ESCORTS LTD.,FARIDABAD vs. ADDL.CIT, SPECIAL RANGE-3, NEW DELHI

PER SATBEER SINGH GODARA, JM

This assessee’s appeal for assessment year 2016-17, arises against the Commissioner of Income Tax (Appeals)-34 [in short, the “CIT(A)”], New Delhi’s order dated 28.06.2019 passed in case no.
172/18-19, involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

This assessee’s appeal raises the following substantive grounds:
Assessee by Sh. R.M. Mehta, CA
Department by Ms. Monika Singh, CIT(DR)
Date of hearing
25.02.2026
Date of pronouncement
13.03.2026
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“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.

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 the brand of 'Farmtrac' which is the main tractor brand of the assessee company in India. The objective of incorporating this company was to expand the reach of the assessee's products and its brand in US markets. FNA had a distributorship agreement with a company in Korea namely L.S. Cables (presently known as L.S. Mitron)
(hereinafter referred to as LSM). Under this agreement, LSM supplied tractors and farm equipments to FNA and allowed suppliers credit of 180 days. In order to secure its dues, LSM wanted a guarantee/assurance from the parent company i.e.
assessee, so that in the event of any defaults in the payment by FNA, the supplier could recover its dues from the assessee
4 | P a g e company. In the larger interest of assessee's business, a guarantee was signed and delivered by the assessee in April, 2007 to LSM agreeing to ensure the payments by FNA to LSM as and when they become due. The guarantee was signed by the assessee company but did not constitute a final guarantee agreement for want of counter signatures of LSM, which became a matter of dispute during the arbitration proceedings. However, the Arbitrators held the guarantee agreement to be valid in arbitration proceedings.

c) From May, 2007, FNA started having liquidity issues due to non/delayed recovery of dues from their sub-dealers/customers in USA mainly on account of quality and regulatory issues etc. in respect of the products sold. Consequently, FNA delayed the payments to LSM beyond due dates. The liquidity conditions got escalated in the course of time and subsequently in November,
2007, LSM filed petition in USA court for appointment of a receiver for FNA to protect the assets of FNA so that the dues of LSM are protected. W.e.f. 15.02.2008, FNA was put under receivership.
d) In the meantime, LSM invoked the guarantee given by assessee company for recovery of their dues against FNA. On being disputed by the assessee company, LSM referred matter to International
Chamber of Commerce (ICC) for arbitration. ICC constituted a bench of three arbitrators. By a 2-1 split judgement of ICC International
Court of Arbitration, Vienna, Austria, the award was given against the assessee company vide order dated 24.09.2012 (copy of arbitration award of majority arbitrators as well as of minority arbitrator are enclosed (page The arbitration award pronounced compensation/damages 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 beneficial for both the parties. The final amount was settled as below:-
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ⅰ) Payable by Escorts to LSM

US$ 4970587.88

ii) Share of cost of arbitration

US$ 205000.00

iii) Legal services fee (ICC)

US$ 547859.15

iv) Interest @ 3% + labor

US$ 1449062.06

Total payable

US$ 7172509.09

In terms of the settlement, 50% amount was required to be paid to LSM within three months of the agreement and the balance 50%
was payable in three equal annual installments commencing from the completion of one year from the date of settlement. The first payment of 50% was duly made during the assessment year 2016-
17 after obtaining the approval of Reserve Bank of India vide their letter dated
23.09.2015).
The remaining three
No.FE.CO.DID/3254/19.05.072/2015-16
(copy of RBI letter enclosed - page payments have since been made in subsequent years thereby ending this matter finally."

The appellant also explained the commercial expediency of the expenditure incurred vide the same letter dated 7th December 2018. The relevant extracts are reproduced below:

"Commercial Expediency The expenditure of Rs.47.64 crores has been wholly and exclusively incurred/laid out for the purpose of business of the assessee company. The perusal of the facts mentioned in the above paragraphs clearly demonstrate the following broad objectives of settlement with LSM:- i) To put an end to protracted litigation: The decision to enter into settlement agreement with LSM was based on principles of commercial expediency.

ii) To protect business interest of the assessee company in Poland.
The assessee sold tractors and spare parts to its subsidiary company in Poland and an attachment of shares in the said subsidiary would have meant loss of export business to the assessee.

ii) To gain commercial advantage in the longer term in US export market. The litigation with LSM had adversely impacted market positioning of the assessee in overseas markets and, therefore,
6 | P a g e settlement of the dispute with LSM was essential to recapture the US market.

iii) Corporate guarantee was given for the debts of subsidiary company towards their suppliers due to commercial expediency.
The whole idea to provide corporate guarantee was to promote the business interest of the assessee company and gain a foothold in a highly competitive US market."

