DCIT 1(3), MUMBAI V. THE WEST COAST PAPER MILLS LTD, MUMBAI

ITA 3564/MUM/2013

• Counselvise Citation: [2024] 130 COUNSELVISE.COM (IT) 3428 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 12-10-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 05-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: UJJAWAL KUMAR CHAVAN
• Assessee Lawyers: ALPESH DHAROD
• Keywords: Commercial expediency; Earning of tax free income; Rule 8D
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘G ‘ BENCH MUMBAI BEFORE: SHRI B R BASKARAN, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No.3746/Mum/2013 (Assessment Year :2008-09) The West Coast Paper Mills Ltd. Shreeniwas House Hazarimal Somani Marg Fort, Mumbai – 400 001 Vs. Addl. Commissioner of Income Tax. 1(3) Mumbai PAN/GIR No.AAACT4179N (Appellant) .. (Respondent) ITA No.3564/Mum/2013 (Assessment Year :2008-09) D.C.I.T. 1(3) Mumbai Vs. The West Coast Paper Mills Ltd. Shreeniwas House Hazarimal Somani Marg Fort, Mumbai – 400 001 PAN/GIR No.AAACT4179N (Appellant) .. (Respondent) Assessee by Shri Alpesh Dharod Revenue by Shri Ujjawal Kumar Chavan Date of Hearing 13/10/2023 Date of Pronouncement 30/10/2023 O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal is in relation to the order giving effect to the order passed by the Third Member. ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 2 In this matter there was divergence of opinion between the members of the Division Bench, hence, separate orders were passed on following points of difference:- 1. Whether on the facts and circumstances of the case and in law, the transaction of providing corporate guarantee bond of Rs.7 crores by the assessee to the KDCC Bank Limited for the bill discounting facility in favour of intermediary WECCSL for the benefit of FGI (AE of the assessee) and consequent encashment of Rs.7.15 crores by the Bank in financial year 2003-04 on invocation of Corporate Guarantee by KDCC Bank Limited was governed by commercial expediency and/or was in the regular course of business of the assessee or not; so much so that writing off amount of Rs.7,07,77,231/- recoverable from FGI by the assessee is whether a business loss or business expenditure us 37(1) of the Act deductible while computing Income of the assessee; or it is a capital loss or otherwise not allowable as deduction while computing income under the provisions of the Act. 2. Whether on the facts and circumstances of the case and in law, the 'draft rehabilitation scheme' submitted by the Fort Gloster Industries Limited (FGI) and its promoters to BIFR on 25.04.2007 (Le. in the previous year 2007-08) is a relevant material fact in deciding the aforesaid issue of disallowance or whether any inference can be drawn regarding the decision of the assessee to write off the amount of Rs.7,07,77,231/- as irrecoverable in this year. 3. Whether on the facts and circumstances of the case and in law, the learned Assessing Officer complied with the provisions of Section 144(2) and (3) of the Income Tax Act, 1961 before invoking Rule 8D of Income Tax Rules, 1962, having regards to the accounts maintained by the assessee and keeping in view the submissions and disclosures made by the assessee during the assessment proceedings as borne out from records? 4. Whether on the facts and circumstances of the case and in law, the amount of disallowance of Rs.25,27,320/- towards indirect expenses under Rule 8D(2)(ii) of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961 as ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 3 computed by the Revenue is sustainable or not; or to what extent the same is sustainable which will meet the ends of justice? 2. In so far as disallowance of irrecoverable advances to tax written off for Rs.7,07,77,231, the brief facts in the succinct manner are that during FY 2002-03 the assessee executed Corporate Guarantee Bond of Rs. 7 Crs in favour of Kanara District Central Co-operative Bank Ltd (KDCC Bank) on 28/09/2002 for bill discounting facility in favour of WECCSL (procurement agent for FGIL) for the benefit of Fort Gloster Industries Ltd (FGIL), an associate company. FGIL had also given counter guarantee on 18/06/2002. The operation of FGIL was subsequently discontinued, due to bad financial position. In FY 2004-05, FGIL was unable to make payment to KDCC Bank. Accordingly, the Bank invoked Corporate Guarantee on 23/08/2004 and asked the assessee to make payment of Rs. 7 Crs. plus interest and the assessee made payment of Rs. 7.15 Crs. along with interest and intimated FGIL to pay it back to the assessee. 3. In books of accounts the aforesaid amount was shown under the head "Loans & Advances. In FY 2007-08 FGIL, filed a draft rehabilitation scheme with BIFR, wherein among others relief was sought from various lenders for revival of FGIL. Considering the continued losses incurred by FGIL. negative net-worth and reference to BIFR Board of Directors of the appellant in their meeting held on 26-06-2008, decided to write-off Rs. 7.07 Crs. after adjusting amount recovered on account of rent payable to FGIL Accordingly, the said amount ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 4 was debited to the Profit & Loss Account The assessee claimed the said write off as a business loss in terms of provision of section 37(1) rws. 28 of the Act. 4. The ld. AO in his order has added back irrecoverable advances written off on the following alleged grounds.  It is a notional loss.  The loss is not incurred in the regular course of business of the assessee. It is a capital loss since the amount was shown under the head "loans and advances".  It cannot be termed as expenditure as per Sec. 37(1) of the Act 5. Ld. CIT(A) held that the assessee was not in the business of furnishing guarantees for third parties and that the guarantee given by the assessee to FGIL was only to help its group company to come out of financial crisis. It further held that since the action of the company was not guided by business considerations, the same could not be considered as a deduction u/s 37(1) of the Act. 6. The Judicial Member held that on the facts of the case providing corporate guarantee to an associate in a financially distress situation from whom it had regular business dealing for its own business cannot be treated as for non-business purpose and there was commercial expediency in the whole of transaction and therefore, it cannot be treated as capital loss, because there is no loss of any capital asset or investment. Accordingly, the amount written of was a capital loss, ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 5 deduction either as business loss or business expenditure u/s.28 r.w.s. 37(1). 