borrowed by subsidiary company and therefore, it was held that assessee company had incurred the loss in carrying on its own business which included furnishing of guarantees to debts borrowed by its subsidiary company”. The Tribunal found that the purpose of setting up a subsidiary company in US by the assessee was to attain its main business objects. The incidental objects as specified in the Memorandum of Association, are that the company in pursuance and development of its business can incorporate or promote any company or companies whether in India or elsewhere which in the company or companies could or might directly or otherwise proved advantage to the assessee. Further, clause 9 of the incidental objects authorizes the assessee to lend as advance money with or without security. The Court followed the decision in Amalgamations Pvt. Ltdand held that “In the present case the assessee has not lent any money to its subsidiary company but had indirectly lent the money by executing standby letter of guarantee for the debts obtained by subsidiary company in U.S.A. In view of this enabling provision in the memorandum of association of company the assessee being holding company stood guarantee for the arrangement of finance for the subsidiary company. The lender invoked the said letter of guarantee and assessee had to make payment for the same. The entire sequence of events resulted into indirectly lending to the subsidiary company which become irrecoverable due to losses of the said subsidiary and had to be written off in the P&L Account of assessee. Keeping in view the ratio of Hon’ble Supreme Court in the case of Amalgamations (P) Ltd. the said unrecovered amount from it’s subsidiary is a loss incurred by assessee in carrying on it’s own business.”

Read more at: http://www.taxscan.in/unrecovered-debt-subsidiary-company-allowable-deduction-itat-amritsar/2368/