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2016 (8) TMI 558 - CALCUTTA HIGH COURT

2016 (8) TMI 558 - CALCUTTA HIGH COURT - [2016] 385 ITR 150 - 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 ha .....

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uch 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published on March 31, 1995, it appears that the caution notice issued by the Reserve Bank of India had already been withdrawn.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 w .....

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a 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. - I. T. A. No. 242 of 2005 - Dated:- 13-5-2016 - Girish Chandra Gupta And Asha Arora, JJ. For the Appellant : A. G. Gutgutia, P. Dutta Maitra For the Respond .....

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ollows : "(ii) For that on the facts and circumstances of the case the learned Tribunal was not justified in law in allowing the deduction of ₹ 1.35 crores 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. (iii) For that on the facts and circumstances of the case the .....

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ssee for its executives in terms of contracts for employment are allowable deductions ?" 4. At the hearing of the appeal, Mrs. Gutgutia, learned advocate appearing on behalf of the Revenue submitted that the ground as regards the allowance of deduction of a sum of ₹ 1.35 crores quoted above involves a substantial question of law and this court should, therefore, also consider the appeal on the basis of the aforesaid ground. 5. Mr. J. P. Khaitan, learned senior advocate appearing on be .....

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was pleased to admit the appeal solely on the ground as appearing from the order dated September 2, 2014. 6. We have considered his objection but we are unable to accede thereto. We have given opportunity to Mr. Khaitan to address us on the point as regards the allowance of deduction of a sum of ₹ 1.35 crores and after hearing him, we are of the opinion that the appeal, in fact, involves substantial question of law with regard thereto and therefore, we have decided to formulate the follow .....

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the parties contains the following recitals. "Whereas DAIL approached the bank and the bank granted credit facility of ₹ 2.17 crores for financing of the operations of the tobacco division of DAIL against the security of hypothecation of stocks, stores and tobacco in transit in respect of the cigarette factory at Biccavolu of the tobacco division of DAIL inclusive of the stocks of tobacco lying at the godowns at Guntur in the State of Andhra Pradesh. Whereas the aforesaid tobacco divi .....

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yed by the tobacco division of DAIL was transferred in favour of NTC, against the security of stocks, stores and tobacco owned by NTC. Whereas on or about September 15, 1987 the bank filed a suit against NTC. and two directors of NTC being suit No.1035 of 1987 before the hon'ble Calcutta High Court for recovery of a sum of ₹ 2,69,54,228 being the amount outstanding from NTC to the bank in respect of the aforesaid credit facility. Whereas pursuant to orders passed by the hon'ble Hig .....

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trial and Financial Reconstruction in the year 1994 is enjoying credit facilities from the bank and that additional facilities as may be required by the said Andhra Cements Limited cannot be considered by the bank unless and until the outstanding dues of NTC to the bank are settled. Whereas DAIL, now desires that, with a view to enable Andhra Cements Limited to obtain further credit facilities as aforesaid and keep harmonious relationship with the bank, the following arrangements be entered into .....

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to advance, so long as the debts owed by the new tobacco company were not cleared. 9. In order to remove the aforesaid hurdle and to rejuvenate the Andhra Cements Ltd., the debts owed by new tobacco company was cleared by the assessee. He added that the aforesaid payment was also necessitated because of the caution issued by the Reserve Bank of India against money being lent to the companies belonging to G. P. Goenka group. 10. He drew our attention to the judgement of the learned Tribunal from .....

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ent that the Reserve Bank of India had issued a caution notice to all the commercial banks for not extending credit facilities to companies of Duncan group on account of failure of NTC to repay the loans to the banks. No modern business can be carried on effectively and efficiently unless proper credit facilities are made available by the banks and institutions. In the circumstances when the apex bank issued caution notice against the appellant on account of NTC's default then it was in the .....

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ntions and allowed the assessee's claim. However, since the accountant member's view was not in line with the views of the Judicial Member, the matter was referred to the Third Member. The hon'ble President of this Tribunal in his order dated July 17, 2004 however agreed with the view taken by the learned Accountant Member. In his order dated July 17, 2004 the learned Third Member made the following observations in paras. 18 and 19, which are relevant for the present appeal and accor .....

