Loss on furnishing guarantees for subsidiary company allowed as incurred by holding company in carrying on its own business – ITAT

Loss on furnishing guarantees for subsidiary company allowed as incurred by holding company in carrying on its own business a the nature of the business of assessee company included furnishing of guarantee to debts borrowed by subsidiary company.

ABCAUS Case Law Citation:
991 2016 (08) ITAT
Assessment Year: 2005-06
Date/Month of the Judgment/Order: August 2016

Brief Facts of the Case:
The respondent assessee was a limited company deriving its income from manufacture and sale of leather goods, Shoe upper, soles etc. During the assessment proceedings for the relevant assessment year the Assessing Officer (AO) observed that assessee, in its P&L Account,  had debited an amount of Rs.3,86,63,836/- on account of loss due to irrecoverability of amount due from its subsidiary company in U.S.A.

The assessee explained that it had opened its wholly owned subsidiary in USA for manufacturing and sale of footwears which is the main business of the company. It stood guarantee for the working capital of the subsidiary company to the extent of Rs.3,86,63,836/-. The subsidiary company due to the circumstances beyond its control had to close down its business and went sick and therefore the guarantee given by the assessee company was invoked by the lenders and it had to pay the guaranteed amount which had become recoverable from its subsidiary and therefore, the assessee had written it off in its P&L Account.

The Assessing Officer did not agree with the explanations and made addition(s) among other things of the said amount.

On appeal, the CIT(A) deleted the said addition.

On appeal filed by the Revenue before the Tribunal, the ITAT partly allowed the appeal of Revenue by reversing the order of CIT(A). The assessee company filed Miscellaneous Application against the order passed by the Tribunal submitting that the Tribunal had omitted to consider a relevant judgment of the Supreme Court and the ITAT partially recalled its earlier order but did not adjudicate on the issue after the recall. In the mean time assessee had approached the jurisdictional High Court which restored the issue back to the Office of Tribunal to decide the issues afresh.

Observations of the Tribunal:

The ITAT observed that in the case of Amalgamations Pvt. Ltd vs. CIT (1969) 226 ITR 188 (SC), the Apex Court had held that the nature of the business of assessee company included furnishing of guarantee to debts borrowed by subsidiary company and therefore, it was held that assessee company had incurred the loss in carrying on its own business which included furnishing of guarantees to debts borrowed by its subsidiary company.

The ITAT noted down the relevant findings of the Supreme Court as contained in pra 8 & 9 of the aforesaid judgment are as under:

“The High Court has referred to its earlier judgment in Amalgamations P. Ltd. vs. CIT (1969) 73 ITR 380 (Mad) : TC 24R.808, wherein the nature of the business of the assessee- company has been considered and it has been held that the provisions of s. 23A of the 1922 Act were applicable to the assessee-company since the assessee-company’s business includes furnishing guarantee to debts borrowed by subsidiary companies. The High Court has held that the said finding given in that case is clearly applicable to the questions under consideration before it and that the assessee-company had incurred the loss In carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. According to the High Court; the loss was allowable as a deduction in the year in which It came to be ascertained and in the instant case the High Court held that the 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 asst. yr. 1962-63 and that the Tribunal was right in allowing it in that year. The judgment of the High Court does not suffer from any legal infirmity. CIT vs. Amalgamation (P) Ltd. (1976) 108 ITR 895 (Mad) : TC 14R.884 affirmed.” 

The ITAT further observed that:

1. that assessee company set up a wholly owned subsidiary in U.S.A for the purpose of attainment of its main objects.
2. The incidental objects as contained in Clause of memorandum of association stated that the company in pursuance and development of its business can incorporate or promote any company or companies whether in India or elsewhere which in the company or companies could or might directly or otherwise proved advantage to the assessee.
3. Clause 9 of the objects incidental to main objects authorized the company to lend and advance money, either with or without security and give credit to such persons on such terms and conditions as the company may think fit in connection with its business.

The Tribunal further noted that in the instant case, though the assessee had not lent any money to its subsidiary company but had indirectly lent the money by executing standby letter of guarantee for the debts obtained by subsidiary company in U.S.A. In view of this enabling provision in the memorandum of association of company the assessee being holding company stood guarantee for the arrangement of finance for the subsidiary company. The lender invoked the said letter of guarantee and assessee had to make payment for the same. The entire sequence of events resulted into indirectly lending to the subsidiary company which become irrecoverable due to losses of the said subsidiary and had to be written off in the P&L Account of assessee.

Held:
The ITAT, keeping in view the ratio of Hon’ble Supreme Court in the case of Amalgamations (P) Ltd. allowed the unrecovered amount from subsidiary being a loss incurred by assessee in carrying on it’s own business. 

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