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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAVISH SOOD
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the Revenue against the order dated 28.09.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2011-12.
The issue raised in 1st ground of appeal is against the deletion of addition by Ld. CIT(A) as made by the AO under section 10B of the Act in respect of Mangalore unit on the ground that the assessee has not fulfilled the pre-conditions provided under the Act.
2 M/s. Sequent Scientific Ltd., (formerly known as PI Drugs Pharmaceuticals Ltd.) 3. At the outset, the Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of the co-ordinate bench of the Tribunal in its own case in ITA No.4443 & 4438/M/2016 A.Y. 2010-11. The Ld. A.R. submitted that even the Ld. CIT(A) has allowed the appeal of the assessee by following his own order for A.Y. 2010-11 by observing that there is no change in facts and circumstances of the case and since it has been allowed in 2010-11, therefore the same was being allowed in the current year also.
The Ld. D.R., on the other hand, relied on the order of AO and grounds of appeal.
5. After hearing both the parties and perusing the order of co- ordinate bench of the Tribunal in A.Y. 2010-11, we observe that the issue is squarely covered in favour of the assessee by decision of the co-ordinate bench of the Tribunal as the coordinate bench has upheld the order of the Ld. CIT(A) allowing the deduction under section 10B of the Act to the assessee in the preceding assessment year 2010-11. We are therefore inclined to uphold the order of Ld. CIT(A) by dismissing the ground No.1 of the revenue.
6. The issue raised in ground No.2 is against the order of Ld. CIT(A) directing the AO to allow deduction on account of addition of inventory which was disallowed by the AO in A.Y. 2009-10.
The Ld. Counsel of the assessee, at the outset, submitted that this ground is not maintainable as not being emanating out
The Ld. D.R., on the other hand, fairly agreed to the contention of the Ld. A.R., however, relied on the grounds of appeal.
9. After perusing the appellate order, we find that the issue challenged in ground No.2 is not emanating out of the appellate order and accordingly we are inclined to dismiss the same.
10. The issue raised in ground No.3 is against the order of the Ld. CIT(A) against the long term capital loss claimed by the assessee in respect of sale of shares of Vedic Fanxipang without appreciating the fact that benefit of indexation can not be given to the assessee as the assessee has not provided the exact date of acquisition of additional investments and date of sale at the time of assessment.
The Ld. Counsel of the assessee submitted before the Bench that all these details have been provided before the Ld. CIT(A) as noted by the Ld. CIT(A) in para 2.4.8. The Ld. A.R. also drew our attention to paper book giving comprehensive details qua the year wise investment from F.Y. 2005-06 to F.Y. 2010-11, the indexation cost of investment and thereafter working of long term capital gain which were furnished before the AO as well as before the Ld. CIT(A). The Ld. A.R. submitted that since the issue raised by the Revenue is only that in absence of date of acquisition of shares and of date of sale, benefit of indexation ought not to be granted to the assessee
4 M/s. Sequent Scientific Ltd., (formerly known as PI Drugs Pharmaceuticals Ltd.) whereas the Ld. CIT(A) after recording a finding of fact has allowed the appeal of the assessee. The Ld. D.R., on the other hand, relied on the grounds of appeal and order of the AO.
12. After hearing both the parties and perusing the appellate order and facts on record on page No.194, 195, 196 & 197 of the paper book, we find that assessee has provided all the details before the AO as well as before Ld. CIT(A) and Ld. CIT(A) has correctly allowed the benefit of indexation to the assessee. Accordingly, ground No.3 raised by the Revenue does not survive and is dismissed.
13. The issue raised in ground No.4 is against the order of Ld. CIT(A) allowing the expenses on account of encashment of bank guarantee by Rabobank without appreciating the fact that the said guarantee was the liability of M/s. Ganelica BVC and as per agreement between M/s. Ganelica BVC and Rabo Bank produced by the assessee in the course of assessment, the assessee company was not a guarantor.
The facts in brief are that the AO during the course of assessment proceedings observed that assessee has debited as exceptional item under note 3 to accounts before arriving at the profit before tax the amount of encashment of guarantee given by assessee. The assessee had given a corporate guarantee to Rabo Bank, Netherland towards loan availed by a subsidiary Ganelica BV amounting to Rs.0.665 million (Rs.42.05 million). The subsidiary has gone into liquidation and corporate guarantee was encashed during the year by the said bank and accordingly the assessee charged the amount encashed by the 5 M/s. Sequent Scientific Ltd., (formerly known as PI Drugs Pharmaceuticals Ltd.) bank under the head exceptional item which was disallowed by the AO and added to the income of the assessee of Rs.42.05 million (Rs.4,20,50,000/-) in the assessment framed.
