High Court of KeralaDivision Bench2019-02-19Appeal dismissed; no interference; Annexure C o...

Commissioner of Income Tax, Cochin v Apollo Tyres Ltd.

Case / Petition Number:ITA.No. 204 of 2010

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: P.R. Ramachandra Menon
N. Anil Kumar
Judgment Date: 2019-02-19
Court Decision / Holding: The appeal is dismissed; no interference with the ITAT's Annexure C order. The High Court upholds the Tribunal's reasoning and declines to adopt a contrary view on the write-off deduction.
Final Disposition: Appeal dismissed; no interference; Annexure C order stands.

Parties to the Case

Appellants / Petitioners

THE COMMISSIONER OF INCOME TAX, COCHIN

Respondents

M/S. APPOLLO TYRES LTD.

Legal Representation & Advocates

Counsels for Petitioners

• Sri Joseph Joseph, SC, for Income Tax
• Sri Christopher Abraham, Income Tax Department
• Sri K.M.V. Pandalai, Income Tax Department

Counsels for Respondents

• Sri Joseph Markose (Sr.)
• Sri Binu Mathew
• Sri B.J. John Prakash
• Sri Joseph Kodianthara (Sr.)
• Sri Mathews K. Uthuppachan
• Sri Terry V. James
• Sri Tom Thomas (Kakkuzhiyil)
• Sri V. Abraham Markos

Case Synopsis & Summary

This High Court ITA appeal challenges Annexure C order of the ITAT Cochin Bench dated 18-08-2009 for the assessment year 1996-97. Apollo Tyres Ltd., the respondent, is engaged in manufacturing automotive tyres. The dispute concerns a deduction claimed by debiting Rs. 90,00,000 under General Expenses for a corporate guarantee furnished in favour of its sister concern, Universal Steel and Alloys Limited. When the bank enforced the guarantee, the assessee paid the amount; recovery from the sister concern was not possible, leading to a written-off loss. The Assessing Officer disallowed the deduction, holding it not in the course of business. The Commissioner of Income Tax did not grant relief; the matter went to the ITAT, which, after considering the matter along with related cases, allowed relief to the assessee under certain heads. The Revenue contends that the deduction requires a clear business nexus and proof of the write-off being in the ordinary course of business; it cites S.A. Builders Ltd. v. C.I.T. (Appeals) and Amalgamations Pvt. Ltd. as controlling authorities. The assessee counters that the loss arose from guaranteeing the obligations of a related concern and is deductible in light of the cited Supreme Court decisions. The High Court finds the reasoning of the ITAT consistent with the principles laid down in these authorities and dismisses the Revenue's appeal.

Provisions of Law Cited

Section 143(3) of the Income Tax ActSection 260A of the Income Tax Act

Submissions & Arguments

Contentions of Appellants / Petitioners

The Revenue submits that the assessee's deduction of Rs. 90,00,000 (Rs. 90 lakhs) debited as a general expense on a corporate guarantee in favour of a sister concern was a genuine business loss incurred in the course of business. The bank guarantee was invoked, and the assessee paid the amount. Since recovery from the sister concern was impossible, the loss was written off. The Assessing Officer disallowed the deduction as not in the course of business. The Commissioner of Income Tax did not provide relief on some issues, so the matter went to the ITAT, which after hearing the case, allowed relief to the assessee. The Revenue contends that where a payment results from guaranteeing the obligations of a subsidiary, the loss is a business loss, particularly in group corporate structures, and that the case law supports such treatment. It argues that the Tribunal properly applied the decisions and that there is a nexus to business activities. The Revenue stresses that the mere fact of non-recovery from a sister concern does not preclude deduction, and the loss is deductible as revenue expenditure in the course of guaranteeing the subsidiary's obligations. It requests reversal of the Tribunal's order and restoration of the assessment.

