ESCORTS LTD.,FARIDABAD V. ADDL.CIT, SPECIAL RANGE-3, NEW DELHI

ITA 7394/DEL/2019

AI Insights

The case involves Escorts Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals)-34, New Delhi, which upheld the disallowance of a claim of expenditure amounting to Rs. 47,64,00,000. This expenditure was incurred on the settlement of a corporate guarantee invoked and awarded against the appellant by the International Court of Arbitration, Vienna, Austria. The guarantee was intended to ensure an uninterrupted supply of material to a subsidiary of the appellant in the USA, engaged in the business of tractors. The primary legal issue was whether the expenditure was a legitimate business expense under the Income Tax Act, 1961, specifically under sections 28 to 36 or section 37.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 23026 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Other Referred Cases: DCIT vs Wires and Fabrics (SA) Ltd. (Kolkata Trib.) ITA No.366/Kol./2010, ACIT vs W.S. Industries (India) Ltd. (Chennai Trib.) 9 ITR (T) 596, ACIT vs Peirce Leslie India Ltd. (Chennai Trib.) ITA No.1244/Mds./2011, S.A. Builders Ltd. vs CIT(Appeals), Chandigarh (2007) 158 Taxman 74 (SC), Principal CIT, Panaji vs V.S. Dempo Holdings (P) Ltd. (2021) 130 taxmann.com 456 (Bom.), Agrawal Indotex Ltd. vs Assistant CIT, Circle 2(1), Indore (2015) 55 taxmann.com 82 (Indore Trib.), CIT vs Spencers and Co. Ltd. (No.1) (2014) 47 taxmann.com 55 (Madras), CIT vs Navsari Cotton & Silk Mills (1982) 135 ITR 546 (Guj.), CIT vs Amalgamation (P.) Ltd. - (1997) 226 ITR 188 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Assessee Lawyers: R. N. MEHTA
• Keywords: Opportunity of being heard; Revised return; Business expenditure; Commercial expediency; Wholly owned subsidiary
• Section: 37; 28; 115JB; 37(1)

