ACIT, CHENNAI V. M/s. Integrated Enterprises (I) Ltd., CHENNAI

ITA 1077/CHNY/2009

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7767 (ITAT-CHENNAI)
• Duration Of Justice: 7 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 26-10-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 03-07-2009
• Court: TRIBUNAL
• Department Lawyers: DURAI PANDIANJCIT
• Assessee Lawyers: S SRIDHAR
• Keywords: Business expenditure; Bad and doubtful debts; Commercial expediency; Revenue expenditure
• Section: 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . / ITA NO. 1077/MDS/2009 / ASSESSMENT YEAR : 2005-06 THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-II(3), CHENNAI 34. ( /APPELLANT) V. M/S . INTEGRATED ENTERPRISES (I) LTD., V FLOOR, KENCES TOWERS, NO.1, RAMAKRISHNA STREET, NORTH USMAN ROAD, T. NAGAR, CHENNAI 600 017 PAN AAACI 1509 F RESPONDENT) / APPELLANT BY : SHRI DURAI PANDIAN,JCIT, D.R / RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE ! / DATE OF HEARING : 26.10.2016 '# ! / DATE OF PRONOUNCEMENT : 28.12..2016 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-III, CHE NNAI DATED 24.2.2009. - - ITA 1077/09 2 2. THE GROUNDS RAISED BY THE REVENUE IN THIS APPEAL ARE AS FOLLOWS:- 2.1 THE LEARNED C IT(A) ERRED IN DELETING THE DISALLOWANCE OF CORPORATE GUARANTEE GIVEN BY THE ASSESSEE ON A SUM AMOUNTING TO 4,98,75,000. 3.1 THE LEARNED CIT(APPEALS) ERRED IN ALLOWING 1.91 CRORES WRITTEN OFF BY THE ASSESSEE. 3. THERE IS A DELAY OF 4 DAYS IN FILING THE APPEAL BEFORE THIS TRIBUNAL. THE DEPARTMENT FILED A CONDONATION PETIT ION DATED 03.08.2016 EXPLAINING THE REASONS FOR DELAY. AFTER GOING THROUGH THE REASONS ADVANCED BY THE DEPARTMENT, WE ARE SATI SFIED THAT THERE IS GOOD AND SUFFICIENT REASON IN FILING THE A PPEAL BELATEDLY. ACCORDINGLY, WE CONDONE THE DELAY AND ADMIT THE APP EAL FOR ADJUDICATION. 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE PROV IDED CORPORATE GUARANTEE TO IDBI FOR THE LOAN SANCTIONED BY IT AND AVAILED BY DIEL. WHEN DIEL DEFAULTED IN THE REPAYM ENT OF THE LOAN OBTAINED, IDBI INVOKED THE CORPORATE GUARANTEE EXECUTED BY THE ASSESSEE. THE ASSESSEE PAID THE SAME TO THE EXTENT OF 498.75 LAKHS AND CLAIMED THE SAME AS BUSINESS EXPEN DITURE. THE AO DISALLOWED THE SAME ON THE GROUND THAT THERE IS NO CLOSE - - ITA 1077/09 3 AND IMMEDIATE NEXUS BETWEEN THE BANK GUARANTEE PROV IDED BY THE COMPANY AND THE BUSINESS CARRIED ON BY THE ASSE SSEE. ACCORDING TO THE AO, THE EXPENDITURE CANNOT BE SAID TO BE LAID OUT WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINE SS. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) . 5. ON APPEAL, CIT(APPEALS) OBSERVED THAT ACCORDING TO CLAUSE 12 OF THE MEMORANDUM OF ASSOCIATION OF THE C OMPANY, THE COMPANY IS AUTHORIZED TO GUARANTEE THE PAYMENT OF MONEY. THE DEVICE WAS NOT PLANNED IN SUCH A WAY SO AS TO A VOID ANY TAX. ACCORDING TO THE CIT(APPEALS), DIEL WAS FORME D IN 1996, IDBI SANCTIONED THE LOAN IN 1998, THE SECOND PHASE OF LOAN WAS SANCTIONED IN 2001, IDBI INVOKED THE CORPORATE GUAR ANTEE IN 2003/2004 AND THE REPAYMENT WAS MADE DURING THE PRE VIOUS YEAR ENDING 31 ST MARCH 2005. THE CLAIM MADE IN 2005 COULD NOT HAVE BEEN THE INTENTION FOR SUBSCRIBING IN THE SHAR ES OF A COMPANY. WHILE