TaxTMI 
TaxTMI 
2015 (7) TMI 846
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....e brief facts of the case are that the assessee is a company which is engaged in the business of manufacturing and sale of Beer. A return of income for the year under consideration was filed by it on 30.12.02 declaring total income at 'Nil'. The assessee company had issued a letter of intent of Rs. 5.5 crores approx. to M/s. Alfa Laval (India) Ltd., in May, 1989 for purchase of brewery equipment. As per the terms of the said letter of intent, an advance of Rs. 1.6 crores being 30% of the value of equipment was also paid by the assessee company. Subsequently, the assessee company decided to purchase equipment worth only Rs. 3 crores from M/s Alfa Laval (India) Ltd. as against the letter of intent issued for Rs. 5.5 crores. One sister concern of the asessee 'M/s Vindale Distilleries Ltd.' was also considering the proposal for purchase of equipment from M/s Alfa Laval (India) Ltd. However, keeping in view of its adverse financial position, it was facing difficulties in securing acceptance of its intent to purchase the machinery on its terms from M/s Alfa Laval (India) Ltd. The assessee company asked M/s. Alfa Laval (India) Ltd. to appropriate the balance amount of Rs. 2.5 cror....
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....d. CIT(A) that AO was right in disallowing its claim for deduction on account of the amount of Rs. 1,63,50,000/- written off in respect of Vindale transaction u/s. 36(1)(vi) r.w.s. 36(2). It was, however, claimed on behalf of the assessee company before the Ld. CIT(A) that the said amount representing its business loss was liable to be considered for deduction under the provisions of Section 28 & 29 of the Act. In support of this alternative stand taken before the Ld. C1T(A), reliance was placed by the assessee company, inter alia, on the decision of Hon'ble Supreme Court in the case of "Ramachandcr Shivnarain vs. CIT", 111 ITR 263 wherein it was held that if there is a direct and proximate nexus between business operation and the loss or it is incidental to it, then the loss is deductible. 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. In support of this contention, reliance was placed on behalf of the assessee company on the decision ....
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....for the outstanding dues of sister concern of the assessee i.e. M/s Vinedale Ltd. He has brought our attention to clause 12 and clause 13 of the object clauses of the 'Memorandum of Association' of the assessee and has further contended that the guarantee was given by the assessee company in furtherance of its business objectives. He has relied upon the decision of Chennai Tribunal in the case of 'ACIT vs. WS Industries (India) Limited' (ITA No.1373/Mad/2008) and further that of Hon'ble Madras High Court in the case of 'CIT vs. Spencers and Co. Ltd.' [359 ITR 612]. The Ld. AR has further contended that the amount in question was utilized as a guarantee given on behalf of sister concern and therefore, any loss suffered by the assessee on account of such surety/guarantee was as allowable business loss u/s.28 read with section 29 of the Act. He has further contended that the loss suffered by assessee in this case was incidental to business of the assessee and as such was deductable as a business loss. He has relied in this respect upon the decisions of the Hon'ble Supreme Court in the case of 'Ramchander Shivnarain vs CIT' (111 ITR 263) and in the case of 'CIT vs. Jaganath Kissonlal L....
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....es by M/s. Vinedale Ltd. from Alfa Laval. Though the facts are clear that not only the advance paid by the assessee on behalf of Vinedale Ltd. of Rs. 81.30 lacs was forfeited but the assessee also paid further amount, it being a guarantor of M/s. Vinedale Ltd., incurring total liability of Rs. 16,350,000/- written off during the year under consideration. The Ld. AR at the first instance has relied upon the object Clause no. 12 and 13 of the Memorandum of Association which for the sake of convenience are reproduced as under:- "Clause 12- Guarantee- To guarantee the performance of any contract or obligations of and the payment of or dividends and interest on any stock shares or securities of any company, corporation, firm or person in any case in which such guarantee may be considered like directly or indirectly to further the objects of the company or the interests of its shareholders. Clause 13- Guarantee & surety- To guarantee the payment of money unsecured and secured by or payable under or in respect of promissory notes, bonds, debentures stock, contractor, mortgages, charges, obligations, instruments and securities of any company or of incorporated or not, and generally to gu....
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....how 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 there is no document on the file which suggests that there was any condition put forward between the parties that if the value of the purchase orders would be reduced, the assessee would have to suffer any 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. Under such circumstances, the advance of Rs. 81.30 lakhs paid by the assessee on behalf of its sister concern for the purchase of equipment by its sister concern Vinedale, could neither be treated as a business or trading advance on behalf of the assessee nor on behalf of its sister concern Vinedale. So far as the question as to the nature of loss suffered by the assessee is concerned, it is pertinent to note that the amount had been paid by the assessee to the creditors of M/s Vinedale Ltd., being its guarantor/surety. After paying the amount/debt of M/s Vinedale Ltd. to the creditors of the M/s ....
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....n for machinery to that of guaranty and further that the purpose of loan advance was of no consequence but that of utilization of the amount, we may, in this respect, observe that in the case in hand the assessee has not utilized the amount in the course of business activity of the assessee. It is not the case that the guaranty given or the amount advanced had changed its character from capital account to trading account. Even the M/s. Vinedale Ltd. had utilized the amount of loan/advance for the purpose of purchase of machinery i.e. for capital asset the said amount has never been treated or utilized by M/s. Vinedale Ltd. as business advance taken from the assessee for the purpose of its business activity nor the assessee company could explain as to how the amount of guaranty given for purchase of machinery, which liability was ultimately owned by the assessee company, can in any manner be said to be relating to the business activity of the assessee or that of the M/s. Vinedale Ltd. The loan amount was used for the purchase of machinery which even otherwise was not in any manner used for the purpose of business of the assessee. Hence, it cannot be said that the character of the am....
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....ame. 13. In appeal, the Ld. 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. 14. The Ld. A.R. of the assessee has submitted before us that the action of the Ld. CIT(A) in rejecting the claim of the assessee was not justified. He has further relied upon the decision of the Hon'ble Gujarat High Court in the case of "Gujarat Gas Ltd. vs. JCIT" (2000) 245 ITR 84. In the said case, the words of the Circular No.549, para 5.12, dt. 31st October, 1989, providing that the assessed income under section 143(3) shall not be less than the returned income was considered by the Hon'ble High Court and it was held that as per proviso to section 119 of the Act, the Board cannot issue instructions to the Income Tax Authority to make a particular assessment or to dispose of a particular case in a particular manner as well as not to interfere with the discretion of the Commissioner in exercise of his appellate functions. It was further held that the....
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.... 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. He has further submitted that during the year, the assessee had not made any investments for earning of exempt income. He has submitted that the assessee had made investments in National Savings Certificate (NSC), Indira Vikas Patre (IVP) and shares of Cooperative Banks. He has further submitted that the 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. He has further relied upon the decision of the Hon'ble Allahabad High Court in the case of "CIT vs. Shivam Motors to stress the point that during the year the assessee had not earned any exempt income, hence no disallowance under section 14A was warranted. We may find that the above contentio....