Judgement Text

" 1 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT IN THE INCOME TAX APPELLATE TRIBUNAL DELHI (DELHI BENCH ‘B’ NEW DELHI BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No. 7394/Del/2019 (A.Y. 2016-17) Escorts Ltd. Corporate Centre, 15/5, Mathura Road, Faridabad, Haryana PAN: AAACE0074B Vs. Addl. CIT Special Range-3, C. R. Building, I. P. Estate, New Delhi Appellant Respondent Assessee by Sh. R. N. Mehta, CA Revenue by Sh. Rajesh Kumar Dhanesta, Sr. DR Date of Hearing 30/01/2025 Date of Pronouncement 19/03/2025 ORDER PER YOGESH KUMAR, U.S. JM: The present appeal is filed by the Assessee against the order of the Commissioner of Income Tax (Appeals)-34, New Delhi [‘Ld. CIT(A))’ for short] dated 28/06/2019 for the Assessment Year 2016-17. 2. The Grounds of Appeal are as under:- “1. That on the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of Assessing officer in disallowing a claim of expenditure of Rs.47,64,00,000/- incurred on settlement of a corporate guarantee invoked and awarded against the appellant. 2 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT 2. That on the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the said guarantee was given to a third party to ensure interrupted supply of material to a subsidiary of appellant in USA engaged in the business of tractors. 3. That on the facts and circumstances of the case and in law, the learned CIT (A) erred in not appreciating that the settlement was arrived at to end litigation, to avoid loss of business and to protect assets of the appellant. 4. That the appellant reserves to itself, the right to add, alter, amend, substitute and/or withdraw any Ground(s) of Appeal on or before the date of hearing.” 3. Brief facts of the case are that, the Assessee filed income tax return on 28/11/2016 for Assessment Year 2016-17 declaring total income at Rs. 27,86,92,900/- under the normal provision of Income Tax Act, 1961, (‘Act’ for short) and book profit at Rs. 72,55,82,742/- u/s 115JB of the Act. Subsequently, revised return has been filed on 27/03/2018 wherein the Assessee made fresh claim of expenditure of Rs.47,64,00,000/- which has been claim to have been incurred consequent to the settlement made with M/s L. S. Cables, Korea, consequent to an Arbitration award pronounced by International Court of Arbitration Vienna, Austria against the Assessee and its subsidiary in North America and thereby declared loss at Rs. 19,87,50,360/- under the normal provisions of Act and book profit at Rs. 72,55,82,742/- under 115JB of the Act. The case of the Assessee was selected for 3 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT scrutiny and the assessment proceedings have been initiated. An assessment order came to be passed on 18/12/2018 by disallowing the expenditure of Rs. 47,64,00,000/- claimed by the Assessee. Aggrieved by the assessment order dated 18/12/2018, the Assessee preferred an Appeal before the Ld. CIT(A). The Ld. CIT(A) vide order dated 28/06/2019, dismissed the Appeal filed by the Assessee.As against the order of the Ld. CIT(A), the Assessee preferred the present Appeal on the grounds mentioned above. 4. The Ld. Counsel for the Assessee submitted that the Ld. CIT(A) erred in upholding the disallowance of expenditure incurred on account of settlement of corporate guarantee invoked and the award passed against the Assessee. Further submitted that the Lower Authorities haveignored the fact that the corporate guaranteed has been given to a third party to ensure uninterrupted supply of material to a subsidiary of the Assessee in USA engaged in the business of manufacture of sale of tractors. The Ld. Counsel further submitted that the Ld. CIT(A) has erred in not appreciating that the settlement arrived to end the litigation to avoid the loss of business and to protect assets of the Assessee. 4 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT 5. The Ld. Counsel further contended that the Ld. CIT(A) committed error in not considering the fact that the Assessee has incurred the expenditure with an intention to buy peace rather than prolonging the litigation between parties and the payment has been made after approval of the RBI for remittance of the amount to LS Mitron, Korea. The Ld. Counsel has also relied on the following Judgments: “DCIT vs Wires and Fabrics (SA) Ltd. (Kolkata Trib.) ITA No.366/Kol./2010 2 ACIT vs W.S. Industries (India) Ltd. Tribunal) 9 ITR (T) 596 (Chennai 3 ACIT vs Peirce Leslie India Ltd. (Chennai Trib.) ITA No.1244/Mds./2011 4. S.A. Builders Ltd. vsCIT(Appeals), Chandigarh (2007) 158 Taxman 74 (SC). 5. Principal CIT, Panajivs V.S. Dempo Holdings (P) Ltd. (2021) 130 taxmann.com 456 (Bom.) 6. Agrawal Indotex Ltd. vs Assistant CIT, Circle 2(1), Indore (2015) 55 taxmann.com 82 (Indore Trib.). 7. CIT vsSpencers and Co. Ltd. (No.1) (2014) 47 taxmann.com 55 (Madras). 8. CIT vsNavsari Cotton & Silk Mills (1982) 135 ITR 546 (Guj.) 9. CIT vs Amalgamation (P.) Ltd. - (1997) 226 ITR 188 (SC).” 6. The Ld. Counsel further submitted that the said expenses had been incurred for the purpose of business, therefore, the authorities have 5 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT committed error in rejecting the claim, the Ld. CIT(A) has even failed to negate any of the assertion made by the Assessee with regard to commercial expediencyof the expenditure claimed, therefore, submitted that the order of the Ld. CIT(A) deserves to be reversed. 7. Per contra, the Ld. Department's Representative submitted that the Assessee has not proved how the expenses claimed through revised return is wholly and exclusively for the benefit of the Assessee company by substantiating the fact that, providing the corporate guarantee in favour of subsidiary is a part of Assessee’s business. Further submitted that for allowing expenditure u/s 37(1) of the Act, there must be nexus between expenditure and business of the Assessee, which should be wholly and exclusively for the purpose of trade and business, since the Assessee has failed to substantiate the claim, the authorities have rightly rejected the claim of the Assessee, which requires no interference at the hands of the Tribunal. 