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Mumbai Tribunal rules loss on sale of investments incurred for preservation of business allowable as business loss
In the case of Deutsche Asset Management India P. Ltd (DAMIPL)[1] (Taxpayer), the Taxpayer carried on business as Securities and Exchange Board of India (SEBI)-registered investment manager for all mutual fund schemes of Deutsche Mutual Fund (DMF) (i.e., equity and debt). In one of the debt-fund schemes, investment made in unsecured non-convertible debentures (NCDs) of a company turned non-performing assets (NPA) with value erosion by 54% provided in the books of mutual fund. The Taxpayer acquired the NPA NCDs at book value (46%) from the mutual fund and incurred further loss on selling them. The issue before the Mumbai Tribunal was whether the Taxpayer can claim such loss on sale of investments (NCDs) as business loss.
The Taxpayer contended that NCDs were classified as NPA (i.e., on account of non-payment of principal and interest) in the books of DWS as per SEBI circular[2]. Furthermore, the NCDs had already eroded by 54% and there was probability of further erosion adversely impacting the returns to the mutual fund unit holders who expect debt funds to be more stable. The negative returns would drive the unit holders to not only withdraw funds from the concerned debt schemes but also from other schemes which would severely impact the business and future profitability of the Taxpayer. The losses faced by unitholders would have adversely impacted Taxpayer’s reputation and standing in the market. Hence, in order to protect business from loss and reputation, out of business exigency, the Taxpayer purchased the NCDs from the debt scheme at book value (46%) and subsequently incurred loss while selling them to a group who were potential buyers of NCDs issuing company under corporate debt restructuring scheme.
The Taxpayer strongly relied on the Bombay High Court (HC) ruling in case of CIT v. Templeton Asset Management (India) (P.) Ltd. [3], wherein, the HC allowed claim of business loss by fund manager of mutual funds towards lesser recovery of expenditure incurred on behalf of the mutual fund due to business exigency. The Taxpayer also strongly relied on Mumbai Tribunal ruling in the case of SBI Funds Management P. Ltd. [4] wherein on similar facts, the Tribunal allowed loss on sale of investments acquired from mutual fund managed by the Taxpayer as a business loss.
The tax authority contended that the Taxpayer was not legally obligated to incur the loss or purchase the NCD at a loss from the mutual fund. Furthermore, since the NCDs were classified as investment in books of account of the Taxpayer, any loss incurred on sale shall be classified as short-term capital loss and not a business loss.
The Mumbai Tribunal ruled in favor of the Taxpayer by upholding Taxpayer’s contentions. It relied on the Supreme Court (SC) ruling in case of CIT v. Birla Cotton Spinning and Weaving Ltd. [5] where the SC held that if expenses are incurred for preservation and protection of taxpayer’s business, then it is allowable as business loss.
[1] TS-119-ITAT-2023 [2] Reference no. MFD/CIR/8/92/2000 dated 18 September 2000 [3] (2012) 340 ITR 379 (Bom) [4] ITA No. 4001/Mum/2002 order dated 27 June 2007 [5] 82 ITR 166