The Income Tax Appellate Tribunal (ITAT) Delhi bench held that payment made to Yes bank for corporate guarantee of joint venture company is business expenditure .Therefore the bench allowed the deduction claimed under Section 37 of the Income Tax Act, 1961
Assessee Liberty Shoes Ltd , is a publicly listed company engaged in the business of manufacturing & trading leather and non-leather footwear. After filing the return of income its case was selected for scrutiny .
During the assessment proceedings AO denied the claim of this amount on account of payment to YES bank on behalf of the corporate guarantee of the joint venture company namely M/s. Foot Mart Retail India Ltd and held that assessee is not in the business of giving guarantees to others so there was no business exigency as the expense has not been incurred wholly and exclusively for the business purposes for purpose section 37 of the Income Tax Act.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeal){ CIT(A)} . who deleted the addition. Thereafter the revenue filed a second appeal before the tribunal.
Satish Gioel, counsel for the assessee submitted 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, Counsel for the revenue supported the decision of lower authorities .
It was observed by the tribunal that Joint Venture had a backing of the assessee and its partners .Thus in order to create dominant position in the retail market the joint venture was incorporated and being promoters the corporate guarantees were extended for the credit facilities received for the joint venture company.
Even though the joint venture was a separate entity it was promoted by the assessee along with his partners and they had direct interest in the sustenance and existence of that company the AO did not consider that .
Further the tribunal found that Joint Venture was not any paper or sham transaction but the matter on record shows it was a functional unit which ended in loss making.
After considering the facts submitted by both parties, the two member bench of Shamim Yahya,(Accountant Member ) and Anubhav Sharma,(Judicial Member) held that payment made to Yes bank for corporate guarantee of joint venture company is business expenditure so eligible for deduction under Section 37 of the Income Tax Act.
Therefore the bench dismissed the appeal filed by the revenue.
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