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August 9, 2022

Loss on investment in equity shares is business loss

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Loss on investment in equity shares is business loss

Facts and Issues of the case

The AO during the course of assessment proceedings noticed from the profit & loss account that the assessee under the head ‘extraordinary items’ written off Rs.641.32 lakhs on account of loss of investment in Ponni Sugars (Orissa) Ltd. The AO required the assessee to explain as to why the investments written off claimed by assessee in Ponni Sugars (Orissa) Ltd., be not treated as capital.

The assessee claimed that the periodical investment in Ponni Sugars (Orissa) Ltd., was made to ensure uninterrupted supply of bagasse to meet 50% of its raw material requirement. It was claimed that the investments were made due to business compulsion and commercial expediency. Since, the value of this investment has become nil, the assessee made write off and claimed that write off as unrealizable amount u/s.37 of the Act, as business expenditure. The AO treated these investments as capital in nature but no finding is given as to why he has treated the same as capital investment.

Observations by the Court

The Court has heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has made investment in Ponni Sugars (Orissa) Ltd. in the equity capital, non-convertible debentures and zero coupon redeemable preference shares. The assessee made every effort to revive the Balangir unit of Ponni Sugars (Orissa) Ltd., which remains idle for many years. The assessee tried for the same and also acquired a co-operative sugar mill at Bargargh, Orissa to be operated on management contract basis and also acquired a license to set up a new sugar mill in Balangir, Orissa.

The assessee has made investments in Ponni Sugars & Chemicals Ltd., which was set up in 1984 and the investments were made in 1992. Once the assessee could not revive, he referred the matter to BIFR for reconstruction of the assessee as sick industrial unit. Finally, BIFR declared the assessee as a sick unit. Even the lead financial institution i.e., ICICI bank has opted for sale of the unit but the offers received for sale of Balangir unit was not even sufficient to meet the dues of secured loans and there was no possibility of getting amount out of sale proceeds to meet the dues of unsecured creditors, preference shareholders and equity shareholders. In such circumstances, whether the loss or losses of investment claimed by assessee as write off of investment u/s.37 of the Act is allowed.

We are of the view that the claim of loss accruing or arising as investment in equity shares, non-convertible debentures and zero coupon redeemable preference shares is not capital loss but eligible for deduction in computation of business income as business loss, for the sale of shares and amount advanced by assessee to various industries towards working capital, the real character of the transaction was those akin to loans and not equity investment.

Conclusion

The loss arising as investment in equity shares, non-convertible debentures and zero coupon redeemable preference shares for business purposes is not capital loss. It is eligible for deduction in computation of business income as business loss.

Seshasayee-Paper-and-Boards-Ltd.-Vs-JCIT-ITAT-Chennai

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