Karnataka High Court
The Commissioner Of Income-Tax vs United Breweries Limited Represented ... on 25 January, 2007
Equivalent citations: (2007)209CTR(KAR)385, [2007]292ITR188(KAR), [2007]292ITR188(KARN)
Author: R. Gururajan
Bench: R. Gururajan, N. Ananda
JUDGMENT R. Gururajan, J.
Income Tax Appeal No. 25/2000
1. Revenue aggrieved by the order of the Tribunal dtd 4-11-1999 is before us. The following questions of law are framed;
1. Whether on the facts and in the circumstances of the case, the tribunal was right in holding that in the case of amalgamation of borrower with the lender, the entries to be passed in the books of the amalgamated company would be different from the situation where no amalgamation takes place?
2. Whether on the facts and in the circumstances of the case, the tribunal was right in allowing the deduction claimed for irrecoverable interest without noting that on 1-4-1994, ie., the first day of the accounting year, the debtors and the debts due to them had ceased to exist?
3. Whether on the facts and in the circumstances of the case the tribunal was right in holding that the irrevocable interest was an allowable deduction, without noting the principle of mutuality and after holding that such interest was allowable in not noting the provisions of Section 41(1) of the Act pertaining to cessation of liability in the hands of the erstwhile debtors?
4. Whether on the facts and in the circumstances of the case, the tribunal was right in holding that on an interpretation of clause of the objects contained in the memorandum of association of the first respondent, the first respondent was carrying on business activity of providing corporate guarantees with respect to loan contracted by third parties?
5. Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was right in holding that the Corporate Guarantee amounts devolved on the First Respondent could be claimed without a fixed basis (neither on payment/nor on devolution), although the Hon'ble Supreme Court in the case of Amalgamations Limited has held differently?
6. Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal had any material before it to conclude that the amounts paid on behalf of the various borrowers by the First Respondent became irrecoverable during this accounting year and therefore could be claimed as a deduction when paid?
7. Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was right in holding that the legal expenses incurred by the First Respondent in connection with the invoking of the guarantees issued to various borrowers was a legitimate business expenditure?
2. The facts of the case are as under;
In the course of assessment proceedings for the year 1995-96, number of disputes came up for adjudication. The assessing officer, after hearing passed adverse order on 31-3-1998, denying certain allowances to the assessee. Aggrieved by the said order, assessee filed an appeal before the appellate authority. The appeal of the assessee was allowed in part. Both the revenue as well as the assessee preferred second appeals before the tribunal. The tribunal has passed the impugned order. Aggrieved by the said order, both the assessee and the revenue are before us. The disputed issues are (1) claim of interest written off as irrecoverable due from subsidiary cause for a sum of Rs. 16,16,33,083/-, (2) Corporate Guarantee obligation Rs. 14,31,51,141/-, (3) Legal expenses Rs. 20.50 lakhs.
3. Dr. Krishna, learned Counsel took us through the material on record to contend that the question of law are to be answered in favour of the revenue. Learned Counsel would say that the assessee had loaned large sums of money to its subsidiary companies. Interest was charged on such loans. Interest was not received. The assesee however accounted for the same on accrual basis and the tax was made over on the interest amount. The said amount was shown as due from subsidiaries. Thereafter the subsidiaries merged with the assessee w.e.f. 1-4-1994. In the light of the merger, according to the learned Counsel, the assessee and the subsidiary company became one and in that view of the matter, according to him, the writing off of interest by the assessee would not arise. Learned Counsel would say that there was no debt available as on 1-4-1994 and that therefore the assessee cannot have the benefit of Section 36(i)(vii) of the Income Tax Act.
4. In so far as corporate guarantee is concerned, he has referred to us the order of the tribunal and also the order of the assessing authority. He would say that the tribunal has committed a serious error in granting this allowance in favour if the assessee. He would say that allowance of the said amount is unsustainable in law. He would say that there is every chance of the assessee recovering the said guarantee amount, in which event the department would be put to loss in terms of his submission.
Similarly he would argue that consideration of legal expenses by the tribunal also require our interference.
5. Per contra, Sri Datar, learned senior counsel would argue that just because there exists merger that by itself would not automatically wipe out the debt in the case on hand. He would say that the debts did exist as on 1-4-1994 and the merger was given effect to by the Company Judge by way of an order only after 1-4-1994. He would say that in these circumstances, the assessee cannot be denied the benefit of Section 36(i)(vii) in the case on hand. He would dispute the contention of the revenue with reference to Section 36 and also with reference to disallowance in the case on hand. He would also argue that Section 41 provides for consideration of amount as profit for the purpose of taxation. He would further say that same yardstick has to be made applicable to the writing off of the amounts on the facts of this case. In so far as guarantee invocation is concerned, he would rely on a judgment of this Court, but however, he would add that in the light of the assessee recovering the amount invoked, the department is not without any remedy in term of the Act. Learned Counsel therefore says that the question may be answered in his favour.
