9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2009 (8) TMI 782 - AT - Income TaxDisallowance of amount paid towards discharge of corporate guarantee obligation - Held that - Both the advances and discharge of liabilities under the corporate guarantees were incurred in the normal course of business for carrying out its business obligations and are legitimately claimed as business loss as they were physically paid out to the bankers by way of cheque payments at the time of the respective settlements to them - Hon ble Apex Court decision in the case of S.A. Builders Ltd. v. CIT 2006 (12) TMI 82 - SUPREME COURT It was held that if the assessee had given corporate guarantee for the purpose of business on grounds of commercial expediency, the amount paid for discharge of corporate guarantee would be allowable as deduction under section 37(1) of the Income Tax Act Appeal is dismissed
Issues Involved:
1. Deletion of disallowance of Rs. 13,07,05,000 paid towards discharge of corporate guarantee obligation. 2. Relationship between the assessee's business and the corporate guarantee. 3. Applicability of legal precedents to the case. 4. Assessment year relevance and accounting treatment of the loss. Detailed Analysis: 1. Deletion of Disallowance of Rs. 13,07,05,000: The primary issue revolves around whether the Commissioner of Income Tax (Appeals) erred in deleting the disallowance of Rs. 13,07,05,000, which was paid by the assessee towards the discharge of corporate guarantee obligations. The assessee had claimed this amount as business expenditure, arguing that the guarantees were provided to secure loans for its subsidiary, W.S. Telesystems Ltd. (WSTL), which was integral to its business operations. 2. Relationship Between the Assessee's Business and the Corporate Guarantee: The assessee, M/s. W.S. Industries (India) Ltd. (WSI), had transferred its Electronics Division to WSTL and continued to advance money and provide corporate guarantees to WSTL for securing loans. The advances and guarantees were argued to be in the normal course of business and essential for the execution of contracts critical to WSI's operations. The Assessing Officer initially allowed the write-off of Rs. 6.11 crores but disallowed the Rs. 13.07 crores related to corporate guarantees, stating it was not connected to the assessee's business activities. 3. Applicability of Legal Precedents to the Case: The Commissioner of Income Tax (Appeals) and the Tribunal relied on several legal precedents to justify the deletion of the disallowance. Key references included: - CIT v. Amalgamations (P.) Ltd.: The court held that losses incurred from guarantees given in the course of business are deductible. - S.A. Builders Ltd. v. CIT: The Supreme Court emphasized that the test of commercial expediency should be applied from the businessman's perspective, not the revenue's. - CIT v. Walchand & Co. (P.) Ltd.: It was held that the reasonableness of expenditure should be judged from the businessman's point of view. - CIT v. Indian Bank Ltd.: The Supreme Court held that expenditure need not necessarily produce taxable income to be deductible. 4. Assessment Year Relevance and Accounting Treatment of the Loss: The Revenue argued that the loss was treated as capital in the assessee's accounts by debiting the share premium account instead of the profit and loss account, suggesting that the treatment for tax purposes should align with this. However, the Tribunal noted that the accounting treatment cannot override the tax laws. The Tribunal also referenced CIT v. Shoorji Vallabhdas & Co. and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which clarified that book entries do not determine the nature of transactions for tax purposes. Conclusion: The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, concluding that the corporate guarantee and the resultant expenditure were commercially expedient and integral to the assessee's business. The loss was thus allowable as a business expenditure under section 37(1) of the Income Tax Act. The appeal by the Revenue was dismissed, affirming that the expenditure was incidental to the business and justified by the legal precedents cited.
|