EXAMINING THE FACTS SO AS TO UNDER STAND WHETHER THE BUSINESS PROJECT OF THE DIEL WAS ALSO P ROVIDING ANY COMMERCIAL IMPETUS TO THE BUSINESS OPERATION OF THE ASSESSEE- COMPANY, THE CIT(APPEALS) OBSERVED THAT THE ASSESSE E IS A RETAIL FINANCIAL SERVICES PROVIDER WITH MORE THAN 1 00 BRANCHES - - ITA 1077/09 4 ACROSS THE COUNTRY. INITIALLY, THE ASSESSEE WAS A PIONEER IN THE FIELD OF MOBILIZING FIXED DEPOSITS FOR CORPORATE. THE COMPANY WAS A MAJOR PLAYER IN TAPPING THE FIXED DEPOSIT MAR KET. SLOWLY, THE FIXED DEPOSIT MARKET BY ITSELF, AS A PRODUCT, W AS WANING AND THE MARKET WAS SLOWLY FLOODED WITH MANY NEW PRODUCT S SUCH AS MUTUAL FUNDS, SHARE REGISTRY, DEPOSITORY REGISTRY E TC. DURING THE 90S, TECHNOLOGY WAS ALSO FAST PICKING UP. ANY PLA YER IN THE FINANCIAL MARKET WITHOUT TECHNOLOGICAL ADVANCEMENT WILL BE WAY BEHIND AND CANNOT SURVIVE. THIS APART, ANY MAJOR TECHNOLOGICAL UPGRADATION REQUIRED HUGE CAPITAL OUTFLOW. A SMALL PLAYER WITH LIMITED RESOURCES WILL BE WIPED OUT EASILY. WITH I NTERNAL GENERATION FROM BUSINESS OPERATIONS AND EQUITY PART ICIPATION FROM ICICI, THE COMPANY WAS ABLE TO PROVIDE ALL THE SERVICES MENTIONED AS ABOVE. IN THE PROCESS, THE COMPANY WA S ABLE TO RETAIN THE CLIENT BASE. THE COMPANY HAD A CLIENT B ASE OF CLOSE TO ` 5 LAKHS INVESTORS ACROSS THE COUNTRY. HAVING PROVI DED ALL SERVICES EXCEPT EQUITY TRADING, THE COMPANY ALSO WA NTED TO ENTER THE SHARE BROKING BUSINESS AND THUS, PROVIDED ALL F INANCIAL SERVICES TO THE RETAIL INVESTOR COMMUNITY UNDER ONE ROOF. - - ITA 1077/09 5 5.1 THE CIT(APPEALS) FURTHER OBSERVED THAT AS SHAR E BROKING WAS PROPOSED TO BE STARTED ACROSS ALL THE BRANCHES, EACH BRANCH WOULD HAVE TO HAVE A PC WHICH IS CONNECTED TO VSAT INSTALLED AT THE BRANCH. THIS VSAT WOULD IN TURN, BE CONNECT ED TO THE CENTRAL VSAT AT CHENNAI THROUGH SATELLITE COMMUNICA TION. THERE WOULD BE A CENTRAL SERVER AT CHENNAI WHICH WO ULD BE IN TURN CONNECTED TO THE NATIONAL STOCK EXCHANGES VSA T, THEREBY PROVIDING THE NSE DATA TO THE BRANCHES. THE BRANCH ES WOULD BE IN A POSITION TO GET REAL TIME PRICE DATA OF ALL TH E COMPANIES LISTED ON THE NSE. THIS WOULD PROVIDE THEM WITH A TRANSPA RENT AND SAFE MECHANISM OF TRADING IN SHARES. THE ORDERS FO R BUYING AND SELLING IN SHARES WOULD BE PUNCHED IN AT THE BRANCH ES THROUGH THE PCS WHICH WOULD BE AGAIN COMMUNICATED TO NATIO NAL STOCK EXCHANGE THROUGH THE CENTRAL SERVER LOCATED AT CHEN NAI. 5.2 ACCORDING TO THE CIT(APPEALS), DURING 1998-99, STARTING THE SHARE BROKING ACTIVITY ACROSS ALL THE 100 BRANC HES, WOULD HAVE ENTAILED A HUGE INVESTMENT OF CLOSE TO 10 CRORES. AT THAT POINT OF TIME, DIEL WAS ESTABLISHING VSAT NETWORK A CROSS THE COUNTRY FOR THEIR MESSAGING PRODUCT. THE UNIQUE PR ODUCT CALLED DELTAGRM WAS A MESSAGING SERVICE WHEREIN, THE SE NDER OF THE - - ITA 1077/09 6 MESSAGE WOULD APPROACH A DIEL CENTRE LOCALLY AND PR OVIDE THE MESSAGE TO BE TRANSMITTED TO A REMOTE LOCATION. DI EL WOULD SEND THIS INFORMATION BY USING ITS VSAT NETWORK TO THE NEAREST DIEL CENTRE OF THE RECEIVER. THE RECEIVING CENTRE WOULD PRINT THE INFORMATION AND DELIVER IT TO THE RECEIVER CONCERNE D. IT WAS AS GOOD AS TELEGRAM BUT CHEAPER, FASTER AND WITH ALL O VER INDIA NET WORK. DIEL HAD ALSO ENTERED INTO AGREEMENTS WITH H CL COMNET SYSTEMS AND SERVICES LTD.