2008 (9) TMI 1010 - HC - Income Tax

Revenue's Appeal Dismissed; Tribunal's Decision for Assessee Upheld, No Evidence of Collusion or Tax Avoidance Found.

The HC dismissed the revenue's appeal, affirming the Tribunal's decision in favor of the assessee. It upheld the CIT(A)'s allowance of the assessee's ... Claim on loss incurred under the guarantee written off - guarantee given by Agrima was genuine or colourable - Whether the Tribunal was right in law in confirming the order of CIT(A) allowing the claim of the assessee for loss being guarantee written off, failing to appreciate that Saurashtra Cement and Chemical India Ltd.(SCCIL), Mehta Pvt.Ltd., Maharana Mills Ltd. and Agrima Project had common Directors and were under the same management and the entire exercise was collusive and only to book losses? - Agrima issued a guarantee to SCCIL in favor of Maharana Mills - Maharana Mills failed to repay the loan SCCIL thereon, called upon the assessee to make good the payment of loan with interest in terms of the guarantee executed by Agrima - In view of the amalgamation of Agrima with the assessee, the assessee paid the amount along with interest to SCCIL in instalments. HELD THAT:- We do not agree with the finding of the A.O. that clause 13 of the Memorandum of Articles of Association is a comprehensive clause and in view of that clause Agrima cannot give any guarantee without security. We are of the view that according to clause 13 of the object clause Agrima could guarantee the performance of any contract or obligation/payment of money of or by any person or company or Corporation. In addition to this, the said Object clause 13 also allows Agrima to secure any guarantee in such a manner as the company may think fit and in particular by the mortgage pledge or other security upon all or on any other properties of the company. This would not mean that Agrima cannot give guarantee without security. Contention of the revenue that the three concerns/companies were under the control and management of the same group of persons and, therefore, warranted application of principles initiated in Mc Dowel’s case, we are of the view that such a contention in the absence of any material in support thereof should be outright rejected. It is argued by the assessee before all the authorities that the said three companies are independent and acted as such at arm’s length. Infact, SCCIL is a listed company. This contention of the assessee is accepted by CIT(A) who has reached a finding of fact that the amounts received by Maharana Mills from the Banks and financial institutions and from SCCIL were utilised in purchasing new machinery which was also installed and it is not the allegation of the AO that these funds were misappropriated by the directors or were frittered away. CIT(A) have, therefore, reached a finding of fact that the guarantee given by Agrima was genuine. This finding of fact is also accepted by the Appellate Tribunal. In view of these concurrent findings of fact, we see no reason as to why we should interfere with the said finding of fact. In view thereof we are of the view that except for making a bare allegation that the entire exercise of giving guarantee by Agrima to SCCIL was collusive and only to book losses on the ground that the companies have common directors and were under the same management, the revenue has failed to produce any material in support of their case that the guarantee given by Agrima was not genuine. Only because some directors were common one cannot reach to a serious conclusion that the entire transaction was collusive and colourable only to book losses. Therefore, we answer the above question raised in the appeal against the revenue and in favour of the assessee. The appeal stands dismissed. Issues Involved:1. Validity of the Tribunal's confirmation of CIT(A)'s order allowing the assessee's claim for loss of Rs. 74,89,041/-.2. Allegation of collusion among companies with common directors to book losses.3. Interpretation of Object Clause 13 of the Memorandum and Articles of Association of Agrima.4. Application of principles from McDowell's case regarding tax avoidance.Detailed Analysis:1. Validity of the Tribunal's Confirmation of CIT(A)'s Order:The core issue was whether the Tribunal was correct in confirming the CIT(A)'s decision to allow the assessee's claim for a loss of Rs. 74,89,041/- due to a guarantee written off. The assessee had claimed this loss in its return for the Assessment Year 1986-87, which the Assessing Officer (AO) initially disallowed, suspecting collusion among the companies involved. The CIT(A) overturned this disallowance, finding that the guarantee was a genuine business decision aimed at protecting the assessee's financial interests, a finding later upheld by the Tribunal. The High Court agreed with the Tribunal, noting that the CIT(A) had thoroughly examined the facts and legal precedents, concluding that the loss was indeed allowable.2. Allegation of Collusion Among Companies:The revenue argued that the companies involved-Saurashtra Cement and Chemical India Ltd. (SCCIL), Maharana Mills Ltd., and Agrima-had common directors and were under the same management, suggesting a collusive effort to book losses. The AO had initially disallowed the loss on these grounds. However, both the CIT(A) and the Tribunal found no substantive evidence of collusion. The High Court concurred, stating that merely having common directors does not prove collusion or a colorable transaction aimed at booking losses. The Court emphasized that the revenue failed to provide any material evidence to support the allegation of collusion.3. Interpretation of Object Clause 13:The AO contended that Object Clause 13 required any guarantee given by Agrima to be secured by a mortgage, pledge, or other security. The CIT(A) and the Tribunal disagreed, interpreting the clause as allowing Agrima to guarantee obligations without necessarily securing them with a mortgage or pledge. The High Court supported this interpretation, stating that the clause permitted Agrima to give guarantees as it saw fit, including without security. This understanding was crucial in validating the guarantee given by Agrima to SCCIL as a legitimate business decision.4. Application of Principles from McDowell's Case:The revenue invoked the principles from McDowell's case, which deals with tax avoidance through colorable devices. They argued that the common management of the companies warranted the application of these principles. However, the High Court rejected this contention, noting the lack of evidence to suggest the transaction was anything but genuine. The Court highlighted that the CIT(A) had found the funds from the loan were used appropriately for purchasing machinery and not misappropriated, a finding upheld by the Tribunal. The High Court saw no reason to interfere with these concurrent findings of fact.Conclusion:The High Court dismissed the appeal, affirming the Tribunal's decision and ruling in favor of the assessee. It concluded that the revenue failed to substantiate its claims of collusion and misuse of Object Clause 13. The Court found that the guarantee given by Agrima was a genuine business decision aimed at protecting its financial interests, thus allowing the loss of Rs. 74,89,041/- as a deductible expense. The appeal was dismissed with no order as to costs.