2022 (11) TMI 782 - HC - Income Tax

Allowable business expenditure/commercial expediency - Disallowance of claim of expenditure on the ground that it was not incurred wholly and exclusively for the purposes of the business - expenditure incurred by the Assessee in the form of loans and advances to its subsidiaries which were subsequently written off - HELD THAT - In the present case, while the nomenclature used for the expenditure incurred may have been different during AYs 1989-90 and 1990-91 where it was loans and advances which were subsequently written off, the fact remains that it was an irrecoverable expenditure as far as the Assessee was concerned. In the present AYs as well, what was paid as compensation by the Assessee to the very same subsidiaries was to recoup the business losses of the subsidiaries, and was again irrecoverable as far as the Assessee is concerned. Considering that the expenditure was in the nature of moneys advanced to the subsidiaries, it cannot be said that there is no intimate connection between the Assessee and the two subsidiaries as far as the business activities are concerned. In that sense the decision of the ITAT to allow the expenditure cannot be said to be inconsistent with the dictum of the Supreme Court in Travancore Titanium Products Ltd. 1966 (1) TMI 21 - SUPREME COURT It must therefore be concluded that the expenditure incurred by the Assessee in the present cases is not only incidental to the business of the Assessee but also necessitated or justified by commercial expediency. Consequently, the Court is not persuaded that the ITAT has in the present cases committed any legal error in answering the questions framed in favour of the Assessee and against the Department.

Summary

Issues:
1. Deductibility of compensation paid to subsidiaries.
2. Allowance of deduction for interest on interest-free loans to subsidiaries.

Issue 1: Deductibility of compensation paid to subsidiaries

The High Court heard appeals by the Revenue against a common order of the ITAT regarding compensation paid by the Assessee to its subsidiaries. The questions framed included whether such compensation, not directly related to the Assessee's business activities, could be considered a business expenditure. The Assessee explained that the compensation was to cover losses incurred by the subsidiaries due to unsuitable ores purchased from the Assessee. The AO initially disallowed the expenditure, citing the necessity for expenses to be wholly and exclusively for business purposes. The ITAT, however, allowed the Assessee's appeals, noting a previous decision that aiding promotional activities of industrial undertakings was part of the Assessee's business. The High Court found the compensation to be necessitated by commercial expediency and intimately connected to the Assessee's business, thus upholding the ITAT's decision.

Issue 2: Allowance of deduction for interest on interest-free loans to subsidiaries

In a separate appeal, the High Court considered the deduction claimed by the Assessee for interest on interest-free loans given to its subsidiaries. The Court questioned the legitimacy of the loans and advances, especially regarding the lack of details on their utilization by the subsidiaries. The ITAT had directed to allow the deduction, similar to a past case where loans were written off. The High Court compared the nature of the expenditure in both cases, emphasizing the irrecoverable nature of the amounts as business losses. The Court found a direct connection between the Assessee and its subsidiaries in terms of business activities, justifying the allowance of the expenditure. Relying on relevant case laws, the High Court concluded that the expenditure on interest-free loans was incidental to the Assessee's business and allowable under Section 37 of the Act.

In both issues, the High Court dismissed the appeals by the Revenue, upholding the ITAT's decisions in favor of the Assessee. The Court found the expenditures incurred by the Assessee, whether as compensation for losses or interest on loans to subsidiaries, to be necessitated by commercial expediency and intimately connected to the Assessee's business activities. The judgments emphasized the importance of a direct and intimate connection between the expenditure and the business, ultimately ruling in favor of the Assessee in both cases.