Bombay High Court on section 28(1) of the Income-tax Act, 19

FACTS ‘A’ Ltd., which carried on business of a financier, was amalgamated with the assessee-company with effect from 1-1-1983. Prior to its amalgamation, ‘A’ Ltd. had issued a guarantee to ‘SCCIL’ in respect of loan advanced by the ‘SCCIL’ to ‘M’ Ltd. ‘A’ Ltd. was of the view that with the help of said loan, ‘M’ Ltd. would overcome its financial difficulties and would be able to start earning profits and to gradually pay off its creditors including ‘A’ Ltd. which had to recover Rs. 15 lakhs from ‘M’ Ltd. As ‘M’ Ltd. failed to repay the aforesaid loan and interest thereon to ‘SCCIL’, ‘SCCIL’ in August, 1985 called upon the assessee to make good the payment of loan with interest thereon in terms of the guarantee executed by ‘A’ Ltd. In view of the amalgamation of ‘A’ Ltd. with the assessee, the assessee had to make the payment of loan with interest to ‘SCCIL’. In its return of income for the relevant assessment year, the assessee claimed loss of said amount. The Assessing Officer, after noticing that some of the directors in ‘SCCIL’, ‘M’ Ltd., ‘A’ Ltd. and the assessee were common, took the view that all companies were under the same management and a device was adopted to receive maximum benefit out of the said transactions which smacked of collusion. Accordingly, the Assessing Officer declined to allow the loss. On appeal, the Commissioner (Appeals) held that act of ‘A’ Ltd. of giving guarantee to ‘SCCIL’ was genuine and, hence, the assessee’s claim was allowable. The Tribunal upheld the order of the Commissioner (Appeals). On appeal to the High Court: HELD It was argued by the assessee before all the authorities that the said three companies were independent and acted as such at arm’s length. In fact, SCCIL was a listed company. That contention of the assessee was accepted by the Commissioner (Appeals) who had reached a finding of fact that the amounts received by ‘M’ Ltd. from the banks and financial institutions and from ‘SCCIL’ were utilized in purchasing new machinery which was also installed and it was not the allegation of the Assessing Officer that those funds were misappropriated by the directors or were frittered away. The Commissioner (Appeals) had, therefore, reached a finding of fact that the guarantee given by ‘A’ Ltd. was genuine. That finding of fact was also accepted by the Appellate Tribunal. In view of those concurrent findings of fact, there was no reason to interfere with the said finding of fact. (Para 5) Except for making a bare allegation that the entire exercise of giving guarantee by ‘A’ Ltd. to ‘SCCIL’ was collusive and only to book losses on the ground that the companies had common directors and were under the same management, the revenue had failed to produce any material in support of their case that the guarantee given by ‘A’ Ltd. was not genuine. Only because some directors were common one could not reach to a serious conclusion that the entire transaction was collusive and colourable only to book losses. (Para 6) Therefore, the Tribunal was right in confirming the order of the Commissioner (Appeals) allowing the claim of the assessee for loss being guarantee written off. (PARA 7)