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2009 (8) TMI 782

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..... ed against the order of Commissioner of Income Tax (Appeals)-VIII, Chennai dated 28-3-2008 and pertains to assessment year 2004-05. 2. The issue raised is that the Commissioner of Income Tax (Appeals) erred in deleting the disallowance of Rs. 13,07,05,000 being the amount paid towards discharge of corporate guarantee obligation. 3. The assessee company, M/s. W.S. Industries (India) Ltd. (WSI) in this case is engaged in the business of manufacturing electro porcelain products. During the course of assessment, assessee had claimed a sum of Rs. 19,18,10,394 towards discharge of corporate guarantee obligation and advances not recoverable debited to share premium and claimed as business expenditure. The Assessing Officer called for details for the same from the assessee. It was explained that assessee during the years 1984 to 1992 had an Electronics Division at Bangalore. In 1992, the company transferred its Electronics Division as a going concern to W.S. Electronics Ltd., a subsidiary of the assessee, which was later known as W.S. Telesystems (WSTL). During the years 1993 to 2000, the WSTL Telesystems Ltd. has been executing certain contracts for WSI for supply of carrier communication .....

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..... ad been made to WSTL in the normal course of business to carry out the regular business activities for the benefit of the company. The corporate guarantees were also issued as part of its regular business activities to protect the company s interest, as otherwise, the business operations of both the companies would have been affected and WSI would have been prevented from executing its contracts with the ultimate customers from whom continuous contracts of national importance have been secured on a regular basis. Thus, 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. In view of the above, the amount of Rs. 19,18,10,394 held as advance to WSTL in the books of WSI and written off during the financial year 2003-04 have been legitimately claimed as business losses of the company. 6. Upon consideration of the above, the Assessing Officer allowed the advance of Rs.6.11 lakhs to be written off. However, a .....

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..... of corporate guarantees. 9. Against this order Revenue is in appeal before us. Following points have further been agitated by the Revenue:- The learned Commissioner of Income Tax (Appeals) failed to note that the Apex Court decision relied upon in the case of Amalgamations Ltd. (supra) is not applicable to the facts of this case inasmuch as in the said case there was clear finding that the business of the company included furnishing guarantees to debts borrowed by subsidiary company. Here, the assessee company s business does not include furnishing guarantees to subsidiaries (in the course of its business). The learned Commissioner of Income Tax (Appeals) ought to have appreciated that there is no evidence on record to show that the loss actually arose in the previous year as the payments were made in 2001-02 and unlike in the case of Amalgamations Ltd. there was no claim from the Liquidators. The learned Commissioner of Income Tax (Appeals) ought to have seen that the assessee has treated the loss as capital in its account by debiting the share premium account instead of debiting the profit and loss account as bad debts and treatment for tax purposes cannot be different. 10. We ha .....

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..... . 12. Hon ble Apex Court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77 had held that there is no need to examine whether the expenditure or allowance which is permissible must be capable of producing taxable income. 13. We further find that in the Articles and Memorandum of Association of the assessee, it has been clearly mentioned in Clause No. 50 of the Objects, that it was one of the assessee s business to give guarantees - financial or otherwise and/or to provide security to any person either on behalf of the company or on behalf of others on such terms and conditions as the company shall determine. Hence, (giving corporate guarantee duly had the sanction of Articles and Memorandum of Association of the company and as such it was a part of the assessee s business. 14. Moreover, when the transaction has been entered into in a commercially expedient manner, the resultant expense / loss is allowable. This is supported by Hon ble Apex Court exposition in the case of S.A. Builders Ltd. (supra) To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities .....

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..... of carrying on its business; (2) though the assessee was obliged to pay the bank during the previous year relevant to the assessment year 1958-59, it did not become a loss in that year because there were possibilities of recovery from the liquidators as was clear from later recoveries; and (3) as the final payment was received only in the previous year relevant to the assessment year 1962-63, the loss arose only then and hence the Tribunal was right in allowing it in that year. The aforesaid decision of the Hon ble Madras High Court was affirmed by the Hon ble Apex Court in the case of Amalgamations (P.) Ltd. (supra). 16. Hon ble Apex Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 had held that mere book keeping entry cannot be determinative of the actual nature of the transaction. Further, Hon ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 1723 had held that principles of accountancy do not override provisions of taxing statute. From the above, it is evident that accounting treatment given by the assessee in the books cannot take precedence over what is mandated by tax laws. 17. We further find tha .....

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