Escorts Limited Vs ACIT (ITAT Delhi)
The appeal concerns disallowance of ₹47.64 crore claimed as business expenditure under section 37(1) of the Income Tax Act, 1961, arising from settlement of a corporate guarantee invoked against the assessee. The Assessing Officer disallowed the claim on the ground that the assessee failed to establish that the expenditure was incurred wholly and exclusively for business purposes. The Commissioner (Appeals) upheld this disallowance, leading to the present appeal.
The assessee, engaged in manufacturing and sale of tractors and farm equipment, had a step-down subsidiary in the USA engaged in marketing its products. To support the subsidiary’s operations and ensure uninterrupted supply of materials, the assessee provided a corporate guarantee to a supplier of the subsidiary. Due to financial difficulties faced by the subsidiary, the supplier invoked the guarantee. The dispute was referred to arbitration, resulting in an award against the assessee. Subsequent litigation ensued, including enforcement proceedings and attempts to attach the assessee’s shareholding in another subsidiary.
To resolve the dispute and avoid prolonged litigation, the assessee entered into a settlement agreement with the supplier, agreeing to pay a total amount in instalments. The assessee claimed that this expenditure was incurred on grounds of commercial expediency, including ending litigation, protecting business interests, safeguarding assets, and preserving its position in international markets. The payment was also approved by the Reserve Bank of India.