(HCL COMNET) FOR PROVIDING AND MAINTAINING THE VSAT EQUIPMENTS. 5.3 THE CIT(APPEALS), FURTHER OBSERVED THAT HCL CO MNET) WAS ONE OF THE PIONEERS IN PROVIDING VSAT COMMUNICA TION NETWORKS IN INDIA. THE COMPANY HAD EXPERTISE IN SA TELLITE BASED NETWORK CONSULTANCY AND DESIGN SERVICES, INTEGRATIO N AND MIGRATION SERVICES AND OPERATION AND DIAGNOSTIC SER VICE S. HCL COMNET HAD TIE-UPS WITH MAJOR VENDORS OF NETWOR KING PRODUCTS AND SERVICES ACROSS THE WORLD, LIKE CISCO, NORTEL, MOTOROLA ETC. IT HAD MANY CLIENTS IN INDIA WHICH I NCLUDED NATIONAL STOCK EXCHANGE OTCEI, HP, UTI ETC. TO NAME A FEW. IT WAS DECIDED THAT IF THE EXISTING VSAT NETWORK OF DI EL, IS USED FOR THE PURPOSE OF TRANSMITTING THE SHARE TRADING D ATA ETC., IT - - ITA 1077/09 7 WOULD BE MUCH COST EFFECTIVE FOR THE IEIL. IT WAS ALSO THOUGHT THAT THE TECHNICAL EXPERTISE OF DIEL COULD BE USED TO SET UP AND MAINTAIN THE NETWORK, AS THE ASSESSEE LACKED TECHNI CAL EXPERTISE THEN, TO CREATE AND MAINTAIN THE NETWORK. AS THE S HARE BROKING ACTIVITY WAS A CRITICAL ONE, ANY DOWNTIME IN THE NE TWORK WOULD HAVE PROVED COSTLY, HENCE, IT WAS THOUGH BETTER TO INVEST IN THE COMPANY, IN ORDER TO EXERCISE BETTER CONTROL OVER T HE FUNCTIONING OF THE COMPANY. GOING FORWARD, IT WAS PROPOSED THA T THE SAME NETWORK COULD ALSO BE USED FOR OTHER FINANCIAL SERV ICES PROVIDED BY THE ASSESSEE, AS IT WOULD ENABLE THEM TO GATHER DATA AT ONE SINGLE LOCATION, PERTAINING TO ALL THE FINANCIAL PR ODUCTS. THIS WOULD ALSO ENABLE FASTER RESPONSE TO THE INVESTORS QUERIES ACROSS ALL THE BRANCHES, THEREBY PROVIDING BETTER S ERVICE TO THE INVESTORS. 5.4 ACCORDING TO THE CIT(APPEALS), ALTHOUGH THE VEN TURE WITH DIEL DID NOT TAKE OFF AS EXPECTED, LATER IN THE YE AR 2006, THE ASSESSEE BECAME A MEMBER OF THE NATIONAL STOCK EXCH ANGE THROUGH ITS SUBSIDIARY, INTEGRATED SECURITIES LTD., AND IS PROVIDING SHARE BROKING SERVICES AT MORE THAN 100 BRANCHES AC ROSS THE COUNTRY TODAY. THE COMPANY HAS DESIGNED ITS OWN NE TWORK AND - - ITA 1077/09 8 HAS A COMBINATION OF LEASED LINES AND VSAT TO SUPPO RT ITS INFRASTRUCTURE NEEDS. BUT THAT COST APPROXIMATELY 20 CRORES. THEREFORE, THE CIT(APPEALS) OBSERVED THAT BOTH THE ASSESSEE AND DIEL HAD A CONVERGENCE OF BUSINESS INTEREST AND THIS SYNERGY OF BUSINESS OPERATIONS PROVIDING SHARE BROK ING FACILITIES TO THE ASSESSEE AT 100 BRANCHES ALL OVER THE COUNTR Y PROMOTED THE ASSESSEE TO STAND AS A GUARANTOR AS OTHERWISE T HE PROJECT WOULD HAVE HAD NO HOPE. 5.5 REGARDING THE ISSUE OF FEASIBILITY OF THE PROJE CT, THE CIT(APPEALS), OBSERVED THAT THE PROJECT PERSE WAS N OT FEASIBLE TO CONCLUDE THAT THE ASSESSEE THREW THE GOOD MONEY IN TO IT. THE MATERIALS FILED AT THE TIME OF ASSESSMENT PROCEEDIN GS WHICH WERE FILED DURING THE COURSE OF APPEAL PROCEEDINGS ALSO SUFFICIENTLY PROVE THAT THE PROJECT WAS FEASIBLE AN D NECESSARY CLEARANCE/APPROVAL WAS OBTAINED FROM THE GOVERNMENT AGENCIES. EVEN VENTURE CAPITALIST SEEMS TO HAVE EV INCED INTEREST AND HAS INVESTED IN THE PROJECT. THEY SHO W THE GENUINE INTENTION OF THE ASSESSEE COMPANY TO INVEST IN A FE ASIBLE PROJECT THEREBY IMPROVE THEIR EXISTING BUSINESS IN A BIG WA Y. BEFORE THE CIT(APPEALS), THE ARGUMENT OF THE A.R. WAS THAT THO