CPC Cannot Disallow Diminution in Subsidiary Investment Under Section 143(1)(a) Contrary to Jurisdictional High Court Ruling

By | September 30, 2026
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CPC Cannot Disallow Diminution in Subsidiary Investment Under Section 143(1)(a) Contrary to Jurisdictional High Court Ruling

Issue

Whether CPC can disallow a claim for diminution in value of investment in a wholly-owned subsidiary under Section 143(1)(a) based solely on a Tax Audit Report when a binding Jurisdictional High Court decision allows it, and whether non-consideration of such a decision constitutes a mistake apparent from record under Section 154.

Facts

  • Assessee & Assessment Year: The assessee claimed diminution in the value of investment in its wholly-owned subsidiary as a revenue expenditure/business loss in its revised return for AY 2019-2020.
  • Adjustment by CPC: CPC processed the return under Section 143(1)(a)(ii) & (iv) and disallowed the claim based solely on disclosures in the Tax Audit Report.
  • Binding Judicial Precedent: Prior to the intimation issued by CPC, the Jurisdictional High Court in Ace Designers Ltd. v. Addl. CIT [2020] had held that diminution in the value of investment in a subsidiary is an allowable business loss.
  • Rectification Application: The assessee filed an application under Section 154 seeking rectification of the Section 143(1) intimation, asserting that the CPC failed to consider the binding Jurisdictional High Court precedent.

Decision

  • Binding Precedent Overrides Audit Report: Held that CPC cannot take a view contrary to binding decisions of the Jurisdictional High Court, and disclosures in a Tax Audit Report cannot override binding judicial precedent [Paras 12 and 17].
  • Invalidity of Summary Adjustment: Held that since diminution in the value of investment in a subsidiary is an allowable business loss as per the Jurisdictional High Court, the summary adjustment made under Section 143(1)(a) cannot be sustained [Paras 12 and 17].
  • Mistake Apparent from Record: Held that non-consideration of a decision of the Jurisdictional High Court or the Supreme Court constitutes a “mistake apparent from record” amendable under Section 154 [Paras 14 and 15].
  • Rectification Merited: Held that since the assessee specifically brought the Jurisdictional High Court ruling to the Assessing Officer’s attention, the rectification application merited acceptance [Paras 14 and 15].

Key Takeaways

  • Limits of Section 143(1)(a) Adjustments: CPC cannot make summary adjustments under Section 143(1) on debatable issues or in direct contradiction to settled law declared by the Jurisdictional High Court.
  • Scope of Section 154 Rectification: Ignoring or failing to apply a binding judgment of the Jurisdictional High Court or the Supreme Court is an error of law that qualifies as a mistake apparent from the record under Section 154.
  • Tax Audit Report Disclosures: Disallowances suggested or indicated in a Tax Audit Report do not automatically justify a statutory disallowance if the underlying claim is supported by binding judicial precedents.
IN THE ITAT BANGALORE BENCH “A”
Happiest Minds Technologies Ltd.
v.
DCIT
SANDEEP SINGH KARHAIL, Judicial Member
and Waseem Ahmed, Accountant Member
IT Appeal No. 2246 (BANG) of 2025
[Assessment Year 2019-2020]
SEPTEMBER  8, 2026
Sharath Rao, CA for the Appellant. Somanath S. Ukkali, CIT-DR for the Respondent.
ORDER
Sandeep Singh Karhail, Judicial Member.-The assessee has filed the present appeal against the impugned order dated 01/09/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], which in turn arose from the order passed under section 154 of the Act for the assessment year 2019-2020.
2. In this appeal, the assessee has raised the following grounds: –
1. The Impugned Order passed by the Commissioner of Income Tax (Appeals) [“CIT(A)”] u/s 250 of the Act upholding the rectification order passed by the Assessing Officer (“AO”) and the intimation under section 143(1) passed without following the due process, is bad in law and on facts and circumstances of the case.
2. The CIT(A) has erred in law in upholding the action of the AO in rejecting the rectification application made by the Appellant against the addition made in the intimation issued under section 143(1) of the Act on the basis that the same is beyond the scope of rectification.
3. The CIT(A) and the AO have erred in law in taking contrary stand of rejecting the rectification application on the basis that the subject issue requires deeper scrutiny on the one hand, and upholding the addition made in the intimation under section 143(1) on the other hand.
4. The CIT(A) has erred law in not appreciating that the submission made by the Appellant were not considered as mandated under second proviso to section 143(1)(a) of the Act and that the relevant documents were filed by the Appellant before the AO at the instance of AO himself through the grievance redressal mechanism.
5. Without prejudice the above, the adjustment proposed under Sec.143(1)(a)(iv) by way of addition of the diminution in the value of its investment in subsidiary to the returned income, is wholly unjustified and unsustainable in law, as the said investment in subsidiary was solely made for business reasons and the diminution in the value thereof represented an expenditure incurred in the normal course of business.
6. The CIT(A) has erred in law in upholding the addition ignoring several judicial precedence on this issue, merely on the basis that the Special leave Petition filed by the Department against the favourable high court order in CIT v. Vaibhav Global Ltd (2022) 138  (Raj) is pending before the Supreme Court.
3. The solitary grievance of the assessee is against the adjustment made under section 143(1) of the Act, disallowing the diminution in the value of investment in a wholly-owned subsidiary.
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a digital transformation IT consulting and services company. For the year under consideration, the assessee filed its return of income on 17/10/2019 declaring a total income of INR Nil and claiming refund of INR 5,39,70,920. Subsequently, the assessee filed the revised return of income on 30/09/2020, rectifying certain errors contained in the original return of income and carrying forward the business loss of INR 122,53,35,292 and unabsorbed depreciation loss of INR 8,67,39,329. The revised return of income filed by the assessee was processed vide intimation dated 19/11/2020 issued under section 143(1) of the Act, computing the total income of the assessee at INR 23,44,93,816, after, inter alia, disallowing the diminution in the value of investment in subsidiary amounting to INR 23,39,58,848. Being aggrieved, the assessee filed an application for rectification under section 154 of the Act against the intimation issued under section 143(1) of the Act on the basis that its claim for allowance of diminution in the value of investment in the wholly-owned subsidiary is a revenue expenditure as the investment was made for business purposes. In support of its contention, the assessee relied upon the decision of the Hon’ble Jurisdictional Karnataka High Court in ACE Designers Ltd. v. Addl. CIT  (Karnataka). The Assessing Officer (“AO”), vide order dated 23/06/2023 passed under section 154 of the Act, dismissed the rectification application filed by the assessee on the basis that the issue of allowance of expenditure does not come under the purview of rectification under section 154 of the Act.
5. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that the issue is beyond the scope of rectification under section 154 of the Act as the assessee’s claim of allowance of of the case for which the assessee would need to file necessary documents. Being aggrieved, the assessee is in appeal before us.
6. We have considered the submissions of both sides and perused the material available on record. In the instant case, the assessee, being an IT consulting and services company, acquired OSS Cube LLC, a U.S.-based digital transformation company, in the year 2017, with the objective of reaching USD 100 million and strengthening its position as a world-class service provider. As per the assessee, the said acquisition was made to further strengthen and expand the assessee’s portfolio of transformative offerings in the consulting-led digital space. Through this acquisition, a team of 240 employees from the new subsidiary joined the workforce of around 2200 employees of the assessee and expanded its active customer base to 170. As per the assessee, the decision of investment was a conscious strategic decision carried out in commercial expediency to strengthen and expand the already existing business operations of the assessee with greater efficiency, expertise and synergy. However, in due course, owing to certain unfavourable circumstances, such as technological obsolescence, the investment in the wholly-owned subsidiary declined significantly, and ultimately the assessee decided to wind up its wholly-owned subsidiary. Accordingly, the diminution in the value of investment in the subsidiary of INR 23,39,58,848 was claimed as revenue expenditure by the assessee while filing its return of income for the year under consideration.
7. As evident from the perusal of the record, while processing the assessee’s revised return of income under section 143(1) of the Act, the Centralised Processing Centre, Bengaluru (“CPC”) issued intimation under the first proviso to section 143(1) of the Act, proposing to make an adjustment under clause (ii) and clause (iv) of section 143(1)(a) of the Act, inter-alia, of a sum of INR 23,39,58,848 being the deduction claimed by the assessee in respect of diminution in the value of investment in subsidiary. It is evident from the record that the assessee furnished its reply explaining the nature of expenditure of a sum of INR 23,39,58,854 being the diminution in the value of investment in subsidiary held during the course of business. However, vide intimation dated 19/11/2020 passed under section 143(1) of the Act, the CPC disagreed with the submissions of the assessee and made an adjustment of INR 23,39,58,848 to the total income of the assessee. The assessee’s application under section 154, seeking rectification of the intimation issued under section 143(1) of the Act on the basis that the diminution in the value of investment in the wholly-owned subsidiary is a revenue expenditure, by placing reliance upon the decision of the Hon’ble jurisdictional Karnataka High Court in Ace Designers Ltd (supra), was dismissed by the AO on the basis that this issue does not come under the purview of rectification under section 154 of the Act. The learned CIT(A), finding favour with the observations of the AO, held that for allowing this expenditure, the assessee needs to file necessary documents, which requires deeper scrutiny of the case, and therefore, this issue is certainly beyond the scope of the provisions of section 154 of the Act.
8. As per the assessee, since the decision of investment in the wholly-owned subsidiary was a conscious decision for strengthening and expanding the already existing business operations of the assessee, any reduction in the value of such investment is the revenue expenditure. In this regard, the assessee has placed reliance upon the decision of the Hon’ble Jurisdictional Karnataka High Court in Ace Designers Ltd. (supra). From the perusal of this decision, we find that in the facts of that case, the taxpayer had set up an establishment in the USA for the exclusive purpose of marketing its products and for promoting its business in the USA and Latin America. Subsequently, the taxpayer invested funds and equity to meet the revenue expenses of the wholly-owned subsidiary. However, the wholly owned subsidiary subsequently failed to meet the taxpayer’s expectations, and it was therefore decided to wind up its operations in the USA. Accordingly, after receiving the necessary approvals, the taxpayer wrote off the entire investment in the wholly owned subsidiary, and the loss was claimed as revenue expenditure. The Hon’ble Jurisdictional High Court, concurring with the view of the Hon’ble Bombay High Court in CIT v. Colgate Palmolive (India) Ltd 370 ITR 728 (Bombay), allowed the claim of the assessee taxpayer and held that investment in the wholly-owned subsidiary was for the business purpose and any loss arising due to diminution in the value of the investment is a business loss. The relevant findings of the Hon’ble Jurisdictional High Court in Ace Designers Ltd (supra) are reproduced as follows: –
“5. We have considered the submissions made by learned counsel for the parties and have perused the record. The core issue, which arises for consideration in this appeal is with regard to disallowance of business loss written off on account of loss arising out of business investment from WOS in USA. It is well settled legal proposition that while deciding the question whether a receipt is a capital or income, it is not possible to lay down any single test as infallible or any single criteria as decisive. The question must ultimately depend on fact of particular case and authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. It has further been held that for determining the question of capital and incomes, trading profit or non trading profit are questions do involve a question of law to be drawn from the facts. [CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148(SC), P.H. Divecha v. CIT [1963] 48 ITR 222(SC), Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261(SC), Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC)and CIT v. BEST and Co. (P.) Ltd. [1966] 60 ITR 11 (SC) The aforesaid tests laid down by the Supreme Court in the aforesaid decisions were referred to with approval in ‘Karamchand Thapper And Bros. (P.) Ltd. and Oberoi Hotel (P.) Ltd. (supra).
6. The Bombay High Court dealt with the issue viz., where an assessee made an investment in its 100% subsidiary for business purpose, the loss on sale of investment would be treated as business loss. The aforesaid issue was answered in the affirmative by the Bombay High Court in Colgate Palm Olive (India) Ltd. (supra) and it was held that investment was made for commercial expediency. The aforesaid decision has been upheld by the Supreme Court as has been noted by Income-tax Appellate Tribunal, New Delhi Bench in its order dated 31-12-2018 in Cosmos Industries Ltd. (supra) In Patnaik & co. Ltd. (supra), it was held that the assessee did not hold on the investment the loan indefinitely and there was no enduring advantage and the investment did not bring in an asset of a capital in nature and the loss suffered by the assessee was a revenue loss and not a capital loss. In Investa Industrial Coporation Ltd. (supra), the division Bench of the High court dealt with a question whether the finances made by the assessee to manage the company were part of or incidental to carrying on a business by the assessee a and since, the managed company went into liquidation the advances became irrecoverable, the loss sustained by the assessee shall be regarded as trading loss.
7. In the backdrop of aforesaid well settled legal position, the facts of the case in hand may be adverted to. From the perusal of the note annexed to the income filed before the assessing officer, it is evident that assessee had set up an establishment in USA during Financial Year 1992-93 for the exclusive purpose of marketing assessee’s products and for promoting its business in US and Latin America. It has further been stated in the note that looking to the stringent norms of product liability in US market, the assessee decided to have a separate Wholly Owned Entity in the US having limited liability. The approval for aforesaid purpose was obtained from the Reserve Bank of India. The assessee therefore, invested funds in equity for meeting the revenue expenses of Wholly Owned Subsidiary Company’s balance sheet. However, WOS could not perform upto company’s expectations and therefore, it was decided to wind up WOS operations in USA. While granting approval for closure of WOS, RBI permitted the company to write off the whole of investment made in WOS and unrealized export receivables. The assessee therefore, made a claim to write off the loss of Rs. 3,41,23,200/- as revenue expenses allowable under the provisions of the Act.
8. Thus, from perusal of the aforesaid facts, it is evident that the issue involved in this appeal is covered by decision of Bombay High Court in Colgate Palm Olive (India) Ltd. (supra), which has been upheld by the Supreme Court. The ratio of aforesaid decision is where the assessee makes investment in its 100% subsidiary for business purpose, loss or sale of investment has to be treated as business loss of the assessee. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee. The WOS suffered losses and therefore the assessee wrote off the assessment of Rs. 3,41,23,200/- as business loss. The investment was made for the purpose of extension of business activity and not with a view to creating capital asset in the form of holding shares. It is also pertinent to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party.
In view of preceding analysis, the first substantial question of law is answered in the negative and in favour of the assessee. It is not necessary for us to answer the remaining substantial questions of law in view of our answer to the first substantial question of law. In the result, the order of the Tribunal dated 14-12-2012 to the extent of the findings contained against the assessee is quashed.
Accordingly, the appeal is allowed.”
9. It is pertinent to note that the Hon’ble Jurisdictional Karnataka High Court rendered its decision in Ace Designers Ltd. (supra) on 09/09/2020, while the CPC rejected the contention of the assessee and made the adjustment by disallowing the diminution in the value of investment in the wholly-owned subsidiary vide intimation dated 19/11/2020. Thus, on the date of issuance of the intimation under section 143(1) of the Act, the decision of the Hon’ble Jurisdictional Karnataka High Court in Ace Designers Ltd. (supra) was already pronounced. Further, when the said decision was specifically brought to the attention of the AO by way of rectification application under section 154 of the Act, the plea of the assessee was rejected on technical grounds.
10. From the record, it is evident that the CPC issued intimation under the first proviso to section 143(1) of the Act, proposing to make impugned adjustment under clause (ii) and clause (iv) of section 143(1)(a) of the Act. Therefore, before proceeding further, it is pertinent to note the relevant provisions of section 143(1)(a) of the Act, which are reproduced as follows:-
“143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—
(a) the total income or loss shall be computed after making the following adjustments, namely:—
(i) ….
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) …
(iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;
(v) … or
(vi) ….:
Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:
11. Thus, as per clause (ii) and clause (iv) of section 143(1)(a) of the Act, if the assessee has made an incorrect claim which is apparent from the information in the return or any disallowance of expenditure has been indicated in the audit report, but not taken into account while computing the total income in the return, then the total income or loss shall be computed under section 143(1)(a) of the Act after making the adjustment. As per the assessee, the tax auditor in Sl. No.21(a) of the Tax Audit Report in Form 3CD has treated the amount of diminution in the value of investment in subsidiary, which is debited to the profit and loss account, to be in the nature of capital expenditure. Accordingly, on the basis of the declaration of the tax auditor in the Tax Audit Report, the impugned adjustment of diminution in the value of investment in the subsidiary was made by the CPC under clause (ii) and clause (iv) of section 143(1)(a) of the Act.
12. Therefore, the first issue that arises for our consideration is whether the observations in the Tax Audit Report can be the sole basis for disallowing an expenditure under the Act when the Hon’ble Jurisdictional High Court has treated the similar expenditure to be an allowable deduction. It is well settled that when the law enacted by the legislature has been construed in a particular manner by the Hon’ble Jurisdictional High Court, the same shall be binding on all the Courts and Tribunals within its jurisdiction. It is pertinent to note that after the change in the mechanism of application of section 143(1) of the Act, once the intimation is issued to the assessee and the order under section 143(1)(a) of the Act is passed after seeking the assessee’s response, the CPC is discharging a quasi-judicial function. Therefore, we are of the considered view that, being a quasi-judicial authority, the CPC cannot take a view contrary to the binding decisions of the Hon’ble Jurisdictional High Court, and the Tax Audit Report cannot be the reason enough to disregard the binding decision of the Hon’ble Jurisdictional High Court. In the present case, since the assessee is assessed to tax in Bangalore and the Hon’ble Karnataka High Court is the Hon’ble Jurisdictional High Court for all matters pertaining to the assessee, the CPC is bound by the decision of the Hon’ble Jurisdictional High Court.
13. It is pertinent that after the CPC disallowed the diminution in the value of investment in subsidiary, the assessee filed a rectification application under section 154 of the Act on this issue, specifically placing reliance upon the decision of the Hon’ble Jurisdictional High Court in Ace Designers Ltd (supra). However, the Jurisdictional AO, vide order dated 23/06/2023, passed under section 154 of the Act, held that the application for rectification of the disallowance of expenditure does not come under the purview of rectification under section 154 of the Act.
14. We find that while dealing with the provisions of section 254(2) of the Act, the Hon’ble Supreme Court in Asstt. CIT v. Saurashtra Kutch Stock Exchange Ltd.  305 ITR 227 (SC), held that non consideration of a decision of a Jurisdictional High Court or of the Supreme Court can be said to be a “mistake apparent from record”. Since section 154 of the Act also uses a similar expression, i.e. “mistake apparent from record”, respectfully following the aforesaid decision, we are of the considered view that when the assessee specifically brought to the attention of the AO the decision of the Hon’ble Jurisdictional High Court in Ace Designers Ltd (supra), wherein a similar claim of loss arising from investment made in a subsidiary was allowed, the assessee’s application seeking rectification merits acceptance.
15. During the hearing, the learned Departmental Representative (“learned DR”), by placing reliance upon the decisions of the Hon’ble Supreme Court in T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC)andCIT v. Hero Cycles Pvt. Ltd. [1997] 228 ITD 463 (SC), submitted that the issue of allowability of diminution in value of investment in subsidiary is a debatable issue as it has gone till the Hon’ble High Court, and thus the AO has correctly dismissed the rectification application filed by the assessee under section 154 of the Act. It is pertinent to note that in the present case, the assessee sought the rectification of the intimation issued under section 143(1)(a) of the Act on the basis of the decision of the Hon’ble Jurisdictional Karnataka High Court in Ace Designers Ltd (supra), wherein the similar issue was decided in favour of the assessee, and this decision, though pronounced prior to the date of intimation under section 143(1)(a) of the Act, was not taken into consideration by the CPC and the impugned disallowance on account of diminution in the value of investment in subsidiary was made. Insofar as these facts are concerned, we are of the considered view that the same cannot be called debatable. Thus, in the present case, the question is whether the non-consideration of the decision of the Hon’ble Jurisdictional High Court is a mistake apparent from record, and as noted in the foregoing paragraph, the Hon’ble Supreme Court in Saurashtra Kutch Stock Exchange Ltd. (supra) answered this question in the affirmative. Therefore, we are of the considered view that the reliance placed by the learned DR upon the decisions of the Hon’ble Supreme Court in Volkart Brothers (supra) and Hero Cycles Pvt. Ltd. (supra) is completely misplaced.
16. The learned DR also placed reliance upon the decision of the Hon’ble Supreme Court in Mepco Industries Ltd. v. CIT [2009] 185  319 ITR 208 (SC). From the careful perusal of the said decision, we find that the Hon’ble Supreme Court held that the rectification order under section 154 of the Act cannot be made on the basis of subsequent judgment. As noted in the foregoing paragraphs, the assessee sought rectification under section 154 of the Act on the basis of the decision of the Hon’ble Jurisdictional High Court which was pronounced prior to the date of intimation issued under section 143(1)(a) of the Act. Thus, in the present case, the rectification was not sought on the basis of subsequent judgment. Therefore, we are of the considered view that the reliance placed by the learned DR upon this decision is completely misplaced.
17. Therefore, in view of the facts and circumstances of the present case, legal position and judicial pronouncements as noted above, we are of the considered view that the learned CIT(A) erred in upholding the order passed under section 154 of the Act rejecting the rectification application filed by the assessee against the intimation issued under section 143(1)(a) of the Act on the issue of allowability of diminution in the value of investment in subsidiary, as the said issue is covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in Ace Designers Ltd (supra). Accordingly, the impugned order is set aside, and the grounds raised by the assessee are allowed.
18. In the result, the appeal by the assessee is allowed.