TMI Blog1983 (9) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of this court in M.C.C. Nos. 95 and 625 of 1971 decided on July 26, 1976 under s. 256(2) of the I.T. Act, 1961. The reference relates to the assessment year 1957-58, the relevant previous year having ended on June 30, 1956. The reference in M.C.C. No. 85 of 1971 was made at the instance of the Commissioner of Income Tax, M. P., Nagpur and Bhandara, Nagpur, under s. 66(1) of the Indian I.T. Act, 1922, relating to the assessment year 1958-59, the corresponding financial year being the previous year. The reference in M.C.C. No. 467 of 1971 was also made at the instance of the Commissioner of Income-tax, Bhopal, under s. 66(1) of the Indian I.T. Act, 1922, relating to the assessment year 1959-60, the corresponding financial year being the previous year. The reference in M.C.C. No. 726 of 1972 was made at the instance of the assessee, M/s. Gwalior Sugar Co. Ltd., under s. 66(1) of the Indian I.T. Act, 1922, relating to the assessment years 1960-61 and 1961-62, the accounting periods being respectively the years ended on June 30, 1959, and June 30, 1960. Similarly the reference in M.C.C. No. 727 of 1972 was made at the instance of the Addl. Commissioner of Income-tax-tax, M. P., Bho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04,017. The assessee-company gave the explanation by its letter dated February 5, 1962, (annex. B) that the agricultural company was running in loss and as the assessee was interested in its welfare, the assessee appointed a sub-committee to go into its affairs and suggest ways and means to improve its condition. The assessee-company paid the extra price for sugarcane purchased from it and also gave up the amount of interest payable on the loans advanced on the recommendations (annex. D) of the said sub-committee as well as on the resolution (annex. E) of the board of directors of the assessee-company sanctioning the same. The ITO took the view that the extra price bad been paid by the assessee and the interest amount had been forgone for purposes other than business purposes. He, therefore, by his order dated March 30, 1962, disallowed the deductions of the said amount (Rs. 1,04,017 paid as extra price and Rs. 50,000 as interest (forgone) on loans advanced). This order was maintained by the AAC in first appeal. In second appeal by the assessee, the Tribunal maintained the orders of the ITO and AAC in so far as it related to the amount of extra payment of price but so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal. On further appeal before the Tribunal (Bench of Delhi Tribunal), it reversed the orders of the ITO and AAC following its earlier order dated September 6, 1968, passed in the earlier assessment proceedings relating to the assessment year 1957-58 in Income-tax Appeal No. 15702 of 1966-67, wherein it was held that the assessee was entitled to claim the allowance for interest surrendered by it. On the application by the CIT, the Tribunal referred the question reproduced above for our answer. The reference in M.C.C. No. 67 of 1971 relates to the assessment year 1959-60, the corresponding financial year being the previous year in which the following question has been referred for our answer: "Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in deleting the addition of the amount of interest of Rs. 50,000 made in the assessment?" In this case also during the assessment year the interest amount Of Rs. 50,000 was surrendered by the assessee-company in favour of the agricultural company for the same reasons as stated earlier. In the assessment proceedings, the ITO took the view that the interest was forgone not for business cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed these claims on the ground that this extra payment over the minimum price fixed by the Government was made for extra-commercial considerations, the object of which was to divert part of the income of the company to its subsidiary company. The assessee-company went in appeal before the AAC, who, relying on a Government notification dated December 24, 1964, allowed only Rs. 73,669 over and above the minimum price for 1960-61 and Rs.1,46,039 for 1961-62. The assessee-company as well as the ITO challenged this order of the AAC before the Tribunal. The Tribunal partly allowed the Department's appeals to the extent that it allowed only a sum of Rs. 38,000 instead of Rs. 73,669 for 1960-61 and also a sum of Rs. 38,000 for 1961-62 as the premium for better recoveries of sugar for supplying cane of better quality on the basis of average of last three assessment years during which such payment had been made and allowed by the Department, The Tribunal dismissed the appeals filed by the assesseecompany and referred the first question in M.C.C. No. 726 of 1972 reproduced above in this para. The facts giving rise to the question No. 2 referred to for our opinion in M.C.C. No. 726 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances that the Tribunal had referred the second question reproduced in para 9 above. This brings us to the fifth and last reference in M.C.C. No. 727 of 1972 which relates to the assessment year 1964-65 corresponding to the previous year which ended on June 30, 1963, The question referred for our opinion in this reference is as follows : " Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in deleting the addition of amount of interest of Rs. 10,000 made in the assessment for the assessment year 1964-65?" In this case also the assessee-company did not charge any interest on the amount due from the agricultural company in the accounting year. The amount of interest was Rs. 10,000. In the assessment proceedings, the ITO did not allow the said deduction and added the amount of interest of Rs. 10,000 to the income of the assessee. The assessee preferred an appeal before the AAC, who allowed the appeal and deleted the addition following the earlier decision of the Tribunal on the same point. The Department preferred an appeal before the Appellate Tribunal. The Appellate Tribunal, following its earlier decision on the point, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of ordinary commercial trading. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party. If the sole object is business promotion, the expenditure would be one incurred wholly and exclusively for the purposes of the assessee's business even though some other object necessarily results, being inherent in the nature and quality of the expenditure." The Full Bench further observed as under : " The expression 'commercial expediency' is not limited to an existing practice prevailing in any particular trade or business. Even if the incurring of a particular expenditure may not be supported by any prevailing practice, yet, if, at the time when the expenditure is incurred, commercial expediency justifies it, the expenditure would be taken to be for the purposes of the business." From the observations made by the Full Bench of this court, it is now distinctly clear that the test to treat an expense in the nature of expenditure incurred wholly and exclusively for the purpose of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation recommended financial assistance to the agricultural company. It was in pursuance of this recommendation that the assessee-company took a decision for payment of extra price for cane on consideration that the price fixed by the Government was not economical and for the same reasons it gave up the amount of interest accrued on the loans advanced. These facts are clearly borne out from the extracts of proceedings of the board of directors of the assessee-company (annexs. C to F). It was because of the assurance and assistance of the assessee that the agricultural company continued to grow cane and it did not divert its land and farms to other crops which were more profitable. It may be pointed out here that the AAC himself while allowing the deletion of interest amount was of the view that the agricultural company was in an embarrassed financial condition. The fact that the agricultural company had taken a loan of Rs. 10,00,000 further indicated that its financial position was not sound and if the interest was not forgone and extra payments were not made, it may possibly have reached a halting stage which situation was bound to be avoided by the assessee by all possible means i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial for keeping the trade going on in the expectation of better future prospects in the business by preserving a profit earning asset and an apparatus like the agricultural company. In CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC), the Supreme Court took the view that the expenditure incurred on the preservation of a profit earning asset of a business is always a deductible expenditure. After examining the entire facts and circumstances of the case before us, we are of the view that the assessee incurred the expenditure in question to avoid any adverse effect on its sugar manufacturing business due to any untimely or short supply of cane needed for its sugar factory by protecting the agricultural company from ruin, in its own interest as the same was an income earning source. The expenditure was incidental to the assessee's trade, purely on considerations of business expedience and entirely for the purpose of keeping the assessee's trade going on and for making it profitable. The expenditure thus had a direct connection with the successful carrying on of business of sugar manufacturing by the assessee. The object behind the payment of extra price and giving up the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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