(1.) THIS is a set of five appeals, i.e., cross -appeals by the assessee and the Revenue for the assessment years 1997 -98 and 1998 -99 and the Revenue's appeal for the assessment year 1999 -2000, arising out of the orders by the Commissioner of Income -tax (Appeals) -III, Mumbai ("CIT (A)" for short), partly allowing the assessee's appeals contesting its assessments under section 143(3) of the Income -tax Act, 1961 ("the Act" hereinafter) for the relevant years. The appeals raising common issues, were taken up for hearing together and are being disposed of likewise for the sake of convenience.
(2.) THE background facts of the case are fairly simple and undisputed. We enlist the same as follows. The assessee, an Indian company in which public is substantially interested, is engaged in two -wheeler business, having set up a scooter project in technical collaboration with M/s. Piaggio Cspa, Italy in 1982 -83 for manufacturing one lakhs scooters per annum. During the financial year 1983 -84, the company received a letter of intent (Lol) for manufacturing additionally, two lakhs scooters as well as 30,000 three -wheelers annually. Rather than setting up a new unit or expanding its existing facilities, the company considered it prudent to form a new joint venture company with Piaggio for the purpose. This, it is stated, would ensure equity participation of Piaggio in the new project. Accordingly, a joint venture company, VCCL, was formed, and the letter of intent sub -leased to it. The new company, it was thought, would also serve the strong customer base (of more than Rs. 20 lakhs LML scooters) expected to be built up over time inasmuch as the assessee -company had booked scooters in that number, also having received advance there against. The two facilities would also complement each other. The cost of the project (for the manufacture of 1.25 lakhs scooters per annum), as finally envisaged for implementation, and its means of financing are as under:
(3.) THE Revenue's case has two limbs to it. Firstly, it is contended that there is no direct connection or nexus of the guaranteeing of loans (by different lenders) to VCCL, which is a separate legal entity, with the assessee's business, which is of production and sale of scooters. The same, therefore, cannot be said to have been furnished for or in the ordinary course of its business or as incidental thereto. Two, the guarantee/s was given only towards and in promoting a new company for setting up a new project. The expenditure, thus, that comes to be incurred in its respect is, consequently, only on capital account. That is, the rights, if any, that the assessee stands to acquire or which may inure to it by furnishing guarantee/s are only capital in nature. Further, the consequences of the non -honouring the guarantee, as for example, the loss of reputation or of its banks not co -operating with it in extending it further working capital, etc., would not alter the character of the amount paid to VCCL to meet its loan obligation to a revenue expenditure.