TMI Blog2011 (5) TMI 571X X X X Extracts X X X X X X X X Extracts X X X X ..... would have committed such a large sum of money without ensuring that the vendor had something tangible offer in its hands, in the instant case PCL being the vendor. The suit filed by PCL is still pending adjudication. It is not understood as to why the assessee would suddenly choose to claim a deduction in the assessment year 1989-90 based on a letter of PCL dated 14.12.1988 followed by a legal opinion received from its lawyer when the amount stood forfeited on 04.05.1985. Admittedly the assessee has made no demands to recover the amount from PCL - Decided against the assessee - ITR No. 5/1996 - - - Dated:- 31-5-2011 - MR JUSTICE SANJAY KISHAN KAUL, MR JUSTICE RAJIV SHAKDHER, JJ. For the Appellant: Mr R. M. Mehta, Advocate For the Respondent: Ms Rashmi Chopra Mr Chandramani Bhardwaj, Advocates. RAJIV SHAKDHER, J 1. This is a reference filed under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the I.T. Act) against the judgment dated 24.01.1995 passed by the Income Tax Appellate Tribunal (hereinafter referred to as Tribunal) pertaining to assessment year 1989-90. The question of law which has been referred to us for adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Lt. Governor, forfeited the earnest money. The forfeiture was effected on 04.04.1985. 2.3 It is pertinent to note that even though the assessee had initially paid a sum of ₹ 44.50 lacs to PCL, the said sum was adjusted to recover a payment of ₹ 36.5 lacs. It has also emerged from the record that PCLs dispute with DDA revolved inter alia around the issue of control drawings ; which according to PCL were inaccurate. It has further emerged from the record that for each such transfer of space in the building PCL had to obtain a prior permission of the DDA against prescribed fee of ₹ 100. Furthermore, as is obvious, the space in the building could not have been sold till the dispute regarding the control drawings was settled. From the documents filed by PCL, it emerges that the PCL received the control drawings only on 11.05.1982 and that PCL had written to the Lt. Governor on 17.05.1982, detailing out the flaws in the control drawings supplied by DDA. As a matter of fact in PCL‟s communication to the Lt. Governor, it had been pointed out that the flaws which obtained in the control drawings would hamper PCLs negotiation with the prospective buyers. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt either in the previous year in issue or prior to that, for the purposes of either swelling its profits, or to reduce its losses in any of the years, including the previous year in issue. The Assessing Officer, therefore, concluded by his order dated 31.05.1991, that the amount in issue, was paid by the assessee to PCL as an advance. This being so, he came to the conclusion that, the assessees case was not covered under the provisions of Section 36(1)(vii) of the I.T. Act since the amount paid to PCL could not be treated as a debt in the first place and hence, the amount in issue, could not be allowed to be deducted even if the assessee had written it off in its accounts. Therefore, the sum of ₹ 31.05 lacs was added in the assessees income. 4. Being aggrieved, the assessee preferred an appeal with the Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A)‟]. Before the CIT(A) even though the assessee had raised a ground, in the alternative, that the amount in issue should be treated as a trading loss, it went on to seek a deduction on the ground that it was a bad debt, in respect of which it ought to be allowed a deduction under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee before the Tribunal. Mr Mehta has argued before us that the authorities below have erred in law, in as much as, having returned a finding of fact that the transaction between the assessee and the PCL was not collusive, it should not have disallowed the deduction merely on the ground that it lacked business prudence. 7.2 Mr Mehra submitted that the lack of wisdom or otherwise was not the test applicable for allowance of deduction under Section 37 of the Income Tax Act. 7.3 It was contended that since PCL was unable to recover the earnest money, which stood forfeited on 04.04.1985; upon taking suitable legal advice the assessee had proceeded to write off the amount in its accounts and hence the claim for deduction. Mr Mehra in support of his submissions has cited the following judgments: S.A. Builders Ltd. vs CIT (Appeals) Anr. (2007) 288 ITR 1; M/s Ramchandar Shivnarayan vs CIT (1977) 4 SCC 529; CIT, Madras vs S.N.A.S.A. Annamalai Chettiar (1973) 3 SCC 339 and CIT vs Crescent Films (P) Ltd. (2001) 248 ITR 670. 8. Ms Rashmi Chopra who appeared for the revenue rebutted the contention of the counsel for the assessee. The learned counsel largely relied upon the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustain a deduction under Section 37 of the I.T. Act that the expense should be incurred for the purpose or should be incidental to the business of the assessee is not fulfilled in the instant case. 10. There is another aspect of the matter which is that the assessee had sought and obtained a refund of ₹ 5.50 lacs from PCL, in the assessment year 1984-85. It has also come on record that the assessee had been receiving rent from PCL and as a matter of fact PCL had purchased certain flats from the assessee in the assessment year preceding the assessment year in issue. The picture portrayed that PCL did not have the necessary funds at hand to return the money paid by the assessee to it, seems nebulous to say the least. The only ground which was raised before the authorities below to justify writing off the amount in issue, as a trading loss, was the receipt letter dated 14.12.1988, issued by PCL to the assessee, expressing therein its inability to refund the money and its apparent paucity of solvent tangible asset to repay the amount in issue to the assessee. 