ANALYSIS OF BOMBAY HIGH COURT A TAX APPEAL JUDGMENT: ALLOWABILITY OF DEDUCTIONS AND MISCELLANEOUS EXPENSES
INTRODUCTION:
The High Court of Bombay- passed a judgement on 09 June 2023. In the case of MAHINDRA and MAHINDRA LTD. Vs STHE COMMISSIONER OF INCOME-TAX,CITY II, MUMBAI IN INCOME TAX APPEAL NO.626 OF 2002 which was passed by a single bench comprising of HONOURABLE SHRI JUSTICE K.R. SHRIRAM, HONOURABLE SHRI JUSTICE M. M. SATHAYE, In a tax appeal filed under Section 206A of the Income Tax Act, 1961, a Public Limited Company engaged in the manufacturing and trading business sought relief regarding the disallowance of certain expenses and the non-recovery of dues from another company. The case involves the interpretation of provisions under the Income Tax Act and their applicability to the expenses incurred and the dues written off. This blog provides an analysis of the key issues and legal considerations in the judgment.
FACTS OF THE CASE:
The appellant, a manufacturer of jeeps, tractors, implements, and other products, also had a trading division for steel and diversified into oilfield services. The dispute in this appeal pertains to the disallowance of miscellaneous expenses amounting to Rs. 42,89,185/- and the non-recoverable dues of Rs. 6,22,01,000/- from the Machinery Manufacturers Corporation Ltd. (MMC). These disallowances were made while computing the appellant’s taxable income under the head “Profits and gains of business or profession.”
Key Questions of Law: The court framed two substantial questions of law for consideration:
- Whether the Tribunal was right in not allowing expenses of Rs. 42.89 lakhs incurred by the appellant company for MMC and not allowing deduction of write-off of Rs. 622.01 lakhs under Section 28 of the Income Tax Act?
- Whether the additional liability on account of exchange rate fluctuation amounting to Rs. 25,04,466/- was allowable as a deduction in the computation of the appellant company’s income?
LEGAL ANALYSIS:
Deduction of Expenses and Dues: The appellant claimed the deduction of expenses incurred for MMC and the write-off of dues based on commercial expediency. However, the Assessing Officer, CIT(A), and the ITAT disallowed the deductions. They held that the expenses and dues were not allowable under the Income Tax Act since they were incurred to meet the liabilities of another company and were not related to the appellant’s business interests.
Under Section 28 of the Income Tax Act, deductions are allowed for expenses incurred wholly and exclusively for the purpose of business or profession. However, the courts held that expenses incurred to meet the liabilities of another company are not allowable deductions. The provisions of Section 28 were interpreted strictly, and the courts emphasized the need for expenses to be directly linked to the taxpayer’s own business.
Exchange Rate Fluctuation: The second question of law pertained to the allowance of an additional liability on account of exchange rate fluctuation. The appellant claimed that this liability should be deductible since it was contingent and determined based on foreign exchange rates prevailing at the year-end.
The appellant relied on previous court judgments, including Woodward Governor India P. Ltd. and other cases, to support its claim. The courts held that deductions for foreign exchange fluctuation could be claimed in the computation of business profits, even if the actual payment had not been made. They emphasized that the liability should be precisely determined based on foreign exchange rates prevailing at the relevant time.
CONCLUSION:
Based on the analysis of the judgment, it is evident that the courts disallowed the deductions claimed by the appellant for expenses incurred and dues written off. The courts emphasized that expenses should be directly related to the taxpayer’s own business and not incurred to meet the liabilities of another company. However, the courts allowed the deduction for exchange rate fluctuation, considering the precise determination of liability based on prevailing foreign exchange rates.
It is important for taxpayers to understand the provisions of the Income Tax Act and the judicial interpretations related to deductibility of expenses. By ensuring a direct connection between expenses and their own business interests, taxpayers can strengthen their arguments for claiming deductions.
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JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW