2019 (2) TMI 730 - HC - Income Tax

Incurring business loss on account of guarantee extended in the ordinary course of business - revenue s contention was that the loss was not suffered in the course of assessee s ordinary business activity and therefore, cannot be claimed as a business loss - Held that - After one round of remand, the Tribunal examined the material on record and in particular Memorandum and Articles of Association of the assessee company to come to the conclusion that the said Articles of Association permitted the assessee company to engage in activity of providing corporate guarantees in favour of other persons and entities. It was pursuant to this Article of Association that the assessee had engaged itself in such activity, providing corporate guarantee for credit facilities sanctioned by Vysya Bank to one Geekay Exim (India) Pvt. Ltd.& Ors. In the process, the assessee had incurred loss. The assessee had also taken reasonable steps for making recoveries by filing civil suits. Thus, on facts, the Tribunal hold in favour of the assessee on both counts namely; that the loss was genuine and that it arose out of the assessee s normal business activities. No error in view taken by the Tribunal.

Summary

Issues:
1. Whether the Tribunal was justified in holding that the assessee incurred business loss on account of a guarantee extended in the ordinary course of business?

Analysis:
The High Court of Bombay heard an appeal by the Revenue against a judgment of the Income Tax Appellate Tribunal regarding the claim of business loss by the respondent assessee for Assessment Year 2001-02. The Revenue contended that the loss did not occur in the ordinary course of business and thus could not be considered a business loss. The Tribunal, after examining the Memorandum and Articles of Association of the assessee company, found that the company was permitted to provide corporate guarantees as per its Articles of Association. The assessee had provided a corporate guarantee to Geekay Exim (India) Pvt. Ltd. & Ors. for credit facilities sanctioned by Vysya Bank, resulting in a loss. The Tribunal concluded that the loss was genuine and arose from the normal business activities of the assessee, who had also taken steps for recovery through civil suits.

The High Court upheld the Tribunal's decision, finding no error in its reasoning. It stated that no question of law arose from the Tribunal's findings and dismissed the tax appeal brought by the Revenue. The judgment highlights the importance of examining the company's constitutional documents, such as the Memorandum and Articles of Association, to determine the scope of its business activities and the legitimacy of losses claimed in the course of such activities. The case underscores the need for a factual analysis to establish the genuineness of losses and their connection to the ordinary business operations of the assessee.