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TMI Blog2023 (6) TMI 884X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - K.R. SHRIRAM M.M. SATHAYE, JJ. For the Appellant : Mr. J.D. Mistri, Senior Advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been answered by this Court in ITR No. 271 of 1997 on 21st August 2014 and by an order dated 22nd July 2016 in ITR No. 156 of 2000. Mr. Mistri also relied upon Commissioner of Income Tax V/s. Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) Mr. Suresh Kumar had requested the matter be stood over to enable him to consider the same. 6. Today Mr. Suresh Kumar also concurred with the view expressed by Mr. Mistri. In ITR No. 271 of 1997 filed by same appellant a similar substantial question of law was framed and the Court, following Woodward Governor (Supra), held that the deduction of foreign exchange fluctuation can be claimed in the computation of the assessee s business profits pending such payment. Therefore, that would leave us to decide only the first substantial question of law as framed on 3rd September 2004. 7. Appellant, admittedly was the promoter of MMC holding more than 27% of the equity capital of MMC. For Assessment Year 1989-1990 appellant claimed deduction of Rs. 622.01 lakhs in computing the taxable income and a sum of Rs. 42.89 lakhs was incurred and included in miscellaneous expenses. 8. Mr. Mistri submitted that MMC s main activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also associated with MMC as managing agents for several years. Since MMC was viewed as a Mahindra Group Company, appellant thought it to be in its own interest to preserve and protect the goodwill attached to its name by the business community, consumers, employees, financial institutions etc. The rehabilitation assistance/guarantees were unavoidable on the grounds of commercial expediency. As the losses suffered by appellant were due to non recovery of such assistance and the losses on account of enforcement of guarantees by IDBI, appellant claimed deduction of Rs. 622.01 lakhs in arriving at the taxable income under Section 28 of the Act. 9. It is also appellant s case that due to the losses incurred by MMC as narrated above, MMC suspended its operations from end April 1988 onwards. During the period of suspension of operations and till winding up order was passed against MMC, MMC had to incur expenses towards salaries of staff and officers, statutory charges, security arrangements, rent etc. Since MMC was a Mahindra Group Company, due to commercial expediency, to preserve and protect the value of goodwill attached to appellant, appellant decided to bear within certain limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the rehabilitation scheme in pursuance to which appellant claims to have lent moneys to MMC and given guarantees never came through; (c) the rehabilitation loans and payments under guarantees made by MMC are not related to the business of appellant and the other major shareholders of MMC have also not contributed to the rehabilitation scheme; and (d) the entire amount due to appellant from MMC is in the nature of a debt and incase the debt has become bad, it should have been written off in the profit and loss account. 12. Unhappy with the findings of the Assessing Officer in the assessment order dated 31st December 1991, appellant preferred an appeal before the Commissioner of Income Tax (Appeals) [ CIT(A) ]. The CIT(A) confirmed the findings of the Assessing Officer. On the miscellaneous expenses of Rs. 42,89,185/-, the view of the CIT(A) was that the expenditure pertains to MMC and not appellant and appellant s claim is not allowable merely because MMC was a Mahindra Group Company Ltd. On the recoverable dues of Rs. 6,22,01,000/-, the CIT(A) deals only with the advances amounting to Rs. 108 lakhs made against purchases of machines from MMC unadjusted as the machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial expediency for appellant to protect the assets of MMC and, therefore, no need to lend to MMC. 16. Before we proceed further, we would note that Mr. Suresh Kumar reiterated the findings of the Assessing Officer, CIT(A) and ITAT. Mr. Suresh Kumar also relied upon the judgment of the Apex Court in Pr. Commissioner of Income Tax 6 V/s. Khyati Realtors Pvt. Ltd. AIR 2022 SC 4030 to submit that Section 36(1) of the Act gives benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year and that benefit is subject to Section 36(2) of the Act. Appellant has not satisfied the ingredients of both these provisions. In our view, this judgment is of no help because it is not appellant s case that they are claiming deduction under Section 36 of the Act but actually they are claiming deduction under Section 28 of the Act. The moot point is whether appellant could claim such deduction and also the miscellaneous expenses incurred. 17. Admittedly, MMC was a subsidiary of appellant. Admittedly there was reference by IDBI to BIFR to formulate a scheme of rehabilitation of MMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or profession . Section 29 of the Act, which provides for income from profits and gains of business or profession, how computed, states The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D . Sections 30 to 37 of the Act provide for the deduction available from the total receipts to compute profit and gain of business or profession. The Act, however, does not provide that the deduction available from the total receipts to compute profit and gain of business are only those deductions which are listed in Sections 30 to 37 of the Act. The list is not exhaustive. Any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at the profits and gains of a business under Section 28 of the Act. We find support for this view in Harshad J. Choksi (Supra), where paragraphs 9 to 12 read as under : 9. Our opinion is sought on the issue, whether if an amount is held to be not deductible as a bad debt, in view of non compliance of the condition precedent as provided under Section 36(2) of the Act, could the same be considered as a allowable busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral principles governing computation of profits under Section 10 of the Indian Income Tax Act, 1922 which is similar/identical to Section 28 of the Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by this court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under Section 10(1) of the Indian Income Tax Act, 1922. (emphasis supplied) 20. The list of allowances enumerated in Sections 30 to 37 of the Act, it is settled law, is not exhaustive. An item of loss or expenditure incidental to business may be deducted in computing profits and gains even if it does not fall within any of these sections, for the tax is on profits and gains properly so called and computed on ordinary commercial principles. In assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession or vocation. Therefore we must differ from the view taken by the Tribunal that a case of embezzlement falls under section 10 (2) (xv). But does it then follow that an assessee who suffers a loss in his business due to an embezzlement by his employee can get no relief, because the various cases of deductions dealt with under section 10 do not cover such a case ? The answer is very simple. As has been often pointed out, the object of section 10 is to ascertain the true profits and gains of an assessee. The profits must be ascertained from a commercial point of view. The sub-section (2) of section 10 deals with certain specific cases of permissible deductions. But even apart from these Permissible deductions, if there is any loss which from the commercial point of view can be considered to be a trading loss, then that loss must be deducted before the true profits can be ascertained. If therefore we take the view that a loss caused to a businessman by reason of the defalcations committed by his employee is a trading loss, then he would be entitled to deduct that loss although such a loss may not fall within the ambit of any of the deductions mentioned in subsection (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed as business expenditure or business loss was acceptable. Paragraph 9 of Spencers and Co. Ltd. (Supra) reads as under : 9. On a careful analysis of the matter in the light of the materials available on record and the decisions cited, we are of the view that since the amounts in question were incurred by the assessee for the business expediency of the wholly owned subsidiary companies and when it is not disputed that 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 in their return of business income. The assessing authority and the Commissioner of Income-tax (Appeals) failed to appreciate the claim in proper perspective. The alternative argument of learned senior counsel for the assessee that the claim of written off bad debts should be allowed as business expenditure or business loss, in our considered view, merit acceptance. The Tribunal has given a cogent and convincing reasons for reaching a finding of fact that expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to facilitate the carrying on the business, may yet be expended wholly and exclusively for the purposes of the trade as held in British Insulated and Helsby Cables Ltd. V/s. Atherton (1926) AC 205. 26. In Commissioner of Income Tax, Delhi V/s. Delhi Safe Deposit Co. Ltd. 1982 (133) ITR 756, 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. Infact 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 Calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be useful to reproduce the relevant portion, which reads as under : The first question which needs to be examined is 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 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade...... Rowlatt J. in Mitchell v. B. W. Noble Ltd. (1927) 1 KB 719; 11 TC 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under Section 28 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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