TaxTMI 
TaxTMI 
2023 (6) TMI 884
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....f Rs. 6,22,01,000/- being the dues considered not recoverable from MMC which were not allowed to be written off while computing the income under the head "Profits and gains of business or profession". 3. On 3rd September 2004 this Court was pleased to frame the following substantial question of law : Whether on the facts and in the circumstances of the case as well as in law the Tribunal was right in not allowing expenses of Rs. 42.89 lakhs incurred by the appellant company for MMC and not allowing deduction of write off of Rs. 622.01 lakhs (not Rs. 578.09 lakhs as originally put) u/s. 28 of the Act being the amount lent to MMC including interest due thereon and advances for purchase of machineries given in the course of business dealings with MMC? 4. On 8th October 2004 this Court was pleased to frame one more substantial question of law : Whether and in the on the facts circumstances of the case as well as in law the Tribunal was right in holding that the additional liability on account of exchange rate to fluctuation amounting Rs. 25,04,466/- was allowable as deduction the computation of the appellant company's actual payment was made and till then, w....
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.... assistance by paying further amounts to MMC as well as by converting its existing intercorporate deposit ("ICD") with MMC into rehabilitation assistance. Appellant also provided a guarantee of Rs. 200 lakhs to IDBI for the rehabilitation assistance disbursed by IDBI to MMC. Subsequently, various winding up petitions were filed by the creditors of MMC in the High Court and certain schemes of compromise or arrangement with the creditors were worked out in conjunction with IDBI. Unfortunately, none of these could ultimately be given effect due to opposition to such schemes by MMC's bankers and certain other parties. As a result of these additional funds, which were projected to be made available to MMC by various institutions and other parties, were not infact made available, MMC's losses continued to mount and finally a reference had to be made to the Board for Industrial and Financial Reconstruction ("BIFR") under the Sick Industrial Companies Act (SICA). BIFR appointed IDBI to formulate a scheme for MMC's rehabilitation. Even while such schemes were being formulated appellant granted assistance whenever the bankers/institutions required such assistance to be given to MMC. BIFR, ho....
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....its not received 17.59 (d) Rehabilitation assistance given to MMC 212.00 (e) Liabilities against guarantees given by the assessee to IDBI in respect of IDBI loans to MMC 247.29 (f) Miscellaneous (6.79) -------- 622.01 -------- 11. The Assessing Officer disallowed the miscellaneous expenses of Rs. 42,89,185/-, after recording appellant's submissions, on the ground that appellant held 27% of MMC equity and 37% was held by Government and financial institutions and banks. Since the other shareholders, who had stakes higher than appellant, have not contributed towards such expenses, the amount of Rs. 42,89,185/- claimed under the head miscellaneous expenses is disallowed and added to the income of appellant. According to the Assessing Officer it was spent for purposes other than the business interest of appellant. The Assessing Officer disallowed the provision made on account of dues from MMC amounting to Rs. 622.01 lakhs on the grounds that (a) MMC was a Mahindra Group Company was not acceptable because the name Machinery Manufacturers Corporation Ltd. did not contain any reference to Mahindra and Mahindra or any Mahindra ....
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.... in the order of CIT(A). ITAT has opined that under no principle of accountancy or law can a deduction be allowed for the expenditure incurred by the assessee to meet the liabilities of another company and for the debts written off in the books. These were not trade debts but the loans advanced to a subsidiary and written off in the accounts. If the assessee's contention regarding safeguarding good name and reputation through cash grants to subsidiaries is accepted, most of the companies under the umbrella of one group management can so arrange their affair that loss of one company is set off against profit of another. 15. In short, the reasons for disallowance under both heads could be summed up as under : (a) under no principle of accountancy and law can a deduction be allowed for the expenditure incurred by appellant to meet the liability of the another company and for the debts written off in the books; (b) the monies lent and expenses incurred by appellant was not the business loss incurred by appellant in the course of its business and, therefore, not allowable while computing the income of appellant under the head "Profits and gains of business or profes....
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....gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. Mr. Mistri also submitted, relying upon a judgment of the Apex Court in Badridas Daga V/s. Commissioner of Income Tax (1958) 34 ITR 10, that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. There is no bar in claiming a loss if the same is incidental to carrying on of a business. It is also settled law that even if a debt is not held to be allowable as bad debt, yet the same would be allowable as a revenue loss deduction in computing profits of the business. 19. What are allowable as deductions can be found in Section 28 read with Section 29 of the Act. Section 28 of the Act states "The following income shall be chargeable to income-tax under the head "Pro....
