TMI Blog2012 (12) TMI 758X X X X Extracts X X X X X X X X Extracts X X X X ..... d on by the assessee-breach of agreement was not by the assessee. If CCL without giving stipulated notice terminated the agreement, then goodwill of the CCL would have been at stake. If any step for maintaining confidence had to be taken then that step had to be of CCL. In these circumstances we are of the opinion that if the AO could not find nexus between the expenditure incurred and the purpose of the business in the said transaction, he was justified. Business expediency was not established by the assessee at any stage of hearing, including hearing before us, for making payment to CCL in violation of the agreement. If sanctity of agreement can be ignored for the sake of argument, even then the vital question of establishing business expediency remains unanswered. - order of AO is upheld – Appeal by assessee is dismissed. - ITA No. 7120/Mum/2010 - - - Dated:- 1-6-2012 - SHRI D.K. AGARWAL, AND SHRI RAJENDRA, JJ. Assessee by : Shri Vijay Mehta Shri Mahesh O. Rajora Revenue by : Ms. Rupinder Brar ORDER PER RAJENDRA, A.M. Following are the effective Grounds of Appeal filed by the appellant against the Order dt. 20-08-2010 of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with effect from 01-09-1997 transferred all the business carried on by the CCL of manufacturing, producing and dealing in textile dyes together with the with beneficial interest and good will of the said business as a going concern with all licenses, permits, quota rights and trade marks to the assessee. Thereafter, vide a deed of covenant dated 31st March, 1998 the CCL undertook that without the consent of the assessee, CCL shall not for a period of 5 years from 1st September, 1997 directly or indirectly carry on or be concerned or interested in the business of manufacturing producing and dealing in textile dyes in competition with assessee, either alone or jointly with or as agent of any other person or partly, firm or company. CCL further covenanted, agreed and undertook with assessee that CCL shall for the duration of the said period of 5 years from 1st September, 1997 or during 3 years after the tenure of the said TMA, whichever is longer keep confidential certain information and not to act in any manner which is likely to jeopardize or adversely affect assessee s business or affairs which have been transferred under the Deed of Assignment. Thereafter, in a Supplementary To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2.20 Crores incurred on account of termination of TMA. 4. Before us, AR submitted that the assessee had paid 2.2 Crores only whereas as per terms it had to pay ₹ 6.5 Crores, that expenditure incurred was wholly and exclusive for business. He referred to various pages of the agreement (pg.2 para6, pg.3para A B , pg.10,pg.11,pg.12 para 2, pg. 18 para 9.1, pg. 20 para 13.6, pg. 27, 28, 33, 38-40). He relied upon cases of SA Builders (288 ITR 1)Nainital Bank Ltd., (62ITR 638)and Sales Magnesite (Pvt.) Ltd.(214 ITR 1). Departmental Representative (DR) submitted that termination or agreement was not as per the terms of the agreement, that expenditure incurred in violation of the agreement was not allowable, that breach of Agreement had occurred because of amalgamation of CCL, that the assessee was not liable to pay damages, that case laws relied upon by the AR were factually different from the case under consideration. He also referred to pg. 6,20,49 and 50 of the Paper Book in his support. In rejoinder, AR submitted that agreement was a private agreement, that in the agreement there was provision of terminating the same mutually, that it was immaterial as who at fau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the times as they occur. The Processor will use its best effort to keep remnant cost at a minimum by transferring employees into other functions and making use of assets for other purposes as far as this is possible within the Processor other business activities . 6. If we analyze both the agreements-original as well as the subsequent agreement- together, one thing become clear that there was a definite arrangement about tenure of the agreements. It was not an agreement that could be terminated at the will of the either party. Processor had to manufacture exclusively for the principal only Principal had to prepare a product-wise rolling forecast of their off take for processor and forecast had to cover a period of three months(term4.1page13of PB). Amalgamation process is not a overnight process-it takes its own time. But, even then it was decided by both the parties on 24th March, 2006 that in the light of amalgamation of CCL taking place on 31st March, TMA should be scrapped. It is a fact that CCL was paid ₹ 2.2 Crores even when violation was on the part of CCL. It is not known whether Clariant continued the process of manufacturing the goods for the assessee or not. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and should have the aim of the continuance and furtherance of the business and an eventual augmentation or stabilization of profits. v). By using the words wholly and exclusively, the Legislature has cast a duty on the assessee to establish that the expenditure was to earn income and not for any other purpose. The effect of the words, wholly and exclusively for the purpose must not be diluted. By using three words, i.e. wholly, exclusively and purpose the Legislature had made it mandatory to find out the reason behind the expenditure incurred. vi). The income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business. The reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. vii). If there is no material on record to establish that the expenditure of the assessee is done bona fide to earn income, the deduction under section 37of the Act will not be available. The dominant pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank after dacoity took place. We are of the opinion that unforeseen circumstances like dacoity cannot and should not be compared with termination of an agreement. Besides, the terms and conditions of pledged jewellery cannot also be equated with a manufacturing activity. Facts of the Nanital Bank case were that in regard to the loss of jewellery the bank settled the claims of the constituents who had pledged their jewellery. The terms of settlement were as under: when the market value of the jewellery pledged exceeded the amount advanced, the difference was paid by the bank to the constituent: when the market value of the jewellery was less than the amount advanced, the difference was recovered from the constituent. Considering above facts, Hon ble Supreme Court held as under: If there are cross-claims-one by the assessee against a stranger and the other by the stranger against the assessee-and as a result of the accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of the account may appropriately be termed expenditure within the meaning of section IO(2)(xv) . Here, other factors considered by the Hon ble Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Thus, it is clear that matter of SA Builders was decided facts and circumstances of that case. It is true that the Hon ble Apex court has also held that the expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business, that the expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. It is noteworthy that while allowing the deduction to the assessee u/s. 36,Hon ble SC carved out an exception also. Following are the observations of the Hon ble court: We wish to make it clear that it is not our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure and its allowability under the provisions of taxation laws are two different concepts. If an assessee incurs an expenditure totally unrelated to his business. The fact will remain that it was an expenditure. He may voluntarily incurred expenditure that is against public policy or he is compelled to incur such expenditure that is prohibited by law. He may voluntarily and an expenditure for philanthropic purposes not related to his business. In all these situations it will be spending or going out of money i.e., an expenditure. But, will it be an allowable expenditure is altogether a different issue. Assessing officer is as representative of sovereign are duty bound to see that new taxes are paid by the subjects. Taxes, it is said, are the price of civilisation, and one has to pay the same to be a constituent of the civilised society. So, if the assessing officer finds that an assessee had not incurred an expenditure for business purposes is supposed to disallow the same. 10.2. We have noticed that the case under consideration breach of agreement was not because of the appellant, but was because of the other party. CCL took a unilateral decision of amalgamation. Had the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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