Loss Arising From Investment In Equity Shares, Non-Convertible Debentures, Zero Coupon Redeemable Preference Shares Covered Under "Business Loss": ITAT

The two-member bench of Mahavir Singh (Vice-President) and Manoj Kumar Aggarwal (Accountant Member) has observed that for the sale of shares and the amount advanced by the assessee to various industries towards working capital, the real character of the transaction was those akin to loans and not equity investment.

The AO, during the course of assessment proceedings, noticed from the profit & loss account that the assessee had 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 the assessee in Ponni Sugars (Orissa) Ltd. should not be treated as capital. The assessee replied, stating various reasons why the investment in Ponni Sugars (Orissa) Ltd. is for the purpose of business. It was explained that Ponni Sugars and Chemicals Ltd. came up with a rights issue of equity shares as well as a rights issue of partly convertible debentures (PCD) to part finance its expansion projects. The assessee company made an investment of 85,900 equity shares and 20,000 PCDs for an aggregate amount of Rs. 55.77 lakhs. The assessee made an investment in the rights issue by subscribing 33,33,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share and making a total investment of Rs. 499 lakhs. The assessee also subscribed to 14% redeemable preference shares for an amount of Rs. 500 lakhs. Following that, in 1999, Ponni Sugars and Chemicals Ltd. proposed a demerger scheme that included the transfer of the Erode unit to Ponni Sugars (Erode) Ltd., as well as the transfer of 40% capital and a significant portion of the debt to Ponni Sugars (Erode) Ltd., which was renamed Ponni Sugars (Orissa) Ltd.The scheme was approved by the Madras High Court in September, 2001. Finally, the Balangir unit could not function and the accumulated losses of Ponni Sugars (Orissa) Ltd. exceeded net wealth as on 31.03.2002.

The assessee made an application to the Board of Industrial and Financial Reconstruction (BIFR) for the reconstruction of the assessee as a sick industrial unit. The assessee company was declared sick by BIFR and therefore lead financial institution ICICI Bank opted for the sale of the unit, but due to insufficient buyers, there was no possibility of getting any amount out of the sale proceeds to meet the dues to unsecured creditors, preference shareholders, and equity share holders. Accordingly, the investment was written off in the profit & loss account for the year ended i.e., 31.03.2003. The assessee claimed that the periodical investment in Ponni Sugars (Orissa) Ltd. was made to ensure an 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. The value of the investment has become nil as on 31.03.2003. The assessee made a write off and claimed that write off as an unrealizable amount under section 37 as business expenditure. The AO treated these investments as capital in nature, but no finding is given as to why he treated them as a capital investment.

The department argued that the investments made in equity capital, non-convertible debentures, and zero-coupon redeemable preference shares cannot be held as revenue for the reason that they are invested in equity capital and the assessee has acquired an interest in Ponni Sugars (Orissa) Ltd. The equity investment is made for the purpose of acquiring an interest in a company that makes the expenditure as capital in nature and the lower authorities have rightly held so.

The ITAT reversed the orders of lower authorities and allowed this issue of the assessee's appeal.

Case Title: Seshasayee Paper and Boards Ltd. Versus The JCIT

Citation: ITA No.: 2835/CHNY/2017

Dated: 22.07.2022

Counsel For Appellant: Advocate G. Baskar

Counsel For Respondent: D.R. P. Sajit Kumar

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