M/S Hero Cycles Ltd. Ludhiana v. Commissioner Of Income Tax, Ludhiana And Another

ITA No. 803 of 2010 [1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Appeal No. 803 of 2010 (O&M)Date of decision: 4.3.2011 M/s Hero Cycles Ltd. Ludhiana .. Appellant v. Commissioner of Income Tax, Ludhiana and another.. Respondents CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Akshay Bhan, Advocate for the appellant. .. Rajesh Bindal J. The assessee is in appeal before this Court raising followingsubstantial questions of law, arising out of order dated 17.5.2010, passed bythe Income Tax Appellate Tribunal, Chandigarh, Bench `A', Chandigarh(for short, `the Tribunal') in ITA No. 768/CHD/2005 for the assessment year2001-2002: (i) Whether in facts and circumstances of the case, the assessee islegally entitled for the deduction u/s 37 of the Act ?legally entitled for the deduction u/s 37 of the Act ? (ii) Whether in fact and circumstances of the case, the action of theauthorities below in not following the judgment of the Hon'bleApex Court in the case of CIT v/s Chandulal Kaeshavlal andCo. 38 ITR 601 and not allowing the deduction to the assesseefor the expenditure incurred on account of subsidy given toMAL, is legally sustainable in the eyes of law?authorities below in not following the judgment of the Hon'bleApex Court in the case of CIT v/s Chandulal Kaeshavlal andCo. 38 ITR 601 and not allowing the deduction to the assesseefor the expenditure incurred on account of subsidy given toMAL, is legally sustainable in the eyes of law? (iii)Whether in fact and circumstances of the case, the action of theauthorities below in not allowing deduction for the revenueexpenditure incurred by the assessee in the relevant assessmentyear is legally sustainable in the eyes of law?authorities below in not allowing deduction for the revenueexpenditure incurred by the assessee in the relevant assessmentyear is legally sustainable in the eyes of law? ITA No. 803 of 2010 [2] (iv) Whether in fact and circumstances of the case, the action of theauthorities below, the impugned orders Annexure A1 to A3 arelegally sustainable in the eyes of law?authorities below, the impugned orders Annexure A1 to A3 arelegally sustainable in the eyes of law? (v) Whether in fact and circumstances of the case, the impugnedorder is legally unsustainable in light of the decision of thisHon'ble High Court in the case of Porrits and Spencer (Asia)Ltd. Vs. CIT?order is legally unsustainable in light of the decision of thisHon'ble High Court in the case of Porrits and Spencer (Asia)Ltd. Vs. CIT? Briefly, the facts are that the assessee-company is engaged inthe business of manufacture and sale of bicycles. For the assessment year inquestion, the assessee filed its return declaring a total income of `35,72,00,470/-. At the time of assessment, inter-alia, the Assessing Officer,vide order dated 29.3.2004, disallowed the claim made by the assessee onaccount of subsidy given to M/s Majestic Auto Ltd. Aggrieved against theorder, the assessee filed appeal before the Commissioner of Income Tax(Appeals), Ludhiana [for short, `the CIT (A)'], which was dismissed videorder dated 4.5.2005. The order passed by the CIT(A) was upheld by theTribunal vide order dated 17.5.2010. The assessee is in appeal before thiscourt raising substantial questions of law arising out of the aforesaid order. Briefly, the facts are that the assessee-company is engaged inthe business of manufacture and sale of bicycles. For the assessment year inquestion, the assessee filed its return declaring a total income of `35,72,00,470/-. At the time of assessment, inter-alia, the Assessing Officer,vide order dated 29.3.2004, disallowed the claim made by the assessee onaccount of subsidy given to M/s Majestic Auto Ltd. Aggrieved against theorder, the assessee filed appeal before the Commissioner of Income Tax(Appeals), Ludhiana [for short, `the CIT (A)'], which was dismissed videorder dated 4.5.2005. The order passed by the CIT(A) was upheld by theTribunal vide order dated 17.5.2010. The assessee is in appeal before thiscourt raising substantial questions of law arising out of the aforesaid order. Learned counsel for the assessee submitted that M/s MajesticAuto Ltd. is a sister concern of the assessee. In fact, it was promoted by theassessee, which holds 29.16% of its share capital. Being a promotercompany, it had undertaken to secure various loans raised by M/s MajesticAuto Ltd. from IFCI and other financial institutions. The assessee hadfurther given guarantee to Central Excise Department as well as City Bankpertaining to amounts due from M/s Majestic Auto Ltd. to the aforesaidinstitutions. The products manufactured by M/s Majestic Auto Ltd. were inthe brand name of `HERO'. On account of decline in the sales and thecompany being in losses, to keep the flag of the brand name of the groupflying, it was decided by a resolution of the Board to give ` 10,00,00,000/-as subsidy to M/s Majestic Auto Ltd., as with the aforesaid help, M/sMajestic Auto Ltd., which is also listed company in the market, was able tostand. As there was business interest involved and the principle not beingthat the amount should always be given ensuring that there would be somereturn out of it, the deduction should have been allowed by the authoritiesbelow as a revenue expenditure under Section 37 of the Income Tax Act, ITA No. 803 of 2010 [3] 1961 (for short, `the Act'). Every transaction has to be considered from thepoint of view of the businessman. After hearing learned counsel for the appellant, we do not findany substantial question of law arises in the present appeal. In fact, themanner in which substantial sum of ` 10,00,00,000/- is sought to bediverted by the assessee to a sister concern claiming the same to be asubsidy is nothing else, but diversion of profits. The nomenclature underwhich part of profit is sought to be given to a sister concern is nothing elsebut evasion of tax. The assessee holds merely 29.16% shares in M/sMajestic Auto Ltd. Even if it had stood guarantor or had furnished certainundertaking or assurance to the financial institutions for securing the loansraised by M/s Majestic Auto Ltd., a sister concern, there is no sanctityavailable in law to give money as a subsidy and claiming the same to be anexpense in a profit making company. If the promoters are so concernedabout the financial health of the group company and also the brand name,the money can very well be invested by the promoters out of their ownresources. There is no justification for taking the money out from a profitearning company, giving the same to a sister concern in the form of subsidyand then claiming the same as an expense to reduce the tax liability. Thedeductions so claimed will not in any manner fall within the four corners ofSection 37 of the Act, as it cannot be said to be laid out or expended whollyand exclusively for the purposes of business of the assessee, as whateverbusiness dealing the assessee had with M/s Majestic Auto Ltd., for thatregular payments were being made or received. For the reasons mentioned above, we do not find anysubstantial question of law arises in the present appeal. Accordingly, thesame is dismissed. ( Rajesh Bindal ) Judge (Adarsh Kumar Goel) Judge For the reasons mentioned above, we do not find anysubstantial question of law arises in the present appeal. Accordingly, thesame is dismissed. ( Rajesh Bindal ) Judge (Adarsh Kumar Goel) Judge ITA No. 803 of 2010 [4]