8. We have heard both the parties and perused the material available on record. The Assessee in its revised return made fresh claim of expenditure of 47.64 Crore claiming to be the settlement amount paid to M/s L. S. Cables, Korea,towards an Arbitration Award of international Court of Arbitration Vienna, Austria against the Assessee Company and 6 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT its subsidiary in North America. It is the case of the Assessee that the expenses in question had been incurred for the purpose of the business and to reach followingbroadobjectives of settlement. “i)To put an end to protracted litigation: The decision to enter into settlement agreement with LSM was based on principles of commercial expediency. ii) To protect business interest of the assessee company in Poland. The assessee sold tractors and spare parts to its subsidiary company in Poland and an attachment of shares in the said subsidiary would have meant loss of export business to the assessee. iii) To gain commercial advantage in the longer term in US export market. The litigation with LSM had adversely impacted market positioning of the assessee in overseas markets and, therefore, settlement of the dispute with LSM was essential to recapture the US market. iv) Corporate guarantee was given for the debts of subsidiary company towards their suppliers due to commercial expediency. The whole idea to provide corporate guarantee was to promote the business interest of the assessee company and gain a foothold in a highly competitive US market.\" 9. However, the Ld. A.O. negatedthe contention of the Assessee stating that the Assessee Company could not substantiate its claim that the expenditure in question so incurred stands the test of commercial expediency. The Ld. CIT(A) while uphold the addition made by the A.O. held as under:- “5.3 I have considered the facts of the case, finding of the AO and submissions of the appellant. The AO has disallowed the expenses amounting to Rs.47.64 Crore related to corporate guarantee given in favour of appellant's subsidiary company 7 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT i.e. Farmtrack North America (FNA), LLC. The appellant has claimed that expenses incurred for the purpose of business of the appellant company but failed to bring on record that valid corporate guarantee agreement is executed by the appellant. Appellant has contended in the arbitration proceedings that no guarantee agreement exists between the claimant and appellant and submitted during the appellate proceedings also that guarantee was signed by the appellant company but did not constitute a final guarantee agreement for want of counter signature of LSM which become a matter of dispute during the arbitration proceedings. The appellant failed to establish the nexus between the expenditure and business of the appellant. Appellant is not benefited by way of so called guarantee given to the subsidiary company and not provided any detail in respect of the services provided by the subsidiary company. Thus appellant failed to prove the commercial expediency for the purpose of incurring the expenditure. The case laws on which appellant has placed reliance facts are distinguishable as FNA is not a 100% subsidiary on the appellant company. No such claim was made by the appellant in the original return and claim was made while filing the revised return. It shows that appellant itself was not sure that it was entitled to claim the expenses incurred on account of corporate guarantee. Considering the above facts, since no valid corporate guarantee exists, payments made by the appellant and claimed as business expenditure is not allowable as the expenses were not incurred wholly and exclusively for the business purposes. Thus addition made by the AO on account of expenses incurred on account of corporate guarantee at confirmed. Rs.47,64,00,000/- is hereby confirmed. 5.4 This ground of appeal of the appellant is dismissed.” 10. It is a matter of fact that, an Award has been passed on 24/09/2012 by International Court of Arbitration Vienna, Austria against the Assessee and its subsidiary in North America. Consequent to the same, a settlement agreements has been entered into between the Assessee Company and LS Mtron Ltd. Korea on 23/04/2015. Based on the said Settlement Agreement, 8 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT the litigation before the Hon’ble Punjab and Haryana High Court has been settled and disposed-off on 17/09/2015. The Assessee made first payment of 50% during the Assessment Year 2016-17 after obtaining the approval from Reserve bank of India vide letter dated 23/09/2015. Subsequently, on 27/03/2018, the Assessee filed revised return, wherein claimed the expenditure of Rs. 67,64,00,000/-claiming to be wholly and exclusively incurred/let out of the purpose of business of the Assessee Company. 11. Now, the only question is,whether thedisallowance of claim of expenditure of Rs. 47,64,00,000/- is part of Assessee’s business expenditure or not?. It is found from the record that the Ld. A.O./Ld. CIT(A) has observed that the Assessee has not brought the valid corporate guarantee agreement executed by the Assessee before the Lower Authorities and it was the case of the Assessee before the Arbitration proceedingsthat no guarantee agreement is in exist between the claimant and the Assessee. Admittedly, the said corporate guarantee though signed by the Assessee, the same has not been signed by the LS Mtron Ltd., however, an Award has been passed by the International Court of Arbitration on 24/09/2012 against the Assessee merely because an Award has been passed against the Assessee. The International Court of Arbitration observed that the Assessee has breached the agreement of guarantee and shall pay the damages to the claimant LS Mtron Ltd. along with interest. The passing of the Award by the International Court of Arbitration of and subsequent settlement, RBI approval substantiates the fact that the 9 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT Assessee has made the payment of Rs. 47.64 Crore. However, the same will not establish the fact that the said payment is a business expenditure. It is for the Assessee to establish before the Revenue Authority that the said expenditure falls u/s 28 to 36 or u/s 37 of the Act. Though, there is no dispute regarding the ratio laid down by the various Courts/Tribunal in the Judgment relied bythe Assessee. Since the dispute involves pure question of facts, the ratio laid down thereon cannot be applied in the case in hand. Accordingly, in the interest of justice, we deem it fit to remit the issue to the file of the A.O. with a direction to the Assessee to prove the commercial expediency to incur the said expenditure and we also direct the A.O. to consider the same in accordance with law and decide the issue after affording opportunity of being heard to the Assessee. Ordered accordingly. 12. In the result, appeal of the Assessee is partly allowed for statistical purpose. Order pronounced in the open court on 19th March , 2025 Sd/- Sd/- (AVDHESH KUMAR MISHRA) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:- 19.03.2025 R.N, Sr.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT 10 ITA No. 7394/Del/2019 Escorts Ltd. Vs. Addl. CIT ASSISTANT REGISTRAR ITAT, NEW DELHI "