Expenditure on Subsidiary for Commercial Expediency Allowable as Business Deduction: Bombay HC in Mahindra Case [Read Order]
Bombay HC held that expenditure on a subsidiary incurred for commercial expediency is allowable as a business deduction
Bombay HC in Mahindra Case
Bombay HC in Mahindra Case
In a recent ruling, the Bombay High Court held that expenditure incurred by a company on its subsidiary for commercial expediency is allowable as a business deduction.
Mahindra & Mahindra Ltd., the assessee, filed its return of income for the assessment year 1999-91. In the course of assessment, the Assessing Officer disallowed expenses of Rs. 49.18 lakh incurred on its subsidiary, Machinery Manufacturers Corporation Ltd. (MMC), which had gone into liquidation as well as a write-off of deposits and interest linked with MMC amounting to Rs. 200.47 lakh.
The Assessing Officer held that these were not business expenses but payments made for non-business considerations. The Commissioner of Income Tax (Appeals) upheld the disallowance, and the Income Tax Appellate Tribunal confirmed it, relying on its earlier order for the assessment year 1989-90.
The revenue’s counsel argued that the expenditure was capital in nature and unrelated to the assessee’s business, and hence not allowable as a deduction. They submitted that the payments could not be treated as incurred wholly and exclusively for business purposes.
The Division Bench comprising Chief Justice Alok Aradhe and Justice M.S. Karnik observed that the assessee had incurred the expenditure to preserve its reputation and maintain goodwill in the market, which amounts to commercial expediency.
The court explained that once expenditure is shown to have been made for business expediency, it must be treated as deductible under Section 28. It pointed out that this view was consistent with its earlier decision in the assessee’s own case for the prior year.
The court held that the expenditure incurred on the subsidiary was allowable as a business deduction. The order of the tribunal disallowing the claim was set aside, and the question of law was answered in favour of the assessee.
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