FORM NO.(J2) IN THE HIGH COURT AT CALCUTTA Special Jurisdiction (Income Tax) ORIGINAL SIDE Present: The Hon'ble Justice Girish Chandra Gupta And The Hon'ble Justice Asha Arora ITA No.242 OF2005C.I.T.KOL- II Versus DUNCAN INDUSTRIES LTD.For Appellant : MRS.A.G.Gutgutia,Advocate MRS.P.Dutta Maitra,Advocate For Respondent/Assessee : Mr.J.P.Khaitan,Sr.Advocate Mr.Sourav Bagaria,Advocate Mr.A.K.Dey,Advocate Heard on :6th May, 10th May, 13th May, 2016 Judgement Delivered on:10/13 May, 2016 GIRISH CHANDRA GUPTA, J.
: The appeal is directed against a judgement and order dated 19th October, 2004 passed by the learned Income Tax Appellate Tribunal, “C” Bench, Kolkata in ITA No.905(Kol)/2013 pertaining to the assessment year 1998-99 allowing the appeal of the assessee partly.
Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal.
The grounds of appeal disclosed, amongst otheRs.are as follows : “ii) For that on the facts and circumstances of the case the Learned Tribunal was not justified in law in allowing the deduction of the 1.35 crores paid to Andhra Bank by the assessee as a one time settlement to clear the dues of M/s.New Tobacco Company, a group concern as the business expenses of the assessee although the same is not paid for the business of the assessee in deviation from the law and the statute.
iii) For that on the facts and circumstances of the case the Learned Tribunal was not justified in law further allowing the deductions in respect of the club subscription charges for its executives in respect of clubs situate at far away places from garden in deviation from earlier practice when all along club expenses for clubs situate near the garden were allowed.” The appeal was, however, admitted solely on the following question of law : “Whether on the facts and circumstances of the case where club subscription were paid by the assessee for its executives in terms of contracts for employment are allowable deductions ?.” At the hearing of the appeal, MRS.Gutgutia, learned Advocate appearing on behalf of the Revenue submitted that the ground as regards the allowance of deduction of a sum of Rs.1.35 Crores quoted above involves a substantial question of law and this Court should, therefore, also consider the appeal on the basis of the aforesaid ground.
Mr.J.P.Khaitan, learned Senior Advocate appearing on behalf of the assessee submitted that at the time of admission of the appeal, the Division Bench heard both the assessee and the revenue and thereafter formulated the question on which the appeal was admitted.
He submitted that the Court should not enlarge the scope of the appeal.
He contended that it is not a case where the appeal was admitted ex parte.
The appeal was admitted by the Division Bench upon notice to the assessee.
The Division Bench heard the contentions of the parties and thereafter was pleased to admit the appeal solely on the ground as appearing from the order dated 2nd September, 2014.
We have considered his objection but we are unable to accede thereto.
We have given opportunity to Mr.Khaitan to address us on the point as regards the allowance of deduction of a sum of Rs.1.35 Crores and after hearing him, we are of the opinion that the appeal, in fact, involves substantial question of law with regard thereto and therefore, we have decided to formulate the following question of law in addition to the one which was formulated by the order dated 2nd September, 2014.
“Whether the learned Tribunal erred in law in allowing deduction of a sum of Rs.1.35 Crores paid by the assessee to clear the dues of M/S.New Tobacco Company ?.” The payment of a sum of Rs.1.35 Crores is backed by an agreement between the assessee and Andhra Bank which is, in fact, intituled as “Terms of Settlement” dated 11th December, 1996.
The agreement between the parties contains the following recitals.
“WHEREAS DAIL approached the Bank and the Bank granted credit facility of Rs.2.17 crores for financing of the operations of the Tobacco Division of DAIL against the security of hypothecation of stocks, stores and tobacco in transit in respect of the cigarette Factory at Biccavolu of the Tobacco Division of DAIL inclusive of the Stocks of tobacco lying at the godowns at Guntur in the State of Andhra Pradesh.
WHEREAS the aforesaid Tobacco Division of DAIL was transferred to and vested with all its assets and liabilities including the dues of DAIL to the Bank in New Tobacco Company Limited hereinafter referred to as “NTC” pursuant to an order dt.31.07.84 passed by the Hon’ble High Court at Calcutta sanctioning a Scheme of Arrangement.
WHEREAS acting on the aforesaid scheme of Arrangement on or about 12th October, 1986, NTC approached the Bank and the aforesaid Credit facility of Rs.2.17 crores earlier enjoyed by the Tobacco Division of DAIL was transferred in favour of NITC, against the security of stocks, Stores and Tobacco owned by NTC.
WHEREAS on or about 15th September, 1987 the Bank filed a suit against NTC and two directors of NTC being suit No.1035 of 1987 before the Hon’ble Calcutta High Court for recovery of a sum of Rs.2,69,54,228/- being the amount outstanding from NTC to the Bank in respect of the aforesaid credit facility.
WHEREAS pursuant to orders passed by the Hon’ble High Court at Calcutta in applications filed in the suit, the hypothecated Tobacco stock were sold by the Joint Receivers appointed by the Court for a sum of Rs.1.35 crores and the amount is lying in a deposit account in the name of the Joint Receivers with the Bank.
WHEREAS Andhra Cements Limited, a Company incorporated under the Companies Act, 1956, having its Registered office at Sr.Durgapuram- 522 414, Guntur District (A.P.) being an undertaking taken over by DAIL from BIFR in the year 1994 is enjoying credit facilities from the Bank and that additional facilities as may be required by the said Andhra Cements Limited cannot be considered by the Bank unless and until the outstanding dues of NTC to the Bank are settled.
WHEREAS DIL, now desires that, with a view to enable Andhra Cements Limited to obtain further credit facilities as aforesaid and keep harmonious relationship with the Bank, the following arrangements be entered into.” Mr.Khaitan submitted that the assessee had taken over Andhra Cements Limited in the year 1994 while the said Andhra Cements Limited was subject matter of a BIFR proceedings.
Andhra Cements Limited had borrowed funds from Andhra Bank.
In order to make the net worth of Andhra Cements Limited positive, the assessee was appointed a promoter and in order to do so, Andhra Cements Limited needed more funds which the Andhra Bank was not agreeable to advance, so long as the debts owed by New Tobacco Company were not cleared.
In order to remove the aforesaid hurdle and to rejuvenate Andhra Cements Ltd., the debts owed by New Tobacco Company was cleared by the assessee.
He added that the aforesaid payment was also necessitated because of the caution issued by the Reserve Bank of India against money being lent to the companies belonging to G.P.Goenka Group.
He drew our attention to the judgement of the learned Tribunal from which it appears that the learned Tribunal allowed the expenditure of a sum of Rs.1.35 Crores on the following basis : a].“The appellant had made payments to different banks in earlier years in order to settle the dues of these banks owned by NTC.” b].“We find that there was a close and proximate business connection between the appellant and NTC which forced the appellant to arrive at the settlement with the banks.” c].“From the press report appearing in the newspaper, it is, quite evident that RBI had issued a caution notice to all the commercial banks for not extending credit facilities to Companies of Duncan Group on account of failure of NTC to repay the loans to the banks.
No modern business can be carried on effectively and efficiently unless proper credit facilities are made available by the banks and institutions.
In the circumstances when the apex bank issued caution notice against the appellant on account of NTC’s default then it was in the commercial interest of the appellant to settle the banks’ claims to enable the appellant to carry on its day-today business operations.
The settlement with the bank was therefore in the commercial interest of the appellant.” d].“We find that in the assessment year 1992-93 appellant’s claim in respect of Rs.6.67 crores paid to Deutsche Bank came up for consideration before this Tribunal.
In its appellate order the Accountant Member extensively dealt with the assessee’s contentions & allowed the assessee’s claim.
However, since the Accountant Member’s view was not in with the views of the Judicial Member, the matter was referred to the Third Member.
The Hon’ble President of this Tribunal in his order dated 17.07.2004 however agreed with the view taken by the Ld.
Accountant Member.
In his order dated 17.07.2004 the learned Third Member made the following observations in paras 18 and 19, which are relevant for the present appeal & accordingly these are reproduced.
“18.
The learned Accountant Member thereafter noted contention of the learned counsel for the assessee-made before him.
It was argued that commitment was required to be honoured as a matter of commercial necessity and secondly to maintain prestige and reputation of the assessee company.
The amount was paid to the bank on account of commitment and with the hope that it would be recovered from the NTC.
Ultimately and after the arbitration Award the assessee lost all hopes to recover the amount and, therefore, wrote it off as a genuine business loss.
In this connection, reliance was placed by the learned Accountant Member on the following decisions: i].Williamson Magor & Co.LTD.: (1979) 117 ITR858(Cal) ii].Gillanders Arbuthnot & Co.LTD.: (1982) 132 ITR763(Cal) iii].Mancneill & Berry LTD.: (1986) 158 ITR374(Vcal) iv].Tuner Morrison : (2000) 247 ITR744(Cal) In all the above cases when recovery of money paid as a guarantor on account of a subsidiary company or otherwise was allowed as a deduction when recovery of money became impossible.
The learned Accountant Member held that ratio of above decisions was applicable to the case in hand.” e].“As such we find that the appellate authorities have consistently held that the amounts paid by the appellant to the banks in settlement of the amounts owned by NTC, was business loss of the appellant & it was allowed as expenditure incurred wholly and exclusively for the business purposes of the appellant.” f].“It has also been stated that unless the appellant had settled the claims of Bank it would not have extended any credit facilities to M/s Andhra Cement Ltd of which the appellant was appointed as the “promoter” for rehabilitation under the scheme approved by the BIFR.