UGH THE - - ITA 1077/09 9 PROJECT COULD NOT TAKE OFF AND THEREBY THE ASSESSEE COMPANY WAS NOT ABLE TO HAVE PAN INDIAN PRESENCE THROUGH DI EL ROUTE, THE SAME HAS BEEN ACHIEVED NOW BY EXPANDING THE BRA NCH NETWORK IN AN AGGRESSIVE WAY ALSO SHOWS THE BONA FI DE INTENT OF THE ASSESSEE COMPANY IN INVESTING IN THE SAID COMPA NY. IT WAS ALSO CONTENDED BY THE A.R. THAT IF THE AMOUNT IS NO T PAID BY THE ASSESSEE COMPANY, ITS BUSINESS GOODWILL AND IMAGE W OULD HAVE IMPAIRED AND WOULD HAVE RESULTED IN LOSS OF ITS BUS INESS ALSO. ACCORDING TO THE CIT(APPEALS), THE PROJECT WAS A FE ASIBLE PROJECT AS THE IDBI EVALUATED IT AND AFTER THAT AGREED TO G IVE THE DIEL THE LOAN TO THE EXTENT OF 5.70 CRORES AND NOW, WITHOUT THIS CORPORATE GUARANTEE, THE DIEL COULD NOT HAVE GOT TH AT LOAN. THEREFORE, LOOKING AT THE BUSINESS ADVANTAGES, THE ASSESSEE CHOSE TO STAND AS A GUARANTOR. FURTHER, CENTURY DI RECT FUND, A VENTURE CAPITAL FUND ALSO INFUSED CAPITAL OF 434 L AKHS. AS ONE OF THE PROMOTERS THE ASSESSEE HAD ALREADY INVESTED 313 LAKHS FOR THE FIRST PHASE OF THE PROJECT OF DIEL AND THER EFORE, IT HAD TO TAKE IT FORWARD. 5.6 WITH REGARD TO THE ISSUE OF COST EFFECTIVENESS AND RISK OF PROVIDING BANK GUARANTEE, ACCORDING TO THE CIT(APPE ALS), IT WAS - - ITA 1077/09 10 MORE EFFECTIVE FOR THE ASSESSEE, AS IT WAS LOSING N OTHING IN REAL TERMS BY STANDING AS A GUARANTOR. THE LOAN WAS PA YABLE BY THE BORROWER AND HAD EVERYTHING GONE AS PER THE PLAN IT WOULD NOT HAVE COST THE ASSESSEE THAT HUGELY AS SETTING UP TH E SAME FACILITY ITSELF WOULD HAVE COST. AS THE ASSESSEE S AYS THAT SETTING UP THE SIMILAR FACILITY HAS COST NOW APPROXIMATELY 20 CRORE. MOREOVER, IT DID NOT HAVE THE REQUISITE TECHNICAL E XPERTISE WHICH WAS AVAILABLE WITH DIEL. HENCE, THE CIT(APPEALS) O BSERVED THAT IT THOUGH IT PRUDENT TO HELP THE DIEL OBTAIN LOAN A ND GET THE ASSURED BROKING FACILITIES FROM THEM. NOW UNDER TH IS SITUATION JUST BECAUSE THE FUND WAS NOT AVAILABLE IN TIME AND THE PROJECT COULD NOT TAKE OFF AS PER SCHEDULE AND ULTIMATELY F AILED RESULTING IN THE ENCASHMENT OF THE GUARANTEE WOULD NOT DISENT ITLE THE ASSESSEE TO CLAIM SUCH LOSS UNDER SEC.37. IF ALL T HESE FACTORS ARE THERE, THEN JUST GIVING GUARANTEE WAS NOT COMME RCIALLY IMPRUDENT DECISION BECAUSE THE ASSESSEE WAS VERY BU LLISH ABOUT THE WHOLE PROJECT, WHICH IS OBVIOUS FROM THE FACT S UBSEQUENTLY ULTIMATELY IF ACHIEVED THE SAME OBJECTIVES THROUGH ITS OWN MEANS, AND IT NEVER ANTICIPATED THAT IT WOULD FAIL. THEREFORE, THE CIT(APPEALS) OBSERVED THAT SUCH EXPENSE/LOSS IS VER Y MUCH - - ITA 1077/09 11 COVERED U/S.37. TO SUPPORT HIS VIEW, HE RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MEH TA (P) LTD.() IN WHICH THE HIGH COURT REFUSED TO INTERFERE WITH T HE CONCURRENT FINDING OF CIT(A) AND THE TRIBUNAL AND HELD THAT IN THE ABSENCE OF ANY MATERIAL, A TRANSACTION OF GUARANTEE AND SUBSEQ UENT SATISFACTION THEREOF BY THE ASSESSEE COULD NOT BE T ERMED AS A COLOURABLE DEVICE TO BOOK LOSS SIMPLY BECAUSE ASSES SEE, THE DEBTOR AND THE CREDITOR WERE CONTROLLED BY A COMMON GROUP AND CIT(A) OBSERVED THAT GUARANTEE GIVEN WAS GENUINE, W HICH FINDING HAVING BEEN ACCEPTED BY THIS TRIBUNAL, THER E IS NO REASON TO INTERFERE WITH THE SAID CONCURRENT FINDING OF FA CT. THUS THE CIT(A) HAS DELETED THE ADDITION. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. LD.D.R SUPPORTED THE ORDER OF LD.CIT(A) AND ARGUED THAT THE SAID CORPORATE GUARANTEE IS NOTHING TO DO WITH ASSESSEES BUSINESS. HE ALSO CLAIMED THAT THE SAID EXPENDITURE OF THE ASSESSEE HAS NOT RESULTED IN ANY EARNING OF INCOME. HE RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CAS E OF CIT - - ITA 1077/09 12 VS. BIRLA BROS. P. LTD. IN [1970] 77 ITR 751 (SC) W HEREIN HELD THAT:- THERE WAS NO PRIVITY OF CONTRACT OR ANY LEGAL RELA TIONSHIP BETWEEN THE ASSESSEE AND THE SELLING AGENT. NEITHER UNDER CUSTOM NOR UNDER ANY STATUTORY PROVISION OR ANY CON TRACTUAL OBLIGATION WAS THE ASSESSEE BOUND TO GUARANTEE THE LOAN ADVANCED BY THE BANK TO THE SELLING AGENT. IT IS DI FFICULT TO SEE HOW IT WAS IN THE INTEREST OF THE ASSESSEE'S BUSINE SS THAT THE GUARANTEE WAS GIVEN. THERE WAS EVEN NO MATERIAL TO ESTABLISH THAT THE MANAGED-COMPANY WAS UNDER ANY LE GAL OBLIGATION TO FINANCE THE SELLING AGENT OR TO GUARA NTEE ANY LOANS ADVANCED TO THE SELLING AGENT BY A THIRD PART Y. IT IS INCOMPREHENSIBLE IN WHAT MANNER THE GUARANTEEING OF THE LOAN ADVANCED TO THE SELLING AGENT INDIRECTLY FACIL ITATED THE CARRYING ON OF THE ASSESSEE'S BUSINESS. IT IS EQUAL LY DIFFICULT TO APPRECIATE THE OBSERVATIONS OF THE HIGH COURT THAT IT WAS IN THE LARGER INTEREST OF THE ASSESSEE'S BUSINESS THAT THE GUARANTEE WAS GIVEN. IN OUR OPINION THE VIEW OF THE APPELLATE TRIBUNAL WAS BASED ON A COMPLETE MISAPPREHENSION OF THE TRUE LEGAL POSITION. THE HIGH COURT ALSO FELL INTO THE SAME ERROR. THE ALLOWANCE WHICH WAS CLAIMED DID NOT FALL WITHIN SECTION 10(2)(XI). NO ATTEMPT WAS MADE NOR INDEED C OULD IT BE USEFULLY MADE TO CLAIM ANY ALLOWANCE UNDER SECTION 10(2)(XV) OF THE ACT. LD.D.R ALSO RELIED ON THE JUDGEMENT OF IN THE CAS E OF APS- STAR INDUSTRIES LTD. V. DCIT IN [2003] 86 ITD 182 (ITAT[AHM]). FURTHER, LD.D.R ALSO RELIED ON THE JUD GEMENT OF IN THE CASE OF MALBROS INVESTMENT LTD. VS. DCIT(DEL.) IN 90ITD 688 WHEREIN HELD THAT AMOUNT PAID IN SATISFACTION OF GU ARANTOR IS NOT A BUSINESS LOSS. - - ITA 1077/09 13 ACCORDING TO LD.D.R, IT CANNOT BE CLAIMED AS A REVE NUE EXPENDITURE. ON THE OTHER HAND LD.A.R SUBMITTED T HAT THE EXPENDITURE INCURRED ON ACCOUNT OF CORPORATE GUARAN TEE WAS A GENUINE BUSINESS EXPENDITURE, WHICH WAS INCURRED FO R THE PURPOSE OF THE ASSESSEE AND IT IS ALSO AUTHORIZED B Y THE MEMORANDUM OF ASSOCIATION CLAUSE-12 AS FOLLOWS:- CLAUSE-12 : TO GUARANTEE THE PERFORMANCE OF ANY CON TRACT OR OBLIGATION OF AND THE PAYMENT AND REPAYMENT OF MONEY OR OF DIVIDE NDS AND INTEREST OR PREMIUM PAYABLE ON ANY STOCKS, SHAR ES OR SECURITIES OF ANY COMPANY, CORPORATION, FIRM OR PER SON IN ANY CASE IN WHICH SUCH GUARANTEE MAY BE CONSIDERED LIKELY DIRECTLY OR INDIRECTLY TO FURTHER THE OBJECT S OF THE COMPANY OR THE INTERESTS OR ITS SHAREHOLDERS. ACCORDING TO LD.A.R, THE AMOUNT INCURRED FOR THE PU RPOSE OF CARRYING OUT THE OBJECTS OF THE ASSESSEE, WHICH IS IN ORDINARY COURSE OF BUSINESS OF ASSESSEE AND IT IS TO BE ALLO WED AS REVENUE EXPENDITURE. 