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.

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.