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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
K.R. SHRIRAM, M.M. SATHAYE, JJ.
Mahindra and Mahindra Ltd. – Appellant
Versus
Commissioner of Income Tax, Mumbai – Respondent
Income Tax Appeal No. 626 of 2002
Decided On : 09-06-2023
Income Tax - Appeal - Section 206A - Deduction of expenses and write off of dues under Section 28 of the Income Tax Act, 1961 - Summary of Acts and Sections: Section 28, Section 29, Sections 30 to 37 - The court discussed the deduction of expenses and write off of dues under Section 28 of the Income Tax Act, 1961. The court referred to various sections including Section 28, Section 29, and Sections 30 to 37, and interpreted the provisions to determine the deductibility of expenses and debts. The court emphasized the commercial meaning of 'Profits and gains of business or profession' and the allowance of deductions for expenses and losses incidental to carrying on business. The court also highlighted the non-exhaustive nature of the list of allowances in Sections 30 to 37, allowing for the deduction of losses and expenditures related to business operations.
Fact of the Case:
The appellant, a Public Limited Company, appealed against the disallowance of miscellaneous expenses and dues relating to Machinery Manufacturers Corporation Ltd. (MMC) for the Assessment Year 1989-1990. The Assessing Officer disallowed the expenses and dues, which were claimed as deductions under Section 28 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal confirmed the disallowance. The appellant contended that the expenses and dues were incurred for commercial expediency and were directly related to its business with MMC.
Finding of the Court:
The court found that the expenses and dues incurred by the appellant were directly related to its business with MMC and were incurred for commercial expediency. The court held that the expenses and debts should be treated as having been incurred for the purpose of business and directly relatable to the business of the appellant, thus eligible for deduction as business expenditure/loss under Section 28 of the Act. The court emphasized the non-exhaustive nature of the list of allowances in Sections 30 to 37, allowing for the deduction of losses and expenditures related to business operations.
Issues: The issues revolved around the deductibility of expenses and debts under Section 28 of the Income Tax Act, 1961. The Assessing Officer disallowed the expenses and debts, questioning the commercial expediency and business relevance of the appellant's claims. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the disallowance, leading to the appeal before the court.
Ratio Decidendi: The court's decision was based on the interpretation of Section 28 of the Income Tax Act, 1961, and related provisions. The court emphasized the commercial meaning of 'Profits and gains of business or profession' and the allowance of deductions for expenses and losses incidental to carrying on business. The court also highlighted the non-exhaustive nature of the list of allowances in Sections 30 to 37, allowing for the deduction of losses and expenditures related to business operations. The court held that the expenses and debts incurred by the appellant were directly related to its business with MMC and were incurred for commercial expediency, thus eligible for deduction as business expenditure/loss under Section 28 of the Act.
Final Decision: The court allowed the appeal and held that the expenses and debts incurred by the appellant were deductible under Section 28 of the Income Tax Act, 1961. The court emphasized the commercial expediency and business relevance of the appellant's claims, overturning the disallowance by the Assessing Officer, the Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal.
JUDGMENT :
K.R. SHRIRAM, J.
1. This is an appeal filed under Section 206A of the Income Tax Act, 1961 (“the Act”). Appellant, a Public Limited Company, carries on business, inter alia, as manufacturer of jeeps, tractors, implements and other products. Appellant also has a trading division for steel and other products and diversified into oilfield services.
2. Though there were various issues raised by the Assessing Officer for the Assessment Year 1989-1990, what is relevant in this appeal was the disallowance of Rs.42,89,185/- of miscellaneous expenses that were relating to Machinery Manufacturers Corporation Ltd. (“MMC”) and a sum of 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:
4. On 8th October 2004 this Court was pleased to frame one more substantial question of law:
5. On 9th September 2021 Mr. Mistri submitted that the second question of law framed was no more res integra since identical question 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 vs. Woodward Governor India Pvt. 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 was manufacture of machinery required by the textile industry. Till 1984 MMC had earned reasonable profits. Thereafter, due to severe recession in the textile industry, MMC started making losses. Inspite of various steps taken by MMC, the losses continued due to the recessionary conditions in the textile industry. In 1986, the Industrial Development Bank of India (“IDBI”) worked out a rehabilitation scheme for MMC. An integral part of the scheme was that appellant were required to contribute direc
The main legal point established in the judgment is the allowance of deductions for expenses and losses incidental to carrying on business under Section 28 of the Income Tax Act, 1961. The court emph....
Expenditures must be incurred wholly and exclusively for the business of the assessee to qualify as deductible business losses under Section 37(1) of the Income Tax Act, 1961.
Notional/hypothetical income like interest on interest-free business advances not taxable; s.14A disallowance impermissible absent exempt income; expense disallowances require proof of non-business n....
Routine administrative and operational business expenses incurred for commercial expediency are allowable under Section 37(1). Assessing authorities cannot disallow such expenses based on mere suspic....
Expenses incurred during pre-operative stages can be claimed as deductions if the business is ready for commencement.
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