Contentions of Respondents

Apollo Tyres Ltd. defends the Tribunal's decision, arguing that the write-off represents a loss not in the ordinary course of business and was not recoverable from the sister concern. It asserts that the Rs. 90 lakhs arose out of a bank guarantee extended to a related company and not from the commercial operations of the appellant's business. The write-off is a non-operating item and should be treated as a capital loss or disallowable as an expenditure incurred in connection with a guarantee that is separate from the core business. It asserts that the decision in S.A. Builders and Amalgamations supports the claim only under more specific factual matrices; here, the guarantee arrangement and the attendant write-off should be examined on the grounds of business nexus, commercial prudence, and whether the loss is incidental to the business. It argues that the ITAT's approach should be strictly tested, and that the relief granted is not consistent with the statutory provisions and the established doctrine in this case. The respondents seek upholding of the ITAT's reasoning and dismissal of the Revenue's appeal.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
S.A. Builders Limited v. Commissioner of Income Tax (Appeals), Chandigarh and Others	288 ITR 1 (SC)	Positive	Cited and applied by the ITAT to permit the deduction; later affirmed by the Supreme Court, establishing the principle that a loss arising from a corporate guarantee/ write-off can be deductible in the appropriate context.
Commissioner of Income Tax v. Amalgamations Pvt. Ltd.	226 ITR 188 (SC)	Positive	Direct decision on point; the ratio is applied to support the assessee's claim for deduction in similar circumstances.

