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2015 (7) TMI 846 - ITAT MUMBAI

2015 (7) TMI 846 - ITAT MUMBAI - TMI - Disallowance of write off of being forfeiture of surety given by the assessee on behalf of associate concern - CIT(A) allowed claim - Held that:- CIT(A), though, held that the amount in question was earlier given as advance for purchase of machinery but has changed its character to that of guaranty/surety but has not given any finding as to how the amount even given as a guaranty for purchase of machinery would fall in the definition of revenue loss. The Ld .....

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id amount has never changed its character as a guaranty rather was advance for the purchase of machinery on behalf of M/s. Vinedale Ltd. The remaining amount was paid by the assessee for settlement of the accounts of M/s. Vinedale Ltd. which were on account of outstanding dues for the purchase of machinery by M/s. Vinedale Ltd. The assessee has paid the said amount on behalf of M/s. Vinedale Ltd. being its guarantor/surety which was not relating to any business or trading activity of the assesse .....

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ut due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. We, accordingly, restore this issue to the file of the Ld. CIT(A) to consider the claim of the assessee on merits and pass a reasoned order, irrespective of the returned loss/ income o .....

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CIT(A) will also look into the other contentions raised by the assessee on this issue. Accordingly, this appeal of the assessee is allowed for statistical purposes. - ITA No. 1471/M/2012, ITA No. 3265/M/2012 - Dated:- 17-6-2015 - R. C. Sharma, AM And Sanjay Garg, JM,JJ. For the Petitioner : Shri R R Vora, AR & Shri Hemen Chandariya, AR For the Respondent : Shri Neil Philip, DR ORDER Per Sanjay Garg, Judicial Member The above titled appeals one by the assessee and the other by the Revenue ha .....

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in deleting the disallowance of write off of ₹ 163 crores being forfeiture of surety given by the assessee on behalf of associate concern. 3. The brief facts of the case are that the assessee is a company which is engaged in the business of manufacturing and sale of Beer. A return of income for the year under consideration was filed by it on 30.12.02 declaring total income at 'Nil'. The assessee company had issued a letter of intent of ₹ 5.5 crores approx. to M/s. Alfa Laval .....

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osal for purchase of equipment from M/s Alfa Laval (India) Ltd. However, keeping in view of its adverse financial position, it was facing difficulties in securing acceptance of its intent to purchase the machinery on its terms from M/s Alfa Laval (India) Ltd. The assessee company asked M/s. Alfa Laval (India) Ltd. to appropriate the balance amount of ₹ 2.5 crores towards M/s Vindale. M/s Alfa Laval (India) Ltd. accepted this proposal put forth by the assessee company subject to the conditi .....

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aware that the said sick company owed it significant amounts. M/s. Alfa Laval (India) Ltd. become apprehensive of collection of its outstanding dues from the said company. It therefore wanted the assessee company to make good the outstanding dues receivable from Vindale. A meeting in this regard was held of all the representatives of the assessee company, Vindale and Alfa Laval, wherein, it was agreed that the assessee company shall pay part of the outstanding amount payable by Vindale to M/s A .....

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ssued in favour of Alfa Laval (I) Ltd. The payment made by the assessee company to M/s Alfa Laval (I) Ltd. on behalf of Vindale against the transaction aggregating to ₹ 1,63,50,000/- therefore was forfeited by M/s Alfa Laval (I) Ltd. and the resultant loss suffered by it on this count was claimed by the assessee company after having written off the said amount. 4. The Assessing Officer (hereinafter referred to as the AO) however disallowed this deduction claimed by the assessee company on .....

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the assessee company before the Ld. CIT(A) that the said amount representing its business loss was liable to be considered for deduction under the provisions of Section 28 & 29 of the Act. In support of this alternative stand taken before the Ld. C1T(A), reliance was placed by the assessee company, inter alia, on the decision of Hon'ble Supreme Court in the case of "Ramachandcr Shivnarain vs. CIT", 111 ITR 263 wherein it was held that if there is a direct and proximate nexus b .....

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ble Supreme Court in the case of "CIT vs. Amalgamations Ltd.", 226 ITR 188 and that of Hon'ble Bombay High Court in the case of Jokhiram Ramchandra v. CIT, 61 ITR 693. After considering the submission of the assessee, the Ld. CIT(A) allowed the said expenditure as business loss u/s.28 and 29 of the Income Tax Act. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Tribunal(ITAT). The Tribunal vide order dated 19th June,2009 observed that the Ld. CIT(A) .....

