(First Published on Linkedin)
Businesses can be undertaken in two ways—either directly through your own operating entity, or indirectly, through strategic investments in subsidiaries, joint ventures, or special purpose vehicles. But irrespective of the route, if the investment was made to further commercial objectives and had a demonstrable nexus with business, it still remains business. The loss, if any, should logically follow the same treatment.
A recent tax ruling has spotlighted this exact issue—where a real estate firm had advanced substantial funds to its 100% subsidiary in the hospitality space. With operations bleeding and the SPV’s net worth turning negative, the parent decided to write off the investment as a business loss. The tax authorities objected. But the Tribunal upheld the write-off, anchoring it in business expediency.
Key cross-domain takeaways:
1. Income Tax Act – Section 37(1) & 36(1)(vii): A write-off of advances to a subsidiary can be allowed as a business loss under Section 37(1), if there’s clear commercial nexus. The Tribunal rejected the “tax avoidance” theory despite the timing of write-off coinciding with certain gains.
2. FEMA – ODI Regulations: While this was a case of onshore investment, in case of overseas investment, when a domestic entity advances funds to an overseas JV/WOS and later writes it off, FEMA ODI Rules permit write off without RBI approval, subject to a CA certificate.
3. Ind AS 109: If the loan is interest-free and repayable on demand, the fair value may already be low. But extinguishment impacts both balance sheet and P&L—either as loss or equity adjustment.
4. Companies Act: Advances to subsidiaries will be subject to section 186—board approval, and special resolution (if applicable). While there are no specific provisions for write offs, write-offs need to be authorised via board resolutions, and must reflect in financial statements with explanatory notes.