Expenditure Incurred to Avoid Adverse Effects on Reputation and Cost of Litigation is a Valid Business Exigency Deductible u/s 37 of Income Tax Act: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the expenditure incurred to avoid adverse effect on reputation and cost of litigation was a valid business exigency deductible under Section 37 of the Income Tax Act 1961.

The assessee, Liberty Shoes Ltd filed a return declaring income. Subsequently, the case was selected under CASS. The assessee was a public listed company and engaged in the business of manufacturing & trading leather and non-leather footwear it has manufacturing units in Karnal, Kutil, Gharaunda, Rourkela and Dehradun.

The AO had considered the fact that assessee had incurred interest liability on interest bearing loans while had earned dividend from investment in the companies where investments in shares was made and taking into consideration the circular made the addition. Further an addition was made by the AO denying the claim of this amount on account of payment to YES bank on behalf of the corporate guarantee of joint venture company namely Footmart Retail India Ltd.

The AO had however disallowed the same first considering expenditure / loss to be capital in nature. Secondly, considering that the assessee was not in the business of giving guarantees to others so there was no business exigency as the expense had not been incurred wholly and exclusively for the business purposes for purpose section 37 of the Income Tax Act.

It was also held that Food Mart Retail India Pvt. Ltd. was an independent entity and there was no compulsion upon the assessee to fulfil liability of a separate entity. AO also concluded that there was no reason from which it could be ascertained that the liability of an entity should be adjusted against the assets of the other entity. AO made the observation that the amount written off on account of payment to YES bank was a contingent liability.

Satish Gioel, on behalf of the assessee explained all facts and circumstances along with business expediency with reference to formation and operation of Foot Mart Retail India Ltd. It was also contended that there being a legal liability under corporate guarantee the assessee was under obligation to make the payment of bank dues of the joint venture company. 

Sanjay Tripathi,on behalf of the revenue supported the findings of AO submitting that AO was right in inferring that there was no business expediency element in repayment of loan liability of separate legal entity.

The two-member Bench of Shamim Yahya, (Accountant Member) and Anubhav Sharma, (Judicial Member) observed that the dues of joint venture were paid on full settlement of the dues standing against the assessee on account of corporate guarantee. The same was certainly a business expenditure as the operations of joint venture was to expand the market of assessee with his partner of joint venture.

The Bench allowed dismissed the appeal filed by the assessee referring to the decision in CIT vs. Delhi Safe Deposit Company Ltd which held that the expenditure incurred to avoid any adverse effect on its reputation and avoid costs of litigation was a valid business exigency and deductible under Section 37 of the Income Tax Act.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates