ITAT Mumbai Allows Write-Off of ₹13.59 Crore as Business Loss in Foreign Subsidiary Case

April 17, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of Shreepati Build Infra Investment Limited, holding that losses arising from investments and loans advanced to a wholly owned foreign subsidiary for business expansion are allowable as business losses once they become irrecoverable.

The decision came in a case where the Revenue had challenged the deletion of an addition of ₹13.59 crore made by the Assessing Officer (AO) on account of write-off of loans and advances. The Tribunal, comprising Judicial Member Narender Kumar Choudhry and Accountant Member Prabhash Shankar, dismissed the Revenue’s appeals and upheld the order of the Commissioner of Income Tax (Appeals).

Background of the Dispute

The assessee, engaged in real estate development, had invested approximately ₹12.67 crore and advanced loans of ₹92.08 lakh to its wholly owned Sri Lankan subsidiary, Shreepati’s Edifice (Private) Limited. The subsidiary was incorporated to execute the “1996 Iconic Tower Project” as part of the company’s international expansion strategy.

However, the project failed after termination of a development agreement dated 7 November 2014 due to non-fulfilment of escrow obligations. Despite efforts to revive the project, it remained commercially unviable, leading to complete erosion of the investment.

Detailed records placed on file, including agreements and financial documents, showed that the funds were used for legitimate business purposes such as contractor payments, architectural services, professional fees, travel, and statutory compliance. Notably, the fund utilisation breakup on page 6 and 7 of the order demonstrates expenditure across multiple project-related heads, reinforcing the business nexus of the investment.

Assessing Officer’s Stand

The AO disallowed the write-off, citing lack of documentary proof of diminution in value and absence of evidence showing recovery efforts. The entire amount of ₹13.59 crore was added back to the assessee’s income.

Findings of the Tribunal

The Tribunal rejected the Revenue’s arguments and held that the investment and loans were made out of commercial expediency for business expansion, not for capital appreciation or dividend income. It observed that once the project failed and the investment became irrecoverable, the write-off was justified.

Crucially, the Bench clarified that after 1 April 1989, it is not necessary for an assessee to prove that efforts were made to recover the amount. Relying on the Supreme Court’s ruling in TRF Ltd. v. CIT and CBDT Circular No. 12/2016, the Tribunal held that writing off the amount in the books is sufficient to claim deduction.

The Tribunal also relied on the Bombay High Court judgment in CIT v. Colgate Palmolive (India) Ltd., which established that losses from investments in wholly owned subsidiaries made for business purposes can be treated as allowable business losses if they become irrecoverable.

Business Loss, Not Capital Loss

The Bench emphasized that the dominant purpose of the investment was business expansion. Since the loss arose during the course of business due to failure of the subsidiary’s project, it qualifies as a revenue loss deductible under Section 37(1) of the Income Tax Act.

The Tribunal noted that the write-off was bona fide, supported by documentary evidence, and not disputed during remand proceedings. Accordingly, it upheld the deletion of the addition of ₹13.59 crore.

Penalty Also Quashed

Since the quantum addition itself was deleted, the Tribunal also upheld the deletion of penalty amounting to ₹2.35 crore imposed under Section 270A. It held that once the foundation of the penalty does not survive, the penalty cannot be sustained.

Conclusion

Dismissing both appeals filed by the Revenue, the Tribunal reaffirmed that commercially justified investments in subsidiaries, even if unsuccessful, can result in allowable business losses when written off in accordance with law.

Case Title: ACIT v. Shreepati Build Infra Investment Limited
Case No.: ITA Nos. 6161 & 6160/Mum/2025
Assessment Year: 2018–19