Two appeals were filed before the ITAT. One by the Revenue and another by the assessee related to A.Y. 2002-03 and A.Y. 2006-07 respectively. Details as under:-
Brief facts of the cases
The assessee company was engaged in the business of manufacturing and sale of Beer as mentioned in the MOA of the company. The assessee company proposes to purchase brewery equipment worth Rs.5.5 crore from M/s Alfa Laval (India) Ltd (‘supplier’), and accordingly a letter of intent (LOI) was issued in May, 1989 between the two parties. As per the terms of LOI, an advance of Rs.1.6 crore, being 30% of equipment value was also paid by the assessee company. Later, assessee-company decided to purchase equipment worth of Rs.3.3 crore only as against the LOI of Rs.5.5 crore. The assessee company asked supplier of Machinery to appropriate the shortfall of Rs.2.5 crore towards M/s Vindale Distilleries Ltd, one sister concern of the assessee company, who was also considering the proposal for purchase of equipment from the same supplier but due to its adverse financial position, facing the difficulties in securing the acceptance of its intent to purchase the machinery on its terms. Supplier of Machinery accepted the proposal put forth by the assessee company on the condition of making good the default, if any, by the assessee company on the part of its sister concern. Subsequently, sister concern of the assessee-company was declared as a sick unit by the BIFR.
The representatives of the assessee company, Vindale and Alfa Laval organized a meeting wherein, it was agreed that the assessee company shall pay part of the outstanding amount payable by Vindale to M/s Alfa Laval and shall co-accept with Vindale, hundis for the final settlement in favour of Alfa Laval (India) Ltd. However unfortunately the bankers of Vindale dishonored the hundis issued 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 Rs. 1,63,50,000/- was forfeited by M/s Alfa Laval (I) Ltd which is claimed by the assessee as business loss but the Assessing officer disallowed the same observing it as capital loss.
Before CIT(A), It was contended that losses incurred by the assessee company on standing surety for another company in the course of mutually beneficial business transaction arise or spring out from the business and hence the same are allowable u/s. 28 r.w.s. 29 of the Act being incidental to the business, which is accepted by CIT(A). Aggrieved revenue file the appeal before the ITAT and the tribunal vide its order dated 19-06-2009 observed that initially the assessee before the A.O. claimed the deduction as Bad debts written off which was changed before CIT(A) and sought to claim the same as deduction u/s 28 read with 29 of the Act as Business loss. The Tribunal further observed that CIT(A) ought to have given opportunity to the A.O. to examine the alternative claim made by the assessee-company and restored the matter back to CIT(A) for deciding the same a fresh by way of well discussed and well reasoned order.
Consequentially CIT(A) heard the case afresh and remand report was also called upon from A.O. Considering the remand report and submissions of the assessee, it was held that though initially amount was given by assessee for purchase of machinery but it had changed its character to guarantee/surety given on behalf of sister concern and amount written off was allowable as business loss.
Aggrieved with the order, Revenue filed the appeal.
Contention of the Assessee
Guarantee was given by the assessee-company in furtherance of its business objective as per clause 12 and 13 of M.O.A. of the company. Therefore any loss suffered on account of such surety/guarantee was incidental to the business of the assessee and thus allowable as business loss u/s.28 read with section 29 of the Act. It was 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
Contention of Revenue
Deduction claimed by the assessee is not the business loss. There was not business expediency for incurring the expenditure in question and further that even otherwise the loss at the most can be said to be capital loss, not allowable as business loss either u/s 36 or u/s 28 and 29 of the Income Tax Act.
Decision by ITAT
The main object of the assessee as written in ‘Memorandum of Association’ is to carry on the business of brewers, maltsters, distillers etc. and further to manufacture, sale or deal etc. in mineral waters etc. Further a perusal of clause 12 and 13 of above MOA 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. The assessee is not able to explain how the act of standing as guarantee for sister concern was beneficial for the interest of shareholders of company or for the purpose of attainment of main object or main business activity of the assessee. There is no document on the file to show that if the assessee had cut down its intent to purchase from Rs.5.5 crore to Rs.3 crore for purchase of equipment, it would have suffered any business/trading 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. The assessee company fully knowing that its sister concern M/s. Vinedale Ltd. was running into losses and having a weak financial status, opted to not only pay advance for the purchase of the machinery by the said sister concern but also settled the accounts of the M/s. Vinedale Ltd. by way of paying the remaining amount. This act of the assessee was neither in furtherance of business activity of the assessee nor was in the interest of its shareholders. The assessee company rather assumed the risk of taking the liability of another company which cannot be said to be for business purpose of the assessee. 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.
(b) Second appeal was filed by the assessee-company on the following two grounds which are summarized as under:-
(i) During the assessment proceedings, the assessee made a revised claim of deduction of Rs.9985274/- on account of consumption of containers. However, since the same was not claimed in the return of income, the AO rejected the same.
CIT(A) also rejected the claim of the assessee on the ground that if the said claim is allowed it would have the effect of increasing the returned loss. 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.
Assessee submitted that if a claim is not made before the AO, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim is not barred. In support of his claim, assessee sighted the verdict of Bombay High Court and Supreme Court. 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 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. Accordingly, ITAT restored the issue to the file of the Ld. CIT(A) to consider the claim of the assessee on merits and to pass a reasoned order, irrespective of the returned loss/ income of the assessee.
(ii) Assessee filed the appeal against order of CIT(A) confirming order of A.O. of disallowance u/s 14A read with rule 8D of the Income Tax Act. Assessee had made investments in National Savings Certificate (NSC), Indira Vikas Patre (IVP) and shares of Co- operative Banks. Assessee submitted that Interest from NSC & IVP are taxable in case of companies and further that dividend from Co-operative Banks is also not exempt under section 10(34) of the Act. He therefore has submitted that such investments were not capable of generating exempt income and therefore there was no question of disallowance under section 14A of the Act. It was 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 “Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT” [(2010) 328 ITR 81 (Bom)], Rule 8 is applicable from assessment year 2008-09 onwards. Therefore, the same cannot be applied for the year under consideration.
It was observed by ITAT, that CIT(A) has overlooked the contentions of the assessee , hence the matter was restored to the file of Ld. CIT(A) for adjudication afresh. Accordingly, the appeal of the assessee is allowed for statistical purposes.