6.1 ON CAREFUL CONSIDERATION OF THE ARGUMENT OF BO TH THE PARTIES, WE FIND THAT ASSESSEE STOOD AS A GUARANTOR IN FAVOUR OF DIEL TO IDBI WITH REGARD TO LOAN TAKEN BY DIEL FROM THE IDBI. THE IDBI HAS INVOKED THE GUARANTEE ON PORTION OF RE PAYMENT OF - - ITA 1077/09 14 LOAN BY DIEL. AS SUCH THE SAID AMOUNT HAS BEEN PAID BY THE ASSESSEE IN FOUR INSTALLMENTS TO IDBI FOR RELEASING IT FROM THE GUARANTEE GIVEN. THE SAME EXPENDITURE HAS BEEN CLA IMED BY THE AS A REVENUE EXPENDITURE. THE GIVING OF CORPORA TE GUARANTEE IS ONE OF THE BUSINESS ACTIVITY OF THE ASSESSEE AS PER CLAUE-12 OF MEMORANDUM OF ASSOCIATION IN OBJECT CLAUSE, AND IT CANNOT BE SAID THAT IT IS NOT INCIDENTAL TO THE BUSINESS ACTI VITY OF THE ASSESSEE. WHEN THE WRITING OFF OF THE ADVANCES HAS TO BE ALLOWED AS A REVENUE EXPENDITURE ON ACCOUNT OF WRIT ING IT OFF AS BAD DEBT, THERE IS NO REASON WHY THE AMOUNTS SPENT TOWARDS DISCHARGE OF CORPORATE GUARANTEE SHOULD BE TREATED DIFFERENTLY. THE AOS PLEA IS THAT THE SAID EXPENDITURE WAS NOT AT ALL HAVING ANY ROLE TO THE BUSINESS OF THE ASSESSEE. FOR COMI NG TO THIS CONCLUSION, THERE IS NO MATERIAL WITH THE AO. MORE SO, THE OBJECT IN MEMORANDUM OF ASSESSEE STATES OTHERWISE AND AUTH ORIZED THE ASSESSEE TO GIVE BANK GUARANTEE TO OTHER PARTIES AN D EARNING INCOME FROM THAT. THE REASONS GIVEN BY THE AO IS A DEVOID OF MERIT AS INCURRING OF EXPENDITURE WAS VERY MUCH INC IDENTAL TO THE INTERESTS OF THE BUSINESS OF THE ASSESSEE. THE HON 'BLE APEX COURT IN THE CASE OF CIT V. WALCHAND AND CO. P. LTD . [1967] 65 - - ITA 1077/09 15 ITR 381 (SC) HAS HELD THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER AN EXPENDITURE W AS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUS INESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE ADJUDGE D FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REV ENUE. THE SAME VIEW WAS REITERATED BY THE SUPREME COURT IN TH E CASE OF S. A. BUILDERS LTD. V. CIT [2007] 288 ITR 1 (SC) WHERE IN HELD THAT REVENUE CANNOT CLAIM TO PUT ITSELF IN THE ARM CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF BOARD OF DIRECTOR AND ASSUME THE ROLE TO DECIDE WHETHER TO INCUR ANY EXPENDITURE OR NOT. THE MADRAS HIGH COURT IN THE CASE OF CIT VS. AMALGAMATI N P. LTD IN 108 ITR 895(MAD.) WHICH WAS AFFIRMED BY THE SUPREM E COURT IN THE CASE OF CIT VS. AMALGAMATIN P. LTD IN 226 ITR 1 88 WHEREIN HELD THAT:- 'THE ASSESSEE-COMPANY HAD GUARANTEED LOANS TAKEN BY A SUBSI DIARY COMPANY ON AN OVERDRAFT ARRANGEMENT WITH A BA NK. THE SUBSIDIARY COMPANY WENT INTO LIQUIDATION IN 1955 AN D THE ASSESSEE-COMPANY AS GUARANTOR WAS OBLIGED TO DISCHA RGE THE LIABILITY TO THE BANK. AFTER ADJUSTING THE AMOUNT R ECOVERED FROM THE LIQUIDATORS THE SUM DUE TO THE ASSESSEE-COMPANY FROM ITS SUBSIDIARY WAS RS.9,08,764 AND THE ASSESSEE CLAIMED THIS AMOUNT AS A BUSINESS LOSS IN ITS ASSESSMENT FOR 195 8-59. THE ASSESSEE RECEIVED FROM THE LIQUIDATORS DURING THE S UBSEQUENT - - ITA 1077/09 16 YEARS 1959-60 TO 1962-63 VARYING SUMS TOTALLING RS. 4,85,508.28. THE OFFICER HELD THAT THE LOSS WAS NOT INCIDENTAL T O THE BUSINESS OF THE ASSESSEE AND WAS A CAPITAL LOSS WHICH DID NO T ALSO COME UNDER SECTION 12B. THE OFFICER ALSO TREATED THE REC EIPTS DURING 1959-60 TO 1962-63 AS INCOME AS A PROTECTIVE MEASUR E. THE APPELLATE ASSISTANT COMMISSIONER ON APPEAL HELD THA T THE LOSS WAS NOT A BUSINESS LOSS BUT HELD THAT SUBSEQUENT RE CEIPTS