Commissioner of Income Tax-I, Cochin v Apollo Tyres Ltd

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON** **&** **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **WEDNESDAY, THE 10TH DAY OF APRIL 2019 / 20TH CHAITHRA, 1941** **ITA.No.40 of 2011** **AGAINST THE ORDER OF INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH IN ITA No.429/COCH/2006 DATED 5.10.2010 of I.T.A.TRIBUNAL,COCHIN BENCH** **APPELLANT:** **THE COMMISSIONER OF INCOME TAX-I COCHIN.** **BY ADVS.** **SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT SRI.JOSE JOSEPH, SC, FOR INCOME TAX** ## **RESPONDENT:** **M/S.APOLLO TYRES LTD.** **6TH FLOOR, CHERUPUSHPAM BUILDINGS,, SHANMUGHAM ROAD, KOCHI 682 031.** **BY ADVS.** **SRI.BINU MATHEW SRI.B.J.JOHN PRAKASH SRI.JOSEPH KODIANTHARA (SR.) SRI.MATHEWS K.UTHUPPACHAN** ITA No.40 of 2011 2 **SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS SRI.V.B.UNNIRAJ** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10.04.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ITA No.40 of 2011 3 ## P.R.RAMACHANDRA MENON & S.V.BHATTI, JJ. ============================= ITA No.40 of 2011 ============================= Dated this the 10[th] day of April, 2019 ## JUDGMENT ## Bhatti, J. The Commissioner of Income Tax-I, Cochin is the appellant. The subject matter of instant tax appeal is the assessment orders passed for the year 2002-03. 2. The appellant and the respondent for short are referred as 'Revenue' and the 'assesee' respectively. 3. For convenience the following dates are noted at the outset. On 28.10.2002, the assessee filed the tax return for the assessment year 2002-2003. On 17.3.2004, the assessee filed revised return. On 12.4.2004, notice under Section 148 of the Income Tax Act (for short the 'Act') was issued by the Assistant Commissioner of Income Tax (I), Ernakulam. The assessee through communication dated 29.04.2004 requested the assessing officer to treat the revised return dated 17.3.2004 as the return filed in pursuance of notice ITA No.40 of 2011 4 issued under Section 148 of the Act. The Assessing Officer (for short 'A.O.') vide assessment order dated 24.2.2006 determined the total tax payable by the assessee as `13,95,78,296/-. The assessee aggrieved by the order of assessment dated 12.12.2008 filed appeal before the Commissioner of Appeals in Appeal No.ITA 80/R-1/E/CIT-II/05-06. The Commissioner of Appeals allowed the appeal in part. The Revenue filed ITA No.429/Coch/2006 before the Income Tax Appellate Tribunal and the appeal was allowed in part by the Tribunal. Hence the Tax Appeal before this Court under Section 260(A) of the Act. The A.O. made a few important additions and also disallowed a few substantial deductions claimed by the assessee. For brivity the conspectus of consideration by the statutory authorities till the disposal of ITA No.429/2006 is stated in the following table. |NATURE OF<br>DISALLOWANCE OR<br>ADDITION|AMOUNT|ASSESSING<br>OFFICER|COMMISSIONE<br>R OF APPEALS|INCOME TAX<br>APPELLATE<br>TRIBUNAL| |---|---|---|---|---| |1)Debited<br>expenses towards<br>repairs to<br>Building leased<br>to SIDBI|`1,20,000/-|Disallowed<br>the expenses<br>claimed by<br>the assessee|Allowed|--| ITA No.40 of 2011 5 |1(a)Disallowance<br>on Corproate<br>Buildings under<br>Section 38|`31,66,617/-|Disallowed<br>the<br>expenditure<br>claimed by<br>the assessee|Appeal partly<br>allowed<br>restricting<br>disallowance<br>to`5,00,000/-|Appeal<br>allowed| |---|---|---|---|---| |1(b)30% of the<br>rent received is<br>treated as<br>expenditure and<br>the claim for<br>30% expenses is<br>rejected|`50,000/-|Disallowed|--|--| |1(c)Expenses<br>debited towards<br>club service by<br>employees|`1,63,815/-|Disallowed<br>entire<br>expenditure|Allowed the<br>appeal and<br>accepted the<br>expenditure<br>claimed by<br>the assessee|Appeal filed<br>by Revenue<br>Dismissed| |1(d)Payment to<br>Employees Trust|`34,968/-|Disallowed|Dismissed|---| |1(e)Expenditure<br>claimed under<br>Prior period<br>items|`45,840/-|Disallowed|Dismissed|---| |1(f)<br>Proportionate<br>allocation of<br>Chairman's<br>office|`6,00,000/-|Addition|Dismissed|---| |1(g)Interest on<br>UTI<br>Mutual<br>Fund and Bank<br>of India|`15,59,046/-|Disallowed|Allowed|Allowed<br>and<br>remanded<br>to A.O. For| ITA No.40 of 2011 6 |||||decision| |---|---|---|---|---| |2)<br>Advance to<br>Gujarat<br>Petro<br>Electricals Ltd.<br>A company<br>promoted<br>by<br>Apollo Tyres and<br>Gujarat Industrial<br>and Investment<br>Corpn. Amounted<br>to `32.70 Crores,<br>written off in the<br>account of assessee<br>by transfer from<br>General reserve<br>account|`32,69,65,146<br>/|Disallowed|Allowed|Dismissed| |3Loss on sale of<br>shares in Gujarat<br>Petro Electricals<br>Ltd.|`4,66,20,000/-|Disallowed|Allowed|--| |4Payment of<br>Bonus for the<br>year 2001-02|`2,72,76,982/-|Disallowed|Allowed|Dismissed| 4. The Commissioner of Appeals allowed the appeal in part and set aside the addition made by the A.O. to an extent of `1,20,000/- being repair charges relating to buildings let out to Small Industries Development Bank of India (SIDBI). The disallowed portion of depreciation amounting to `31,66,617/restricted the disallowance to `3,30,000/-. In other words, the claim ITA No.40 of 2011 7 of assessee is allowed to an extent of `31,66,617— `3,30,000=`28,36,617/-. The disallowance of entertainment expenditure amounting to `1,63,815/- is set aside and deduction to the said extent was permitted. The disallowance of expenditure by reference to Section 14A is set aside and held that the appellant is entitled to deduction both in law and fact. The next major head of disallowance ordered by the A.O. is `32,69,65,146/- paid by the assessee to Gujarat Petro Electricals Ltd. (GPEL), a joint venture established by the assessee and the Government of Gujarat. The attendant circumstances in this behalf are that the assessee as a share-holder, with about 51% shares in GPEL, was obliged, while implementing a scheme approved by BIFR and also as a business exigency paid to GPEL from reserve fund a sum of `32.70 crores and had written off the debt of GPEL in its Books of Accounts. The deduction is claimed as business or trading loss. The A.O. disallowed the entire claim of Rs.32.70 crores. The Commissioner of Appeals allowed the deduction and held that the claim for setting off from the profits made by the