Pranav B Prem

The Income Tax Appellate Tribunal (ITAT), Pune Bench, has held that losses arising from an overseas investment made as part of a company’s business strategy can be treated as business expenditure, and not as capital loss. The Bench comprising Vinay Bhamore (Judicial Member) and Dr. Manish Borad (Accountant Member) allowed the appeals of Brahm Precision Materials Pvt. Ltd. for Assessment Years 2018–19 and 2020–21, holding that the company’s write-off of investment in its U.S.-based wholly owned subsidiary constituted a business loss incurred for commercial expediency.

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Background

The assessee, Brahm Precision Materials Pvt. Ltd., an Aurangabad-based manufacturer of precision auto components, had incorporated a wholly owned subsidiary in the United States — Brahm Corporation, Indiana (WOS-BC, USA) — to expand its market for aerospace and high-precision aluminum casting components in the U.S. and Europe. The U.S. subsidiary, in turn, acquired 80% shareholding in Littler Diecast Corporation (LDC, USA), a company engaged in aluminum casting. However, both entities faced financial distress, defaulted on bank loans, and became subject to litigation initiated by Regions Bank, Alabama. Subsequently, a resolution for liquidation of the U.S. entities was passed in 2018, resulting in Brahm Precision writing off ₹97.61 lakh as a business loss in AY 2018–19 and ₹9.56 crore in AY 2020–21.

Assessment Proceedings

The Assessing Officer (AO) and the Commissioner (Appeals) rejected the company’s claim, classifying the write-off as a capital loss. The AO further made an addition of ₹99.23 lakh under Section 68 of the Income Tax Act, 1961, treating it as unexplained cash credit allegedly received from foreign sources. The assessee contended that the investment in its U.S. subsidiary was made for business expansion and commercial expediency, and therefore any loss on such investment was a revenue loss. It further explained that the disputed ₹99.23 lakh represented advance against sales received from Littler Diecast Corporation, supported by corresponding bank records and ledger entries.

Tribunal’s Observations

The Tribunal accepted the assessee’s explanation, noting that the investment was closely linked to its core business operations and not for the purpose of earning dividends or capital appreciation. It observed: “The purpose of the investment in Brahm Corporation, USA was not to earn dividend or appreciation in capital value but to expand the assessee’s business of manufacturing high-precision components for aerospace and defence industries in the U.S. The resulting loss is therefore revenue in nature.”  The Bench emphasized that Brahm Precision had already started deriving business income from its overseas ventures in the form of service charges and export sales as early as FY 2016–17, proving a direct nexus between the investment and the assessee’s main business.

Placing reliance on judicial precedents, including CIT v. Colgate Palmolive (India) Ltd. (2015) and Ace Designers Ltd. v. ACIT (2020), the Tribunal reiterated that when an investment in a subsidiary is made for business purposes, any resulting loss is allowable as a business loss under Section 37(1) of the Income Tax Act. Accordingly, the disallowance of ₹97.61 lakh for AY 2018–19 and ₹9.56 crore for AY 2020–21 was deleted.

Addition Under Section 68

Regarding the addition of ₹99.23 lakh, the Tribunal found that the amount represented a legitimate advance against export sales received from the U.S. subsidiary and was duly reflected in the company’s records. As no discrepancy was found between the books of account and the bank statements, the Tribunal held that the addition under Section 68 was unjustified and directed its deletion.

Condonation of Delay

The Tribunal also condoned a 445-day delay in filing one of the appeals after the assessee explained that it had mistakenly believed that a single appeal covered both assessment years. Relying on the Supreme Court rulings in Collector, Land Acquisition v. Mst. Katiji (1987) and Inder Singh v. State of M.P. (2025 INSC 382), the Bench observed that technical lapses should not defeat substantive justice when the cause of delay is bona fide.

The Tribunal concluded that since the overseas investment was integral to the assessee’s business strategy, the resultant write-off constituted a business loss allowable under the Act. It accordingly:

• Allowed the assessee’s appeals for both assessment years;

• Deleted the disallowance of ₹97.61 lakh and ₹9.56 crore; and

• Deleted the addition of ₹99.23 lakh under Section 68.

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The appeals were thus partly allowed in favour of the assessee.

Appearance

Counsel For  Appellant: Hari Krishan

Counsel For Respondent: Amol Khairnar

Cause Title: Brahm Precision Materials Pvt. Ltd. v. CIT(A)/NFAC, Delhi

Case No: ITA No.425/PUN/2025

Coram: Vinay Bhamore (Judicial Member), Manish Borad (Accountant Member)