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he Ld. CIT(A) ought to have given opportunity to the assessing officer to examine the alternative claim made by the assessee company and further he should have passed a speaking order while examining the claim of the assessee and in respect of his conclusions made thereupon. The Tribunal therefore, restored the matter back to the file of the Ld. CIT(A) for deciding the same a fresh by way of a well discussed and well reasoned order. 5. Consequent to the directions of the ITAT, the case was heard .....

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mited (206 ITR 291) held that the amount written off was allowable as business loss. Aggrieved by the order of CIT(A). The revenue has preferred the present appeal before us. 6. We have heard the rival contentions and have also gone through the record. The Ld. AR of the assessee has vehemently contended that the assessee had acted in accordance with its business objective as a guarantor/surety for the outstanding dues of sister concern of the assessee i.e. M/s Vinedale Ltd. He has brought our at .....

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the amount in question was utilized as a guarantee given on behalf of sister concern and therefore, any loss suffered by the assessee on account of such surety/guarantee was as allowable business loss u/s.28 read with section 29 of the Act. He has further contended that the loss suffered by assessee in this case was incidental to business of the assessee and as such was deductable as a business loss. He has relied in this respect upon the decisions of the Hon ble Supreme Court in the case of Ra .....

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Narasinggirji (1973)[91 ITR 544] (SC). He has further submitted that the amount written off was an irrecoverable business advance given by the assessee during the course of business and as such the same was otherwise allowable as a business loss u/s.28 read with section 37 of the Act. He has further submitted that the amount forfeited by Alfa Laval given as a guarantee by the assessee on behalf of its sister concern Vinedale had changed its character to advance receivable from its sister concer .....

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forth by the assessee. The Ld. DR on the other hand has submitted that the deduction claimed by the assessee is not allowable as business loss. He has further submitted that there was no business expediency for incurring the expenditure in question and further that even otherwise the loss at the most can be said to be a capital loss, not allowable as business loss either u/s 36 or u/s 28 and 29 of the Income Tax Act. 7. We have considered the rival contentions. It is an admitted fact that initi .....

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s. Vinedale Ltd. from Alfa Laval. Though the facts are clear that not only the advance paid by the assessee on behalf of Vinedale Ltd. of ₹ 81.30 lacs was forfeited but the assessee also paid further amount, it being a guarantor of M/s. Vinedale Ltd., incurring total liability of ₹ 16,350,000/- written off during the year under consideration. The Ld. AR at the first instance has relied upon the object Clause no. 12 and 13 of the Memorandum of Association which for the sake of conveni .....

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payable under or in respect of promissory notes, bonds, debentures stock, contractor, mortgages, charges, obligations, instruments and securities of any company or of incorporated or not, and generally to guarantees or become sureties for the performance of any contracts or obligations." 8. It is pertinent to mention here that the above reproduced objects of the assessee company are not the main objects of the company. The main object of the assessee is written in Article a of Memorandum of .....

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Further a perusal of clause 12 and 13 above reveals that the assessee for the furtherance of its main objects or for the sake of interests of its shareholders can stood as a guarantee or surety for other companies, firms or persons, as the case may be, in relation to the performance of contract or payment of money etc. When adjudicating on an identical issue, the Coordinate Bench of the Tribunal in the case of LML Ltd. vs. Joint CIT 2014 33 ITR(Trib) 269 (Mum), wherein, the assessee company had .....

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er before the AO or before the CIT(A) or before us that how the act of standing as guarantee for M/s. Vinedale Ltd. was beneficial for the interest of the shareholder of the company or for the purpose of attainment of main object or main business activity of the assessee. The only plea that has been taken is that since the assessee had to renegotiate about the terms of intent to purchase the equipment and that is why it had opted to ask Alfa Laval to treat the excess advance of the assessee as a .....

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any loss on that account. Even otherwise the money was paid by the assessee for purchase of capital asset and the loss if any on account of cut in the purchase order would otherwise be a capital loss. Under such circumstances, the advance of ₹ 81.30 lakhs paid by the assessee on behalf of its sister concern for the purchase of equipment by its sister concern Vinedale, could neither be treated as a business or trading advance on behalf of the assessee nor on behalf of its sister concern Vin .....

