Hero Cycles Ltd. V. Commissioner of Income Tax, Ludhiana and another

ITA/803/2010

AI Insights

M/s Hero Cycles Ltd., the appellant, challenged the decision of the Income Tax Appellate Tribunal, which upheld the disallowance of a deduction claimed for a subsidy given to M/s Majestic Auto Ltd., a sister concern. The subsidy was intended to support the financial health of M/s Majestic Auto Ltd. amidst declining sales and losses. The appellant argued that the subsidy was a business necessity to maintain the brand and was thus a deductible revenue expenditure under Section 37 of the Income Tax Act, 1961. However, the Tribunal and the High Court found that the subsidy was essentially a diversion of profits and not an expenditure laid out wholly and exclusively for the purposes of the business of the assessee, thus not qualifying for deduction under Section 37.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 796356 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 04-03-2011
• Assessment Year: misc
• Other Referred Cases: CIT v/s Chandulal Kaeshavlal and Co. 38 ITR 601, Porrits and Spencer (Asia) Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: AKSHAY BHAN
• Keywords: Income tax appeal; Revenue expenditure; Sister concern; Subsidy; Tax Evasion
• Section: 37

Judgement Text

"ITA No. 803 of 2010 [ 1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Appeal No. 803 of 2010 (O&M) Date of decision: 4.3.2011 M/s Hero Cycles Ltd. Ludhiana .. Appellant v. Commissioner of Income Tax, Ludhiana and another .. Respondents CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Akshay Bhan, Advocate for the appellant. .. Rajesh Bindal J. The assessee is in appeal before this Court raising following substantial questions of law, arising out of order dated 17.5.2010, passed by the Income Tax Appellate Tribunal, Chandigarh, Bench `A', Chandigarh (for short, `the Tribunal') in ITA No. 768/CHD/2005 for the assessment year 2001-2002: (i) Whether in facts and circumstances of the case, the assessee is legally entitled for the deduction u/s 37 of the Act ? (ii) Whether in fact and circumstances of the case, the action of the authorities below in not following the judgment of the Hon'ble Apex Court in the case of CIT v/s Chandulal Kaeshavlal and Co. 38 ITR 601 and not allowing the deduction to the assessee for the expenditure incurred on account of subsidy given to MAL, is legally sustainable in the eyes of law? (iii)Whether in fact and circumstances of the case, the action of the authorities below in not allowing deduction for the revenue expenditure incurred by the assessee in the relevant assessment year is legally sustainable in the eyes of law? ITA No. 803 of 2010 [ 2] (iv) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders Annexure A1 to A3 are legally sustainable in the eyes of law? (v) Whether in fact and circumstances of the case, the impugned order is legally unsustainable in light of the decision of this Hon'ble High Court in the case of Porrits and Spencer (Asia) Ltd. Vs. CIT? Briefly, the facts are that the assessee-company is engaged in the business of manufacture and sale of bicycles. For the assessment year in question, the assessee filed its return declaring a total income of ` 35,72,00,470/-. At the time of assessment, inter-alia, the Assessing Officer, vide order dated 29.3.2004, disallowed the claim made by the assessee on account of subsidy given to M/s Majestic Auto Ltd. Aggrieved against the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals), Ludhiana [for short, `the CIT (A)'], which was dismissed vide order dated 4.5.2005. The order passed by the CIT(A) was upheld by the Tribunal vide order dated 17.5.2010. The assessee is in appeal before this court raising substantial questions of law arising out of the aforesaid order. Learned counsel for the assessee submitted that M/s Majestic Auto Ltd. is a sister concern of the assessee. In fact, it was promoted by the assessee, which holds 29.16% of its share capital. Being a promoter company, it had undertaken to secure various loans raised by M/s Majestic Auto Ltd. from IFCI and other financial institutions. The assessee had further given guarantee to Central Excise Department as well as City Bank pertaining to amounts due from M/s Majestic Auto Ltd. to the aforesaid institutions. The products manufactured by M/s Majestic Auto Ltd. were in the brand name of `HERO'. On account of decline in the sales and the company being in losses, to keep the flag of the brand name of the group flying, it was decided by a resolution of the Board to give ` 10,00,00,000/- as subsidy to M/s Majestic Auto Ltd., as with the aforesaid help, M/s Majestic Auto Ltd., which is also listed company in the market, was able to stand. As there was business interest involved and the principle not being that the amount should always be given ensuring that there would be some return out of it, the deduction should have been allowed by the authorities below as a revenue expenditure under Section 37 of the Income Tax Act, ITA No. 803 of 2010 [ 3] 1961 (for short, `the Act'). Every transaction has to be considered from the point of view of the businessman. After hearing learned counsel for the appellant, we do not find any substantial question of law arises in the present appeal. In fact, the manner in which substantial sum of ` 10,00,00,000/- is sought to be diverted by the assessee to a sister concern claiming the same to be a subsidy is nothing else, but diversion of profits. The nomenclature under which part of profit is sought to be given to a sister concern is nothing else but evasion of tax. The assessee holds merely 29.16% shares in M/s Majestic Auto Ltd. Even if it had stood guarantor or had furnished certain undertaking or assurance to the financial institutions for securing the loans raised by M/s Majestic Auto Ltd., a sister concern, there is no sanctity available in law to give money as a subsidy and claiming the same to be an expense in a profit making company. If the promoters are so concerned about the financial health of the group company and also the brand name, the money can very well be invested by the promoters out of their own resources. There is no justification for taking the money out from a profit earning company, giving the same to a sister concern in the form of subsidy and then claiming the same as an expense to reduce the tax liability. The deductions so claimed will not in any manner fall within the four corners of Section 37 of the Act, as it cannot be said to be laid out or expended wholly and exclusively for the purposes of business of the assessee, as whatever business dealing the assessee had with M/s Majestic Auto Ltd., for that regular payments were being made or received. For the reasons mentioned above, we do not find any substantial question of law arises in the present appeal. Accordingly, the same is dismissed. ( Rajesh Bindal ) Judge (Adarsh Kumar Goel) Judge 4.3.2011 mk ITA No. 803 of 2010 [ 4] "