6. Both the learned Counsel placed reliance on several judgments.
7. After hearing we have carefully perused the material on record.
Re. Question No. 18. Admitted facts would reveal that the assesse had loaned sums of money to the subsidiaries of the assessee charging interest on such loans. Interest was not received. Assessee accounted for the same on accrual basis and offered the interest to tax. He however assessed the same as due from subsidiaries. Subsidiaries claimed the same as expenditure on accrual basis. Noticing this, the assessing authority has chosen to disallow. Aggrieved by the same an appeal was filed. In appeal also assessee lost his battle. The tribunal after hearing the parties has chosen to accept the case of the assessee. This finding is assailed by the revenue by contending that in the light of the merger of the subsidiary with the assessee as on 31-3-1994 in terms of the order of the High Court, there exists no debt at all for the parties to write off the interest on such debts. The same is countered by the assessee.
9. Revenue relies on 186 ITR 278 in support of its submission. The facts in that case would read as under;
The appellant-company was the subsidiary of ISGEC, the holding company. In proceedings under Sections 391 and 394 of the Companies Act, 1956, amalgamation of the two companies was effected by an order of the High Court as a result of which ISGEC stood dissolved and ceased to be in existence and the appellant-company was to meet he liabilities of ISGEC. Prior to the amalgamation, ISGEC had claimed in an earlier year the sum of Rs. 58,735 as a trading liability on the basis of accrual and the sum was allowed as a deduction in computing its profits. After amalgamation, the appellant-company derived benefit of the sum of Rs. 58,735 but claimed that it was not liable to tax thereon under Section 41(1) of the Income-tax Act, 1961. The Appellate Tribunal held that, upon amalgamation, the identity of ISCEG was lost and that company was no longer in existence and, therefore, the appellant-company was not liable to tax on the sum of Rs. 58,735 under Section 41(1). The High Court, on a reference, held that the appellant-company was a successor in interest of ISGEC and since the assets of both the companies merged and the two companies blended to form a new company, the liabilities attaching to ISGEC devolved on the appellant-company and, therefore, the latter was liable under Section 41(1).
On appeal to the Supreme Court ruled as under;
The High Court was in error in holding that, even after amalgamation of the two companies, the transferor-company did not become non-existent but instead it continued its entity in a blended form with the appellant-company. The High Court's view that, on amalgamation, there is no complete destruction of the corporate personality of the transferor-company but instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that, when two companies amalgamate and merge into one, the transferor-company loses its entity as it ceases to have its business. However, their respective rights and liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor-company ceases to exist with effect from the date the amalgamation is made effective.
10. Subsequently, the Apex court in 226 ITR 189 has chosen to consider the 'business loss' in its judgment. The Apex Court after noticing the various aspects of the matter, ruled that the assessee company had incurred loss in carrying on its own business which included furnishing guarantees to debts borrowed by its subsidiary companies. The assessee company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators, which was received in the relevant previous year for the assessment year 1962-63 and it was allowable in that year.
11. The law is settled in terms of the Apex Court ruling as referred to above. However the facts of each case has to be seen in the light of the law in terms of the law laid down by the Apex Court rulings.
Section 36(vii) would read as under;
Subject to provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.
A reading of the same would show that deduction is permissible subject to Sub-section 2 of Section 36. Sub-section 2 of Section 36 would read as under;
(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-
(i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
(ii) If the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;
(iii) Any such debt or part may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, but the assessing officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;
(iv) Where any such debt or part of debt is written off as irrecoverable in the accounts of an earlier previous year being a previous year relevant to the assessment year commencing on the first day of April, 1988, or any earlier assessment year, and the assessing officer is satisfied that such debt or part became a bad debt in any previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the previsions Sub-section 6 of Section 155 shall apply.
(v) Where such debt or part relates to advances made by an assessee to which Clause (viia) of Sub-section (1) applies, no such deduction shall be allowed unless the assessee had debited the amount of such debt or part thereof in that previous year to the provisions for bad and doubtful debts account made under that clause.
