Payment Towards Corporate Guarantee Settlement Allowable as Deductible Business Expenditure u/s 37(1): ITAT [Read Order]
The ITAT ruled that a payment for settling a corporate guarantee is deductible as a business expense under Section 37(1) of the Income Tax Act.Summary
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) addressed whether a payment made towards settling a corporate guarantee could be considered a deductible business expenditure under Section 37(1) of the Income Tax Act, 1961. The case involved Escorts Limited, which provided a guarantee to a Korean supplier (L.S. Cables, Korea) for credit extended to its US subsidiary (Farmtrac North America LLC). When the subsidiary defaulted, the guarantee was invoked, leading to arbitration and a settlement of USD 7.17 million. Escorts claimed the settlement payment as a business expense, but the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) disallowed it, arguing it wasn’t exclusively for business purposes.
Escorts argued the guarantee was given in the ordinary course of business to support its subsidiary and promote its brand in the US. They cited precedents supporting the allowance of similar claims. The Revenue countered that a valid guarantee didn’t exist due to a lack of countersignature and questioned the expenditure’s connection to Escorts’ business, noting the subsidiary was only 75% owned.
The ITAT ruled in favor of Escorts, stating the guarantee’s validity was established through arbitration and High Court proceedings. The tribunal emphasized that the tax department shouldn’t second-guess business decisions and that once a guarantee is given, the resulting liability is a legitimate business obligation. Consequently, the disallowance of Rs. 47.64 crores was reversed, allowing Escorts to deduct the settlement payment as a business expense.
(Source：Taxscan)