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The said loan on being become irrecoverable or unrealizable on account of the debtor company declared as sick unit and incurring huge losses, the nature of loss of assessee cannot be said to be a business loss or expenditure but a capital loss only. Reliance in this respect can also be placed on the decision of the co-ordinate bench of the Tribunal in the case of "LML Ltd." (supra). The assessee company fully knowing that its sister concern M/s. Vinedale Ltd. was running into losses a .....

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Hence, the activity of advancing the money and paying the debt of the M/s. Vinedale Ltd. which was on account of purchase of machinery being capital asset, cannot be said to be the business activity or any activity incidental to the business of the assessee. The loss incurred by the assessee thus can neither be said to be a business loss allowable as deduction under section 28 read with section 29 of the Act nor can be said to be a business expenditure. The assessee has also failed to explain t .....

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given by the assessee which partakes the character of debt cannot be said to be a business advance. So far as the contention that the character of the advance given by the assessee has changed from that of advance given for machinery to that of guaranty and further that the purpose of loan advance was of no consequence but that of utilization of the amount, we may, in this respect, observe that in the case in hand the assessee has not utilized the amount in the course of business activity of th .....

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aranty given for purchase of machinery, which liability was ultimately owned by the assessee company, can in any manner be said to be relating to the business activity of the assessee or that of the M/s. Vinedale Ltd. The loan amount was used for the purchase of machinery which even otherwise was not in any manner used for the purpose of business of the assessee. Hence, it cannot be said that the character of the amount advanced had changed from capital account to revenue account. The various ca .....

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f machinery would fall in the definition of revenue loss. The Ld. CIT(A) has simply observed that earlier the assessee had paid the amount as an advance with purchase of machinery but later on the same was converted as guaranty for purchase of machinery by M/s. Vinedale Ltd. and thereafter without giving any reasoning treated the same as revenue loss. The Ld. CIT(A) even has not considered that the amount of advance paid to M/s. Alfa Laval (India) Ltd. which was initially treated as advance on b .....

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not relating to any business or trading activity of the assessee in any manner. We therefore do not find any merit in the order of the Ld. CIT(A) and the same is therefore set aside. The action of the AO disallowing the said loss is confirmed. 10. Now we take up the assessee s appeal bearing ITA No.3265/M/2012 for A.Y. 2006-07. ITA No.3265/M/2012 for A.Y. 2006-07 11. The assessee in this appeal has taken two effective grounds of appeal. 12. Ground No.1 is relating to the action of the Ld. CIT(A .....

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ss. He held that assessment under section 143(3) of the Act cannot be framed below the return of income. He therefore disallowed the claim of the assessee. 14. The Ld. A.R. of the assessee has submitted before us that the action of the Ld. CIT(A) in rejecting the claim of the assessee was not justified. He has further relied upon the decision of the Hon ble Gujarat High Court in the case of "Gujarat Gas Ltd. vs. JCIT" (2000) 245 ITR 84. In the said case, the words of the Circular No.54 .....

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s. It was further held that the AO, while exercising his quasi judicial powers was not bound by the said circular and should have exercised his powers independently. The Hon ble High Court, therefore, directed the AO to make the assessment without keeping in mind the said circular. It may be further observed that the Hon ble Bombay High Court in the case of Pruthvi Brokers & Shareholders Pvt. Ltd. ITA No.3908 of 2010 decided on 21.06.12, while relying upon the various decisions of the Hon bl .....

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e Assessing Authority and the said judgment does not impinge on the power or negate the powers of the appellate authorities to entertain such claim by way of additional ground. Even otherwise, the Ld. CIT(A) ought to have considered the claim of the assessee in exercise of his appellate jurisdiction under section 250 of the Act. Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of inc .....

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this issue and to decide the issue in accordance with law. 15. The second ground is relating to the disallowance under section 14A of the Act. The Ld. A.R. of the assessee, at the outset, has stated that the Ld. CIT(A) has made the disallowance under section 14A as per the provisions of Rule 8D of the Income Tax Rules. He has further submitted that the assessment year under consideration is A.Y. 2006-07 and in view of the law laid down by the Hon ble Bombay High Court in the case of "Godre .....

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