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Issues: Whether the amount paid by the assessee as one-time settlement of loan liability of its 100% subsidiary under a corporate guarantee was allowable as business expenditure.
Analysis: The assessee had given a corporate guarantee to support working capital loans raised by its 100% subsidiary, which had been carved out of one of the assessee's divisions. The guarantee commission received for earlier years had been treated as business income, and the payment made on invocation of the guarantee was connected with safeguarding the assessee's business interest. The payment was not for acquisition of any fixed asset or for creating a capital asset, and the settlement arose in the course of a commercially prudent business decision. The Tribunal followed the principle that expenditure incurred on grounds of commercial expediency and linked to business operations is not disallowable merely because it relates to a subsidiary's debt.
Conclusion: The settlement payment was held to be allowable as business expenditure and the disallowance was rightly deleted.
Ratio Decidendi: Where a holding company incurs expenditure in discharging a corporate guarantee given for the working capital needs of its 100% subsidiary, and the payment is made out of commercial expediency in the course of business, the outgo is revenue in nature and allowable as business expenditure.
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