ACIT, CHENNAI V. M/s. Peirce Leslie India Ltd., CHENNAI

ITA 1244/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58105 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-02-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 06-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: V D GOPAL
• Keywords: Business expenditure; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NO. 1244/MDS/2011 (ASSESSMENT YEAR : 2005-06) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(2), CHENNAI - 600 034. (APPELLANT) V. M/S PEIRCE LESLIE INDIA LTD., NO.37, DR.P.V. CHERIAN CRESCENT, EGMORE, CHENNAI - 600 008. PAN : AAACP2746F (RESPONDENT) APPELLANT BY : SHRI ANIRUDH RAI, CIT-DR SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL RESPONDENT BY : SHRI V.D. GOPAL, ADVOCATE DATE OF HEARING : 29.02.2012 DATE OF PRONOUNCEMENT : 16.03.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANC E IS THAT CIT(APPEALS) DELETED THE DISALLOWANCE OF EXPENDITUR E INCURRED BY THE ASSESSEE TOWARDS ONE TIME SETTLEMENT OF LOAN AVAILE D BY ITS SUBSIDIARY COMPANY. AS PER THE REVENUE, LD. CIT(AP PEALS) PLACED RELIANCE ON THE DECISION OF CO-ORDINATE BENCH OF TH IS TRIBUNAL IN THE I.T.A. NO. 1244/MDS/11 2 CASE OF ACIT V. W.S. INDUSTRIES (INDIA) LIMITED (12 8 ITD 98), AND THIS VIEW HAS NOT BEEN ACCEPTED BY THE REVENUE. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN PROCESSING, TRADING AND SERVICE BUSINESS, HAD VARIOUS DIVISIONS WHICH INCLUDED A DIVISION CALLED AGRO PRODUCTS DIVISION DEALING WI TH AGRICULTURAL PRODUCTS. ASSESSEE HIVED OFF THIS SAID AGRICULTURA L PRODUCTS DIVISION TO A SEPARATE 100% SUBSIDIARY CALLED PL AGRO TECHN OLOGIES LTD. (PLAT). FOR ITS WORKING CAPITAL REQUIREMENT, M/S PLAT APPROACHED M/S NEDUNGADI BANK LTD., WHICH REQUIRED A CORPORATE GUARANTEE FROM THE ASSESSEE BEING THE HOLDING COMPANY. SUCH A COR PORATE GUARANTEE WAS GIVEN BY THE ASSESSEE AND PLAT WAS RE QUIRED TO GIVE GUARANTEE COMMISSION TO THE ASSESSEE IN LIEU. LATE R ON, NEDUNGADI BANK LTD. WAS MERGED WITH PUNJAB NATIONAL BANK. DU E TO CONTINUOUS LOSS SUFFERED BY M/S PLAT, THEY WERE UNABLE TO REPA Y THE LOAN AND INTEREST TO M/S NEDUNGADI BANK. FROM FINANCIAL YEA R 2002-03, NEGOTIATIONS WERE GOING ON FOR A ONE TIME SETTLEMEN T FOR DISCHARGING THE DEBT TO THE SAID BANK. EVENTUALLY THE ISSUE WA S SETTLED BY ASSESSEE-COMPANY, WHICH AS A CORPORATE GUARANTOR AG REED TO PAY ` 250 LAKHS TO M/S PUNJAB NATIONAL BANK. OUT OF THE SAID AMOUNT, ` 200 LAKHS WAS PAID BY THE ASSESSEE ON 23 RD MARCH, 2005. SINCE THE PAYMENT FELL IN FINANCIAL YEAR 2004-05, A CLAIM OF EXPENDITURE WAS I.T.A. NO. 1244/MDS/11 3 MADE BY THE ASSESSEE FOR IMPUGNED ASSESSMENT YEAR. HOWEVER, ASSESSING OFFICER WAS NOT IN FAVOUR OF ALLOWING THE CLAIM. AS PER THE A.O., ASSESSEE HAD MADE A CLAIM IN THIS REGARD IN A SSESSMENT YEAR 2003-04 ALSO AS A PROVISION FOR CONTINGENCY AND T HIS WAS DISALLOWED BY THE ASSESSING OFFICER THAT YEAR ALSO. AGAIN, AS PER THE A.O., SAID DISALLOWANCE WAS CONFIRMED BY LD. CIT(APPEALS) IN A SSESSEES APPEAL FOR THE SAID ASSESSMENT YEAR. A.O. NOTED THAT SETT LEMENT OF DEBT OF SUBSIDIARY COMPANY, WHICH LOAN WAS TAKEN BY