DCIT, CHENNAI V. W.S.Industries (India) Ltd., CHENNAI

ITA 1109/CHNY/2015

• Counselvise Citation: 110921714 RSA 2015
• Duration Of Justice: 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 24-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 11-05-2015
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: SAROJ KUMAR PARIDA
• Keywords: Business expenditure; Commercial expediency; Revenue expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , ! , ' #$ BEFORE SHRI N.R.S.GANESAN, JUDICIAL MMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ./ ITA NO. 1109/MDS/2015 / ASSESSMENT YEAR : 2008-09 THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-3(2), CHENNAI-34. ( /APPELLANT) VS M/S. W.S. INDUSTRIES (INDIA) LTD., 108, MOUNT POONAMALLEE HIGH ROAD, PORUR, CHENNAI-116. PAN AAACW0572E ( /RESPONDENT) / APPELLANT BY : SHRI P. RADHAKRISHNAN, JCIT / RESPONDENT BY : SHRI SAROJ KUMAR PARIDA, ADVOCATE / DATE OF HEARING : 24.08.2015 ! / DATE OF PRONOUNCEMENT: 28.08.2015 / 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) DATED 30 .12.2014. - - ITA 1109/1 5 2 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL: 2.1 THE ID. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF ` 50,00,000/- MADE BY THE ASSESSING OFFICER TOWARDS THE EXPENSES ON THE GUARANTEE PAYMENTS MADE BY THE ASSE SSEE TO THE BANKS AND OTHER PARTIES ON BEHALF OF ITS SUB SIDIARY COMPANY IS ALLOWABLE AS DEDUCTION. 2.2. THE ID. CIT(A) ERRED IN HOLDING THAT THE BANK GUARANTEE WAS GIVEN TO THE BANKS ON BEHALF OF ITS SUBSIDIARY COMPANY, M/S. WS TELESYSTEMS LIMITED ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND THE SAME IS ALLOWABLE AS DEDUCTION. 2.3. THE ID. CIT(A) FAILED TO APPRECIATE THE FACT T HAT THE GUARANTEE PAYMENTS MADE ON BEHALF OF THE ASSESSEE'S SUBSIDIARY COMPANY IS NOT ALLOWABLE AS DEDUCTION SI NCE SUCH PAYMENTS WERE NOT RELATED TO ASSESSEE'S BUSINESS IN AS MUCH AS THE GUARANTEE WERE GIVEN WHEN THE SUBSIDIARY COM PANY WAS ALREADY SICK COMPANY BEFORE THE BIFR. 2.4. THE ID. CIT(A) ERRED IN HOLDING THAT GUARANTEE PAYMENTS ARE ALLOWABLE AS DEDUCTION ON THE GROUND THAT GIVIN G GUARANTEE WAS ONE OF THE OBJECTS AS PER THE MEMORAN DUM OF UNDERSTANDING OF THE ASSESSEE COMPANY. 2.5. THE DECISION RELIED ON BY THE ID CIT(A) IN THE ASSESSEE'S OWN CASE IN ITA 1373/MDS/2008 DATED 21.8.2009 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND FURTHER APPEAL HAS B EEN FILED BEFORE THE HON'BLE HIGH COURT (TCA NO.1118 OF 201 0 ). 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER DISALLOWED THE AMOUNT OF ` 50,00,000/- CLAIMED BY THE - - ITA 1109/1 5 3 ASSESSEE AS CORPORATE GUARANTEE OBLIGATION BECAUSE IT WAS A MERE PROVISION FOR CONTINGENT LIABILITY WHICH IS NOT AN ALLOWABLE EXPENDITURE. THE RELEVANT PORTION FROM THE ASSESSMENT ORDER IS REPRODUCED AS UNDER: DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WHEN THIS WAS PUTFORTH TO THE ASSESSES REPRESENTATIVE, HE HA S STATED THAT THE GUARANTEE HAS BEEN GIVEN TO THE VYSYA BANK LTD. ON BEHALF OF W.S. TELESYSTEMS LTD. (SUBSIDIARY OF WS INDUSTRIES) TO ACQUIRE THE WORKING CAPITAL FACILITI ES. HE ALSO STATED THAT THE ASSESSEE COMPANY IS ONLY A C O-DEFENDANT (BEING THE GUARANTOR) AND AFTER THE WINDING UP OF W S TELESYTEMS BY BIFR AS SICK INDUSTRY, MLS. VYSYA BAN K LTD. HAS MOVED TO DEBT RECOVERY TRIBUNAL FOR THE RECOVER Y OF THE MONEY FROM M/S. W.S. TELESYSTEMS ALONG WITH THE ASSESSEE COMPANY AS CO-DEFENDANT. THEREFORE, THE LI ABILITY TOWARDS CORPORATE GUARANTEE OBLIGATION HAS BEEN MAD E BY THE ASSESSEE COMPANY AND CLAIMED AS PROVISION FOR CONTINGENT LIABILITY UNDER THE HEAD OTHER COSTS. AFTER CAREFUL EXAMINATION OF THE ASSESSEE'S SUBMISS ION, IT IS CLEAR THAT THE CLAIM MADE THE ASSESSEE IS NOT ACCEP TABLE BECAUSE IT IS MERE PROVISION FOR CONTINGENT LIABILITY. RELIANCE IS PLACED ON ITO VS EMCO TRANSFORMERS LTD. MAT, MUM BAI AND WHILE CONSIDERING THE ISSUE OF PROVISION FOR GU ARANTEE LIABILITY IN THIS CASE, IT HAS OBSERVED THAT, IN F ACT, TAKING THE PRINCIPLE ENUNCIATED BY THE SUPREME COURT IN THE CA SE OF INDIAN MOLASSES CO. (P.) LTD. V. CIT (L959] 37 ITR 66 IN WHICH IT WAS HELD THAT THE CONTINGENT LIABILITY COU LD NOT BE ALLOWED WHILE COMPUTING THE NET INCOME, WE ARE OF T HE OPINION THAT CONTINGENT LIABILITY, WHICH IS NOT ARISING IN PRAESENTI AND DEPENDS ON SEVERAL CIRCUMSTANCES AND WILL CRYSTALLISE ONLY ON A FUTURE DATE, CANNOT BE ALLOWE D AS BUSINESS EXPENDITURE IN THE ASSESSMENT YEAR IN QUESTION. WE , THEREFORE, HOLD THAT PROVISION FOR CONTINGENT LIABILITY, WHICH WAS NOT B EING MADE BY THE ASSESSEE IN THE EARLIER YEARS AND WHICH IS ONLY A L IABILITY WHICH IS TO ACCRUE IN FUTURE YEARS, CANNOT BE ALLOWED AS AN EXPENDITUR E. - - ITA 1109/1 5 4 BASED ON THE ABOVE DISCUSSION, IN THE INSTANCE, THE SAID CLAIM IS ONLY A LIABILITY WHICH IS TO ACCRUE I N FUTURE YEARS CANNOT BE ALLOWED AS BUSINESS EXPENDITURE IN THE ASSESSMENT YEAR AND ADDED TO THE TOTAL INCOME O F THE ASSESSEE. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFO RE THE CIT(APPEALS), WHO FOLLOWING THE ORDER OF THE TRIBUN AL, IN ITA NO. 1373/MDS/2008 DATED 21.8.2009, DIRECTED THE AO TO DELETE THE ADDITION AND ALLOWED THE CLAIM OF THE ASSESSEE. AGAINST THIS, THE REVENUE IS IN APPEAL B EFORE US. 4. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1373/MDS/2008 DATED 21.8.2009 FOR THE ASSESSMENT YEAR 2004-05, WHEREIN IT WAS OBSERVED AS FOLLOWS: 10. WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RELEVANT RECORDS. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND CLAIMED THAT THE SAID CORPORATE GUARANTEE HAS NOTHING TO DO WITH ASESSEE' S BUSINESS. HE ALSO CLAIMED THAT IT WAS ALSO NOT CLEA R AS TO THE YEAR FOR WHICH THE SAME RELATED TO. HE FURTH ER ARGUED THAT THE SAID EXPENDITURE OF THE ASSESSEE HA S NOT RESULTED IN ANY EARNING OF INCOME. THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, CLAIMED THAT EXPENDITURE INCURRED ON ACCOUNT OF CORPORATE GUARANTEE WAS A GENUINE EXPENDITURE. HE CLAIMED - - ITA 1109/1 5 5 THAT, WHEN THE RELATED ADVANCE OF OVER ` 6 CRORES WAS ACCEPTED BY THE REVENUE, HE CLAIMED THAT THERE WAS NO REASON WHY THE AMOUNT PAID TOWARDS DISCHARGE OF CORPORATE GUARANTEE SHOULD NOT BE ALLOWED. HE ARGUE D THAT HON'BLE MADRAS HIGH COURT DECISION CITED AND RELIED UPON BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WAS VERY MUCH RELEVANT AND HE RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) AND CLAIMED THAT THE AMOUNT INCURRED IN THIS REGARD BE ALLOWED AS REVENUE EXPENDITURE. 11. UPON CAREFUL CONSIDERATION WE FIND THAT ASSESSEE HAD INCURRED A SUM OF ` 13.07 CRORES TOWARDS DISCHARGE OF CORPORATE GUARANTEE GIVEN TO T HE LENDERS OF ITS SUBSIDIARY COMPANIES. IN THIS CONNEC TION, WSI HAS ALSO GIVEN ADVANCE OF ` 6.11 CRORES. THE SUBSIDIARY COMPANY OF THE ASSESSEE WAS SUPPLYING MATERIALS WHICH WERE IMPORTANT FOR THE ASSESSEES BUSINESS. IN SUCH CIRCUMSTANCES, ALL THE ACTION OF THE ASSESSEE I.E. GIVING CORPORATE GUARANTEE AS WELL AS ADVANCES ARE INCIDENTAL TO THE BUSINESS OF THE COMPANY. WHEN THE WRITING OFF OF THE ADVANCES HAS BEEN ALLOWED BY THE REVENUE AS BUSINESS EXPENDITURE, THERE IS NO REASON WHY THE AMOUNT SPEN T TOWARDS DISCHARGE OF CORPORATE GUARANTEE SHOULD BE TREATED ANY DIFFERENTLY. THE ASSESSING OFFICER'S PL EA THAT THE SAID EXPENDITURE HAS NOT RESULTED IN ANY INCOME IS DEVOID OF COGENCY AS THE INCURRING OF EXPENDITURE WAS VERY MUCH INCIDENTAL TO THE INTERES TS OF THE BUSINESS OF THE ASSESSEE. HON'BLE APEX COURT IN THE CASE OF CIT VS. WALCHAND AND CO. PRIVATE LTD. 6 5 ITR 381 (SC) HAS HELD THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF BUSINESSMAN AND NOT OF THE REVENUE. 12. HON'BLE APEX COURT IN THE CASE OF CIT VS. INDIAN BANK LIMITED 56 ITR 77 (SC) HAD HELD THAT - - ITA 1109/1 5 6 THERE IS NO NEED TO EXAMINE WHETHER THE EXPENDITURE OR ALLOWANCE WHICH IS PERMISSIBLE MUST BE CAPABLE O F PRODUCING TAXABLE INCOME. 13. WE FURTHER FIND THAT IN THE ARTICLES AND MEMORANDUM OF ASSOCIATION OF THE ASSESSEE, IT HAS BEEN CLEARLY MENTIONED IN CLAUSE NO. 50 OF THE OBJECTS, THAT IT WAS ONE OF THE ASSESSEE'S BUSINESS TO GIVE GUARANTEES - FINANCIAL OR OTHERWISE AND / OR T O PROVIDE SECURITY TO ANY PERSON EITHER ON BEHALF OF THE COMPANY OR ON BEHALF OF OTHERS ON SUCH TERMS AND CONDITIONS AS THE COMPANY SHALL DETERMINE. HENCE, GIVING CORPORATE GUARANTEE DULY HAD THE SANCTION OF ARTICLES AND MEMORANDUM OF ASSOCIATION OF THE COMPANY AND AS SUCH IT WAS A PART OF THE ASSESSEE'S BUSINESS. 