COULD NOT ALSO BE TAXED AS INCOME. IN THE FURTHER APPEALS TO THE TRIBUNAL BOTH BY THE ASSESSEE AND THE DEPARTMENT, T HE TRIBUNAL HELD THAT THE ASSESSEE HAD GUARANTEED THE LOANS IN THE COURSE OF ITS CARRYING ON ITS BUSINESS AND THE LOSS WAS ADMIS SIBLE AS A DEDUCTION. IT, HOWEVER, HELD THAT AS THE ASSESSEE H AD RECEIVED THE LAST OF THE PAYMENTS FROM THE LIQUIDATOR IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1962-63, ONLY THE B ALANCE OF RS. 4,23,256 REMAINED UNRECOVERABLE AND IT WAS THIS AMO UNT WHICH WAS ALLOWABLE AS A DEDUCTION IN THE ASSESSMENT YEAR 1962-63.' THE HON'BLE HIGH COURT HELD AS UNDER (HEADNOTE ): 'HELD, (1) THAT IN VIEW OF THE ASSESSEE'S BUSINESS HAVING BEEN HELD TO INCLUDE FURNISHING GUARANTEES TO DEBTS BORROWED BY ITS SUBSIDIARY COMPANIES, THE ASSESSEE INCURRED THIS LOSS IN THE COURSE OF CARRYING ON ITS BUSINESS ; (2) THOUGH THE ASSESSEE WAS OBLIGED TO PAY THE BANK DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1958-59, IT DID NOT BECOME A LOSS IN THAT YEAR BECA USE THERE WERE POSSIBILITIES OF RECOVERY FROM THE LIQUI DATORS AS WAS CLEAR FROM LATER RECOVERIES ; AND (3) AS THE FINAL PAYMENT WAS RECEIVED ONLY IN THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1962-63, THE L OSS - - ITA 1077/09 17 AROSE ONLY THEN AND HENCE THE TRIBUNAL WAS RIGHT IN ALLOWING IT IN THAT YEAR.' 6 .2 THE AFORESAID DECISION OF THE HON'BLE MADRAS HIG H COURT WAS AFFIRMED BY THE HON'BLE APEX COURT IN THE CASE OF AMALGAMATIONS P. LTD. [1997] 226 ITR 188 (SC). 6.3. THE HON'BLE APEX COURT IN THE CASE OF CIT V. S HOORJI VALLABHDAS AND CO. [1962] 46 ITR 144 (SC) HAD HELD THAT MERE BOOK KEEPING ENTRY CANNOT BE DETERMINATIVE OF THE A CTUAL NATURE OF THE TRANSACTION. FURTHER, THE HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. V. CIT [1997] 227 ITR 172 (SC) HAD HELD THAT PRINCIPLES OF ACCOUNTANC Y DO NOT OVERRIDE THE PROVISIONS OF TAXING STATUTE. FROM THE ABOVE, IT IS EVIDENT THAT ACCOUNTING TREATMENT GIVEN BY THE ASSE SSEE IN THE BOOKS CANNOT TAKE PRECEDENCE OVER WHAT IS MANDATED BY TAX LAWS. 6.4. WE FURTHER FIND THAT THE HON'BLE MADRAS HIGH COURT IN THE CASE OF DEVI FILMS P. LTD. V. CIT [1970] 75 ITR 301 (MAD) HAS HELD THAT, IF AN EXPENDITURE CANNOT BE ALLOWED AS A BAD DEBT, - - ITA 1077/09 18 ALLOWANCE OF THE SAME IS PERMISSIBLE AS BUSINESS LO SS IF THE NECESSARY CRITERIA IS SATISFIED. 7. IN THE BACKGROUND OF THE ABOVE SAID DISCUSSION AND PRECEDENT, IT IS CLEAR THAT GIVING CORPORATE GUARAN TEE WAS ONE OF THE OBJECT OF ASSESSEES COMPANY AND IT WAS IN THE INTEREST OF ASSESSEES COMPANY WHILE CARRYING OUT ITS OBJECTS O F THE BUSINESS. HENCE, BUSINESS DECISION HAS BEEN TAKEN BY THE ASSESSEE AS SUCH IT WAS GIVEN A GUARANTEE TO IDBI I N FAVOUR OF DIEL AND LOSS ARISING OUT OF SUCH BUSINESS DECISION TO BE CONSIDERED AS BUSINESS LOSS ONLY AND IT IS TO BE AL LOWED AS BUSINESS EXPENDITURE. ACCORDINGLY, THIS GROUND OF REVENUE IS DISMISSED. 8. THE SECOND ISSUE RELATES TO THE ADDITION OF 1,90,91,570/- WHICH IS REVERSAL OF INCOME ON ACCOUNT OF DOUBTFUL OF RECOVERY. 