Mumbai Tribunal rules write-down of investment loss allowable if a “direct and proximate” nexus exists with a business

This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal) in the case of Tata Communications Ltd. (Taxpayer). The Taxpayer is in the business of providing international telecommunication services in India and holds investments in the shares of a company incorporated in the UK (UKCo). UKCo was set up to establish and operate a satellite-based mobile telecommunication system which would provide connectivity in any part of the world. However, due to inadequacy of funds, UKCo filed for bankruptcy, which resulted in a fall in the value of its shares. The issue was whether such a fall could be claimed as allowable against business income under the Indian Tax Laws (ITL). The Tribunal, on the facts of the case, ruled that a fall in the value of shares is not permissible to be reduced from business income, as the investment does not have a direct or proximate nexus with the business activity, but only remotely aids the Taxpayer.

This ruling highlights that loss arising on account of investment having a direct and proximate nexus with the business is tax deductible, despite the fact that the investment was regarded as a capital asset in the books of account. In the present case, the Tribunal has categorically observed that the method of accounting of investments in the books of account should not have a bearing while evaluating deductibility under the ITL. On the facts of the case, the Tribunal, however, denied deduction in respect of a fall in the value of the investment as, in the view of the Tribunal, the requisite test of “direct and proximate nexus” with the existing business of the Taxpayer was not present.