Madras High Court
Commissioner Of Income Tax vs Sahara Asset Management on 10 June, 2025
2025:MHC:1337
T.C.A. No.761 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 10.06.2025
CORAM
THE HON'BLE MR.K.R.SHRIRAM, CHIEF JUSTICE
AND
THE HON'BLE MR.JUSTICE SUNDER MOHAN
Tax Case Appeal No.761 of 2010
Commissioner of Income Tax,
Chennai. .. Appellant
-vs-
Sahara Asset Management
Company Pvt. Ltd.,
Unit No.A & B, VIII Floor,
No.12 & 13, Riaz Garden,
29, Kodambakkam High Road,
Chennai 600 034. .. Respondent
Prayer: Appeal filed under Section 260A of the Income Tax Act, 1961,
against the order dated 10.02.2010 passed in ITA No.950/Mds/2009 on the
file of Income Tax Appellate Tribunal, Madras 'A' Bench, for the Assessment
Year 2005-06.
Page 1 of 28
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T.C.A. No.761 of 2010
For Appellant : Mr.T.Ravikumar
Sr. Standing Counsel
For Respondent : Mr.R.Meenakshi Sundaram
*****
ORDER
(Order of the Court was made by the Hon'ble Chief Justice)
The appeal was admitted on 09.08.2010 and the following
substantial question of law was framed:
" Whether on the facts and in the circumstances of the
case, the Income-tax Appellate Tribunal was right in deleting
the addition on account of Mutual Fund Promotion
Expenditure and Initial Public Offer Expenditure when the
expenses under reference have been incurred by the assessee
purely for the purpose of business activities of another person?"
2. The assessee is an asset management company acting as fund
manager, managing mutual fund schemes. For the Assessment Year 2005-
06, assessee had claimed mutual fund promotion expenditure and initial
public offer expenditure. The Assessing Officer held that the assessee
company is a fund manager for the mutual fund company and the assessee
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company need not have incurred mutual fund launch expenses and mutual
fund promotion expenses. The Assessing Officer, consequently, disallowed
the expenses incurred by the assessee and added the same to the total
income.
3. Aggrieved by the assessment order, the assessee filed an appeal
before the Commissioner of Income-tax (Appeals) [in short 'CIT-A']. The
CIT (A) allowed the appeal following the decision of the Income Tax
Appellate Tribunal dated 29.08.2008 in assessee's own case in ITA No.
987/Mds/2007. Aggrieved by the order of CIT (A), Revenue preferred an
appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT, by the
impugned order dated 10.02.2010, relying upon its earlier decision dated
29.08.2008, dismissed the Revenue's appeal. It is against that order, this
appeal under Section 260A of the Income Tax Act, 1961, has been filed.
4. To answer the substantial question of law, we have to consider
why the ITAT, in its order dated 29.08.2008 for the Assessment Year 2003-
04 allowed the appeal of the assessee. For that, it will be useful to
reproduce the relevant portions of the order dated 29.08.2008 and they are
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5. An appeal against the above order was preferred in this Court,
which was withdrawn due to the low tax effect. Counsel for assessee states
that even this case requires to be withdrawn for low tax effect, but
Sri.Ravikumar disagreed. Sri.Ravikumar says, his instructions are that this
is a recurring issue and therefore, should not be withdrawn.
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6. Be that as it may, we agree with the findings of the ITAT. The
Assessing Officer has disallowed the assessee's claim on the ground that the
assessee was a fund manager for the mutual fund company and there was
no need to incur the expenses. In our opinion, the Assessing Officer cannot
claim to put himself in the arm chair of the assessee and assume the role to
decide whether to incur the expenses and how much is a reasonable
expenditure, having regard to the circumstances of the case.
7. For this view, we are also supported by the view expressed by a
Division Bench of the Bombay High Court in Mahindra and Mahindra Ltd.
vs. Commissioner of Income Tax1 , which was authored by one of us (Chief
Justice).
8. In that case, Mahindra was a promoter holding more than 27% of
the equity shares of its group company called Machinery Manufacturers
Corporation Ltd (“MMC”). It had to incur certain miscellaneous expenses
amounting to Rs.42,89,185/- on behalf of MMC. It also had to recover a
1 [2023] 151 taxmann.com332 (Bombay)
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sum of Rs.6,22,01,000/- which was not allowed to be written-off. Mahindra
had also provided guarantee of Rs.200 lakhs to IDBI for the rehabilitation
assistance disbursed by IDBI to MMC. Mahindra, to preserve and protect the
value of good-will attached to it, decided to bear the unavoidable
expenditure of Rs.42.89 lakh of MMC and included the same in
miscellaneous expenses. The Assessing Officer disallowed the same as also
the amount of Rs.6,22,01,000/- that it had written-off. The Court held that
since the expenditure was wholly incurred for the purpose of commercial
expediency because MMC was a group company of Mahindra and the nexus
between Mahindra and MMC was not disputed, the AO failed to appreciate
the claim in its proper perspective. The 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 Mahindra's return of business income.
9. It will be apposite to reproduce paragraphs 25 to 27 of Mahindra
and Mahindra (supra).
“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
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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 [1926] AC 205.
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
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. In
fact 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
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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
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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
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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;
1 1 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
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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
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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.”
In the circumstances, we answer the substantial question of law in the
affirmative. Appeal is, accordingly, dismissed. There shall be no order as to
costs.
(K.R.SHRIRAM, CJ.) (SUNDER MOHAN, J.)
10.06.2025
Index : Yes
Neutral Citation : Yes
sra
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To
1. The Income Tax Appellate
Tribunal Madars 'A' Bench.
2. The Commissioner of Income Tax,
Chennai.
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The Hon'ble Chief Justice
and
Sunder Mohan, J.
(sra)
10.06.2025
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