Bombay High Court Upholds Commercial Expediency for Deductions & Sets Boundaries on AO Jurisdiction under Section 115J of the Income-tax Act

Introduction

The Hon’ble Bombay High Court in Mahindra & Mahindra Ltd. v. Commissioner of Income-tax[i] decided upon the eligibility of Mahindra & Mahindra Ltd. (‘Appellant’), to claim deductions under ss. 28(i) and 37(1) of the Income-tax Act, 1961 (‘IT Act’), for expenditure made in support of its subsidiary, Machinery Manufacturers Corporation Ltd. (‘MMC’), during its winding-up. Simultaneously, the Court examined the jurisdictional boundaries of the Assessing Officer’s (‘AO’)  powers under s. 115J, particularly regarding the acceptance of profit and loss (‘P&L’) accounts certified under the Companies Act, 1956 (‘Companies Act’). This dual ruling reinforces judicial protection for commercially expedient expenditures while defining the limits of the AO’s jurisdiction under s. 115J of the IT Act.

Brief Facts

• The Appellant, a public limited company engaged in manufacturing jeeps, tractors, implements, and related products, promoted MMC and held a 27% equity stake in it. MMC, a group company in the textile sector, suffered prolonged recession-driven losses, ultimately leading to its winding-up by court order on 16.04.1989. For assessment year (‘AY’) 1990–91, the Appellant filed a return declaring total income of Rs. 3,50,20,837/-.

• The Appellant had placed deposits with several concerns, which became irrecoverable following MMC’s winding-up. To safeguard its commercial interests, preserve group goodwill, and maintain the Mahindra brand reputation, the Appellant incurred expenses of Rs. 49.18 lakhs for maintaining MMC during the winding-up process and wrote off Rs. 200.47 lakhs in deposits and interest linked to MMC. These amounts were claimed as business expenditure and deductions under ss. 28(i) and 37(1) of the IT Act.

• However, the AO disallowed both claims, reasoning that the expenditure was not incurred in the course of the Appellant’s own business but rather amounted to a settlement of a third-party liability, making it inadmissible under the IT Act. The Commissioner of Income-tax (Appeals) [‘CIT(A)’] upheld the disallowances, further disallowing deductions for warranty claims (Rs. 87.02 lakhs), past service gratuity liability (Rs. 2.42 crores), and write-off of certain deposits and interest (Rs. 2.47 crores) when computing book profit under s. 115J.

• The Income-tax Appellate Tribunal (‘ITAT’), by order dated 25.02.2003, confirmed these disallowances, primarily relying on its earlier decision in the Appellant’s own case for AY 1989–90. Aggrieved, the Appellant filed an appeal under s. 260A of the IT Act before the Bombay High Court, challenging both the disallowances and the AO’s jurisdiction to go behind audited accounts under the Minimum Alternate Tax (‘MAT’) provisions of s. 115J.

Held

• The High Court allowed the appeal, quashed the ITAT’s order dated 25.02.2003, and answered all the substantial questions of law in favour of the Appellant. Regarding the disallowance of business losses and miscellaneous expenses, the Court observed that these issues were closely interlinked. Relying on the Supreme Court’s ruling in CIT v. Delhi Safe Deposit Co. Ltd.[ii], the Court reiterated that expenses incurred wholly and exclusively for business purposes, even if voluntary, are deductible under s. 37 of the IT Act. It emphasized that such claims must be assessed considering commercial realities, not narrow interpretations.

• The Court further placed reliance on its earlier decision in Mahindra & Mahindra Ltd. v. CIT[iii], where it had held that the Tribunal’s disallowance of similar claims was unjustified. It noted that MMC was a subsidiary, with the Appellant holding a significant equity stake and having historically acted as its managing agent. Hence, to sustain MMC’s operations, the Appellant had extended financial support, including deposits, interest, and guarantees.

• The Court found that the Appellant’s participation in MMC’s rehabilitation was well-documented, supported by Board for Industrial and Financial Reconstruction (BIFR) records. It reflected the Board of Directors’ formal resolutions in March 1989 and July 1990 to meet expenses until MMC’s winding-up. These actions were deemed commercially prudent, undertaken to preserve MMC’s value, protect the group’s reputation, and ensure commercial continuity.

• Referring to British Insulated and Helsby Cables Ltd. v. Atherton[iv], the Court reiterated that even voluntary expenditures are deductible when incurred to facilitate business. Once recorded as business losses, the burden shifts to the Revenue to disprove the claim – something the Court observed was not done in this case. Further, the Revenue’s reliance on the Tribunal’s earlier decision for AY 1989-90 was found to be misplaced, as that order had already been set aside by the Division Bench in Mahindra & Mahindra Ltd.[v], a ruling the Revenue accepted without filing a special leave petition (SLP). The Court thus reaffirmed the allowability of Rs. 49.18 lakh in miscellaneous expenses and Rs. 200.47 lakh in write-offs.

• On the third question, relating to s. 115J, the Court clarified that this provision, introduced by the Finance Act, 1987, and effective from AY 1988-89, deems 30% of a company’s book profit as taxable income if the total income under regular provisions falls below that threshold. It noted that the book profit is derived from the P&L account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, subject only to specific adjustments listed in the Explanation to s. 115J.

• The Court noted that in Apollo Tyres Ltd. v. CIT[vi], the Supreme Court had held that once the P&L account is prepared in accordance with the Companies Act and certified by statutory auditors, the AO cannot question its correctness or recompute income except to the limited extent provided in the Explanation to s. 115J(1A). This position was found to be reaffirmed in Malayala Manorama Co. Ltd. v. CIT[vii], which reiterated that the AO lacks authority to go behind the audited accounts unless statutory inconsistencies exist. Accordingly, the Court concluded that the AO exceeded jurisdiction by questioning the audited P&L account and making disallowances not permitted under s. 115J of the IT Act.

Our Analysis

With this judgment, the Bombay High Court delivered a precise reaffirmation of two critical principles under the IT Act. First, it confirmed that commercial expediency remains a valid and sufficient ground for deduction of business expenditure under ss. 28 and 37, even when the expenditure benefits a distressed group entity, provided it is undertaken to protect long-term business interests. By treating the Appellant’s financial support to MMC as a commercially sound business decision – not a non-business liability – the Court aligned with established jurisprudence on how business decisions must be assessed within their real-world commercial context.

Second, the Court drew a firm boundary around the AO’s jurisdiction under s. 115J, making clear that once P&L accounts are duly prepared and certified under the Companies Act, the AO’s role is strictly limited to applying the specific adjustments enumerated in the Explanation to s. 115J(1A). The ruling thereby upholds the integrity of statutory financial reporting, ensuring that MAT computations cannot be arbitrarily altered based on the AO’s subjective views.

By restoring the Appellant’s deductions and curbing unwarranted interference into audited financials, the Court not only upheld the legitimacy of sound commercial decision-making but also highlighted the sanctity of legislative boundaries set for tax authorities. This ruling carefully balances tax accountability with managerial autonomy, strengthening taxpayer protection against arbitrary or overreaching tax administration.

End Notes

[i] Mahindra & Mahindra Ltd. v. Commissioner of Income-tax, [2025] 174 taxmann.com 154 (Bombay).

[ii] CIT v. Delhi Safe Deposit Co. Ltd., [1982] 133 ITR 756 (SC).

[iii] Mahindra & Mahindra Ltd. v. CIT, [2023] 151 taxmann.com 332 (Bombay).

[iv] British Insulated and Helsby Cables Ltd. v. Atherton, [1926] AC 205.

[v] Supra note iii.

[vi] Apollo Tyres Ltd. v. CIT, [2002] 122 Taxman 562 (SC).

[vii] Malayala Manorama Co. Ltd. v. CIT, [2008] 169 Taxman 471 (SC).

Authored by Sanket Pisal at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.