assessee is lawful and permissible. The Commissioner of Appeals likewise set aside the ITA No.40 of 2011 8 order of A.O. disallowing the claim of `2,72,79,645/- paid by the assessee to the employees towards bonus for the assessment year 2002-2003 and held that the payment of bonus satisfies the requirement of Section 43B of the Income Tax Act. The Commissioner of Appeals set aside the disallowance claimed under Section 80-IA in respect of the new industrial undertaking, i.e. the power generating unit at Baroda. The Commissioner of Appeals remanded the claims relating to interest falling under Section 80(h) (h)(c) of the Act to A.O. and accordingly, partly allowed the appeal and remanded the matter to A.O. The rejection of claim under Section 115JB by A.O. is set aside and disallowance ordered by A.O. is set aside. The revenue filed the appeal against the order dated 24.4.2006 of Commissioner of Appeals before the Tribunal. The Tribunal, through the order impugned before this Court, rejected the appeal in toto except to the extent of a few additions/disallowance. 5. The revenue challenges the orders of Commissioner of Appeals and the order of Tribunal by raising the following substantial questions. ITA No.40 of 2011 9 1. Whether, on the facts and in the circumstances of the case, the assessee company is entitled to claim deduction of `4,38,829/- as club expenses incurred towards membership fee and subscription? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in interfering with the disallowance of interest of `15,59,046/- on the investment made from pool of funds? 3(a) Whether, on the facts and in the circumstances of the case is not the assessment order denying the claim of the assessee company which had advanced a sum of `32.70 crores to Gujarat Petro Electrical Ltd., a company promoted by the assessee and had written off the amount by transfer from general Reserve Account justified, valid and in accordance with law and the ITAT is right in law in interfering with the such denial of the claim? (b) The Tribunal is right in law in interfering with the denial of `32,69,65,146/- by the Assessing Officer? 4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the deduction for the bonus in the Asst. Year 2002-03 claimable and paid in the asst. year 2001-02? 5 (a) Whether, on the facts and in the circumstances of the case and sections 115JA and JB being similar should not the ITAT have, in the light of the decision of the Supreme Court reported in 255 ITR 273, held that in the context of computation of book profit under section 115JB no adjustment other than provided in the statute could be made; ITA No.40 of 2011 10 (b) Whether on the facts and in the circumstances of the case should not the ITAT have agreed with the computation of book profit by the Assessing Officer? 6. We have heard the learned Standing Counsel for Revenue Sri Christopher Abraham and the learned Senior Counsel Mr.Joseph Markos for the assessee. We may at the outset point out that the counsel appearing for both the parties have substantially reiterated the submissions made before the Tribunal or the appellate authority. The learned Standing Counsel appearing for Revenue reiterates the substantial questions of law framed in this appeal and these contentions are examined firstly by relying on the concurrent findings of fact recorded by the CIT [Appeals] and the Income Tax Appellate Tribunal and finally whether these contentions present a substantial question of law under Section 260A of the Act or not. The arguments of the counsel are mainly addressed on admissibility of club expenses i.e., - (i) towards membership fee and subscription; (ii) accepting deduction of interest earned on the investment made from pool of funds; ITA No.40 of 2011 11 (iii) business loss claimed by assessee on writing off bad debt of GPEL; (iv) payment of bonus due for the year 2001-02 in the assessment year whether is a claimable deduction or not. ## Point No.I 7. The background circumstances of this point are that the assessee claimed `4,38,829/- as admissible club expenses. The said sum comprises of membership fee of `2,75,014/- and amount spent towards other services at `1,63,815/-. The A.O. disallowed the expenses of `1,63,815/-. On appeal, the Commissioner of Appeals set aside the disallowance and the finding of Commissioner was confirmed by the Tribunal through the order under appeal. The counsel appearing for both the parties submit that the extent to which the assessee is entitled to claim as permissible deduction is no more res integra, by the decision of this Court in ITA No.1347 of 2009 dated 13.3.2019. Both the counsel state that the assessee is entitled to claim deduction to the extent of subscription or membership fee if paid by the assessee but not incidental expenses incurred by the employees/member of the assessee. The conclusion recorded by this Court on club membership expenses in ITA ITA No.40 of 2011 12 ## 1347/2009 reads thus: 18. Another issue involved in the appeal is in relation to the expenditure claimed by the assessee towards payment of 'club membership fee' of `3,02,841/-. It was contended by the Assessee that the membership fee was incurred for furtherance of business of the Assessee and since 'usage expense' was not claimed, it was never to be treated as personal expense of the members. This plea was repelled by the Assessing Officer holding that the expenditure was of personal in nature. But, the version of the Assessee was accepted by the Commissioner of Income Tax(Appeals) in the appeal preferred by the Assessee, following similar orders passed in the Assessee's own case for the assessment years 1998-99 and 1991-92, whereby the additions made by the Assessing Officer had been deleted. 19. In the appeal preferred by the Revenue, the Tribunal noted that the decision of the Tribunal under similar circumstances in respect of the assessment year 1991-92 (in the Assessee's own case) had been accepted by the Revenue and that the said finding was supported by the decisions of other High Courts as well, which stood in favour of the Assessee. It was accordingly, that the order passed by the Commissioner of Income Tax (Appeals) in favour of the assessee was upheld and the appeal preferred by the Revenue was dismissed in relation to the challenge against 'club expenses'. The finding arrived at by the Tribunal is well supported by reasons. The amount spent for acquiring membership in the Clubs stands on a different pedestal from the amounts incurred for availing materials supplied or service provided in the clubs. This Court finds that the said issue is to be answered in favour of the assessee. It is declared accordingly. 