As such in absence of settlement with Andhra Bank, the appellant’s economic & commercial interest would have adversely affected and therefore it was in the business and commercial interest of the appellant to arrive at a settlement with the said bank.
We thus find that the ratio laid down in the earlier appellate orders was fully applicable to the present case.
We accordingly direct the A.O.to allow deduction for Rs.1.35 crores payable to Andhra Bank under the terms of settlement.” Mr.Khaitan, learned senior advocate, in support of his submission that the payment of a sum of Rs.1.35 crores was deductible expenditure, cited a judgment of the Apex Court in the case of C.I.T.versus Delhi Safe Deposit Co.LTD.reported in (1982) 133 ITR756(S.C.) wherein the following views were taken.
“(i) on the facts, that the managing agency agreement with the managed company was a profitable source of income.
The assessee incurred the expenditure in question to avoid any adveRs.effect on its reputation, to protect the managing agency, which was an income earning apparatus, and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before.
Therefore, the expenditure was laid out on purely business considerations and wholly for the purpose of the assessee’s business.
(ii) That the fact that the firm had not claimed the expenditure in its return did not affect the right of the assessee to claim deduction in respect of the amount paid by it.
The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader.
The expenditure incurred on the preservation of a profit-earning asset of a business is always a deductible expenditure.” The judgment cited by Mr.Khaitan does not appear to us to have any applicability to the facts and circumstances of this case.
The assessee in that case was a partner of a firm of managing agents (hereinafter referred to as a ‘managing agency’).They were managing a company known as Bharat Carbon (hereinafter referred to as a ‘managed company’).At the instance of one of the partners of the managing agency huge sum was lent and advanced by the managed company which became irrecoverable.
The aforesaid act of negligence on the part of one of the partners of the managing agency was likely to have landed the managing agency in a ruinous litigation.
It is in those circumstances, the settlement was arrived at and the money was paid.
It would appear that the managed company had a cause of action in that case against the managing agency and, therefore, the payment made by the assessee on account of its share of the loss of the managed company was allowed as an expenditure.
The next judgment cited by Mr.Khaitan is in the case of Bikaner Gypsums LTD.versus Commissioner of Income-tax reported in (1991) 187 ITR39S.C.).Mr.Khaitan drew our attention to the following views expressed by the Apex Court.
“The court pointed out that there is a sharp distinction between the removal of a disability on the one hand, payment for which is a revenue payment, and the bringing into existence of an advantage, payment for which may be a capital payment, on the other.
Since, in the case before the court, the company had made payments for removal of the disabilities which confined their business under the out of date charter of 1773, the expenditure was on revenue account.
In Empire Jute Co.v.CIT [1980].124 ITR1 this court held that the expenditure incurred by an assessee for the purpose of removing the restriction on the number of working hours with a view to increase its profits, was in the nature of revenue expenditure.
The court observed that if the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future.
We agree with the view taken in the aforesaid two decisions.
In our opinion, where the assessee has an existing right to carry on a business, any expenditure made by it during the couRs.of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset.
Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business but that by itself would not acquire any capital asset.” We do not think that the judgment in the case of Bikaner Gypsums LTD.has any application to the facts of this case either.
What had happened in that case was that the assessee was a lessee in respect of a mine.
The area leased out to the lessee contained a railway station and track, which were causing disruption in the business of the assessee.
In order to shift the railway station and the track payment of a sum of Rs.3 lakhs was made.
The question was whether the payment was an expenditure of a capital nature or of a revenue nature.
It is in that context their Lordships held that “the restriction operated as an obstacle to the assessee’s right to carry on business in a profitable manner.” It is in those facts that the payment was allowed as a revenue expenditure.
The third and the last judgment cited by Mr.Khaitan is in the case of S.A.Builders LTD.versus Commissioner of Income-Tax(Appeals) And Another reported in (2007) 288 ITR1(SC).Mr.Khaitan drew our attention to paragraphs 25,35 and 36 of the aforesaid judgment, which read as follows:- “25.
In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle.
In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed.”
35. We agree with the view taken by the Delhi High Court in CIT v.
Dalmia Cement (B.) LTD.[2002].254 ITR377that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself).the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.
No businessman can be compelled to maximize his profit.
The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act.
The authorities must not look at the matter from their own view point but that of a prudent businessman.
As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”
36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern.
It all depends on the facts and circumstances of the respective case.
For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency.
However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here).However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.” The aforesaid judgment does not help him either.
According to us, in paragraph 36, the Apex Court has clarified that in every case interest on borrowed loan cannot be allowed where the money borrowed had been advanced interest free to a sister concern.
Therefore, the judgment is to be understood in the facts of its own case.
What had happened was that the money had been borrowed by the assessee and advanced to the sister concern.
The assessee obviously was interested in the working of the sister concern.
The assessee naturally had business relation and the assessee was also interested in the profits to be earned by the sister concern.
It is in that view of the matter that the concept of business expediency or commercial expediency was taken into account.
The facts of the case before us are altogether different.
It would appear from the Terms of Settlement entered into between the assessee and the Andhra Bank that the tobacco division of the assessee was demerged and was transferred pursuant to a scheme sanctioned by this Court with the consent of the creditor, that is to say, Andhra Bank.
The lender Andhra Bank not only consented to the scheme passed by this Court on 31st July, 1984 but also acted upon such transfer by rearranging the monies lent and advanced to New Tobacco Company.
There is a recital that on 12th October, 1986 New Tobacco Company approached the bank and the credit facilities earlier granted to the assessee were transferred in favour of the New Tobacco Company, against the security of stocks, stores and Tobacco owned by the borrower, namely, New Tobacco Company.
It would further appear from the recitals that the suit filed by the Bank against New Tobacco Company was not also a suit against the assessee.
The assessee, as a matter of fact, was not a party to that suit.
After the scheme dated 31st July, 1984 was sanctioned by this Court, the assessee had no further connection with New Tobacco Company nor was the assessee liable for the debt due by New Tobacco Company to its lender Andhra Bank.
This important fact pointed out to us by Mrs.Gutgutia was missed by the learned Tribunal.
The learned Tribunal drew an analogy with the deductions allowed to the assessee in the earlier years but failed to notice that in the case of earlier payments where deductions were allowed to the assessee, the assessee was in the position of a guarantor.
A guarantor is co-obligant and, therefore, he is jointly and severally liable to the lender.
In the earlier yeaRs.the money paid by the assessee was debited to the account of the New Tobacco Company.
After the money became irrecoverable, the debt was written off.
The similar facts were not there when the question arose whether the payment of Rs.1.35 crores made by the assessee to Andhra Bank was an allowable expenditure.
The money paid by the assessee, even assuming that the assessee was interested to pay, was recoverable under Section 69 of the Contract Act and payable by the New Tobacco Company under Section 70 of the Contract Act which provides as follows:- 69.
Reimbursement of person paying money due by another, in payment of which he is interested.
- A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
Illustration B holds land in Bengal, on a lease granted by A, the zamindar.
The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government.
Under the revenue law, the consequence of such sale will be the annulment of B’s lease.
B, to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A.
A is bound to make good to B the amount so paid.”
70. Obligation of person enjoying benefit of non-gratuitous act.
- Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.
The learned Tribunal was also wrong in proceeding on the basis that the Reserve Bank of India had issued a caution notice.
We asked Mr.Khaitan to produce the caution notice before us for consideration.
Pursuant to our request, Mr.Khaitan has produced before us a news item published in the business page of The Telegraph dated 31st March, 1995 from which it appears that the caution notice issued by the Reserve Bank of India had been withdrawn on or prior to 30th March, 1995.
The contents of a news item published in a newspaper are not admissible in evidence.
What is admissible is that such a news was published.
Whether it is correct or incorrect there is no evidence with regard thereto.
Even assuming that such a news was published on 31st March, 1995, it appears that the caution notice issued by the Reserve Bank of India had already been withdrawn.
Therefore, the learned Tribunal was wrong in proceeding on the basis that it is due to the pressure exerted by the Reserve Bank of India that the assessee was made to pay the debt due by New Tobacco Company to the Andhra Bank.
There was nothing before the learned Tribunal to show that the Andhra Bank would not have advanced any further money to Andhra Cements LTD.except upon payment by the assessee the dues owed by New Tobacco Company.
Even assuming for the sake of argument that there was any such situation then the payment of Rs.1.35 crores would take the character of the cost of acquisition of the shares of Andhra Cements LTD.acquired by the assessee shortly before such payment.
It is an admitted fact that the Andhra Cement LTD.was acquired by the assessee in the year 1994 while the Andhra Cements LTD.was in a BIFR proceeding.
The learned Tribunal was utterly wrong in holding that the amount paid by the assessee to the bank in settlement of the debt owed by New Tobacco Company was a business loss of the appellant.
For the aforesaid reasons, the question formulated by us in Court is answered in the affirmative and in favour of the Revenue.
In so far as the question no.1 is concerned, there is consensus at the Bar that the same is already covered by judgements in favour of the assessee.
Therefore, the question no.1 formulated on 2nd September, 2014 is answered in the affirmative and in favour of the assessee.
The appeal is, thus, partly allowed.
(GIRISH CHANDRA GUPTA, J.) I agree.
s.saha/sb/sm (ASHA ARORA, J.)