Expenditure Incurred to Protect Business Reputation of Group Company Is Deductible: Bombay High Court Allows Mahindra & Mahindra's Appeal

“Assessing Officer Cannot Re-Scrutinize Statutory Books Under Section 115J Once Certified Under Companies Act”— Bombay High Court delivered a landmark judgment clarifying two crucial principles of income tax law. Firstly, the Court held that amounts written off in support of a group company can be treated as business expenditure under Section 28 of the Income Tax Act, 1961, if they are incurred out of commercial expediency. Secondly, the Court reaffirmed that under Section 115J, the Assessing Officer (AO) cannot question profit and loss accounts duly certified by statutory auditors as compliant with the Companies Act. Chief Justice Alok Aradhe, delivering the verdict, emphasized, “These expenditures were wholly incurred for the purpose of commercial expediency… and thus eligible for deduction as business expenditure.”

The appeal arose from disallowances made during the assessment for the year 1990–91. Mahindra & Mahindra had claimed a deduction of ₹49.18 lakhs as miscellaneous expenses and ₹200.47 lakhs as write-off of deposits and interest relating to its then subsidiary, Machinery Manufacturers Corporation Ltd. (MMC), a financially distressed group company. The Assessing Officer rejected these claims, alleging that the expenses were capital in nature and unrelated to the assessee's business.

The AO further denied the legitimacy of entries under Section 115J, contending that the profit and loss account prepared by the company could be subjected to fresh scrutiny despite certification under the Companies Act.

The High Court rejected the Tribunal’s reliance on its own earlier order which had already been set aside in Mahindra & Mahindra Ltd. v. CIT [2023]. It noted that “the Tribunal relied upon a decision that had already been reversed by this Court and which the Revenue has not challenged further.”

Justice Aradhe underscored that MMC was undeniably a Mahindra group company in which the assessee held 27% equity and had historically acted as its managing agent. Referring to BIFR records, the Court acknowledged the assessee’s repeated efforts to revive MMC, stating, “Appellant had spent substantial money to keep MMC afloat and revive MMC… it would not be prudent to give blanket guarantees because MMC was not viable.”

The Court applied the doctrine of commercial expediency as laid down by the Supreme Court in CIT v. Delhi Safe Deposit Co. Ltd. and British Insulated and Helsby Cables Ltd. v. Atherton, reaffirming 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… may yet be expended wholly and exclusively for the purposes of the trade.”
Regarding the ₹49.18 lakhs spent by Mahindra on staff salaries and operating costs of MMC, and the ₹200.47 lakhs written off due to unrecoverable advances and deposits, the Court held that “such expenditure/debt should be treated as having been incurred for the purpose of business and directly relatable to the business of the assessee.”

On the AO’s Powers Under Section 115J
The Court categorically rejected the Revenue's argument that the Assessing Officer could go behind the company’s certified accounts under Section 115J of the Act. Citing the Supreme Court’s ruling in Apollo Tyres Ltd. v. CIT and Malayala Manorama Co. Ltd. v. CIT, the Court ruled, “Section 115J does not empower the authority under the Act to probe into the account accepted by the authorities under the Companies Act.”

It observed that “if the legislature intended the Assessing Officer to reassess the company's income, then it would have stated so… the provision makes no reference to any ‘below the line’ concept—this is legally irrelevant.”

Ultimately, the Court held that both the deduction of ₹49.18 lakhs and the write-off of ₹200.47 lakhs were allowable business losses under Section 28. The AO’s attempt to question entries in the profit and loss account under Section 115J was declared ultra vires the statutory scope. Accordingly, the 2003 order of the Income Tax Appellate Tribunal was quashed.

Justice Aradhe concluded, “Expenditure incurred for commercial expediency to preserve reputation and support group entities must be allowed as business loss; Assessing Officer has no authority to re-scrutinize certified accounts under Section 115J.”

Date of Decision: 2 May 2025