Wednesday, April 10, 2013

Loan repaid by the guarantor to lender on default by borrower is ‘capital receipt’ in the hands of borrower

Gillette Co. USA had provided primary security in shape of corporate guarantee for grant of loan to assessee for running its business. On default by assessee in repaying the debts, Gillette USA repaid the bank loan to discharge the corporate guarantee. Amount so paid was to be treated as capital receipt

In the instant case, Gillette Co. USA (‘G’) had provided primary security in shape of guarantee for grant of loan to assessee for running its business.  Since the assessee- company was incurring losses, G considered it prudent to get it discharged from security provided by it in respect of loan taken by assessee. In furtherance thereto G, remitted a sum to various Banks. Banks after receipt of money released corporate guarantee of G. During assessment, AO concluded that remittance of said amount was a revenue receipt. On appeal, CIT(A) held that the remittance was capital receipt not chargeable to tax. Revenue preferred an appeal to the ITAT. So the moot question that arose for consideration of ITAT was as under:

Whether since amount had been paid to bank for discharge of stated corporate guarantee and, moreover, it was not in nature of compensation and was not paid to improve financial position of assessee for running its business, it was to be treated as, a capital receipt?

The Tribunal held in favour of assessee as under:

1) The undisputed fact was that G had provided primary security in the shape of corporate guarantee for the grant of loan to the assessee and the amount had been paid to the bankers for discharge of such corporate guarantee directly. It suggests that the sum remitted was not in the nature of profit but was a capital receipt;

2) The master agreement and the relevant clause of the agreement nowhere suggested that the sum was remitted to the assessee to improve its financial position by discharging its liability and enabling it to earn income. Thus, such finding of the AO was contrary to the material on record;

3) The sum paid was also not in the nature of compensation because there was no obligation on G under any contract to compensate the assessee. Under these circumstances there was no infirmity in the decision of the first appellate authority in treating the sum remitted as capital receipt and, hence, not chargeable to tax;

4) It was only in such circumstances that G remitted the sum to discharge its own liability and, hence, it was not correct to conclude that the assessee had obtained any subsidy or grants in aid or compensation as a result of remittance of sum to the bank. The finding of the CIT(A) on the issue was ,thus, upheld - Luxor Writing Instruments (P.) Ltd. v. Dy. CIT [2013] 31 408 (Delhi - Trib.)

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