THE SUB SIDIARY COMPANY FOR ITS WORKING CAPITAL REQUIREMENTS COULD ONLY BE CONSIDERED AS CAPITAL EXPENDITURE IN THE HANDS OF A SSESSEE AND NOT AS REVENUE EXPENDITURE. HE THUS DISALLOWED THE CLA IM OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR AS WELL. 3. BEFORE THE LD. CIT(APPEALS), ARGUMENT OF THE ASS ESSEE WAS THAT ASSESSEE-COMPANY WAS HAVING VARIOUS DIVISIONS LIKE CASHEWS, COFFEE CURING, SHIPPING, FERTILIZERS, INDUSTRIAL PR ODUCTS, AGRICULTURAL PRODUCTS, ETC., AGRICULTURAL PRODUCTS DIVISION WAS HIVED OFF TO A SUBSIDIARY CALLED M/S PLAT BEING A 100% SUBSIDIARY. ITS BUSINESS INTEREST WAS TO BE SAFEGUARDED BY THE ASSESSEE AND CORPORATE GUARANTEE WAS GIVEN FOR FACILITATING WORKING CAPITA L LOANS FOR M/S PLAT AND THIS WAS DONE ONLY AS A MEASURE OF COMMERC IAL EXPEDIENCY. AGAIN AS PER THE ASSESSEE, GIVING CORP ORATE GUARANTEE I.T.A. NO. 1244/MDS/11 4 WAS PART OF ITS BUSINESS, SINCE SUCH AN OBJECT WAS CLEARLY MENTIONED BY IT IN ITS MEMORANDUM OF ASSOCIATION. ASSESSEE A LSO BROUGHT TO THE NOTICE OF LD. CIT(APPEALS) DETAILS OF GUARANTEE COM MISSION RECEIVED FROM M/S PLAT WHICH WERE ACCOUNTED BY THE ASSESSEE FOR VARIOUS FINANCIAL YEARS STARTING FROM 1996-97 ONWARDS AND O FFERED FOR INCOME- TAX AS WELL. ASSESSEE ALSO RELIED ON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF W.S. INDUSTRI ES (INDIA) LIMITED (SUPRA). 4. LD. CIT(APPEALS) WAS APPRECIATIVE OF THE ABOVE C ONTENTIONS OF ASSESSEE. ACCORDING TO HIM, WHAT THE ASSESSEE GAVE WAS A CORPORATE GUARANTEE TO A 100% SUBSIDIARY COMPANY. THE SAID 100% SUBSIDIARY COMPANY WAS FORMED TO OPERATE A DIVISION OF ASSESSEE- COMPANY ITSELF. THE CORPORATE GUARANTEE COMMISSION WAS A TRADING RECEIPT AND ASSESSEE HAD INCLUDED IT IN ITS P&L ACC OUNT FOR EARLIER ASSESSMENT YEARS. THIS BEING SO, HE WAS OF THE OPI NION THAT PAYMENT TO M/S PUNJAB NATIONAL BANK AS A GUARANTOR COULD NOT HAVE BEEN DISALLOWED SINCE IT WAS NOT A PAYMENT IN THE C APITAL FIELD. AS PER LD. CIT(APPEALS), GIVING CORPORATE GUARANTEE WA S A PART OF ASSESSEES BUSINESS AND THEREFORE, PAYMENTS EFFECTE D WERE BUSINESS EXPENDITURE. FURTHER, AS PER THE LD. CIT(APPEALS), THE CASE OF W.S. I.T.A. NO. 1244/MDS/11 5 INDUSTRIES (INDIA) LIMITED (SUPRA) WAS ON ALL FOUR SQUARES WITH THAT OF ASSESSEE. HE, THEREFORE, DELETED THE DISALLOWANCE. 5. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT THE CORPORATE GUARANTE E GIVEN BY THE ASSESSEE WAS NOT FOR COMMERCIAL EXPEDIENCY. MAY BE , AS PER THE LEARNED D.R., THE LOANS WERE TAKEN BY THE SUBSIDIAR Y COMPANY FOR MEETING ITS WORKING CAPITAL REQUIREMENTS. HOWEVER , CORPORATE GUARANTEE GIVEN BY THE ASSESSEE COULD NOT BE CONSID ERED ON THE SAME FOOTING AND THE OUTGO ARISING OUT OF SETTLEMEN T COULD ONLY BE CONSIDERED IN THE CAPITAL FIELD. THEREFORE, ACCORD ING TO LEARNED D.R., LD. CIT(APPEALS) FELL IN ERROR IN DELETING THE DISA LLOWANCE. 6. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD GIVEN CORPORA TE GUARANTEE FOR THE LOANS TAKEN BY ITS 100% SUBSIDIARY COMPANY. TH ERE IS ALSO NO DISPUTE THAT THE SAID SUBSIDIARY HAD RAISED SUCH LO ANS TO MEET ITS WORKING CAPITAL REQUIREMENTS AND NOT FOR FINANCING ANY FIXED ASSETS. IT IS ALSO AN ACCEPTED FACT THAT THE 100% SUBSIDIAR Y COMPANY WAS FORMED BY HIVING OFF A DIVISION OF ASSESSEE-COMPANY . WE CANNOT SAY I.T.A. NO. 1244/MDS/11 6 THAT SAFEGUARDING THE BUSINESS INTEREST OF SUCH A S UBSIDIARY IN THE GIVEN CIRCUMSTANCES WAS NOT A COMMERCIALLY PRUDENT DECISION TAKEN BY THE ASSESSEE. IT COULD ONLY BE CONSIDERED AS A PART OF THE BUSINESS OF THE ASSESSEE. CORPORATE GUARANTEE WAS GIVEN FOR WORKING CAPITAL LOANS USED BY THE SUBSIDIARY AND FO R SUCH GUARANTEE GIVEN BY THE ASSESSEE, IT WAS GETTING COMMISSION AL SO. SUCH COMMISSION WAS INCLUDED AS A PART OF ITS BUSINESS I NCOME IN THE EARLIER YEARS. IN SUCH A SCENARIO, WE CANNOT SAY T HAT WHEN CORPORATE GUARANTEES WERE INVOKED BY THE LENDER, THE PAYMENTS EFFECTED WERE CAPITAL EXPENDITURE. ASSESSEE AS A PRUDENT BUSINES S MAN MUST HAVE FOUND IT COMMERCIALLY EXPEDIENT TO MAKE THE SETTLEM ENT ON ACCOUNT OF WORKING CAPITAL LOANS RAISED BY ITS SUBSIDIARY COMP ANY WHICH THE LATTER WAS UNABLE TO REPAY. WE ARE, THEREFORE, OF THE OPINION THAT LD. CIT(APPEALS) WAS WELL JUSTIFIED IN FOLLOWING THE DE CISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF W.S. INDUSTRI ES (INDIA) LIMITED (SUPRA) WHEREIN IT WAS HELD AS UNDER:- SECTION 37(1) OF THE INCOME-TAX ACT, 1962 BUSINES S EXPENDITURE ALLOWABILITY OF ASSESSMENT YEAR 2 004-05 ASSESSEE - COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING ELECTRO PORCELAIN PRODUCTS - A SUBS IDIARY COMPANY OF ASSESSEE HAD BEEN EXECUTING CERTAIN CONT RACTS ON BEHALF OF ASSESSEE FOR SUPPLY OF ELECTRONIC EQUIPME NT - ASSESSEE HAD GIVEN CORPORATE GUARANTEE TO VARIOUS B ANKS FOR ITS SUBSIDIARY COMPANY - CONSEQUENT TO SUBSIDIARY COM PANY I.T.A. NO. 1244/MDS/11 7 BECOMING SICK, ASSESSEE ENTERED INTO SETTLEMENTS WI TH BANKS BY EFFECTING ONE TIME PAYMENT AND GOT CORPORATE GUARAN TEES DISCHARGED - ASSESSEE WROTE OFF AMOUNT SO PAID IN ITS BOOKS AND CLAIMED DEDUCTION FOR SAME - ASSESSING OFFICER REJ ECTED ASSESSEES CLAIM - IT WAS NOTED THAT SUBSIDIARY C OMPANY OF ASSESSEE WAS SUPPLYING MATERIALS WHICH WERE IMPORTA NT FOR ASSESSEES BUSINESS AND, THUS, GIVING CORPORATE GUA RANTEE WAS INCIDENTAL TO BUSINESS OF ASSESSEE - COMPANY - IT WAS ALSO NOTICED THAT AS PER ARTICLES AND MEMORANDUM OF ASSO CIATION OF ASSESSEE - COMPANY, IT COULD GIVE CORPORATE GUARAN TEE TO ANY PERSON EITHER ON BEHALF OF COMPANY OR ON BEHALF OF OTHERS ON SUCH TERMS AND CONDITIONS AS COMPANY SHALL DETERMIN E - WHETHER, ON FACTS, IT WAS CLEAR THAT GIVING CORPORA TE GUARANTEE WAS NOT ONLY ONE OF OBJECTS OF ASSESSEE - COMPANY BUT SAME WAS GIVEN FOR ITS SUBSIDIARY COMPANY AND IT WAS IN INTE REST OF ASSESSEE - COMPANY AND, HENCE, COMMERCIALLY EXPED IENT DECISION - HELD, YES - WHETHER, THEREFORE, ASSESSEES CLA IM IN RESPECT OF CORPORATE GUARANTEE WAS TO BE ALLOWED. HELD, YE S. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORD ER OF LD. CIT(APPEALS). 8. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 16 TH MARCH, 2012. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 16 TH MARCH, 2012. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-V, CHENNAI-34 / CIT, CHENNAI-III, CHENNAI/D.R./GUARD FILE