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Extracted Judgment Text

Exact text extracted from official judgment records.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT** **THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON** **&** **THE HONOURABLE MR.JUSTICE N.ANIL KUMAR** **TUESDAY ,THE 19TH DAY OF FEBRUARY 2019 / 30TH MAGHA, 1940** **ITA.No. 204 of 2010** **AGAINST THE ORDER IN ITA 21/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 18-08-2009** ## **APPELLANT/RESPONDENT:** **THE COMMISSIONER OF INCOME TAX, COCHIN.** **BY ADVS. SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT SRI.K.M.V.PANDALAI, INCOME TAX DEPARTMENT** ## **RESPONDENT/RESPONDENT:** **M/S. APPOLLO TYRES LTD. 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD, KOCHI-31.** **BY ADVS. SRI.JOSEPH MARKOS (SR.) SRI.BINU MATHEW SRI.B.J.JOHN PRAKASH SRI.JOSEPH KODIANTHARA (SR.) SRI.MATHEWS K.UTHUPPACHAN SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 19.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ITA.204/10 2 ## **JUDGMENT** ## **P.R. Ramachandra Menon, J.** This appeal is at the instance of the Revenue. Challenge is against Annexure C order passed by the Income Tax Appellate Tribunal, Cochin Bench. The assessment is in respect of the assessment year 1996-97. 2. The respondent Assessee Company is engaged in the manufacture and sale of automotive tyres, tubes, etc. Return was filed by the Company on 28.11.1996, which was followed by a revised return. Finally, the assessment was completed in terms of Section 143(3) of the Income Tax Act by the Assessing Officer as per Annexure A order dated 10.01.2002, assessing a total income of Rs.5,79,77,070/- and fixing the tax liability accordingly. This was sought to be challenged by the Assessee by filing appeal before the Commissioner of Income Tax. After considering the plus and minus points, the appeal was finalised as ITA.204/10 3 per Annexure B order, whereby some points were answered in favour of the Assessee, while some additions were made in favour of the Revenue. This was challenged both by the Assessee and the Revenue before the Income Tax Appellate Tribunal. After hearing the matter in detail, along with some other cases, a common verdict was passed as per AnnexureC order dated 18.08.2009, whereby the grievance projected by the Assessee was redressed under some of the relevant heads, which are stated as detrimental to the interest of the Revenue and hence the challenge in the appeal filed by the Revenue. 3. Heard Mr. Christopher Abraham, the learned Standing Counsel for the Department as well as Mr.Joseph Markose, the learned Sr.Counsel for the Assessee, at length. 4. The Revenue has pointed out some questions, as involving substantial questions of law, which ITA.204/10 4 are in the following terms: (a) Whether, on the facts and in the circumstances of the case and also in view of the fact that the amount of Rs.90,00,000/- had not been advanced for carrying on the business of the assessee, the assessee is entitled to claim deduction of the same? (b) Whether, on the facts and in the circumstances, of the case, 1. did the assessee discharge the burden of proof; 2. did the assessee establish the claim of saving of reputation; 3. the assesssee is entitled to the deduction? 5. The dispute is with regard to the course pursued by the Assessee debiting in its account, under the head 'General Expenses', a sum of Rs.90 lakhs towards the corporate guarantee given in favour of 'M/s Universal Steel and Alloys Limited', a sister concern. The Bank had enforced the Bank Guarantee, by virtue of which, the Assessee had to pay the said amount to the Bank. This was not recoverable from the sister concern and hence it ITA.204/10 5 was written off. It was disallowed by the Assessing Officer, as it was never in the course of business of the Assessee and hence liability was mulcted upon the shoulders of the Assessee. As no substantial relief was given by the Commissioner of Income Tax, the matter was taken up before the Tribunal. After considering the various factual aspects involved and also applying the law declared by the Apex Court in **S.A. Builders Limited v.** **Commissioner of Income Tax (Appeals), Chandigarh and Others [288 ITR 1 (SC)],** the claim of the Assessee was allowed, holding that there was nothing wrong on the part of the Assessee in having it written off, M/s Universal Steel and Alloys Limited being a sister concern/subsidiary of the company. 6. In response to the submission made by the learned Standing Counsel for the Revenue and also with reference to the grounds raised in the appeal, Mr.Joseph Markose, the learned Sr. Counsel for the ITA.204/10 6 Assessee Company submits that there is a direct decision as well on the point, as reported in **Commissioner of Income Tax v. Amalgamations Pvt.** **Ltd. [1997 (226) ITR 188 (SC)]** . The Assessee Company had purchased all the shares of a company by name 'Sembiam Saw Mills (Private) Limited', which originally was a subsidiary company of Addison and Company (Private) Limited and thus the former company (SSM) became the direct subsidiary of the Assessee Company. The subsidiary company had borrowed amounts from the National Bank of India Limited, to which the Assessee Company had offered bank guarantee, particularly by virtue of the enabling clause in the Memorandum of Association in this regard to offer guarantee for the affairs of the subsidiary companies. The loss sustained by the Assessee and written off accordingly was disallowed by the Assessing Officer stating that the transaction was not a part of the business of the Assessee Company, which contention ITA.204/10 7 was repelled by the Tribunal granting relief to the Assessee Company accepting the claim of the Assessee Company. This came to be affirmed by the Apex Court in **Commissioner of Income Tax v. Amalgamations Pvt. Ltd. [1997 (226) ITR 188 (SC)]** . The appeal preferred came to be dismissed by the Apex Court as per the said judgment. 7. The learned Senior counsel submits that the facts and circumstances are almost similar to the course of business herein and the ratio of the decision is quite applicable to the instant case as well. 8. We find force in the said submissions. In so far as there is no case for the Revenue, that M/s Universal Steel and Alloys Limited is not a sister concern of the Assessee Company and since there is no dispute with regard to the loan procured from the financier offering bank guarantee and also as to the loss sustained (leading to have the debt written off), we find that the issue is ITA.204/10 8 covered by the dictum laid down by the Apex Court, as cited above. This being the position, this is not a fit case, where interference could be made by this Court in terms of Section 260A of the I.T. Act. The appeal fails. It is dismissed accordingly. **Sd/P.R.RAMACHANDRA MENON JUDGE** **Sd/N.ANIL KUMAR JUDGE** okb //True copy// P.S. to Judge