12. These two sections have to be noticed for the purpose of consideration of the case of the assessee. Admitted facts would show that the assessee did make some payment to its subsidiaries. Interest is available to the assessee. Assessee has made over tax on the interest. However in the light of the irrecoverable nature of the same, the assessee had chosen to write it off in terms of the calculations shown at page 122 of the paper book. When the assessee wrote it off factually the amalgamation had not taken place. In fact the matter was pending in this Court. The Company Court passed an order on 29-6-1995 accepting amalgamation. However, amalgamation was w.e.f. 1-4-1994. Therefore factually speaking debts were available on the crucial date. The retrospective effect given to the amalgamation would not nullify, in our view, the decision with regard to writing off of the interest on the ground of irrecoverable nature. Therefore we are not prepared to accept the argument that the debt did not exist on the said date in terms of the submission made before us. It is not disputed that money-lending business is available to the assessee. It is also not disputed before us that the assessee has made over tax on the accrued interest. It was taken in to account for the earlier part of the year. Taking into consideration, all these aspects of the matter, we are of the view that the tribunal is justified in considering the case of the assessee on the peculiar facts of the case in the light of Section 36 of the Income Tax Act. An order of the court accepting amalgamation would wipe out the relationship in terms of the retrospective effect of the order. However, it would not nullify a decision taken prior to the order of the High Court in a given case. In fact the Apex Court in 226 ITR 189 has chosen to consider the 'business loss' in the said judgment. The Apex Court ruled that such expenditure is allowable in the said case. The said case to a certain extent supports the orders. We must also notice another judgment of the Apex Court in 223 ITR 809 wherein the Apex court has ruled as under;
Held accordingly, reversing the decision of the High Court, that since the company courts had not only sanctioned the scheme of amalgamation as presented to them, but had also not specified any other date as the date of transfer/amalgamation, it followed that the date of amalgamation/date of transfer was the date specified in the scheme as the transfer date. In such a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. Therefore, the notices issued by the Income-tax Office were not warranted in law.
13. This judgment would show that judicial notice has been taken with regard to the delay in considering amalgamation and also with regard to giving effect even for earlier period. Taking into consideration all aspects of the matter, we accept the order of the tribunal on the facts of this case.
14. At this stage, we must take into consideration, the subsequent order dtd 21-1-2000 in the matter of giving effect to the order of the tribunal. Though the interest recoverable in terms of the material on record is Rs. 16.6 crores, the authority has chosen to provide relief only in so far as Rs. 13,80,83,000/-. This order has become final. Assessee also says that they would accept this order and claim benefit only to the extent Rs. 13,80,83,000/-. This submission is accepted.
Re.Question No. 215. The second question is with regard to corporate guarantee invocation. Tribunal has noticed with regard to corporate guarantee invocation in para 13 of the order. The findings are given in para 16.9 onwards. The tribunal after noticing the material on record has chosen to uphold the claim of the appellant for deduction of the amount paid as guarantee in the case on hand. The tribunal after noticing the material on record has chosen to uphold the claim of the appellant for deduction of the amount paid as a guarantee in the case on hand. The tribunal after referring to the material facts has chosen to hold that the four companies could not find finance to pay the liability resulting in compulsory compensation at the hands of the assessee-company. We do not find any legal error in the order of the tribunal. Section 4 of the Income Tax Act do not in any way prohibit such payments. In the circumstances, we accept the order of the tribunal, but however, we deem it proper to reserve liberty to the department, in the event of the department coming to know that the company was able to get back the balance amount in any manner, the department would be at liberty to initiate fresh proceedings in accordance with law despite this order.
Re.Question No. 316. The third question of law is with regard to Legal Expenses on Devolution.
The tribunal has also noticed that the legal expenses were in connection with the guarantee. In the light of the material facts and on the facts of this case, it cannot be said that the expenses incurred could not but be with the business activity as rightly ruled by the tribunal. The order is based on facts and we also answer this issue in favour of the assessee.
17. Moreover, in similar circumstances, this Court in ITA 12/1999 has accepted a similar issue in terms of the order dtd 15-9-2006.
ITA 24/200018. This appeal is filed by the assessee aggrieved by the very order. It is unnecessary for us to refer to the facts in the light of the reference to the fact findings in the connected appeals. The assessee in ITA 24/000 has raised the following questions of law;
1. "Whether on the facts and in the circumstances of the case the value of the asset transferred during the relevant year as on 1.4.81 determined by the Assessing Authority and upheld by the Authority and upheld by the Tribunal was justified?
2. Whether the Tribunal was justified in ignoring the report of an approved valuer with regard to the value of the immovable property as on 1.4.81, when the said value was determined by the approved valuer made in the scientific manner?
3. When there being no other report of an expert, whether the valuation report of the approved valuer can be ignored by the Assessing Authority?
4. Whether on the facts the Tribunal having accepted the claim of bad debt is justified in restricting the quantum of allowance to the amount in excess of the net asset of the debtor (without ascertaining whether the net assets shown in the balance sheet of the debtor reflected the true market value of those assets) and the money's worth recoverable out of said assets?
19. After the order of the tribunal, the assessing authority has given effect to the said order in terms of an order dtd 21-1-2000. In the said order the assessing authority has restricted the allowance to Rs. 13,80,83,000/-. In the connected appeal in ITA NO. 25 of 2000, we have upheld this claim in terms of our finding in the connected appeal.
20. At the time of hearing, the assessee has filed a memo declaring that the assessee would be satisfied if the allowance of Rs. 13,80,83,000/- as determined by the assessing authority is upheld. In the light of this memo, no orders are necessary in ITA 24/2000.
21. The questions of law raised in ITA No. 25 and 26/2000 are answered in favour of the assessee, however, restricting the benefit to Rs. 13,80,83,000/- with liberty in terms of this order. Questions of law raised in ITA 24/2000 are not answered in terms of the memo filed by the appellant. No costs.