7. The Ld. Accountant Member held that assessee is not entitled for deduction as providing guarantee was not in the regular course of business and providing guarantee was an act of making investment of capital advance rules, accordingly it was held to be a capital loss. 8. In view of the difference of opinion, the question was referred to the Hon’ble Third Member in terms of Section 255(4). The Hon’ble Third Member in this issue observed and held as under:- “The short question that I must first deal with is whether extending the corporate guarantee to KDCC Bank, on the facts of this case and on behalf of FGIL, can be said to be in the course of a normal business or not. The answer, to my mind, is emphatically in negative because given the negative net worth of the FGIL at the point of time when the guarantee was given, no prudent person can extent the corporate guarantee in the normal course of business. Such an act can only be done to help out a sister concern, that FGIL admittedly was, and there is nothing wrong in that act, the trouble, however, is that expenses incurred to extend financial help to the sister concerns are not tax deductible. What can be allowed as deduction in computation of business income is an expense incurred during the course of normal business, but when at the point of time when corporate guarantee is extended, and that too without any consideration, it is almost certain that the issuance of corporate guarantee could, in all likelihood, result in a loss, it cannot be said that the issuance of corporate guarantee was in the normal course of business. Whether the Memorandum of Association permit such an issuance of corporate guarantee or not, it is wholly irrelevant from the point of ascertaining true motive of the issuance of the corporate guarantee- and it is this motive which ends up determining whether or not the transaction of issuance of corporate ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 6 guarantee was a normal business transaction or not. It is also important to bear in mind the fact that the transaction in question was a contrived transaction which brings into picture a cooperative society as sole procurement agent, and the bills raised by the procurement agent are discounted from the bank- resulting in financing of purchase by FGIL, though in a circuitous manner, which is covered by the corporate guarantee issued by the assessee appellant. When bills raised by the procurement agent are accepted by the FGIL, and against this acceptance of the bill, the finance is given to the procurement agent, in effect, it becomes a liability of the FGIL that the bills duly accepted are honoured by the FGIL. Therefore, even though the money is flowing from KDCC Bank to the WECSSL, and in the process, to the end supplier, it is the financing of purchases by FGIL because the basis of finance is the bills accepted by the FGIL. A corporate guarantee to finance purchases of goods by a concern, which has a negative net worth and constantly deteriorating financial position, is anything but a transaction in the normal course of business. Once I hold so, there cannot be any justification for allowing a deduction, under section 37(1) or under section 28, of write-off of the amount paid on encashment of this corporate guarantee. On both of these points thus, I concur with the conclusions arrived at by the learned Accountant Member. 9. Since on this ground the Hon’ble Third Member had concurred with the finding of the ld. Accountant Member and accordingly, the ground Nos. 6 & 7 are decided against assessee and accordingly, the same are dismissed. 10. In so far as disallowance of prorate indirect expenses under Rule 8D(2)(iii) of Rs.25,27,320/-, the brief facts are that assessee has received dividend of Rs.35,08,679/- which was claimed as exempt u/s 10(34) / 10(35) of the Act. No disallowance had been computed by the assessee against the said exempt income as no expenditure was incurred for earning such income. The ld. AO computed the disallowance ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 7 u/s.14A r.w. Rule 8D of Rs.62 lakhs wherein he has made disallowance of Rs. 37 lakhs under Rule 8D(2)(ii) and Rs.25 lakhs under Rule 8D(2)(iii) both under the normal computation of total income as so far as computation of book profit u/s.115JB. The ld. CIT (A) deleted the disallowance of interest expenditure u/r 8D(2)(ii) and upheld the disallowance u/r. 8D(2)(iii). On this issue assessee had raised ground No.2 before the Tribunal. 11. The Judicial Member proposed disallowance of Rs.1,00,000/- based on the ITAT order in assessee’s own case for earlier years taking into account the director’s fee and auditor’s remuneration looking to the nature of expenditure debited to the profit and loss account. However, the ld. Accountant Member directed that the matter should be restored back to the AO to work out the disallowance u/s.14A, keeping in view the investment which was kept for earning exempt income. On this issue, the reference to the Third Member was with respect to Question No.3 & 4 as incorporated above. The Hon’ble Third Member had decided this issue in the following manner:-  The Hon'ble Third Member by relying on the decision of Special Bench in case of ACIT Vs. Vireet Investments Pvt. Ltd [2017] 58 ITR 313 [Del SBI and held that a contrary view would arise if the decision of Accountant Member is considered i.e to restore the matter to the file of the AO for working out disallowance u/s 14A having regards to the accounts of the assessee keeping in view of the investments which are capable of earning exempt income. ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 8  Accordingly, an adhoc disallowance of Rs. 1,00,000/- was considered which was in accordance with the decisions of co-ordinate benches in assessee's own case for AY 2009-10 to AY 2011-12.  Hence, the Hon'ble Third Member concurred with the conclusions arrived by the Judicial Member. 11. Thus, ground No.4 & 5 on the issue of disallowance u/s.14A r.w.r 8D(2)(iii), the Hon’ble Third Member had concurred with the conclusion of the Judicial Member, therefore, the ground raised by the assessee is treated as partly allowed. 12. In the result, appeal filed by the assessee is partly allowed and appeal filed by the Revenue is dismissed. Order pronounced on 30 th October, 2023. Sd/- (B.R. BASKARAN) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 30/10/2023 KARUNA, sr.ps ITA No.3564/Mum/2013 & 3746/Mum/2013 M/s. West Coast Paper Mills Ltd. 9 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//