2016 (8) TMI 558 - HC - Income Tax

Business loss - whether tribunal was not justified allowing the deduction paid to Andhra Bank by the assessee as a one-time settlement to clear the dues of M/s. New Tobacco Company, a group concern as the business expenses of the assessee although the same is not paid for the business of the assessee in deviation from the law and the statute? - Held that - Tribunal was wrong in proceeding on the basis that the Reserve Bank of India had issued a caution notice. We asked Mr. Khaitan to produce the caution notice before us for consideration. Pursuant to our request, Mr. Khaitan has produced before us a news item published in the business page of The Telegraph dated March 31, 1995 from which it appears that the caution notice issued by the Reserve Bank of India had been withdrawn on or prior to March 30, 1995. The contents of a news item published in a newspaper are not admissible in evidence. What is admissible is that such a news was published. Whether it is correct or incorrect there is no evidence with regard thereto. Even assuming that such a news was published on March 31, 1995, it appears that the caution notice issued by the Reserve Bank of India had already been withdrawn. Therefore, the learned Tribunal was wrong in proceeding on the basis that it is due to the pressure exerted by the Reserve Bank of India that the assessee was made to pay the debt due by New Tobacco Company to the Andhra Bank. There was nothing before the learned Tribunal to show that the Andhra Bank would not have advanced any further money to Andhra Cements Ltd. except upon payment by the assessee the dues owed by New Tobacco Company. Even assuming for the sake of argument that there was any such situation then the payment of ₹ 1.35 crores would take the character of the cost of acquisition of the shares of Andhra Cements Ltd. acquired by the assessee shortly before such payment. It is an admitted fact that the Andhra Cement Ltd. was acquired by the assessee in the year 1994 while the Andhra Cements Ltd. was in a BIFR proceeding. The learned Tribunal was utterly wrong in holding that the amount paid by the assessee to the bank in settlement of the debt owed by New Tobacco Company was a business loss of the appellant. - Decided in favour of the Revenue.

Summary

Issues Involved:
1. Deduction of ?1.35 crores paid to Andhra Bank as a one-time settlement.
2. Deduction of club subscription charges for executives.

Issue-wise Detailed Analysis:

1. Deduction of ?1.35 crores paid to Andhra Bank as a one-time settlement:

The primary issue in this appeal was whether the ?1.35 crores paid by the assessee to Andhra Bank to clear the dues of M/s. New Tobacco Company (NTC) was an allowable business expenditure. The Tribunal had allowed this deduction, but the Revenue contested it.

The court examined the agreement titled "Terms of Settlement" dated December 11, 1996, between the assessee and Andhra Bank. The agreement detailed the credit facility initially granted to DAIL, which was later transferred to NTC following a scheme of arrangement sanctioned by the Calcutta High Court. The bank had filed a suit against NTC and its directors for recovery of dues, and the hypothecated tobacco stock was sold, with proceeds lying in a deposit account.

The assessee argued that the payment was made to facilitate further credit facilities for Andhra Cements Limited, which it had taken over and was promoting for rehabilitation under a BIFR scheme. The Tribunal supported this view, citing previous instances where similar payments were allowed as business expenses due to commercial expediency and maintaining business operations.

However, the court disagreed with the Tribunal's reasoning. It noted that after the scheme sanctioned on July 31, 1984, the assessee had no further connection with NTC and was not liable for its debts. The Tribunal's analogy with earlier years' deductions was flawed because, in those instances, the assessee was a guarantor, making it jointly and severally liable. The payment of ?1.35 crores did not meet the criteria of a business expenditure as it was not directly related to the assessee's business operations but was more of a capital expenditure related to the acquisition of Andhra Cements Ltd.

The court also found no evidence supporting the Tribunal's claim that the Reserve Bank of India had issued a caution notice affecting the assessee's credit facilities. The court concluded that the payment was not a business loss but could be seen as part of the cost of acquiring Andhra Cements Ltd.

2. Deduction of club subscription charges for executives:

The second issue was whether the club subscription charges paid by the assessee for its executives were allowable deductions. The court noted that this question had already been settled in favor of the assessee by previous judgments. Therefore, the court affirmed that such expenses were allowable deductions as they were incurred for business purposes, in line with the contracts of employment for the executives.

Conclusion:

The appeal was partly allowed. The court ruled in favor of the Revenue concerning the ?1.35 crores payment to Andhra Bank, deeming it not an allowable business expenditure. On the other hand, the court ruled in favor of the assessee regarding the deduction of club subscription charges for its executives.