10.1 Given the circumstances referred to above, we are unable to appreciate the basis of the legal opinion sought by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn as a measure of commercial expediency. In this regard the Supreme Court observed that the expression commercial expediency is an expression of wide import, which includes, every such expenditure that a prudent businessman may incur for the purposes of his business. Even though the expenditure may not have been incurred under a legal obligation, yet it may be allowable as business expenditure. The court went on to observe that the expression for the purpose of business is wider in scope than the expression for earning profits; therefore, the Income Tax Authorities while ascertaining as to whether or not an expenditure is commercially expedient should look at the matter not, from their own point of view, but that of a prudent businessman. The Supreme Court concluded by saying that whether interest on borrowed loan ought to be allowed if advances are made by the assessee to the sister concern would depend on the facts and circumstances of each case. Therefore, taking cue from the principle enunciated by the Supreme Court it is clear that much would depend on the facts of each case. 14. The second case cited was that judgment of the Supreme Court in the case of S.N.A.S.A. Annama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied the test of direct and proximate connection and/or nexus between the business operation and the loss. The Supreme Court observed that if such a nexus is established or, the loss is incidental to the business operation it would be deductable as trading loss. In the background of this the Supreme Court observed that the assessee having borrowed a sum of ₹ 50,000/- from a creditor, which was brought to a particular place by its employee, and such mode of business operation being common and well known, the loss of ₹ 30,000/- on account of theft out of the sum of ₹ 50,000/- which was meant for purchase of government securities, had to be allowed as a trading loss being directly connected with the assessees business operation. 16. The last case referred to by Mr Mehta was Crescent Films (supra). The facts briefly were as follows: The assessee was in the business of film distribution. In the course of his business the assessee had advanced a sum of ₹ 7.50 lacs to a producer to obtain distribution rights for a film under production. The producer of the film apparently ran into difficulty. A situation emerged which seemed to suggest that the producer would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not of the nature described in Sections 30 to 36 of the I.T. Act and that it is neither an expenditure in the nature of capital expenditure or a personal expense of the assessee. This leaves us with the last limb of the section, which is, that the expenditure in issue, can only be allowed if it is laid out or expended wholly or exclusively for the purposes of the business. As held in S.A. Builders (supra) the expression for the purposes of business is wider than the expression for the purposes of earning income, profits or gains. Therefore, it ought to be an expenditure, which is, incurred voluntarily for commercial expediency. 19. Thus, the underlying principle is that, the expenditure should be incurred for the assessee ought to apply the approach which would have been adopted by a prudent businessman and not what the revenue thought was prudent. With this principle in mind let us examine the facts which emerged in this case. 20. The assessee paid a sum of ₹ 4.50 lacs to the PCL on 12.03.1982. At the stage at which the money was paid to PCL auction had not been held. Therefore, the assessee, who is in the business of sale and purchase of flats, could not have incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... choose to claim a deduction in the assessment year 1989-90 based on a letter of PCL dated 14.12.1988 followed by a legal opinion received from its lawyer when the amount stood forfeited on 04.05.1985. Admittedly the assessee has made no demands to recover the amount from PCL. This is despite the fact that both the Assessing Officer and the CIT(A) have returned finding of fact that PCL has not only paid rents to the assessee but also purchased flats from it in the years preceding the assessment year in issue. 22. Before we part with judgment as a footnote we would like to observe the following : 22.1 After the judgment had been reserved Mr Mehta, counsel for the assessee sought to mention the matter, though in the absence of counsel for the revenue. We were informed that even though he had informed the counsel for revenue she had not remained present at the time of mentioning. The methodology adopted according to us was unique. 22.2 Nevertheless Mr Mehta during mentioning sought to bring to our notice observations in paragraph 4.3 of the impugned judgment. The observation being to the effect that the assessee had shown the amount in issue, in respect of which the deduction w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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