Relief for Sahara Asset: Madras HC Upholds ITAT Order Allowing Mutual Fund Promotion Expenses as Commercially Justified [Read Order]

The High Court of Madras, upheld the ITAT’s order allowing Sahara Asset Management Company Pvt. Ltd. to claim mutual fund promotion and Initial Public Offering (IPO) related expenses as commercially justified business expenditure.

The Revenue appellant challenged the order dated 10.02.2010 passed by the ITAT for the Assessment Year 2005-06. In this case, Sahara Asset Management Company Pvt. Ltd, respondent-assessee, acted as a fund manager handling mutual fund schemes.

Are You GST Compliant? Get the Clarity You Need on RCM  - Click here 

For the Assessment Year 2005-06, it claimed expenses related to mutual fund promotion and initial public offer. The Assessing Officer (AO) disallowed the claim, holding that a fund manager was not required to bear such expenses, and added the amount to the total income.

The assessee challenged the order before the Commissioner of Income Tax (Appeals)[CIT(A)], who allowed the appeal based on an earlier ITAT decision in the assessee's own case. The Revenue then appealed to the ITAT, which upheld the CIT(A)’s order, again relying on its earlier ruling. Aggrieved by this, the Revenue filed the present appeal under Section260A of the Income Tax Act.

An earlier appeal against the same issue was withdrawn due to low tax effect. In this case, the assessee’s counsel suggested withdrawal for the same reason, but Sri. Ravikumar opposed it, stating that the issue was recurring and should be pursued.

The Court agreed with the ITAT’s findings. It held that the AO was not justified in disallowing the claim by assuming the role of the assessee and deciding whether the expenses were necessary or reasonable based on the circumstances.

The Bench referred to the Bombay High Court’s decision in Mahindra and Mahindra Ltd. vs. CIT, authored by one of the present judges, in support of its view.

In the Mahindra case, it held over 27% shares in its group company, Machinery Manufacturers Corporation Ltd (MMC), and had incurred expenses of ₹42.89 lakh on its behalf. It had also written off ₹6.22 crore and provided a guarantee of ₹2 crore to IDBI for financial support given to MMC. The AO disallowed both the expenses and the write-off.

The Bombay High Court held that the expenses were incurred for commercial reasons, given the close business link between Mahindra and MMC. Since the spending was directly connected to Mahindra’s business, it was allowed as a business expenditure or loss.

The Court referred to paragraphs of the Mahindra and Mahindra judgment, where it held that the decision to treat certain expenses or debts as business loss or deduction under Section 28 of the Act was a commercial decision of the taxpayer, based on materials available at the time. Once such amounts were recorded as business expenditure in the books, the onus shifted to the AO to prove otherwise with cogent reasons,which was not done in that case.

The High Court noted that the expenses were incurred towards a group company, MMC, for business expediency. Since there was a clear business connection between the two entities, the amounts spent were considered directly relatable to the taxpayer's business and eligible for deduction.

Further, the bench relied on the Supreme Court ruling in Delhi Safe Deposit Co. Ltd., where similar expenditure was allowed as deductible on grounds of commercial expediency. In that case, the payment was made to preserve the assessee’s business reputation and to protect a profit-earning apparatus, and was therefore treated as incurred wholly for business purposes.

The Court also cited settled legal principles that an expenditure, even if voluntary and not yielding immediate returns, could still be allowable if incurred to facilitate ongoing business or protect its reputation, assets, or income-earning sources.

In the case at hand, the bench found that the assessee had incurred the expenditure in the interest of preserving MMC ,a group company,and to keep it as a going concern. It participated in MMC’s rehabilitation, provided financial assistance, converted loans, and gave guarantees ,all acts showing commercial expediency.

The Division Bench of Chief Justice K.R.Shriram and Justice Sunder Mohan, accordingly concluded that the expenditure incurred and debts recoverable from MMC were eligible for deduction under Section 28 of the Act. It answered the substantial question of law in the affirmative and dismissed the appeal of the income tax department.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates