TMI Blog2005 (5) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... n office and godown for the storing of cargo which should be in the vicinity of the International Airport at New Delhi. The assessee agreed to this condition. The arrangement was ultimately finalized like this. The assessee was to construct the godown. Continental Carriers would provide the funds for the construction and adjust them against the commission payable to the assessee. This would be subject to the upper limit of Rs. 50,00,000. In other words, the assessee had agreed to bear not more than Rs. 50,00,000 as cost of construction of the godown. Fortunately for the assessee, his wife owned a plot of land near the international airport. She was willing to permit the godown to be put up in her land. This arrangement was reduced to writing to which we shall presently refer. 2. In accordance with the above arrangement construction commenced and an amount of Rs. 18,10,007 was provided by Continental Carriers towards the same. However, the DDA raised objections to the construction and ultimately the structure was totally demolished. The entire arrangement thus fell through. But as per the arrangement the amount spent by Continental Carriers on the construction was debited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussions they had earlier in connection with the increase in the rate of commission. In this letter, the assessee stated that the land owned by his wife would be provided for the purpose of construction of the office and godown. The assessee agreed to bear the cost of construction and furnishing subject to a limit of Rs. 50,00,000. The assessee also stated that the construction can be done as per the choice of Continental Carriers and the amount spent may be debited to the assessee s commission account. The letter also states that in case of any dispute arises between the parties, the arrangement shall be withdrawn and in that case the entire premises alongwith the land will revert to the assessee and the Continental Carriers shall provide peaceful vacant possession. The assessee further stated that in consideration of the above arrangement, the rate of commission shall be increased from 1% to 1.2%. On 12th April, 1993 an arrangement was entered to in writing between the assessee and his wife. A letter was written by the assessee s wife to the assessee in which she agreed to provide her land for the construction of the godown. The letter further states that the assessee shall i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so not correct because according to clause 8 of the letter dated 12-4-1993, the assessee s wife was to refund the assessee the entire amount of advance on completion of the connection of the superstructure, retaining only three month s rent as security. It seems to us from an examination of the arrangement between the assessee, his wife and Continental Carriers that the less is allowable as incidental to the assessee s business. It is not in dispute that the commission income earned by the assessee is assessable under the head "business". It has been so returned by the assessee as we find from the computation of income at page 1 of the paper book. It has been assessed under the head "business" as seen from page 4 of the assessment order. The assessee has been deriving substantial commission income. In the assessment year 1993-94, he derived commission of Rs. 64,69,924. For the year under consideration, he derived commission income of Rs. 67,49,610 of which the commission derived from Continen- tal Carriers was Rs. 27,57,232. This commission figure is the net figure which is arrived at by deducting the amount of Rs. 18,10,007 from the commission of Rs. 45,67,239 received from Contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. In that case it was held that the loss for which a deduction could be made must be one that a springs directly from the carrying on business and is incidental to it and not any loss sustained by the assessee, even if it is merely connected with his business. The principle laid down in the case of Badridas Daga ( supra ) has been applied subsequently in several cases and we shall notice some of them briefly. In CIT v. B.M.S. (P.) Ltd. [1979] 119 ITR 321 (Mad.) the assessee was a company carrying on business as transporters. It borrowed money from the bank at 20% interest and prescribed to the Government bonds which carried interest only at four and a half per cent. These bonds were purchased at the instance of the road transport authorities, obviously to keep them in good humour and under the bona fide belief that it was necessary to keep them in good humour in order to carry on the business smoothly. The assessee thereafter sold the bonds at a loss and claimed the same as a deduction in computing its business income. It contended that the bonds were sold before they matured for payment only to stop incurring further loss on account of huge interest payment on the loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Bombay High Court in the case of IBM World Trade Corpn. v. CIT [1990] 48 Taxman 11 . In this case, the assessee-company entered into an agreement with landlord whereby the landlord undertook to construct a factory together with a garrage and a two rooms flat on the plot owned by him and agreed to grant a lease of the premises to the assessee for a period of 10 years which was renewable for a further period of 5 years at the option of the assessee. In order to facilitate speedy construction, the assessee-company advanced certain amount to the landlord for interest. The landlord became insolvent and could not return the money to the assessee. The assessee, therefore, wrote off both the principal and the interest accrued in its books and claimed the amount written off as a business loss. The claim was rejected up to the Tribunal but the Bombay High Court held that the loss/business loss. The following observations are relevant : "The question that arises for consideration is whether the fact that in the present case the amounts have been advanced to the landlord in pursuance of the agreement before the execution of the lease deed would make not any difference. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to agree to the proposal made by Continental Carriers. Since the construction could not get completed on account of supervening circumstances over which the assessee had no control nor was he responsible for the same, the amount spent by Continental Carriers was debited to the commission account thereby reducing the commission due to the assessee. On these facts we are of the opinion that there is a close nexus between the assessee s business activity and the loss claimed by him as a deduction. In our opinion the loss claimed is allowable. 11. In the course of the arguments, a question arose as to whether the loss can be considered to fall within the Explanation below section 37(1) inserted by the Finance Act, 1998 with retrospective effect from 1-4-1962. This Explanation says that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made. This point came up in connection with the fact that the building had to be demolished because of violation of the building rules. However, this Explanation is not applicable f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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