8. The order of Commissioner of Appeals and the Tribunal ITA No.40 of 2011 13 having regard to above decision, to the extent of granting complete deduction to amount spent towards club membership fee and incidental expenses is untenable. Hence is liable to be set aside and accordingly set aside, and this issue is remitted to A.O. for verification of the actual expenses incurred by the assessee and pass revised orders. The point is answered in favour of the revenue as indicated above and the matter remitted to A.O. for passing orders after examining the accounts on the actual extent of expenses incurred by the assessee in this behalf and grant deduction to the actual expenses incurred by the assessee by keeping in viewd the ratio laid down by this Court in ITA 1347/2009. ## Point - II 9. The next substantial question deals with disallowance of interest of `15,59,046/- on the investment made from pool of funds. ## 10. The substantial question reads thus: Whether on the facts and in the circumstances of the case, the Tribunal is right in law in interfering with the disallowance of interest of `15,59,046/- on the invest made from pool of funds. ITA No.40 of 2011 14 11. The assessee received dividend from UTI mutual fund and the Bank of India aggregating to `10,59,119/- and reduced from the net profit under Explanation (ii) below the second proviso to sub section (2) of section 115JB by treating the said income to which the provisions of section 10(33) of the Act would apply. The A.O. disallowed the said deduction by holding that the assessee for the previous assessment year in an appeal pending before the Apex Court has taken a different stand from the stand taken in the present assessment year. Separate accounts are not maintained for the investment in mutual fund independent of the business carried out for the year under consideration. The assessee claims that the investment in mutual funds is made from out of own funds, i.e. non-interest-bearing funds, cannot therefore be accepted. The investment made is from an inseparable fund of interest and noninterest-bearing funds and therefore, the investment carries with it both the ingredients. The assessee failed to establish that the borrowed funds have no direct nexus with the investments in units of mutual funds, and added `15,59,046/- to the net income of the ITA No.40 of 2011 15 assessee. The Commissioner of Appeals held that the inclusion of interest in the net income of the assessee is without proper verification of the accounts and held that the assessee is entitled to deduction amounting to `15,59,046/- under Section 115JB. In other words, inclusion of interest in the net income is unsustainable. The Tribunal, after considering the rival contentions, held as follows: “ 13. Ground No.3 : After hearing both the parties, we find that during assessment proceedings AO noted that assessee has reduced a sum of `10,59,119/- being dividend received from UTI Mutual fund and Bank of India from the book profits u/s 115JB. He further noticed that no amount of expenditure has been reduced from this. On enquiry, it was submitted that no borrowed funds were used for buying these units and, therefore, there was no nexus between the borrowed funds and interest free investments. It was noted by the AO that such funds were being invested from the pool of funds and the same argument was taken by the assessee in the earlier year before the Supreme Court in the case reported at 255 ITR 273. Further, no separate accounts were being maintained for investments in mutual fund. Since, according to the AO, investment was made from the common pool of fund, he allocated the proportionate amounting to `15,59,046/-.” 12. The Tribunal set aside the order of Commissioner of Appeals by referring to the view taken by this Court in the case of CIT v Leena Ramachandran (judgment dated 14[th] June 2010) and remitted the matter to A.O. for fresh consideration with a direction ITA No.40 of 2011 16 to verify whether the units of UTI mutual funds were purchased on account of trading or investment. If the shares/investment is in trading account, then by following the decision of the Kerala High Court in the case of Leena Ramachandran, no expenditure can be disallowed under section 36(1)(iii). However, if they are on account of investment, then reasonable expenditure which is directly attributable to earning such dividend, income may be disallowed. In other words, the Tribunal directed the A.O. to re-consider the particular entries, keeping in view the ratio laid down by this Court in Leena Ramachandran's case and redetermine the tax liability. After perusing the reasons recorded by the Tribunal and the decision in Leena Ramachandran's case, we are of the view that no substantial question is made out for interfering with the order of remand on this issue by the Tribunal. In our considered view the remand to A.O. is justified and no interference is warranted in the appeal. The findings of Tribunal in this behalf are tenable, does not warrant interfering and the point is answered accordingly. ## Point No.III ITA No.40 of 2011 17 13. The assessee claimed deduction of `33,56,74,286/- in computing the book profit under Section 115JB and the said deduction claimed in the return was disallowed by the A.O. thereby adding to the book profit of the assessee. The circumstances leading to the investment made by the assessee as joint venture participant in Gujarat Petro Electrical Ltd. (GPEL) are stated in sufficient detail in the order of the Tribunal. The revenue does not dispute the correctness of the narration of statement of facts noticed by the Tribunal or the Commissioner of Appeals. Therefore, to the limited extent now required, we may refer to the undisputed circumstances . ` relied on by the parties in this behalf 33,56,74,286/- disallowed includes a sum of `32.70 crores paid by the assessee from reserve funds of GPEL as guarantor of Bank loans. The assessee as part of its business expansion designs, decided