14. MOREOVER, WHEN THE TRANSACTION HAS BEEN ENTERED INTO IN A COMMERCIALLY EXPEDIENT MANNER, TH E RESULTANT EXPENSE / LOSS IS ALLOWABLE. THIS IS SUPP ORTED BY HON'BLE APEX COURT EXPOSITION IN THE CASE OF S.A . BUILDERS LTD. VS. CIT , 288 ITR 1: 'TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUCTION UNDER SECTION 36(1)(III) OF INTEREST PAID BY THE ASSESSEE ON AMOUNTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN, THE AUTHORITIES AND THE COURTS SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY AND WHAT THE SISTER CONCERN DID WITH THE MONEY. THAT THE BORROWED AMOUNT IS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS BUT HAD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCERN IS NOT RELEVANT. WHAT IS RELEVANT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. 15. WE FURTHER FIND THAT HON'BLE MADRAS HIGH - - ITA 1109/1 5 7 COURT IN AN ANALOGICAL CASE IN THE CASE OF CIT VS. AMALGAMATIONS (P) LTD. 108 ITR 895 (MAD) WHERE THE FACTS WERE THE FOLLOWING:- THE ASSESSEE COMPANY HAD GUARANTEED IOANS TAKEN BY A SUBSIDIARY COMPANY ON AN OVERDRAFT ARRANGEMENT WITH A BANK. THE SUBSIDIARY COMPANY WENT INTO LIQUIDATION IN 1955 AND THE ASSESSEE COMPANY AS GUARANTOR WAS OBLIGED TO DISCHARGE THE LIABILITY TO THE BANK. AFTER ADJUSTING THE AMOU NT RECOVERED FROM THE LIQUIDATORS THE SUM DUE TO THE ASSESSEE COMPANY FROM ITS SUBSIDIARY WAS ` 9,08,764/- AND THE ASSESSEE CLAIMED THIS AMOUNT AS A BUSINESS LOSS IN ITS ASSESSMENT FOR 1958-59. THE ASSESSEE RECEIVED FROM THE LIQUIDATORS DURING THE SUBSEQUENT YEARS 1959-60 TO 1962-63 VARYING SUMS TOTALING ` 4,85,508.28. THE OFFICER HELD THAT THE LOSS WAS NOT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND WAS A CAPITAL LOSS WHICH DID NOT ALSO COME UNDER SECTION 12B. THE OFFICER ALSO TREATED TH E RECEIPTS DURING 1959-60 TO 1962-63 AS INCOME AS A PROTECTIVE MEASURE. THE APPELLATE ASSISTANT COMMISSIONER ON APPEAL HELD THAT THE LOSS WAS NOT A BUSINESS LOSS BUT HELD THAT SUBSEQUENT RECEIPTS COULD NOT ALSO BE TAXED AS INCOME. IN THE FURTHER APPEALS TO THE TRIBUNAL BOTH BY THE ASSESSEE AND THE DEPARTMENT, THE TRIBUNAL HELD THAT THE ASSESSEE HAD GUARANTEED THE LOANS IN THE COURSE OF ITS CARRYING ON ITS BUSINESS AND THE LOSS WAS ADMISSIBL E AS A DEDUCTION. IT, HOWEVER, HELD THAT AS THE ASSESSEE HAD RECEIVED THE LAST OF THE PAYMENTS FROM THE LIQUIDATOR IN THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR 1962-63, ONLY THE BALANCE OF `4 ,23,256/- REMAINED UNRECOVERABLE AND IT WAS THIS AMOUNT WHICH WAS ALLOWABLE AS A DEDUCTION IN THE ASSESSMENT YEAR 1962-63. THE HON'BLE HIGH COURT HELD AS UNDER:- 'HELD, (1) THAT IN VIEW OF THE ASSESSEE'S BUSINESS - - ITA 1109/1 5 8 HAVING BEEN HELD TO INCLUDE FURNISHING GUARANTEES TO DEBTS BORROWED BY ITS SUBSIDIARY COMPANIES, THE ASSESSEE INCURRED THIS LOSS IN THE COURSE OF CARRYI NG 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 BECAUSE THERE WERE POSSIBILITIES RECOVERY FROM THE LIQUIDATORS AS WAS CLEAR FROM LAT ER RECORD AND (3) AS THE FINAL PAYMENT WAS RECEIVED ONLY IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1962-63, THE LOSS AROSE ONLY THEN AND HENCE THE TRIBUNAL WAS RIGHT IN ALLOWING IT IN THAT YEAR.' THE AFORESAID DECISION OF THE HON'BLE MADRAS HIGH COURT WAS AFFIRMED BY THE HON'BLE APEX COURT IN THE CASE OF M/S AMALGAMATIONS LTD. , 226 ITR 188. 16. HON'BLE APEX COURT IN THE CASE OF CIT VS. MESSRS. SHOORJI VALLABHDAS AND CO. 41 ITR 144 (SE) HAD HELD THAT MERE BOOK KEEPING ENTRY CANNOT BE DETERMINATIVE OF THE ACTUAL NATURE OF THE TRANSACTION. FURTHER HON'BLE-APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LIMITED VS. CIT 22 7 ITR 172 (SC) HAD HELD THAT PRINCIPLES OF ACCOUNTANC Y DO NOT OVERRIDE PROVISIONS OF TAXING STATUTE. FROM THE ABOVE, IT IS EVIDENT THAT ACCOUNTING TREATMENT GIVE N BY THE ASSESSEE IN THE BOOKS CANNOT TAKE PRECEDENCE OVER WHAT IS MANDATED BY TAX LAWS. 17. WE FURTHER FIND THAT HON'BLE MADRAS HIGH COUR T IN THE CASE OF DEVI FILMS PRIVATE LTD. VS. CIT 75 I TR 301 HAS HELD THAT, IF AN EXPENDITURE CANNOT BE ALLOWED AS A BAD DEBT, ALLOWANCE OF THE SAME IS PERMISSIBLE AS BUSINESS LOSS IF THE NECESSARY CRITE RIA IS SATISFIED. - - ITA 1109/1 5 9 18. IN THE BACKGROUND OF AFORESAID DISCUSSION AND PRECEDENT, IT IS CLEAR THAT GIVING CORPORATE GUARAN TEE WAS NOT ONLY O NE OF THE OBJECTS OF THE ASSESSEE COMPANY BUT THE SAME WAS GIVEN FOR ITS SUBSIDIARY COMPANY AND IT WAS IN THE INTEREST OF THE ASSESSEE COMPANY AND HENCE THE COMMERCIALLY EXPEDIENT DECISION. UNDER THE CIRCUMSTANCES, FOLLOWING THE AFORESAID PRECEDENTS, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LEARNED COMMISSIONE R OF INCOME TAX (APPEALS). 19. IN THE RESULT, THIS APPEAL FILED BY THE REVENU E IS DISMISSED. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL AND TAKI NG A CONSISTENT VIEW, WE ARE INCLINED TO DISMISS THE APP EAL OF THE REVENUE. 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED ON FRIDAY, THE 28 TH OF AUGUST, 2015 AT CHENNAI. SD/- SD/- ( ' . . ' . #$ ) ( % & ' ( ) ) N.R.S.GANESAN * )+,-./0-1223-04* 5 67 /JUDICIAL MEMBER 6789::2;.<-.<=>?@>0 %5 /CHENNAI, A6 /DATED, THE 28.8.2015. MPO* - - ITA 1109/1 5 10 6$ BCDC /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. E)* /CIT(A) 4. E /CIT 5. CF# G /DR 6. #HI /GF.