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....necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR page 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. 11. On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. 12. In fact this court in the matter of Commissioner of Income Tax v. R.B. Rungta & Co. (Supra) upheld the finding of the Tribunal that the loss could b....
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.... (Supra) reads as under : Then it is suggested that even if the case falls under section 10 (2) (xv) the relevant time for claiming the deduction is not when the loss occurred but when the loss was written off. In the first place, in our opinion, the case cannot fall under section 10 (2) (xv). Section 10 (2) (xv) deals with any expenditure laid out or expended wholly or exclusively for the purpose of business, profession or vocation. Therefore the deduction contemplated by section 10 (2) (xv) must arise out of a voluntary act on the part of the assessee. He must spend and amount for the purpose of the business, profession or vacation and then claim that amount as having been spent wholly and exclusively for the purpose of business, profession or vocation. When the money is lost to the business as a result of embezzlement, there is no expenditure on the part of the employer. It is true that there is loss to the business, but that loss is entirely involuntary, and although the loss may arise in the course of the business or be incidental to the business, it cannot be said that the amount represented by the loss was an amount spent wholly and exclusively for the purpose of th....
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....ase had offered a guarantee to the bank on behalf of the subsidiary company and on invocation of the guarantee, it had paid to the bank the amount payable by the subsidiary company but the amount could not be recovered from the subsidiary company. The assessee, therefore, wrote off the amount. There were other subsidiaries of the assessee where also loan was advanced but could not be recovered. The assessee spent amounts for the business expenditure of the subsidiaries. The claim of deduction was disallowed. The Hon'ble Madras High Court upheld the case of the assessee and held that since the amounts were incurred by the assessee for the business expediency of its wholly owned subsidiary companies and when there existed a business nexus between the assessee and the subsidiary companies, such expenditure should be treated as having been incurred for the purpose of business and directly relatable to the business of the assessee and thus eligible for deduction as business expenditure. The Court held that the Assessing Authority failed to appreciate the claim in the proper perspective. The Court also held that the alternative argument of the assessee that the written off bad debts shou....
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.... on the relevant material in possession of the assessee. Once the assessee records the amounts as business loss/ deductions in his books of account that would prima facie establish that it was not recoverable loss unless the Assessing Officer for good reasons holds otherwise. The burden would be on the Assessing Officer to make out cogent reasons, which is not so in the case here. It is also not in dispute that the amounts spent were against/recoverable from group company MMC. It is quite obvious for reasons mentioned above that the amounts in question were incurred by appellant for the business expediency of the group company. It is not disputed that there existed a nexus between appellant and MMC. Such expenditure/debt should be treated as having been incurred for the purpose of business and directly relatable to the business of appellant and thus eligible for deduction as business expenditure in their return of business income. Otherwise it would not reflect the true profit and gain of appellant. A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indir....
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....consideration and that the assessee had made the payment purely on business considerations with the sole object of maintaining its business connection which was yielding profit. On a reference, the High Court held that the assessee was entitled to the deduction claimed. On appeal, the Apex Court held that the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency, which was an income earning apparatus, and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. The Apex Court, therefore, held that the expenditure was laid out on purely business considerations and wholly for the purpose of the assessee's business. The Apex Court also held that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader and the expenditure incurred on the preservation of a profit earning asset of a business is always a deductible expenditure. It will be usefu....
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....dmissible expenditure in the computation of the income-tax liability of the brewery, Lord Sumner upholding the above claim observed in Usher's Wiltshire Brewery L'd. v. Bruce [1915] AC 433, 469 (HL), thus: Where the whole and exclusive purpose of the expenditure is the purpose of the expender's trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, say that of the publican, or that the brewer incidentally obtains some advantage, say in his character of land- lord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose. In British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205; [1925] 10 TC 155, 193 (HL), Lord Cave observed: It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce [1915] AC 433 (HL) and Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 KB 674 (KB), that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indir....
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....e assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessed, The expenditure was, therefore, rightly held to be deductible under s. 37. 27. In the case at hand also the expenditure incurred were wholly incurred for the purpose of commercial expediency because MMC was a group company of appellant and appellant was, as could be seen from the orders passed by BIFR, keen in the preservation of MMC and to keep it as a going concern. The nexus between appellant and MMC is also not di....