to gain foot hold in the State of Gujarat and in fact established a Tyres Manufacturing unit at Baroda, State of Gujarat. As part of this business design forayed into forming GPEL with Gujarat Industrial and Investment Corporation (GIIC). Thus set up a new business through the joint venutre company known as GPEL. The assessee had acquired ITA No.40 of 2011 18 `51,80,000 equity shares of `10/- each in GPEL which comes to 37.45% of share capital of GPEL. The assessee stood as guarantor to loans borrowed from Banks by GPEL. GPEL went before BIFR and it was finally ordered to be wound up, thereby the assessee being the guarantor to GPEL had to ultimately pay `32,69,65,146/- to the financial institutions/Banks under one-time settlement. In these circumstances, the assessee has written off the debt of GPEL and claimed the amount of `32.70 crores as allowable deduction in the returns filed for subject year. The A.O. while adding back a sum of Rs.33.56 crores noted that the direct nexus between the assessee and the business of GPEL is disbelieved, and that there was no connection between the assessee and GPEL, none of the products of GPEL are used by the assessee company. The repayment of loan by the assessee cannot be treated as revenue expenditure and the loss suffered by the assessee has no direct and proximate nexus between the business operations of the assessee and GPEL. According to A.O., GPEL was a separate entity. The liabilities of GPEL, if cleared by the assessee, cannot be treated as business expenditure and hence has disallowed the deduction and added `32.70 crores to the income ITA No.40 of 2011 19 of the assessee. 14. Mr.Christopher Abraham places reliance on the reasons recorded by the A.O. and argues the following two substantial questions: 1 (a) Whether, on the facts and in the circumstances of the case is not the assessment order denying the claim of the assessee company which had advanced a sum of `32.70 crores to Gujarat Petro Electrical Ltd., a company promoted by the assessee and had written off the amount by transfer from general Reserve Account justified, valid and in accordance with law and the ITAT is right in law in interfering with the such denial of the claim? (b) The Tribunal is right in law in interfering with the denial of `32,69,65,146/- by the Assessing Officer? 2 (a) Whether, on the facts and in the circumstances of the case and sections 115JA and JB being similar should not the ITAT have, in the light of the decision of the Supreme Court reported in 255 ITR 273, held that in the context of computation of book profit under section 115JB no adjustment other than provided in the statute could be made; (b) Whether on the facts and in the circumstances of the case should not the ITAT have agreed with the computation of book profit by the Assessing Officer? 15. At the outset we may state that the argument of the revenue is not that law does not allow deduction of bad debts as ITA No.40 of 2011 20 expense or business loss suffered by the assessee. The argument of revenue is that in the admitted circumstances, allowing such deduction is not correct and the disallwance ordered by A.O. ought to have been maintained by the Tribunal and Commissioner of Appeals. The revenue can make out a substantial question that the concurrent of fact noted and recorded the findings by Commissioner of Appeals and the Income Tax Appellate Tribunal are based on no evidence and/or while arriving at the said finding, relevant evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence or whether the evidence has been misread or that the orders in appeal have misinterpreted or wrongly applied law to the issue on hand. Therefore unless one or the other grounds is made out, the revenue can't successfully challenge the findings of fact recorded by the Commissioner of Appeals and the Tribunal. We are for the purpose of appreciating the findings under challenge find it useful to refer to the order of the Tribunal. 16. The Tribunal has considered each one of the contentions ITA No.40 of 2011 21 urged by the revenue in this behalf and the gist of the findings reads thus: "39. We have considered the rival submissions carefully in the light of the material on record as well as the decisions cited by both the parties. We find that the assessee in order to establish a foothold for extension of tis business in the State of Gujarat entered into an agreement with GIIC for establishment of the project by floating GPEL which was incorporated on June 28, 1990. Later on, a shareholders agreement was entered into on 2[nd] May, 1991 through which assessee along with GIIC was to take 51% of the quity, out of which 11% was to be given to GIIC and balance 40% to the assessee. The assessee was designated as an associated aprtner and the day-to-day management as well as operations of this project were entrusted to the assessee. The assessee company was allowed to depute fur directors in the Board GPEL, whereas GIIC was to have only two members on the GPEL. The chairman and Managing Director of GPEL were also to be the nominee of the assessee company. Further, assessee company was entrusted the role of arranging finances for this project which was for manufacture of copper clad laminates as per the letter of intent by Government of India. Accordingly, assessee subscribed to the share capital of GPEL for a sum of `5.18 crores. An advance of `5 crores in two transcripts amounting to `2.43 crores in F.Y.1997-98 and `2.57 crores in F.Y.1998-99 was also given. Assessee also stood guarantor to the loans granted to GPEL by banks and financial institutions. The operations of the GPEL were unsatisfactory right from its inception and ultimately GPEL was referred to BIFR on 11.8.1997 and later on a Rehabilitation Scheme was proposed which has been confirmed by the Hon'ble Gujarat High Court. As per this Rehabilitation Scheme, copy of which is placed at ITA No.40 of 2011 22 pages 188 to 202 of the paper book, mainly restructuring of loan term liability as well as reduction of share capital was proposed. Certain sacrifices were also required to be made by Government of Gujarat as well as Government of India. As per para-3 of the scheme ATL was accepted as guarantor of the loans to GPEL to make payaments of entire principal term loan and 50% of the simple interest to banks and financial institutions the debenture holders were also required to waive 50% of the interest. The Government of Gujarat was required to (i) defer the payment of purchase tax on the basis of interest free deposits (ii) to defer sales tax liability, (iii) to defer octroi duty and (iv) to defer electricity duty. The Central Governmetn to grant - (i) an exemption from sec.41(1) of the Incoem Tax Act, (ii) an exemption from sec.36(1) of the Act, (iii) to exempt the company from the provisions of sections 100 to 102 of the Companies Act, 1956 and (iv) to exempt the company from the applicability from the provisions of sec.81A of the Companies Act. 40. The assessee company was further exempted from compliance of sec.372 of the Companies Act and from SEBI Regulations. Even Ahmedabad Electricity Corporation was required to make minimum demand charges and penalty thereon as well as to ensure uninterrupted power supply to GPEL. The equity capital was also required to be written down by 90%. In view of this scheme, assessee company made payments in the form of guarantees and/or payment of loans and interest charges to banks and financial institutions which amounted to `32.70 crores. In its board meeting held on 26.6.2002 it was decided that the amount recoverable from GPEL was not recoverable considering the over all facts and financial health of GPEL and, therefore, it was decided to write off the same. It was further decided in this meeting that this amount should be withdrawn from the general reserve. Accordingly, assessee has made claim for this loss during the A.Y. 2002-03 i.e. The eyar under ITA No.40 of 2011 23 ## consideration before us. 41. This claim has been not allowed by the AO because, according to him, there was no direct business connection between the assssee and GPEL. The products of GPEL were not being used by the assessee in its manufacturing process. The activities of GPEL had no connection with that of the assessee and, therefor,e loss suffered by the assessee has no direct and proximate nexus between the business operations carried on by it or incidental to its business. It was further observed that in any case it was a loan repayment and, therefore, it cannot be termed as revenue loss. It was also noted that GPEL was a separate entity and assessed as such and, therefore liabilities created by it did not automatically became the business expenditure of the assessee. The alternate claim u/s.36(1) (vii) was also rejected by observin that assessee was not in the business of banking or money lending and even the decision of the Hon'ble Calcutta High Court in the case of Turner Morisson & co. V CIT (supra) was distinguished by observing that in that case money was advanced to a subsidiary company on the winding up and int he rpesent case GPEL was not the subsidiary and it has also not been wound up. It was also noted that resolution for writing off this claim was passed on 26.6.2002 and, therefore, this amount could not be claimed in the present year. AO also placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v Birla Bros (P) Ltd. (supra) to disallow this claim. 42. The Id CIT(A) has allowed the relief mainly on the basis that it was a legitimate business decision. The joint venture entered into by the assessee company was with the government of Gujarat and it was not an arrangement to siphon off the money and the payments have been made in terms of the settlement approved by BIFR. 43. On the above acts we are required to find out whether assessee's claim is allowable. For this, we need to look at ITA No.40 of 2011 24 the proper aspect of the whole issue. The assessee is a company engaged in the manufacture and sale of tyres and tubes but at the same time it is authorised by clause IIIB(6) of "objects incidental or ancillary to the attainment of the main object" which reads as under: "6. To amalgamate, enter into partnership or into any arrangements for sharing profits, union of interests, cooperation, joint-adventures, or reciprocal concessions or for limiting competition with any person or company carrying on or engaged in or about to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted so as to directly or indirectly benefit the company." The above clause clearly shows that to meet the aspiration of becoming a diversified company the above clause authorised it to enter into any partnership or arrangeent to start any business. Therefore, for getting into the new business a letter of intent was got issued from Government of India to start new business of production and manufacture of copper clad laminates and the company known as GPEL was incorproated in May 2,1999. The assessee with specific intention of establishing its foothold in the State of Gujarat for expansion of its existing business of tyre entered into collaboration with the Government of Gujarat through GIIC to start a new company. Because of this agreement, assessee has been successfully able to establish Asia's largest business plant at Limda near Baroda in the State of Gujarat. Therefore, it is clear that whatever was being tried to be achieved through GIIC was a larger business interest or what in other words is known as commercial expediency. The Hon'ble Supreme Court in the case of S.A.Builders Ltd. V CIT (supra) has given the following definition of commercial expediency at pacitum-26: "The expression "commercial expediency" is an expression of wide import and includes such expenditure such as a ITA No.40 of 2011 25 prudent businessma incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency". 