Section 37(1)- Amount paid towards discharge of corporate guarantee obligation, which guarantee was issued for its subsidiary company and was in the interest of the assessee’s business, is allowable as a deduction while computing `Business Income’.

45 2009-TIOL- 783-ITAT- MAD

ACIT vs. W S Industries (India) Ltd.

ITA No. 1373/Mds/2008

Assessment Year: 2004-05. Date of Order: 21.8.2009

Section 37(1)- Amount paid towards discharge of corporate guarantee obligation, which guarantee was issued for its subsidiary company and was in the interest of the assessee’s business, is allowable as a deduction while computing `Business Income’.

The assessee was engaged in the business of manufacturing electro porcelain products. W. S. Telesystems (WSTL), a subsidiary of the assessee, was supplying to the assessee the material required by the assessee for executing its contracts. For this purpose, the assessee used to make advances to WSTL from time to time. Over a period of time, amounts aggregating to Rs 6.11 crores were advanced by the assessee in excess of the amounts billed. The assessee had issued corporate guarantees in respect of borrowings of WSTL from ICICI, Central Bank of India and Kirloskar Finance Ltd. Upon WSTL becoming sick and being under the threat of invocation of guarantees, the assessee entered into a onetime settlement with the lenders of WSTL, whom the assessee had given corporate guarantees and paid amounts aggregating to Rs 13.07 crores in consideration of discharge of corporate guarantees. Thus, a total Rs 19.18 crores was shown as receivable from WSTL. Upon closure of the WSTL factory and WSTL becoming sick, the assessee, with the approval of the High Court of Madras, u/s 391 of the Companies Act, 1956, debited the sum of Rs 19.18 crores to share premium account in the books of the company, but claimed it as a deduction in the course of assessment. The Assessing Officer (AO) allowed the deduction of Rs 6.11 crores, but did not allow the deduction of Rs 13.07 crores.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the deduction of Rs 13.07 crores towards discharge of corporate guarantee obligation.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

Giving corporate guarantee was one of the objects under the Memorandum of Association; and also since the subsidiary company was supplying materials which were important for the assessee’s business, the action of giving corporate guarantee as well as advances was held to be incidental to the assessee’s business, and a commercially expedient decision. The Tribunal observed that when the writing off of advances has been allowed as a deduction, there is no reason why the amount paid towards discharge of corporate guarantee should be treated any differently. Incurrence of expenditure was incidental to the interest of the business of the assessee.

The appeal filed by the Revenue was dismissed.