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l hopes to recover the amount and, therefore, wrote it off as a genuine business loss. In this connection, reliance was placed by the learned Accountant Member on the following decisions : (i) CIT v. Williamson Magor and Co. Ltd. [1979] 117 ITR 858 (Cal) ; (ii) CIT v. Gillanders Arbuthnot and Co. Ltd. [1982] 138 ITR 763 (Cal) ; (iii) Macneill and Barry Ltd. v. CIT [1986] 158 ITR 374 (Cal) ; and (iv) Turner Morrison and Co. Ltd. v. CIT [2000] 245 ITR 724 (Cal). In all the above cases when recover .....

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d wholly and exclusively for the business purposes of the appellant. (f) It has also been stated that unless the appellant had settled the claims of bank it would not have extended any credit facilities to M/s. Andhra Cement Ltd of which the appellant was appointed as the "promoter" for rehabilitation under the scheme approved by the Board for Industrial and Financial Reconstruction. As such in absence of settlement with Andhra Bank, the appellant's economic and commercial interest .....

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yment of a sum of ₹ 1.35 crores was deductible expenditure, cited a judgment of the apex court in the case of CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC), wherein the following views were taken (headnote) : "(i) on the facts, that the managing agency agreement with the managed company was a profitable source of income. The assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency, which was an income earn .....

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or the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The expenditure incurred on the preservation of a profit-earning asset of a business is always a deductible expenditure." 12. The judgment cited by Mr. Khaitan does not appear to us to have any applicability to the facts and circumstances of this case. The assessee in that c .....

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in a ruinous litigation. It is in those circumstances, the settlement was arrived at and the money was paid. 14. It would appear that the managed company had a cause of action in that case against the managing agency and, therefore, the payment made by the assessee on account of its share of the loss of the managed company was allowed as an expenditure. 15. The next judgment cited by Mr. Khaitan is in the case of Bikaner Gypsums Ltd. v. CIT reported in [1991] 187 ITR 39 (SC). Mr. Khaitan drew o .....

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1773, the expenditure was on revenue account. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), this court held that the expenditure incurred by an assessee for the purpose of removing the restriction on the number of working hours with a view to increase its profits, was in the nature of revenue expenditure. The court observed that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and con duct of the assessee's business to .....

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t, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business but that by itself would not acquire any capital asset." 16. We do not think that the judgment in the case of Bikaner Gypsums Ltd. has any application to the facts of this case either. What had happened in that case was that the assessee was a lessee in respect of a mine. The area leased out to the lessee contain .....

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ent was allowed as a revenue expenditure. 17. The third and the last judgment cited by Mr. Khaitan is in the case of S. A. Builders Ltd. v. CIT (Appeals) reported in [2007] 288 ITR 1 (SC). Mr. Khaitan drew our attention to paragraphs 25, 35 and 36 of the aforesaid judgment, which read as follows (page 8) : "In our opinion, the High Court as well as the Tribunal and other Income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the abo .....

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(which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income-tax authorities must put themselves in the shoes of the asses see and see how a prudent businessman would act. The auth .....

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ds on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep .....

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ed interest-free to a sister concern. Therefore, the judgment is to be understood in the facts of its own case. What had happened was that the money had been borrowed by the assessee and advanced to the sister concern. The assessee obviously was interested in the working of the sister concern. The assessee naturally had business relation and the assessee was also interested in the profits to be earned by the sister concern. 19. It is in that view of the matter that the concept of business expedi .....

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ted upon such transfer by rearranging the monies lent and advanced to New Tobacco Company. There is a recital that on October 12, 1986 the New Tobacco Company approached the bank and the credit facilities earlier granted to the assessee were transferred in favour of the New Tobacco Company, against the security of stocks, stores and tobacco owned by the borrower, namely, New Tobacco Company. It would further appear from the recitals that the suit filed by the bank against New Tobacco Company was .....

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e in the earlier years but failed to notice that in the case of earlier payments where deductions were allowed to the assessee, the assessee was in the position of a guarantor. A guarantor is co-obligant and, therefore, he is jointly and severally liable to the lender. In the earlier years, the money paid by the assessee was debited to the account of the New Tobacco Company. After the money became irrecoverable, the debt was written off. The similar facts were not there when the question arose w .....

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of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. Illustration B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of B's lease. B, to pre vent the sale and the consequent annulment of his own lease, pays to the Government the sum d .....

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eserve 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 admi .....

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