2023 (6) TMI 884 - HC - Income Tax

Expenses of Group Companies - 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? - Bad debts - Write off of advances given for purchase of Machinery - Computing the income under the head Profits and gains of business or profession - deductible expenditure u/s 28 - Deduction not claimed u/s Section 36(1)(vii) - HELD THAT - 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 disputed. The Assessing Officer failed to appreciate the claim in the proper perspective. Appellant participated in the rehabilitation scheme of MMC and lent rehabilitation assistance by paying amounts to MMC as well as by converting 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 u/s 28 - ITAT was not right in not allowing the claims of assessee. Appeal is allowed and accordingly disposed.

Summary

Issues Involved:
1. Disallowance of Rs. 42,89,185/- of miscellaneous expenses related to MMC.
2. Disallowance of Rs. 6,22,01,000/- considered not recoverable from MMC.
3. Allowability of additional liability on account of exchange rate fluctuation amounting to Rs. 25,04,466/-.

Summary:
Issue 1: Disallowance of Miscellaneous Expenses
The appellant, a Public Limited Company, claimed a deduction of Rs. 42,89,185/- incurred for MMC under "miscellaneous expenses" due to commercial expediency. The Assessing Officer disallowed this amount, stating it was spent for purposes other than the business interest of the appellant. The CIT(A) and ITAT upheld this disallowance, reasoning that the expenditure pertained to MMC and not the appellant, and other major shareholders of MMC did not contribute to such expenses. The High Court, however, noted that the expenditure was incurred to preserve the goodwill of the Mahindra Group and was incidental to the appellant's business, thus eligible for deduction under Section 28 of the Act.

Issue 2: Disallowance of Dues Considered Not Recoverable
The appellant claimed a deduction of Rs. 6,22,01,000/- as business loss under Section 28 of the Act, which included amounts due from MMC, advances for machinery, unpaid interest, rehabilitation assistance, and liabilities against guarantees given to IDBI. The Assessing Officer disallowed this, stating the loans and payments were not related to the appellant's business. The CIT(A) and ITAT upheld this, citing lack of commercial expediency. The High Court disagreed, emphasizing that the expenses were incurred for commercial expediency to preserve a group company and maintain the appellant's business reputation. The Court held that such expenditures are deductible as business losses under Section 28.

Issue 3: Exchange Rate Fluctuation
The second question of law regarding the additional liability on account of exchange rate fluctuation amounting to Rs. 25,04,466/- was resolved based on precedent cases (ITR No. 271 of 1997 and ITR No. 156 of 2000) and the Supreme Court's decision in Commissioner of Income Tax V/s. Woodward Governor India P. Ltd. The Court concurred that the deduction of foreign exchange fluctuation can be claimed in the computation of the assessee's business profits pending such payment.

Conclusion:
The High Court ruled in favor of the appellant, allowing the deductions for both the miscellaneous expenses and the dues considered not recoverable from MMC under Section 28 of the Act, emphasizing the commercial expediency and business nexus between the appellant and MMC. The appeal was allowed, and the ITAT's disallowance was overturned.