TaxTMI 
TaxTMI 
2026 (3) TMI 1480
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.... law, the learned CIT(A) erred in not appreciating that the said guarantee was given to a third party to ensure interrupted supply of material to a subsidiary of appellant in USA engaged in the business of tractors. 3. That on the facts and circumstances of the case and in law, the learned CIT (A) erred in not appreciating that the settlement was arrived at to end litigation, to avoid loss of business and to protect assets of the appellant. 4. That the appellant reserves to itself, the right to add, alter, amend, substitute and/or withdraw any Ground(s) of Appeal on or before the date of hearing. 2. We next note that the CIT(A)'s lower appellate discussion upholding the Assessing Officer's action disallowing the assessee's expenditure claim of Rs. 47.64 crores; read as under: "5. Ground No. 1 The appellant has challenged the addition of Rs. 47,64,00,000/- made by the AO by disallowing the claim of expenditure incurred on settlement of a corporate guarantee. 5.1 The appellant has made fresh claim of expenditure of Rs. 47.64 Crore in the revised return in respect of settlement made with M/s L.S. Cables, Korea towards an arbitration award pronoun....
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....der:- Ground No. 1 to 1.2 Disallowance of expenditure on settlement of guarantee given for subsidiary Briefly submitted, the appellant, inter alia, carries on business of manufacturing & sale of tractors and farm equipment. In order to promote its business interests and the brands of its products in US markets, the appellant had a step-down subsidiary by the name of Farmtrac North America LLC. (FNA) promoted by a wholly owned subsidiary of the appellant in USA. To avoid repetition of facts, we reproduce hereunder the detailed explanation provided during assessment proceedings vide letter dated 7th December 2018 in connection with a guarantee provided by the appellant to a supplier of FNA and the circumstances under which the said guarantee came to be invoked against the appellant. (Kindly refer pages to of paper book) "a) The assessee company had a step-down subsidiary in USA by the name of Farmtrac North America LLC (hereinafter referred as FNA). The assessee company had beneficial interest of 75% in the said company. b) FNA was in the business of marketing of agri-machinery i.e. tractors and other farm equipments in North America under....
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....s in favour of LSM towards the dues of FNA, interest on dues, breach of guarantee to). agreement, administrative cost etc. a) The assessee company took the matter to Courts in India against the award as also LSM who initiated legal proceedings to enforce the award. LSM also initiated legal proceedings and sought to attach the shareholding of assessee company in its subsidiary company in Poland with a motive of taking over the control of the same. In the meantime, the assessee company was advised that it will not be prudent and in the best interest of the assessee to prolong the litigation because the interest element would enhance the ultimate payable amount which may go beyond the original compensation as per arbitration award. Thereafter, negotiations were made with the representatives and management of LSM to settle the matter across the table it a dignified and mutually beneficial manner. They also responded positively since they were also keen to have the final financial settlement as soon as possible. A settlement agreement was signed between the assessee company and LSM on 23.04.2015 (copy enclosed page __________ to __________) which was mutually beneficia....
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....ket." The appellant contends that the expense in question had been incurred for the purpose of business. The necessary conditions for allowance under section 37 are: * Such expenditure should not be covered under the specific section i.e. sections 30 to 36, * Expenditure should not be of capital nature * The expenditure should be incurred during the previous year. * The expenditure should not be of personal nature. The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession. * The business should be commenced. It is trite law that the claim for deduction under section 37 of the IT Act should satisfy three conditions: firstly, it should be an expense which is incurred wholly and exclusively for the purpose of the assessee's business or profession; secondly, it should not be an expense incurred to bring into existence a capital asset; and lastly, it should not be an expense of a personal nature. The appellant had direct interest towards the promotion of business of FNA in US markets in so much so that FNA was promoting the brands of appellant in these markets.....
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.... held with the management and top officials of LSM which finally led to the settlement agreement for an aggregate amount of US$ 7.17 million payable in instalments. (Refer pages to of paper book) Given the close association of the appellant with FNA, there was a possibility that the business world could lose confidence in the appellant, which would have been detrimental to its tractors and farm equipment business which constitutes about 80% of its total business. Therefore, this settlement was in the best interest of the appellant since it protected the goodwill and reputation in the business world particularly as the appellant was trying to gain its foothold in the international markets. The payment of this settlement amount has been duly sanctioned by RBI (refer page of paper book). The appellant claimed the settlement amount as expenditure u/s 37(1) of Income Tax Act, 1961 incurred wholly and exclusively for the purposes of its business and commercially expedient. The expression "for the purposes of its business or profession" should be construed as expenses incurred, among others, for the purpose of protection of assets and property from expropriation, coerciv....
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....the case of Amalgamation Pvt. Ltd. (supra), wherein it is held that one company SSM, was originally a subsidiary of A, which was a subsidiary of the assessee-company and on and from February 1, 1954, the assessee-company purchased all the shares of SSM from A and SSM thus became the direct subsidiary of the assessee-company. Hon'ble court further noted that SSM had borrowed monies from a bank and the assessee-company had guaranteed the loan to the said company by the bank and SSM went into liquidation some time in 1955. Hon'ble Apex Court further noted that when SSM went into liquidation, the assessee-company, as guarantor, was required to clear those overdrafts in accordance with the terms of the guarantee and after adjusting the amount recovered from the liquidators, the sum due to the assessee-company from the liquidated company on account of the said overdraft was Rs. 9,08,764. It was further observed by Hon'ble Apex Court that the assessee-company claimed deduction of this amount as a loss which arose in the course of and incidental to its business in the assessment for the year 1958-59 relying on its memorandum of association which authorised it to be the guaranto....
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....come Tax on 29 February, 2012 in I.T.A. No. 1244/Madras/2011 (Assessment Year: 2005-06) The relevant extract of the decision of hon'ble ITAT is reproduced below: "7. We have perused the orders and heard the rival submissions. There is no dispute that assessee had given corporate guarantee for the loans taken by its 100% subsidiary company. There is also no dispute that the said subsidiary had raised such loans to meet its working capital requirements and not for financing any fixed assets. It is also an accepted fact that the 100% subsidiary company was formed by hiving off a division of assessee-company. We cannot say that safeguarding the business interest of such a subsidiary in the given circumstances was not a commercially prudent decision taken by the assessee. It could only be considered as a part of the business of the assessee. Corporate guarantee was given for working capital loans used by the subsidiary and for such guarantee given by the assessee, it was getting commission also. Such commission was included as a part of its business income in the earlier years. In such a scenario, we cannot say that when corporate guarantees were invoked by the len....
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.... In the facts and circumstances of the case and in law, the disallowance of Rs. 47.64 crore deserves to be deleted. 5.3 I have considered the facts of the case, finding of the AO and submissions of the appellant. The AO has disallowed the expenses amounting to Rs. 47.64 Crore related to corporate guarantee given in favour of appellant's subsidiary company i.e. Farmtrack North America (FNA), LLC. The appellant has claimed that expenses incurred for the purpose of business of the appellant company but failed to bring on record that valid corporate guarantee, agreement is executed by the appellant. Appellant has contended in the arbitration proceedings that no guarantee agreement exists between the claimant and appellant and submitted during the appellate proceedings also that guarantee was signed by the appellant company but did not constitute a final guarantee agreement for want of counter signature LSM which become a matter of dispute during the arbitration proceedings. The appellant failed to establish the nexus between the expenditure and business of the appellant. Appellant is not benefited by way of so-called guarantee given to the subsidiary company and no....