Mahindra and Mahindra Ltd. v. Commissioner of Income Tax

247.29 (f) Miscellaneous (6.79)

622.01

11 The Assessing Officer disallowed the miscellaneous expenses of Rs.42,89,185/-, after recording appellant’s submissions, on the ground that appellant held 27% of MMC equity and 37% was held by Government and financial institutions and banks. Since the other shareholders, who had stakes higher than appellant, have not contributed towards such expenses, the amount of Rs.42,89,185/- claimed under the head miscellaneous expenses is disallowed and added to the income of appellant. According to the Assessing Officer it was spent for purposes other than the business interest of appellant. The Assessing Officer disallowed the provision made on account of dues from MMC amounting to Rs.622.01 lakhs on the grounds that (a) MMC was a Mahindra Group Company was not acceptable because the name Machinery Manufacturers Corporation Ltd. did not contain any reference to Mahindra and Mahindra or any Mahindra Company; (b) 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 machines were not received. The CIT(A) accepts that appellant were promoters of MMC and held 27% of the equity and that MMC had incurred substantial loss which had accumulated to over Rs.57 Crores. But because appellant was not in need of machines manufactured by MMC for its business purposes and the advances made for the purchase of machines had nothing to do with the business of appellant, therefore, appellant was not entitled to the deduction.

13 This was carried in appeal before the Income Tax Appellate Tribunal (“ITAT”) which, by an order dated 14th February 2002, confirmed the findings of the CIT(A). It is this order that is impugned in the present appeal.

14 According to ITAT, none of the amounts claimed with the probable exception of interest (Rs.17.59 lakhs) due can be described as trade debts which also has not been claimed under Section 36(1)(vii) but all deductions have been claimed under Section 28 of the Act. According to ITAT, which accepted the submissions of the Revenue, write off of the loans advanced to a subsidiary or associate concern is not an allowable deduction. It agreed with the findings given in the assessment order and also in the order of CIT(A). ITAT has opined that under no principle of accountancy or law can a deduction be allowed for the expenditure incurred by the assessee to meet the liabilities of another company and for the debts written off in the books. These were not trade debts but the loans advanced to a subsidiary and written off in the accounts. If the assessee’s contention regarding safeguarding good name and reputation through cash grants to subsidiaries is accepted, most of the companies under the umbrella of one group management can so arrange their affair that loss of one company is set off against profit of another.

15 In short, the reasons for disallowance under both heads could be summed up as under: (a) under no principle of accountancy and law 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; (b) the monies lent and expenses incurred by appellant was not the business loss incurred by appellant in the course of its business and, therefore, not allowable while computing the income of appellant under the head “Profits and gains of business or profession”;

(c) there was no commercial 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.[2] 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. As per the scheme and as per the copy of the order dated 23rd September 1988 passed by BIFR available on record, it was just and equitable to wind up MMC. In the said order of BIFR, there is also a reference that appellant had already invested money to revive MMC. Infact it is also recorded that appellant was directed to amalgamate MMC with

2. AIR 2022 SC 4030 itself which appellant refused to because that would make appellant itself a sick company. It is also recorded in the order that appellant felt it would not be prudent to give blanket guarantee in respect of MMC because that was not viable. It is, therefore, certain that appellant had incurred the expenses of Rs.42,89,185/- for MMC and also had debts recoverable from MMC. The issue is whether appellant could claim these expenses and deductions under Section 28 of the Act.

18 Mr. Mistri submitted that section 28 of the Act imposes a charge on the profits or gains of business or profession. Mr. Mistri relied upon a judgment of the Division Bench of this Court in Harshad J. Choksi V/s. Commissioner of Income Tax, Bombay City – VII, Mumbai[3] to submit that the expression “Profits and gains of business or profession” is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. Mr. Mistri also submitted, relying upon a judgment of the Apex Court in Badridas Daga V/s. Commissioner of Income Tax[4], that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental

3. (2012) 210 Taxman 143 (Bombay)

4. (1958) 34 ITR 10 to it. There is no bar in claiming a loss if the same is incidental to carrying on of a business. It is also settled law that even if a debt is not held to be allowable as bad debt, yet the same would be allowable as a revenue loss deduction in computing profits of the business.

19 What are allowable as deductions can be found in Section 28 read with Section 29 of the Act. Section 28 of the Act states “The following income shall be chargeable to income-tax under the head “Profits and gains of 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 business loss. The Tribunal in its order dated 19.12.1994 has not considered the issue, whether or not a loss claimed by the assessee is allowable as a business loss on the basis of the evidence produced by the assessee. The Tribunal proceeded on a premise that once a claim is made for deduction as bad debts, then the deduction can be granted only if the provision of Section 36 of the Act are satisfied and it is not open to an assessee to claim a deduction in the alternative under any other provision of the Act. In view of the above, we are not making any observation with regard to whether the claim of the assessee on merits is allowable as a business loss. We are only examining the issue posed for us viz. that when the claim made for bad debts is not satisfied, could it be considered as a allowable business loss.

10. Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression “Profits and gains of business or profession” is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR page 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it.

11. On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.

12. In fact this court in the matter of Commissioner of Income Tax v. R.B. Rungta & Co. (Supra) upheld the finding of the Tribunal that the loss could be allowed on general 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 incurred, otherwise he would not arrive at the true profits and gains. Business losses, though they fall outside the purview of Sections 30 to 37 of the Act, are allowable on ordinary commercial principles of computing profits.

21 Reliance has been placed by Mr. Mistri on Lord’s Dairy Farm Ltd. V/s. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Baroda[5] where the provisions of the Income Tax Act 1922 were under consideration and the Division Bench held that apart from the deductions permissible under Section 10 of the 1922 Act (paramateria to Section 28 of the Act), 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

5. 1955 ITR 700 deducted before the true profits can be ascertained. If 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 Section 10. The only requirement is that the loss must be said to be necessarily incurred in carrying on the trade. The relevant portion in Lord’s Dairy Farm Ltd. (Supra) reads as under: Then it is suggested that even if the case falls under section 10 (2) (xv) the relevant time for claiming the deduction is not when the loss occurred but when the loss was written off. In the first place, in our opinion, the case cannot fall under section 10 (2) (xv). Section 10 (2) (xv) deals with any expenditure laid out or expended wholly or exclusively for the purpose of business, profession or vocation. Therefore the deduction contemplated by section 10 (2) (xv) must arise out of a voluntary act on the part of the assessee. He must spend and amount for the purpose of the business, profession or vacation and then claim that amount as having been spent wholly and exclusively for the purpose of business, profession or vocation. When the money is lost to the business as a result of embezzlement, there is no expenditure on the part of the employer. It is true that there is loss to the business, but that los is entirely involuntary, and although the loss may arise in the course of the business or be incidental to the business, it cannot be said that the amount represented by the loss was an amount spent wholly and exclusively for the purpose of the business, 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 section 10.

22 Let us examine whether the expenditure incurred or the deduction claimed arose in carrying on business of appellant or incidental to it. As noted earlier and at the cost of repetition, MMC was a group company of appellant and appellant held almost 27% of the equity share capital in MMC. It cannot be disputed that MMC was part of appellant group because the order of BIFR also confirms that. The order of BIFR passed on 23rd September 1988 also records that. Order of BIFR also mentions that appellant had spent substantial money to keep MMC afloat and revive MMC. The Chairman of appellant and the Deputy Managing Director of appellant also attended the hearings before BIFR. MMC also had public shareholders. Therefore, the fact that commercial expediency required appellant to incur expenditure or give advances or give ICDs cannot be dismissed lightly.

23 A similar situation arose in the case of Commissioner of Income Tax V/s. Spencers and Co. Ltd.[6] where the assessee had claimed deduction as bad debts of certain sums written off against the subsidiary companies of the assessee. The assessee in that case had offered a guarantee to the bank on behalf of the subsidiary company and on invocation of the guarantee, it

6. (2013) 359 ITR 612 (Madras) had paid to the bank the amount payable by the subsidiary company but the amount could not be recovered from the subsidiary company. The assessee, therefore, wrote off the amount. There were other subsidiaries of the assessee where also loan was advanced but could not be recovered. The assessee spent amounts for the business expenditure of the subsidiaries. The claim of deduction was disallowed. The Hon’ble Madras High Court upheld the case of the assessee and held that since the amounts were incurred by the assessee for the business expediency of its wholly owned subsidiary companies and when 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. The Court held that the Assessing Authority failed to appreciate the claim in the proper perspective. The Court also held that the alternative argument of the assessee that the written off bad debts should be 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 was directly relatable to the business of the assessee and should be allowed as business expenditure.