8.1 ACCORDING TO THE CIT(APPEALS), THE INCOME HAS A LREADY BEEN TAKEN INTO ACCOUNT. THE ASSESSEE COMPANY SUBS EQUENTLY CHOOSES TO WRITE OFF A PORTION OF THE SAME AS IT DO ES NOT WANT TO LOSE ITS CUSTOMERS BY FORCING THEM TO PAY WHICH IN ANY CASE IS - - ITA 1077/09 19 IRRECOVERABLE AS THEY ARE NOT PAYING AND IN A WAY I T IS ONLY WRITE OFF OF DOUBTFUL OF RECOVERY. THE CIT(APPEALS ), OBSERVED THAT IT WAS THE BUSINESS CONSIDERATION THAT DROVE T HE ASSESSEE TO RESORT TO SUCH A DECISION OF GIVING IT A COVER OF W AIVER. THIS ASPECT HAS NOT BEEN CORRECTLY NOTED BY THE AO AND T HIS CANNOT BE CONSIDERED TO BE AN AFTER-THOUGHT. THE CIT(APPEA LS) OBSERVED THAT THERE ARE 56875 ACCOUNT HOLDERS IN RE SPECT OF WHICH THE IMPUGNED SUM HAS BEEN WAIVED. THERE ARE 28959 ACCOUNTS HOLDERS IN RESPECT OF WHICH 450/- EACH HAS BEEN WAIVED AMOUNTING TO 1,30,31,550/-. SIMILARLY, THERE ARE 3505 ACCOUNT HOLDERS IN RESPECT OF WHICH 150/- EACH HAS BEEN WAIVED AMOUNTING TO 5,25,750/-. FURTHER, HE OBSERVED THAT THERE ARE 3289 ACCOUNT HOLDERS OWING 300/- EACH AMOUNTING TO 9,86,700/-, THUS, THERE ARE SEVERAL SUCH ACCOUNTS O WING A SMALL SUM OF 25/- TO 475/- AND THEY ARE NOT PAYING THIS AMOUNT TO THE ASSESSEE AND THE ASSESSEE HAS PAID TAX ON THE SAME AS CLAIMED BY THE ASSESSEE. THEREFORE, ACCORDING TO T HE CIT(APPEALS), IT SHOULD BE ALLOWED AS IRRECOVERABLE BAD DEBT. ACCORDINGLY, HE DIRECTED THE AO TO DELETE THE ADDIT ION. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. - - ITA 1077/09 20 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE ASSESSEE CLAIMED AN AMOUNT OF ` 1,90,90,570/- AS BAD DEBTS WHICH WAS WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF ASSESSEE ON ACCOUNT OF 30 YEARS CELEBRATION. THE AO DISALLOWED THE SAME ON THE REASON THAT THERE IS NO BOARD RESOLUTION PASSED BY THE ASSESSEE COMPANY TO WRITE OFF THIS DEBT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT CHI EF OPERATING OFFICER HAS TAKEN A DECISION TO WRITE OFF IT FOR WH ICH THERE IS NO NECESSITY OF BOARD RESOLUTION. ACCORDING TO AO, TH E DECISION OF CHIEF OPERATING OFFICER WAS NOT APPROVED BY THE BOA RD. AS SUCH IT CANNOT BE ALLOWED. IN OUR OPINION, EVERY ACTIVI TY OF THE ASSESSEE COMPANY CANNOT BE DECIDED BY THE BOARD ITS ELF. IF THE DECISION HAS TAKEN, THE CHIEF OPERATING OFFICER, WH O HAS A DELEGATION OF POWER, IT CANNOT BE QUESTIONED BY THE REVENUE AS RIGHTLY HELD BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. AMALGAMATION P. LTD IN 226 ITR 188(SC). IN OUR OPI NION, WHEN DEBTS WERE ACTUALLY WRITTEN OFF IN THE BOOKS ACCOUN TS OF THE ASSESSEE AND IT FULFILLS THE CONDITIONS LAID DOWN I N SEC.36(1)(VII) OF THE ACT, IT SHOULD BE ALLOWED. HENCE, THE AO HA S TO SEE - - ITA 1077/09 21 WHETHER THE CONDITIONS LAID DOWN IN SEC.36(1)(VII) OF THE ACT HAS BEEN FULFILLED OR NOT. IF IT IS FULFILLED, THE DEB TS WRITTEN OFF BY THE ASSESSEE TO BE ALLOWED AS BAD DEBTS WHILE COMPUTING THE INCOME OF ASSESSEE. WITH THIS OBSERVATION, WE REMI T THE ISSUE TO THE FILE OF LD. ASSESSING OFFICER FOR FRESH CONSID ERATION. 10. IN THE RESULT, THE APPEAL OF REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 28 TH DECEMBER, 2016 AT CHENNAI. SD/- SD/- ( $% & ) ( ' ( ) $ ) *%+,-,./01,2345,.62,+778,293 : ;< /JUDICIAL MEMBER ! ;<=>>70.?,.?@A1BA2 ': /CHENNAI, C; /DATED, THE 28 TH DECEMBER, 2016. K S SUNDARAM ;D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H3 /CIT(A) 4. H /CIT 5. FIJ K /DR 6. JLM /GF.