Sanjay Arora, Member (A) -
(1.) THIS is a set of five appeals, i.e., cross -appeals by the assessee and the Revenue for the assessment years 1997 -98 and 1998 -99 and the Revenue's appeal for the assessment year 1999 -2000, arising out of the orders by the Commissioner of Income -tax (Appeals) -III, Mumbai ("CIT (A)" for short), partly allowing the assessee's appeals contesting its assessments under section 143(3) of the Income -tax Act, 1961 ("the Act" hereinafter) for the relevant years. The appeals raising common issues, were taken up for hearing together and are being disposed of likewise for the sake of convenience.
Issue No. 1
This issue is raised as per ground No. 1 of the assessee's appeals for the assessment years 1997 -98 and 1998 -99. The same is qua the deductibility of the sums paid to banks/financial institutions by the assessee -company as a guarantor of M/s. Vespa Car Co. Ltd. ("VCCL" for short), a joint venture (JV) company (of the assessee and its foreign technical collaborator, M/s. Piaggio Cspa) engaged in the manufacturing of two -wheelers, claimed at Rs. 436.15 lakhs and Rs. 620.67 lakhs for the two consecutive years respectively.
(2.) THE background facts of the case are fairly simple and undisputed. We enlist the same as follows. The assessee, an Indian company in which public is substantially interested, is engaged in two -wheeler business, having set up a scooter project in technical collaboration with M/s. Piaggio Cspa, Italy in 1982 -83 for manufacturing one lakhs scooters per annum. During the financial year 1983 -84, the company received a letter of intent (Lol) for manufacturing additionally, two lakhs scooters as well as 30,000 three -wheelers annually. Rather than setting up a new unit or expanding its existing facilities, the company considered it prudent to form a new joint venture company with Piaggio for the purpose. This, it is stated, would ensure equity participation of Piaggio in the new project. Accordingly, a joint venture company, VCCL, was formed, and the letter of intent sub -leased to it. The new company, it was thought, would also serve the strong customer base (of more than Rs. 20 lakhs LML scooters) expected to be built up over time inasmuch as the assessee -company had booked scooters in that number, also having received advance there against. The two facilities would also complement each other. The cost of the project (for the manufacture of 1.25 lakhs scooters per annum), as finally envisaged for implementation, and its means of financing are as under:
The shareholding pattern of VCCL was as:
Assessee -32 per cent, Piaggio -28 per cent and Indian public -40 per cent.
The assessee also furnished guarantees to different banks/financial institutions against extension of credit facilities to VCCL, for an aggregate of, over time, Rs. 990 lakhs. The joint venture company (VCCL), however, did not perform well, and the said guarantee/s came to devolve on the assessee; in fact, it was settled at a discount by way of a one -time settlement (OTS) entered into with the loan creditors. The assessee being under a legal obligation to honour the guarantees, accepted the one -time settlement offer. The Revenue disallowing it as a deductible business expense/business loss in the computation of business income, the assessee is in second appeal.
We enlist the respective cases of both sides, as culled out from the orders of the authorities below, the written submissions and the arguments advanced before us.
The assessee's case.
The same is based on the premise that the assessee's action in discharging the guarantees (by accepting the OTS offer of the creditors) was guided by business consideration/s and, therefore, qualifies for deduction as revenue expenditure of its business. The formation of the joint venture company was only a mode of conduct of its two -wheeler business, and the guarantees furnished, as a part of the trade practice, is therefore only in the ordinary course of its business. Towards the business purpose/s, the following were cited as the various incidences that would have arisen were the guarantee/s to be invoked:
"The assessee's act was motivated with following reasons:
(a) Eliminating the impediments in company obtaining enhanced working capital.
(b) Avoiding additional burden on the company's assets if called upon to pay as a guarantor.
(c) Avoiding cost of litigation that would ensure if the guarantee is not honoured.
(d) Preserving the image and goodwill of the company which could be harmed in case default by joint venture company becomes a matter of public knowledge."
(Reference was made in this regard to pages 1 -13, 20, 23, 52 -53 of the paper book).
The Revenue's case
(3.) THE Revenue's case has two limbs to it. Firstly, it is contended that there is no direct connection or nexus of the guaranteeing of loans (by different lenders) to VCCL, which is a separate legal entity, with the assessee's business, which is of production and sale of scooters. The same, therefore, cannot be said to have been furnished for or in the ordinary course of its business or as incidental thereto. Two, the guarantee/s was given only towards and in promoting a new company for setting up a new project. The expenditure, thus, that comes to be incurred in its respect is, consequently, only on capital account. That is, the rights, if any, that the assessee stands to acquire or which may inure to it by furnishing guarantee/s are only capital in nature. Further, the consequences of the non -honouring the guarantee, as for example, the loss of reputation or of its banks not co -operating with it in extending it further working capital, etc., would not alter the character of the amount paid to VCCL to meet its loan obligation to a revenue expenditure.