TaxTMI 
TaxTMI 
2025 (6) TMI 576
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.... assessee to satisfy the dues of the defaulting sister company is for the purpose of the assessee's business and the assessee is entitled for deduction of business loss?" 2. Assessee is an investment company engaged in the trading of shares. Assessee was promoted by Balaji Group of Companies. Assessee also held shares in Balaji Distilleries Ltd (BDL) as promoter. Assessee held these shares as stock-in-trade. One of the companies which was promoted by Assessee was Balaji Industrial Corporation Ltd (BICL). 3. BICL availed a loan of Rs. 10 Crore from the Industrial Credit and Investment Corporation of India Ltd (ICICI Ltd). As one of the conditions required for disbursing the loan, understandably to secure the repayment of the loan, assessee, being the promoter of BICL, had to pledge the shares that it held in BDL, to ensure asset coverage of 1.5 times of loan sanctioned by ICICI and guarantee assistance on market value basis. Accordingly, assessee pledged 28,69,200 equity shares of BDL. 4. Over a period, BCIL was unable to repay its loan to ICICI. ICICI, to recover the amount that was payable to it by BICL, under the terms and conditions of loan and guarantee given by assessee....
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....on 36(1)(vii) of the Act. It was also submitted that the condition prescribed under Section 36(2) of the Act has not been satisfied inasmuch as assessee has not shown in any year that this amount was recoverable by BICL. 10. In our view, the issue in this case is squarely covered by a judgment of a Division Bench of the Bombay High Court in Mahindra and Mahindra Ltd. vs. Commissioner of Income Tax [2023] 151 taxmann.com332 (Bombay), which was authored by one of us (Chief Justice). 11. In that case, Mahindra was a promoter holding more than 27% of the equity shares of its group company called Machinery Manufacturers Corporation Ltd ("MMC"). It had to incur certain miscellaneous expenses amounting to Rs. 42,89,185/- on behalf of MMC. It also had to recover a sum of Rs. 6,22,01,000/- which was not allowed to be written-off. Mahindra had also provided guarantee of Rs. 200 lakhs to IDBI for the rehabilitation assistance disbursed by IDBI to MMC. Mahindra, to preserve and protect the value of good-will attached to it, decided to bear the unavoidable expenditure of Rs. 42.89 lakh of MMC and included the same in miscellaneous expenses. The Assessing Officer disallowed the same as also th....
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....sulated and Helsby Cables Ltd. V/s. Atherton [1926] AC 205. 26 In Commissioner of Income Tax, Delhi V/s. Delhi Safe Deposit Co. Ltd.8 the Apex Court was examining whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under Section 37 of the Act when the assessee was claiming deductions on the ground that the expenditure was incurred due to commercial expediency. In that case also the assessee had incurred the expenditure in question to avoid any adverse effect on its reputation like the case at hand. The Apex Court held that the expenditure incurred was a deductible expenditure. In fact that was the case where three persons A, B and the assessing company, which had also other businesses, were partners in a managing agency firm with 50%, 25% and 25% shares, respectively. At the instance of A, a large sum of money was advanced by the managed company to another firm at Calcutta. When the demand for repayment was made, the Calculta firm repudiated the claim and, out of the loss of Rs. 1,90,092/- to the managed company, the sum of Rs. 95,092/- was a....
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....xpenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under s. 37 of the Act. It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses, the managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one of its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liab....
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.... 372, held that the money spent on getting rid of a director and saving the company from scandal was deductible. Affirming the above view, the Court of Appeal (whose judgment appears at p. 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfettered by the presence of the retiring director, which might have had a bad effect on the credit of the company, it must be treated as revenue and not as capital expenditure and was deductible as such for income-tax purposes. 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. In CIT v. Malayalam Plantations Ltd. [1964] 7 SCR 693; 53 ITR 140, 180, Subba Rao J. (as he then was) summarised the legal position, at p. 705, thus: The aforesaid discussion leads to the following result: The expression for the purpose of the busines....
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....ing its existing ICDs 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. If there was no commercial expediency, there was no reason for appellant to incur these amounts or participate in the rehabilitation scheme of MMC. Appellant was also the managing agents of MMC and MMC was also a Mahindra Group Company. It is certainly not necessary for the name of Mahindra and Mahindra to be used in the name of MMC to prove it was a group company. These expenditure/debts 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/loss in assessee's return of business income. The expenditure incurred by appellant or the debts that were recoverable from MMC, in our view, therefore, would certainly be deductible expenditure under Section 28 of the Act." 13. In the case in hand also, it is not disputed that assessee was a promoter of BICL; that assessee had pledged 28,69,200 shares of BDL and that 25,15,200 shares were sold on 01.04.2008 at Rs. 37.65 per share, accoun....
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....ourt was considering an almost identical situation. The assessee in that case had transferred a huge amount of Rs. 82 Lakhs to its subsidiary company out of the Cash Credit Account of the assessee in which there was a huge debit balance. The Assessing Officer held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of total interest paid to the bank deserved to be disallowed and he disallowed a particular sum. The Hon'ble Apex Court held that extending such a loan would fall under the expression used for the purpose of business. If the amount has been advanced as a measure of commercial expediency, the interest on funds borrowed by the assessee should be allowed as deduction under Section 36(1)(iii) of the Act. Paragraph Nos. 19 to 36 of S.A. Builders Ltd. (supra) read as under : 19. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities belo....
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.... above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 26. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent business- man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the inter-est thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allow....
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....he view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 34. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth- Tax(1995) 215 ITR 582 also does not appear to be correct. 35. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the pur pose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view ....
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....return of income has been furnished by the assessee but no assessment has been made and it is noticed by the A.O. that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return." For the purpose of Clause (b) to Explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return and taking of such notice must be consistent with the provisions of the applicable law. It cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. Paragraph No. 20 of Prashant S. Joshi (supra) reads as under : 20. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of section 147. Explanation 2 to section 147 creates a deeming fiction of cases where income ch....