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. The appellant was a direct and indirect beneficiary by giving a guarantee for FNA so that it could get supplier's credit which would help it to get uninterrupted supplies of materials. It was a sound business decision to provide the guarantee instead of providing direct financial support to FNA by way of loan or any other mode of financing. The guarantee was issued wholly and exclusively in the interest of appellant's business which would have grown simultaneously with the growth of business of FNA in US markets.

Now coming to the circumstances leading to the invocation of the guarantee & its subsequent settlement with the beneficiary i.e. L S
Mitron (LSM), complete facts with documentary evidences have been furnished before the Assessing Officer by letter dated 7th December
2018 (supra). Due to adverse market conditions developing in US markets for farm equipment manufacturers, the said FNA started having liquidity issues due to delayed or non recovery of its dues from its dealers and customers leading to default in repayment of its dues to LSM. This led to the invocation of guarantee by LSM against the appellant. With the intervention of LSM in US courts,
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FNA was put under receivership. The matter was also referred by LSM to International Chamber of Commerce (ICC) which appointed a panel of three arbitrators. The appellant initially took the stand that the guarantee was technically and legally not maintainable because the guarantee agreement was not signed by LSM. This was however rejected by the arbitrators and the guarantee was held to be validly issued.

In the arbitration award the appellant was directed to pay the guarantee amount along with interest till date. (Refer pages to of paper book) The appellant took the matter to Courts in India and LSM also initiated legal proceedings to enforce the award against the appellant. LSM also initiated legal proceedings to take the control of another subsidiary of the appellant in Poland. The said subsidiary is also in the same business of manufacturing of tractors and farm to whom assessee exports its tractors both in CKD and SKD form.

As the litigation was getting prolonged, the appellant was legally advised to go for a settlement with LSM to minimize the potential damage in the event that the Courts were to enforce the award against the assessee. Thereafter negotiations were 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, coercive process or assertion of hostile title. The expression "wholly and exclusively" used for allowing business expenditure does not mean that the expenditure ought to have been incurred
"necessarily". Ordinarily, it is for a taxpayer to decide whether any expenditure should be incurred in the course of his or its business.

One of the tests of determining the allowability of an expense is whether the transaction is properly entered into as a part of the 8 | P a g e taxpayer's legitimate business needs, in order to facilitate the carrying on of its business. It is immaterial that a third party also derives benefits from such expenses.

The appellant relies on the following judgements:

Deputy Commissioner of Income-tax -Vs- M/s. Wires & Fabrics (SA)
Ltd.

Circle-3, Kolkata. I.T.A No. 366/Kol/2010

The relevant operative part of the decision is reproduced below:

"8. We find that this is a fact that none of the authorities have doubted the genuineness of payment of Rs.1.6 cr. to ICICI and IDBI, rather the lower authorities have accepted that this is a genuine payment. As regards to the fact that, assessee entered into corporate guarantee with these two financial institutions for the loan granted by them to KPM is also a fact. This guarantee is also a continuing guarantee and could not be revoked without the consent of the party in whose favour the guarantee is given as per terms and conditions of the guarantee. The assessee during the pendency of guarantee, as a precautionary measure had intimated to the financial institutions that the corporate guarantee given by it is no more effective since KPM is ceased to be a subsidiary of assessee and it had no control over the management and affairs of that company, but financial institutions initiated legal proceedings against assessee during FY 2003-04 and ultimately it had settled by paying a sum of Rs.60 lakh in financial year 2003-04, which was subject matter of appeal before CIT(A) in AY AY 2016-17; 143(3) of the IT Act

2004-05 and ultimately CIT(A) allowed the claim of the assessee, which has become final as no appeal against the order of CIT(A) was filed by the revenue in higher forums. The assessee settled the amount with IDBI and ICICI for non-payment of outstanding dues of KPM as it was facing a lot of problems with IDBI. We find that Hon'ble Apex Court in 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 9 | P a g e 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 guarantor for the loans and there were receipts by the assessee-company in the course of the liquidation of SSM in later years. Hon'ble Apex Court further noted the facts that the total amount received came to Rs. 4,85,508.28 spread over the relevant accounting years for the assessment years 1959-60 to 1962-63 and ITO held that the loss in question did not arise during the course of or incidental to the business of the assessee-company and in his view, it was at best a capital loss and he making assessments for the years 1959-60 to 1962-63, treated the receipts from the liquidator as income as a protective measure. The Tribunal held that the assessee-company had guaranteed the loan in the course of carrying on its own business and the loss was clearly admissible as a deduction but since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63 it was held that the balance of Rs. 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. This was upheld by the High Court. Hon'ble Apex Court held that the assessee-company had incurred the loss in carrying on its own business which included furnishing guarantees to debts borrowed by its subsidiary companies and 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. In the present case also the facts are exactly identical, wherein the company has been authorised to stand guarantee by special resolution for KPM as stated by Ld. Counsel for the assessee, while making statement at Bar. It is also a fact that the assessee has made this payment to avoid closure or reduction of limits availed from IDBI and restriction of further sanction of limits. There is also possibility of increase in interest rates and/or blacklisting of the company by the financial institutions. We are of the view that this payment was made for commercial expediency and hence, allowable,
The decision in this case has been followed by the hon'ble Tribunal in the case of Peirce Leslie India Ltd., Chennai vs Department Of Income 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:
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"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 lender, the payments effected were capital expenditure. Assessee as a prudent business man must have found it commercially expedient to make the settlement on account of working capital loans raised by its subsidiary company which the latter was unable to repay. We are, therefore, of the opinion that Id. CIT(Appeals) was well justified in following the decision of co-ordinate Bench of this Tribunal in the case of W.S. Industries (India) Limited (supra) wherein it was held as under:-

Business "Section 37(1) of the Income-tax Act, 1962 expenditure
Allowability of Assessment year 2004-05 Assessee Company was engaged in the business of manufacturing electro porcelain products
- A subsidiary company of assessee had been executing certain contracts on behalf of assessee for supply of electronic equipment
Assessee had given corporate guarantee to various banks for its subsidiary company Consequent to subsidiary company becoming sick, assessee entered into settlements with banks by effecting one time payment and got corporate guarantees discharged Assessee wrote off amount so paid in its books and claimed deduction for same Assessing Officer rejected assessee's claim

It was noted that subsidiary company of assessee was supplying materials which were important for assessee's business and, thus giving corporate guarantee was incidental to business of assessee company It was also noticed that as per Articles and Memorandum of Association of assessee company, it could give corporate guarantee to any person either on behalf of company or on behalf of others on such terms and conditions as company shall determine
Whether, on facts, it was clear that giving corporate guarantee was not only one of objects of assessee company but same was given for its subsidiary company and it was in interest of assessee company and, hence, commercially expedient decision"

The stand of the learned Assessing Officer that the assessee could not substantiate the claim of commercial expediency, does not hold
11 | P a g e ground. He has not been able to negate any of the assertions made by the appellant with regard to the "commercial expediency" of the expenditure claimed. The judgements relied upon by the appellant have been dealt with in a very casual manner as simply not applicable'. There is nothing in the assessment order that shows the rebuttal of assessee's contentions.

In the facts and circumstances of the case and in law, the disallowance of Rs. 47.64 crore deserves to be deleted.

This is what leaves the assessee aggrieved.
3. Both the parties vehemently reiterate their respective stands against and in support of the impugned addition. The Revenue, more particularly, seeks to make out a case in support of the CIT(A)’a above extracted detailed discussion that the assessee’s
12 | P a g e corporate guarantee claim has been rightly upheld as not incurred
“wholly” and “exclusively” for the purpose of business on account of its failure in not proving the same as a valid one all along. We reiterate that it has already come on record as per the relevant arbitration agreement which ended in a compromised settlement before hon’ble Punjab & Haryana high court (supra) that there indeed was a corporate guarantee entered at its behest in support of the group entity with the third party which could not be allowed to be questioned at this belated stage. The Revenue’s further stand is that the assessee never incurred or undertook any liability also fails to evoke our concurrence since the relevant terms and conditions incorporated therein stand fortified in both arbitration award as well as in the execution proceedings forming subject matter of adjudication before hon’ble high court. We also deem it appropriate to refer to their lordships’ landmark decision in M/s.
S.A. Builders Ltd. Vs. CIT [2007] 288 ITR 1/158 Taxman 74 (SC); although in a different context of interest being funds advanced to a group entity that the department could not sit in the armchair of a businessman as to in what manner the relevant day-to-day affairs are to be carried out. We indeed seek valuable guidance therefrom
13 | P a g e to conclude herein that once the assessee has entered into the impugned corporate guarantee in the earlier assessment years, the liability raising therefrom on payment of arbitration claim award against it could not be disallowed as not satisfying the relevant criteria under section 37(1) of the Act. This is further coupled with the fact that the assessee has quoted a catena of case law (supra) allowing identical corporate guarantee claims against the department. We thus delete the corporate guarantee arbitration awarded expenditure claim disallowance of Rs.47.64 crores in very terms.

No other ground or argument has been pressed.
4. This assessee’s appeal is allowed.
Order pronounced in the open court on 13th March, 2026 (NAVEEN CHANDRA)
JUDICIAL MEMBER

Dated: 13th March, 2026. RK/-