24 In the case at hand also appellant had (a) incurred expenditure of Rs.42,89,185/- towards salary of staff and officers of MMC; (b)(i) an amount of Rs.43.92 lakhs was due from MMC; (ii) advances against purchases of machines from MMC, and those machines were not received, amounting to Rs.108 lakhs; (iii) unpaid interest due from MMC on ICDs was Rs.17.59 lakhs; (iv) rehabilitation assistance of Rs.212 lakhs was given to MMC; (v) there were liabilities against guarantees given by the assessee to IDBI in respect of IDBI loans to MMC amounting to Rs.247.29 lakhs etc. which total to Rs.622.01 lakhs after giving credit of Rs.6.79 lakhs towards miscellaneous head.

25 One can understand the Assessing Officer had disallowed these amounts after arriving at a conclusion that the decision to incur the expenses mentioned above or the debts mentioned above was not bonafide. That is not the case. 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. The burden would be on the Assessing Officer to make out cogent reasons, which is not so in the case here. It is also not in dispute that the amounts spent were against/recoverable from group company MMC. It is quite obvious for reasons mentioned above that the amounts in question were incurred by appellant for the business expediency of the group company. It is not disputed that there existed a nexus between appellant and MMC. Such expenditure/debt should be treated as having been incurred for the purpose of business and directly relatable to the business of appellant and thus eligible for deduction as business expenditure in their return of business income. Otherwise it would not reflect the true profit and gain of appellant. A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly 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[7].

26 In Commissioner of Income Tax, Delhi V/s. Delhi Safe Deposit Co. Ltd.[8] the Apex Court was examining whether the amount in question

7. (1926) AC 205

8. 1982 (133) ITR 756 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 Calcutta. When the demand for repayment was made, the Calculta firm repudiated the claim and, out of the loss of Rs.1,90,092/- to the managed company, the sum of Rs.95,092/- was agreed to be borne by B, the assessee company and D, who was the brother of A, who was inducted into the managing agency firm as partner in place of A. The assessee's claim to have the sum of Rs.9,500/- which was paid by it to the managed company during the previous year relevant to the assessment year 1962-1963 in partial discharge of its liability of Rs.47,500/- deducted as business expenditure, was disallowed by the Income Tax Officer and the AAC confirmed the order of the Income Tax Officer on the ground that the amount was actually the loss of a firm which was no longer in existence, that the loss had been borne by the assessee on personal considerations and that the managing agency firm had not claimed the loss in its return. The Appellate Tribunal reversed the order of the AAC and allowed the assessee's claim on the ground that though there was a change in the constitution of the firm, the assessee's liability had not ceased, that since the assessee was a company there was no question of any personal consideration and that the assessee had made the payment purely on business considerations with the sole object of maintaining its business connection which was yielding profit. On a reference, the High Court held that the assessee was entitled to the deduction claimed. On appeal, the Apex Court held that the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency, which was an income earning apparatus, and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. The Apex Court, therefore, held that the expenditure was laid out on purely business considerations and wholly for the purpose of the assessee's business. The Apex Court also held that 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 and the expenditure incurred on the preservation of a profit earning asset of a business is always a deductible expenditure. It will 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 company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business, reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered. into by the assessee to benefit the defaulting partner, exclusively even though he might have been benefited to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case, whether it would make any difference at all is the point for consideration. Dealing with the question whether an expenditure incurred by a brewery in aid of their tenants of tied houses as a necessary incident of the profitable working of the brewery business was an admissible expenditure in the computation of the income-tax liability of the brewery, Lord Sumner upholding the above claim observed in Usher's Wiltshire Brewery L'd. v. Bruce [1915] AC 433, 469 (HL), thus: Where the whole and exclusive purpose of the expenditure is the purpose of the expender's trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, say that of the publican, or that the brewer incidentally obtains some advantage, say in his character of land- lord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose. In British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205; [1925] 10 TC 155, 193 (HL), Lord Cave observed: It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce [1915] AC 433 (HL) and Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 KB 674 (KB), that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly 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 SCR 693; 53 ITR 140, 180, Subba Rao J. (as he then was) summarised the legal position, at p. 705, thus: The aforesaid discussion leads to the following result: The expression for the purpose of the business' is wider in scope than the expression for the purpose of earning profits. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a per- son carrying on the business. In the instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessed, The expenditure was, therefore, rightly held to be deductible under s. 37.

27 In the case at hand also the 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 under Section 28 of the Act.

28 In the circumstances, we answer the substantial question of law in negative. The ITAT was not right in not allowing the claims of assessee. Appeal is allowed and accordingly disposed. (M.M. SATHAYE, J.) (K. R. SHRIRAM, J.)