THE COMMISSIONER OF INCOME TAX COCHIN vs. M/S. APPOLLO TYRES LTD.

Facts

The Revenue has appealed against an order of the Income Tax Appellate Tribunal (ITAT) for assessment year 1996-97. The assessee, M/s Appollo Tyres Ltd., a manufacturer of automotive tyres, had debited Rs. 90 lakhs under 'General Expenses' for a corporate guarantee given to its sister concern, M/s Universal Steel and Alloys Limited. When the bank enforced the guarantee, the assessee paid the amount, which became irrecoverable from the sister concern and was written off. The Assessing Officer disallowed this as it was not in the course of the assessee's business. The Commissioner of Income Tax (CIT) provided some relief, but the ITAT ultimately allowed the assessee's claim, holding the write-off was permissible.

Held

The High Court held that the issue was covered by the dictum laid down by the Apex Court in Commissioner of Income Tax v. Amalgamations Pvt. Ltd. [1997 (226) ITR 188 (SC)]. The Court noted that there was no dispute that M/s Universal Steel and Alloys Limited was a sister concern of the assessee, nor was there any dispute regarding the loan procured from the financier, the offering of bank guarantee, or the loss sustained leading to the debt being written off. Consequently, the ITAT's decision allowing the deduction was affirmed. The Court found no substantial question of law warranting interference under Section 260A of the Income Tax Act. The appeal was dismissed.

Key Issues

1. Whether, on the facts and circumstances, the assessee is entitled to claim a deduction of Rs. 90,00,000/- which was not advanced for carrying on its business, considering the corporate guarantee given to a sister concern. 2. Whether, on the facts and circumstances, the assessee discharged the burden of proof, established the claim of saving of reputation, and is entitled to the deduction. Assessee's arguments: The assessee contended that the loss incurred due to the corporate guarantee for a sister concern, which was written off, should be allowed as a deduction. They relied on the Apex Court's decision in S.A. Builders Limited v. Commissioner of Income Tax (Appeals) and Commissioner of Income Tax v. Amalgamations Pvt. Ltd. The facts are similar to the Amalgamations Pvt. Ltd. case where a similar loss was allowed. Revenue's arguments: The Revenue argued that the amount was not advanced for carrying on the assessee's business and questioned whether the assessee discharged the burden of proof and established the claim of saving of reputation.