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2025 (5) TMI 368 - HC - Income TaxDisallowing write-off of the deposits and interest thereon as the business loss incurred by the appellant company u/s. 28 of the Act in the course of its business - Disallowing miscellaneous expenses incurred u/s 37 of commercial expediency as well as on the ground of the expenses where so incurred in order to preserve the reputation of estate and business of the assessee - HELD THAT - The Supreme Court in CIT VS DELHI SAFE DEPOSIT CO. LTD. 1982 (1) TMI 2 - SUPREME COURT examined the question whether an expenditure incurred on account of commercial expediency is admissible as deduction u/s 37 of the 1961 Act. The Supreme Court held that the expenditure incurred was a deductible expenditure. Admittedly MMC is a subsidiary of the assessee and assessee holds 27% equity capital of MMC since its incorporation. The assessee promoted the MMC on 15th May 1946. From the date of incorporation of the assessee it was the managing agent of the MMC and the assessee has acted as a managing agent till 1974 when the Companies Act 1974 abolished the Managing Agency System. However due to severe recession in the textile industry MMC started making losses. Thereupon the MMC was wound-up. The assessee in its board meeting held on 27th March 1989 agreed to incur expenditure for maintenance of MMC. Thereafter on 10th July 1990 the Board of Directors of the assessee agreed to resolve the dispute to meet the expenditure till the affairs of MMC were wound-up. The Board of Directors approved the expenditure made by the assessee in the previous relevant Assessment Year 1990-91. The assessee held substantial portion of equity capital of MMC and MMC was regarded in public and official circles as a Mahindra Company. The assessee in order to protect and preserve the assets and to protect the value of goodwill attached to the assessee by various sections of the society and on the ground of commercial expediency incurred expenditure which is permissible as deduction. The contention urged on behalf of the revenue in opposition to the aforesaid claim has already been dealt with by a Division Bench of this Court. Therefore even otherwise the assessee is entitled to deduction. For the reasons assigned by us supra we agree with the view taken in assessee s own case in MAHINDRA MAHINDRA LTD. 2023 (6) TMI 884 - BOMBAY HIGH COURT in respect of the previous assessment year which even otherwise squarely applies in respect of the first and additional substantial question of law. We therefore find force in the submissions made by assessee that the first substantial question of law as well as additional substantial question of law deserves to be answered in favour of the assessee. Determining the book profit u/s 115J - Section 115J of the 1961 Act mandates that in case of a company whose total income as computed under the provisions of the Act 1961 is less than 30% of the book profit the total income chargeable to tax will be 30% of the book profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI of the Companies Act 1956 after certain adjustments. Explanation to Section 115J (1A) provides that net profit so computed is to be increased by certain amounts and it is to be reduced by certain amounts which are mentioned therein. The provision does not contain any reference to concept of above the line or below the line . Sub section (1A) of Section 115J mandates the company to maintain its accounts in accordance with the requirements of Companies Act and is bodily lifted from the Companies Act into the Act of 1961 for the limited purpose of making the said account so maintained as a basis for computing the company s income for levy of income-tax. It was also held that the provision does not empower the authority under the Act to probe into the account accepted by the authorities under the Companies Act. It was also held that if the legislature intended the Assessing Officer to reassess the company s income then it would have stated in Section 115-J that income of the company is accepted by the Assessing Officer . The aforesaid principle was reiterated by the Supreme Court in MALAYALA MANORAMA COMPANY LIMITED 2008 (4) TMI 20 - SUPREME COURT . Thus it is evident that the Assessing Officer does not have jurisdiction to go behind the net profit shown in profit and loss account except to the extent provided in Explanation to Section 115J. For the aforementioned reasons the second substantial question of law also deserves to be answered in favour of the assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, for Assessment Year 1990-91, are as follows: (i) Whether the Tribunal was correct in disallowing the write-off of deposits and interest thereon as a business loss under Section 28 of the Act, amounting to Rs. 200.47 lakhs, incurred by the appellant company in the course of its business. (ii) Whether the Assessing Officer (AO), while determining the book profit under Section 115J of the Act, can question the correctness of the profit and loss account prepared and certified by the statutory auditors of the appellant company as having been prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. (iii) Whether the Tribunal erred in not allowing miscellaneous expenses of Rs. 49,18,786 incurred by the appellant for Machinery Manufacturers Corporation Ltd. (MMC) under Section 37 of the Act on grounds of commercial expediency and preservation of the reputation of the assessee's estate and business. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) and (iii): Deductibility of write-off of deposits, interest, and miscellaneous expenses under Sections 28 and 37 of the Income Tax Act Relevant Legal Framework and Precedents: The Court examined Section 28 of the Income Tax Act, which pertains to profits and gains of business or profession, and Section 37(1), which allows deduction of any expenditure (not being capital expenditure or personal expenses) laid out wholly and exclusively for the purposes of the business. The Supreme Court's decision in CIT vs. Delhi Safe Deposit Co. Ltd. (1982) was a key precedent, where it was held that expenditure incurred on commercial expediency, even if voluntary, may be deductible if it is wholly and exclusively for the purpose of business. Court's Interpretation and Reasoning: The Court found that MMC was a subsidiary and group company of the appellant, with the appellant holding 27% equity capital and acting as managing agent until 1974. MMC was undergoing financial distress and was ordered to be wound up. The appellant incurred expenses and wrote off deposits and interest due from MMC as part of efforts to preserve MMC's business and goodwill, which was integral to the appellant's commercial interests. The Court relied heavily on a recent Division Bench judgment of the same High Court in the appellant's own case for the preceding assessment year (MAHINDRA & MAHINDRA LTD. VS. COMMISSIONER OF INCOME TAX), where similar claims were allowed. The Division Bench had held that the expenditure and write-offs were incurred for commercial expediency and were directly relatable to the business of the appellant. It further emphasized that the amounts were not gratuitous but were incurred to protect the business reputation and preserve the value of goodwill. Key Evidence and Findings: The BIFR (Board for Industrial and Financial Reconstruction) orders and records showed that MMC was part of the appellant's group and that the appellant had invested substantial amounts to revive MMC. The appellant's Board of Directors had approved the expenditure and write-offs. The appellant's role as managing agent and the nexus between the two companies were undisputed. Application of Law to Facts: The Court applied the principle from Delhi Safe Deposit Co. that commercial expediency justifies the deduction of such expenses. The nexus between the appellant and MMC, the nature of the losses as business losses, and the commercial rationale behind the expenditure supported the claim. The Court held that these expenses and write-offs should be treated as incurred wholly and exclusively for the purpose of business and thus deductible under Sections 28 and 37. Treatment of Competing Arguments: The revenue contended that the loss was capital in nature, not business loss, and that the expenses were not incurred to carry on the appellant's business. The revenue also relied on the fact that the amounts were debited below the line in the profit and loss account and that the Tribunal had confirmed disallowance based on precedent for the previous year. The Court rejected these contentions, holding that the precedent was overruled by the Division Bench decision and that the commercial expediency principle applied. The concept of "below the line" was held to be irrelevant as Schedule VI does not prescribe such a classification. Conclusions: The Court answered the first and additional substantial questions of law in favour of the appellant, allowing the deduction of Rs. 49,18,786 and Rs. 200.47 lakhs as business expenses and losses incurred in the course of business. Issue (ii): Whether the Assessing Officer can question the correctness of the profit and loss account certified by statutory auditors under Section 115J of the Income Tax Act Relevant Legal Framework and Precedents: Section 115J mandates that companies prepare their profit and loss accounts in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, for the purpose of computing book profits for minimum alternate tax (MAT). The Supreme Court decisions in Apollo Tyres Ltd. vs. CIT (2002), Malayala Manorama Company Ltd. vs. CIT (2008), and Khaitan Chemicals and Fertilizers Ltd. vs. CIT (2008) were pivotal. These cases held that the Assessing Officer's powers under Section 115J are limited to verifying whether the accounts are prepared according to the Companies Act and certified by statutory auditors, and do not extend to re-assessing or questioning the correctness of the profit and loss account entries. Court's Interpretation and Reasoning: The Court reiterated that Section 115J(1A) requires preparation of accounts as per Schedule VI, and the net profit so computed forms the basis for book profit. The provision does not empower the AO to probe beyond the statutory certification or to re-examine the correctness of the accounts. The Court observed that if the legislature intended to allow such reassessment, it would have explicitly stated so in the statute. Key Evidence and Findings: The appellant's profit and loss account was certified by statutory auditors as prepared in accordance with Schedule VI. The revenue's contention that the amounts were debited below the line was found irrelevant since Schedule VI does not recognize the concept of "below the line." Application of Law to Facts: The Court applied the above principles to hold that the AO could not question the correctness of the profit and loss account entries, including the disputed expenses and write-offs, for the purpose of computing book profit under Section 115J. Treatment of Competing Arguments: The revenue relied on a Supreme Court decision in Principal Commissioner of Income Tax-6 vs. Khyati Realtors Pvt. Ltd. (2022) to argue that the AO could interfere with the accounts. The Court distinguished this case and held that the AO's powers remain circumscribed under Section 115J and the accounts certified by auditors cannot be disturbed. Conclusions: The Court answered the second substantial question of law in favour of the appellant, holding that the AO cannot question the correctness of the profit and loss account prepared and certified under the Companies Act for the purpose of computing book profit under Section 115J. 3. SIGNIFICANT HOLDINGS The Court made the following crucial legal determinations and established core principles: "The expenditure incurred was a deductible expenditure. 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." (CIT vs. Delhi Safe Deposit Co. Ltd.) "Whether to treat the debt as bad debt or as business loss/deduction under Section 28 of the Act is a commercial or business decision of the assessee based on the relevant material in possession of the assessee. Once the assessee records the amounts as business loss/deductions in his books of account that would prima facie establish that it was not recoverable loss unless the Assessing Officer for good reasons holds otherwise." (Division Bench judgment in appellant's own case) "Section 115J(1A) mandates the company to maintain its accounts in accordance with the requirements of the Companies Act and is bodily lifted from the Companies Act into the Act of 1961 for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. It does not empower the authority under the Act to probe into the account accepted by the authorities under the Companies Act." (Apollo Tyres Ltd. vs. CIT) Final determinations:
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