44. The assessee having though achieved its major object of establishing its tyre business at Limda but in the meantime the opeations of GPEL were not running satisfactorily. Ultimately, GPEL went to BIFR and a scheme of rehabilitation was framed which has been confirmed by the Hon'ble Gujarat High Court. As contended by the Ld. Counsel of the assessee every stake holder of GPEL was to make some sacrifices. Para 3 of the Rehabilitation Scheme provides for following: i. Financial institutions and banks were required to accept principal amounts of loan only @ 50% of the simple interest outstanding. ii. For this, they were directed to accept the assessee company as guarantor of the loans and ultimately one time payment of the principal and 50% interest was prescribed; iii. Debenture holders were to sacrifice 50% of the interest iv. Government of Gujarat was required to defer payment of purchase tax on interest free basis and was also required to defer sales tax liability as well as octroi duty and electricity duty; v. Central Government was required to grant exemption u/s.41(1) of the I.T. Act for remission of liability and to give exemption u/s.36(1)(iii) of the I.T. Act for notional interest on promoters contribution. The ITA No.40 of 2011 26 government was further required to exempt the company from the provisions of sections 100 to 102 of the Companies Act regarding alteration/deduction of share capital; vi. Further it was required to grant exemption from the provisoins of sec.81A of the Companies Act and compliance of SEBI gruidelines for issue of optional convertible debentures. vii. The was also to government required grant exemption to ATL i.e., the assessee company from compliance of provisions of sec.370A of the Companies Act; viii. The Ahmedabad Electricity Corporation was required to waive minimum demand charges and penalty from the date of discontinuation to the date of reconnection and was further directed to ensure uninterrupted power of supply. ix. The assessee company was specifically required to bring in capital of `291 lakhs towards the rehabilitation scheme. The payment made by the assessee is, in fact, towards compliance of the Rehabilitation Scheme. It clearly shows that the assessee company was trying to rehabilitate the operations of the GPEL but still the same could not be revived. Therefore, in addition to the above compulsions by the order of the BIFR, the assessee company was further required to defend its reputation by paying to the financial institutions and bankers towards discharge of its guaranteed liabilities and other liabilities as proposed by the BIFR. Failure to pay these liabilities would have exposed the assessee company of getting black listed and losing the face from financial institutions and banks for its future projects. In fact, when the whole situation is ITA No.40 of 2011 27 looked from this angle, it seems that the assessee company had no choice but to pay the amount. Even the delay for making these payments would have led the assessee company into further trouble in the sense that liabilities of financial institutions and banks would have gone up further. 45. Thus, it is clear that payments were made out of the commercial expediency and as observed by the Hon'ble Supreme Court in the case of in the case of S.A. Builders that even if there is no necessity to make the payments and such payments are made voluntarily on the grounds of commercial expediency, then such claim has to be allowed. We would like to reproduce the relevant observations which are given at placitum 24 of the judgment as under: “Thus in Atherton v. British insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions eg. Eastern Investments Ltd vs. CIT (1951) 20 ITR 1 (SC), CIT v. Chandulal Keshvlal & Co. (1960) 38 ITR 601 (SC) etc. The Hon'ble Apex Court has further at placitum-35 while approving the decision of Hon'ble Delhi High Court in the case of CIT vs. Dalmia Cement (B) Ltd. [254 ITR 377] observed as under: “We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd (2002) 174 CTR (Del) 188: (2002) 254 ITR 377 (Del) that once it is ITA No.40 of 2011 28 established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair 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 its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.” From the above observations it become clear that claim has to be allowed even if it is not necessary to make such payments if the payments had been made voluntarily on the grounds of commercial expediency. Further it is not necessary that such business should be that of assessee itself. In the case before us though the amounts have been made in respect of GPEL but basically assessee was trying to establish the new business through GPEL and was also trying to achieve the larger business interest by establishing further factory in the State of Gujarat and it has been done also by establishment of tyre manufacturing unit at Limda near Baroda. ## 17. While dealing with Section 115JA and 115JB held as follows: The above clearly shows that any amount withdrawn from any reserve is to be allowed to be reduced. However, proviso to above clause puts a restriction that such reduction is permitted only if such amounts were ITA No.40 of 2011 29 added back to the book profits in the earlier year. Before the AO the details of reserve created in earlier years were also filed. These general reserves were stated to be reserves which were created after debiting the profit & loss account. However, AO has rejected the same on the premise that strictly speaking the same has not been added to the book profits because in those years assessee suffered tax under the normal provisions. This is not the correct way of interpreting the concept of MAT. The MAT provisions sections 115JA and 115JB were introduced in the statute because certain companies which are also known as zero tax companies were though declaring profits in the books and were also paying dividends but because of deductions prescribed under the Act not tax was being paid. To avoid that situation, minimum alternate tax what is now generally known as MAT was prescribed so that even zero tax companies paid some amount of tax. Therefore, if a company has suffered tax under the normal provisions which is naturally higher to the 30% of the book profits, then it is not necessary that such company should simultaneously be levied MAT also because that would amount to double taxation. Therefore, the profits which have already suffered tax under the normal provisions and were credited to the general reserve are now withdrawn to meet the assessee's liabilities, the same has to be reduced even from the book profits so that the profits taxed earlier do not suffer tax again and that is why the Legislature has provided the reduction of amounts withdrawn from reserve under clause (I) of Explanation 1 to sec.115JB. 18. The Tribunal held that the contention of A.O. if accepted literally amounts to deciding the priorities of the business exigencies of the assessee, as long as the truthfulness of the entries ITA No.40 of 2011 30 is not doubted and it is not a case of syphoning of money through cheap fictitious entries, the Tribunal held that there was no need to interfere with the findings recorded by the Commissioner of Appeals. 19. The learned counsel for the revenue contends that the GPEL is not a subsidiary of assessee company and that the writing off debt of GPEL in the books of assessee is completely impermissible. While answering the said contention, we may quickly add that the revenue is not disputing the entries in books of accounts and circumstances considered either by the Commissioner of Appeals or the Tribunal. Therefore, for all purposes the findings recorded by the Tribunal and the Commissioner of Appeals are findings of fact. No perversity is pointed out to us for deeper examination into this contention or change the effect of the entries by accepting the contention as a substantial question of law. Further the case of revenue is not that the deduction is unavailable in law, but the argument proceeds that the assessee could not have claimed the writing off bad debt as a business loss in the peculiar circumstances of the case while ITA No.40 of 2011 31 computing total income. The instant argument or question does not satisfy the requirements of Section 260A of the Act, viz. that a substantial question of law arises for consideration of this Court. 20. In the singular facts and circumstances of this case, and particularly for the subject assessment year, we are of the view that the assessee has established that the memorandum of association, authorised the assessee to expand its business into new areas i.e. incorporating GPEL etc. The Tribunal has recorded a finding of fact that the assessee has, in fact, established one of the biggest tyre manufacturing companies in the State of Gujarat and with a view to expand its business activities incorporated GPEL. GPEL on account of technical glitches in sharing know-how provided by the foreign collaborator could not take off on expected lines, resulting in cash loss etc. GPEL was referred to BIFR as sick industry. BIFR notified a scheme for operation or reviving GPEL. BIFR, under the scheme had equally distributed the obligations both to Gujarat infrastructure Development company and the assessee. The assessee, as part of implementation of a scheme accepted by BIFR had to clear the debt of GPEL as guarantor. The Tribunal refers to ITA No.40 of 2011 32 a circular of reserve bank. It says that (a) business entity of the corporation commits default as guarantor also attracts disadvantage in credit rating. The assessee who takes a well informed decision permissible in law and as per the standard accountancy practices, it is not for the revenue to suggest the manner in which the said situation of honouring the directions in the scheme issued by the BIFR and after honouring the direction how such entries are to be treated in the books of accounts of the assessee. 21. This Court is of the view that the findings of fact recorded both by the Commissioner of Appeals and the Tribunal do not attract the scope of interference of this Court under Section 260A of the Act and therefore, we confirm the findings and answer the point against the revenue and in favour of the assessee. We hasten to add that the confirmation of findings of Tribunal and the CIT (Appeals) by this Court is in the circumstances considered for the current assessment year and ought not be treated as a precedent for claiming deduction under similar heads in the subsequent assessment years or any other assessment year in future. Such situations are independently considered as and when the situation arises. ITA No.40 of 2011 33 ## Point No.IV 22. The A.O. disallowed the deduction claim of the assessee made towards the payment of bonus in the assessment year 2002- 2003 payable for the assessment year 2001-2002. 23. The Assessing Officer noticed that during the Assessment Year 2001-02 a provision towards payment of bonus amounting to `4,55,00,000/- was made. The assessee before filing the return for the Assessment Year 2001-02 paid a sum of `2,72,76,982/- out of `4,55,00,000/-. The assessee did not claim at the time when it becomes due to get deduction under Section 43B on payment basis. The assessee did not claim deduction of payment of `2,72,76,982/- under Section 43B of the Act for the assessee suffered loss in the A.Y. 2001-2002. In other words, the assessee did not claim deduction under Section 43B of the Act since the asessee suffered loss in the A.Y. 2001-2002. 24. The reasoning of the A.O. is that without making provision, claiming deduction in the Assessment Year 2002-03, when assessee earns profit, is incorrect and the intention of the assessee is quite clear that the assessee wants to take deduction ITA No.40 of 2011 34 under Section 43B to reduce the net taxable amount for the Assessment Year 2002-03. The understanding of the assessee of proviso to Section 43B is incorrect and the assessee has adopted a colourable device in tax planning with an intention to avoid the incidence of tax in the Assessment Year 2002-03. Thereby the assessment officer added `2,72,79,645/- to the net income of the assessee. 25. The Commissioner (Appeals) from the admitted dates and entries and upon construing the scope of Section 43B held that the appellant claimed benefit under Section 43B in the assessment year during which the actual payment was made. According to the Commissioner (Appeals) Section 43B does not impose restriction on the assessee either to claim in the Assessment Year in which it became payable or that a provision is made. According to the Commissioner (Appeals), Section 43B merely provides for allowance of certain payments on actual payment basis. In the case on hand, the actual payment has been made during the previous year relevant for the current year under appeal. The CIT Appeal puts it that there is no bar for the assessee in ITA No.40 of 2011 35 making the claim in the Assessment Year 2002-2003. 26. Finally, the CIT Appeals held that there is no restrictive provision in Section 43B to the effect that deduction cannot be allowed in the year of payment if it has been made before the due date for filing the return for the previous year. Therefore, the addition made by the above was set aside by the CIT Appeals. The Tribunal has independently considered the scheme of Section 43B held as follows: 43B. Notwithstanding anything contained in any other provision of this Act a deduciton otherwise allowable under this Act in respect of-- xx xx a) xx xx xx b) xx c) any sum referred to in clause (ii) of subsection (1) of section 36.] [or] xx xx d) xx xx xx e) xx xx xx f) xx shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. [Provided that nothing contained in this section shall ITA No.40 of 2011 36 apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. Clause (c) makes reference to clause (ii) of sub section (1) of Sec.36 which refers to any sum paid to an employee as bonus or commission. Therefore, payment on account of bonus is also controlled by Sec.43B. The plain reading of the provision clearly shows that deduction on account of any of the items mentioned in sec.43B would not be allowed unless and until the payment has been made and the same is allowable in the year in which payment has been made irrespective of the assessment year in which liability for the same has been incurred and recognized by the assessee by the method of accounting adopted by him. Therefore, it is clear that items referred to in Section 43B can be allowed only if payment has been made and the same are allowable in which payment has been made. Since assessee has been making payment on account of bonus on the occasion of Onam which is a most important festival in the State of Kerala and has been consistently claiming deduction of payment of bonus only in the year of payment. This fact becomes clear from the assessment order because no claim has been made in the A.Y. 2003-04 on the basis of proviso to Sec.43B. 57. The proviso to Sec.43B gives further concession that if payment in respect of any of the items referred in sec.43B is made in a particular year before the due date of filing of the income tax return, then such claim can be made in the earlier year also for which return is due to be filed. This seems to be only a further concession and cannot be read as a restriction that necessarily deduction has to be claimed in the earlier year which AO had ITA No.40 of 2011 37 interpreted. We fail to understand that as to how AO has referred to the decision of McDowell by observing that in earlier year i.e. A.Y 2001-02 there was a loss and that is why assessee has not claimed any deduction. Even if it is a case of loss, such loss would have been carried forward to next year and allowed accordingly. Simply because assessee has not claimed a particulate deduction, it cannot be said to be a colourable device as envisaged by the decision of McDowell case. The deduction relates to payment of bonus which has been actually paid in the present year and deduction has been claimed as per sec.43B. Such deduction has been claimed on consistent basis in the year of payment and, therefore, no adverse inference should have been taken. In these circumstances, we find nothing wrong in the order of the ld. CIT[A] and confirm the same. to 27. The Tribunal referred to C.O. No.75/Coch/2006 appreciate the grounds raised by the assessee. The definite ground raised by the assessee reads thus: “Bonus relating to the financial year ended 30.03.2002 which was paid during the financial year ended 31.03.2003 and before the due date of filing of income tax return for the Assessment Year 2002-03, was claimed in the Assessment Year 2003-04 and was allowed by the Commissioner of Income Tax (Appeals) in the Assessment Year 2003-04 [Para 8 of the Commissioner of Income tax (Appeals) for the Assessment Year 2003-04]. If for any reason the said decision is reversed, such amount may be allowed in Assessment Year 2002-03.” 28. Then the Tribunal excerpted Section 43B of the Income Tax Act and held that clause (c) of Section 43B makes reference to clause ITA No.40 of 2011 38 (ii) of sub-section (1) of Section 36. If refers to any sum paid to an employee as 'bonus' or 'commission'. Therefore, the payment on account of 'bonus' is controlled by Section 43B. The plain construction of the provision, i.e. Section 43B(c) shows that the deduction on account of any of the items mentioned in Section 43B would not be allowed unless and until the payment has been made and the same is allowable in the year in which payment has been made, irrespective of the assessment year in which a liability for the same has been incurred and recognised by the assessee by the method of accounting adopted by the assessee. 29. The Tribunal further refers to consistent practice followed by the assessee, namely that the assessee makes payment on account of 'bonus' on the occasion of Onam, which is an important festival in the State of Kerala. It is finally held that a combined reading of Section 36(2) of sub-section (1) of Section 36 read with Section 43 allows accepting the expenditure on actual payment basis made by the assessee. The Revenue could not show an infirmity or raise a substantial question on the concurrent finding of facts and law recorded by the Commissioner (Appeals) and the Income Tax ITA No.40 of 2011 39 Tribunal. 30. We are not convinced that a substantial question of law arises on the findings recorded by the orders of Commissioner (Appeals) and the Income Tax Tribunal. Hence confirm the findings of the Tribunal and accordingly hold this point against the revenue and in favour of the assessee. 31. For the above reasons, the Income Tax Appeal is allowed in part to the limited extent of remanding the case to the A.O. for fresh assessment on the admissibility of 'club expenses' and pass reassessment orders to the said limited extent alone. We also confirm the order of remand of the Tribunal on Point No.3. The assessing officer completes the assessment on both these aspects expeditiously from the date of receipt of a copy of this judgment. Rest of the findings are confirmed. ## Sd/- P.R.RAMACHANDRA MENON JUDGE sd/- S.V.BHATTI JUDGE css/jjj ITA No.40 of 2011 40 ## APPENDIX ANNEXURE A COPY OF ASST.ORDER U/S 143(3) r.w.s.147 DATED 12.12.2008 FOR THE ASSESSMENT YEAR 2002-03. ANNEXURE B COPY OF THE ORDER DATED 24.4.2006 OF THE COMMISSIONER OF INCOME TAX (APPEALS) ANNEXURE C COPY OF THE ORDER DATED 5.10.2010 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH ITA No..429/COCH/2006. ANNEXURE D ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 147 OF THE IT ACT DATED 24.2.2006 FOR AY 2002-03.