The Ld. CIT(A) allowed the same by observing and holding as under: “5.5.3 It is noted that the facts given at internal paras 6.1 to 6.9 of the contentions of the appellant extracted above are not in dispute by the Assessing Officer. To state very briefly, the relationship between the appellant company Sequent Scientific Ltd (SSL) and the subsidiary, Galencia BV (GBV) can be understood as below: • SSL is an amalgamated company formed from amalgamation of one PI Drugs Ltd and Sequent Scientific Ltd. The post-amalgamation name was adopted as Sequent Scientific Ltd. \ • Pre-amalgamation that then Sequent entered into a JV with a European company Orffa International Holdings BV (Orrfa). The JV company was called Galencia BV. • Galencia BV interns formed a wholly owned subsidiary Codiffar NV, under Belgian laws. • Both the parties to the joint-venture had given npn-fund-based financial commitments for commencement of business Activity of Galencia BV. • During the year under consideration, the financial condition of Galencia BV and its subsidiary deteriorated and both the joint-venture partners, SSL and Orrfa were required by Rebo Bank to honour the bank guarantee. • The appellants liability towards repayment of the bank loan resulted to Euro 6.65 lakhs equivalent to Rs. 4.21 crore Was debited to P&L account as exceptional item. • Documentary evidence including contract for suretyship, correspondence with Rebo Bank, annual report of Galencia BV's, shareholders agreement between appellant, Orrfa and Galencia BV etc. corroborate the above and the AO has not contested the above facts.
5.5.4 The appellant had intended that payment made in respect of bank guarantee was to facilitate its business as it would enable the subsidiary to carry on business which would have directly benefited the business of the appellant. Therefore, it is contended that the transaction was in nature of commercial expediency and, hence allowable as revenue expenditure/business expenditure. The appellant has also relied upon several case laws including SA Builders Ltd 288 ITR 1 (SC) and Hero Cycles P. Ltd vs CIT, 379 ITR 347.
5.5.5 The facts of the case indicate that the sole reason for the appellant to enter Into a joint-venture with a European company was to explore the potential of European markets. The non-fund based financial commitment was part of the conditions agreed to further JV. Due to restrictions of European laws, the appellant
5.5.6 The Supreme Court in the case of Or T. A. Quereshi vs. CIT [2006] 157 Taxman 514 (SC) held that a business loss must be allowed on ordinary commercial principles in computing the taxable profits.
5.5.7 In the case of CIT vs. Amalgamation (P) Ltd [1997] 92 Taxman 132 (SC), the apex court held that where the assessee stood as guarantor to bank in respect of loan taken by its subsidiary and that subsidiary went into liquidation and liquidator recovered net amount from the assessee, such amount paid by the assessee was allowed as business loss because as per the apex court, such loss was incurred in carrying on its own business by the assessee which included furnishing guarantees to debts borrowed by subsidiary company.
5.5.8 The Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd vs. CIT [2016] 381 ITR 107 (P&H), was dealing with the question whether interest on loan was allowable on interest free loan advanced to a 89% subsidiary. The Court allowed the appeal and held that the amounts advanced were used by the subsidiary for its business purpose. The assessee advanced these amounts to sister concern as a measure of commercial expediency for the purpose of business. The assessee owned about 89% in the sister concern. The court further held that when a holding company invested money for the purpose of business of the subsidiary, it must necessarily be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amounts advanced to it by the holding company, would not merely indirectly but directly benefit its holding company. There would be a direct benefit on account of the advance made by the assessee to its sister concern if it improved the financial health of the sister concern and made it a viable enterprise. But it was not necessary that the advance results in a positive tangible benefit.
5.5.9 The Bombay High Court in the case of CIT vs. Mehta (P) Ltd. Reported in [2008] 174 Taxrnan 104 (Bom) held that the loss incurred by the assessee on account of guarantee money paid on behalf of a company amalgamated with the assessee due to sickness of the sister concern is an allowable business loss due to the fact that giving guarantee was a genuine Act.
5.5.10 The Chennai ITAT in the case of AC vs. W. S. Industries (I) Ltd reported in [2011] 9JTR (Trib) 596 (Chennai) dealt with a question whether loss suffered by an assessee on account of discharge of a corporate guarantee for securing the loan taken by the subsidiary was an allowable deduction. In this case, the holding company advanced loans and other amounts from time to time and balance of such amounts advanced was Rs.6.11 crores. The Holding Company also issued a corporate guarantee of Rs.13.07 crores to a bank to secure the loan taken by the subsidiary. During the relevant previous year, due to financial difficulties, the assessee discharged its corporate guarantee by entering into one-time settlement with the bank of the subsidiary and paid the loan amount. Due to financial difficulties and remote possibility of recovery of the amounts due from the subsidiary of Rs.6.11 crores and Rs.13.07 crores paid to the bank was claimed as 7 M/s. Sequent Scientific Ltd., (formerly known as PI Drugs Pharmaceuticals Ltd.) business deduction. The write off of unrecovered loan of Rs.6.11 crores was duly allowed by the Assessing Officer but the amount paid for settling the unpaid bank loan of the subsidiary pursuant to the corporate guarantee was not allowed by the AO. The Hon Tribunal held that it was one of the assessee's business to give guarantees, financial or otherwise. Such guarantee was given for its subsidiary and it was in the interest of the assessee company and hence the commercially expedient decision to write off the irrecoverable amount and the same was held to be deductible.
5.5.11 According to the ratio of that judgement of jurisdictional Hon'ble Bombay High Court in CIT v. Colgate Palmolive (India) Ltd, 370 ITR 728 (BOM) losses in relation to such business Activity are allowable in the hands of the appellant. Further, in S.A. Builders vs CIT 158 Taxman 74 (SC) the Hon'ble Apex Court held that where holding company has deep interest in the subsidiary and advance interest free loan to the subsidiary which uses it for business purpose, the holding company would ordinarily be entitled to deduction of interest on its borrowed funds. Similar view was also expressed by Hon'ble Bombay High Court in Vassanji Sons & Co. (P) Ltd v. CIT, 125 ITR 462 (BOM), wherein it was held that loss suffered by holding company on account of amount outstanding from subsidiary which went into liquidation was allowable business expense for the holding company.
5.5.12 (find that the ratio of various decisions including those of jurisdictional High Court and Hon'ble Supreme Court cited above and those relied upon by the appellant in this regard apply with full force to the facts and circumstances of the case. The invocation of bank guarantee by Rabo Bank had to be paid by the appellant as a necessity of commercial expediency. The very purpose for formation of a JV was to explore European markets and expand business. If the Activity of Galencia BV resulted in profits, the same would be in furtherance of the appellant's business. Similarly, any expenditure necessitated due to the operation of the JV would also have to be treated as commercial expediency and business expenditure. Such expenditure cannot be said to be resulting in acquisition of any enduring benefit or asset and, hence cannot be termed as capital in nature. Therefore, in the facts and circumstances of the case, the treatment given by the Assessing Officer cannot be upheld and disallowance of Rs. 4,20,50,000/- is deleted. Accordingly, this ground of appeal is allowed. ALLOWED 5.6 Ground No. 7 5.6.1 This ground relates to addition of Rs. 1,80,6367- on the basis of AIR information. The Assessing Officer has dealt with it under Para 13 of his order. He has noted the following discrepancies in Form 26AS:
Team Leader Log Pvt Ltd Rs 1,17,876/- Bomi Rustomji Karanjia Rs. 33,330/- Sandoz Pvt. Ltd. Rs. 29,430/-
5.6.2 The appellant had contended that the amounts do not pertain to it. The appellant has relied on S. Ganesh vs ACIT, ITA 527/Mum/2010 to contend that addition cannot be made solely relying on AIR information.
5.6.3 In M/s. A.F. Ferguson & Co. vs. JCIT" & 437/M/2013 decided on 17.10.2014, the Hon'ble Mumbai ITAT while dealing the issue of un- reconciled amount as per the AlR information has held that the addition cannot be made solely on the basis of AIR information, especially, when the assessee denies any such receipt as the burden to prove such receipts is on the Assessing Officer as the assessee cannot be asked to prove the negative. This ratio has also been followed in ITA NOS.6406/M/2012 & 6152/M/2013, in M/s. S. Kant Healthcare Ltd. and 3/A, Shiv Sagar Estate and also in DCIT vs Reliance Network Ltd, ITA No.3531/M/2013. 5.6.4 Respectfully following the decision of jurisdictional ITAT, the Assessing Officer is directed to verify the amounts and delete the addition of those amounts as do not pertain to the appellant. This ground is allowed for statistical purposes.”
After hearing both the parties and perusing the material on record, we observe that the issue has rightly been allowed by Ld. CIT(A) after following the decision of the jurisdictional High Court as well as of Hon’ble Apex Court as discussed hereinabove in the Ld. CIT(A) findings. We are also in agreement with the conclusion of the Ld. CIT(A) that the corporate guarantee encashed by the bank as given by the assessee on behalf of its subsidiary is a revenue item in the hands of the assessee and has to be allowed. Accordingly, ground no. 4 is dismissed by upholding the order of Ld. CIT(A).
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 27.07.2021.