TMI Blog2008 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... y the order of the Commissioner of Income Tax (Appeals) allowing the expenses incurred by the assessee, to the tune of Rs 1,30,60,957/- towards settlement of a foreseeable liability in respect of premature termination of an agreement for use of premises entered into with an entity by the name of, Paharpur Business Centre (hereinafter referred as to PBC). 1.1 The only issue which arises for our consideration is that whether settlement expenses paid by the assessee fall within the provision of Section 37 (1) of the Act. The learned counsel for the Revenue, Mr R D Jolly contends to the contrary ? the basis being, that since there was no obligation under the contract on the assessee to pay settlement expenses, it cannot be said that the expenses have been incurred wholly and exclusively for the purposes of business, which is a sine qua non for seeking a deduction under Section 37 (1) of the Act. 2. In order to appreciate the controversy at hand, the following facts require to be noted:- 2.1 The assessee in respect of the assessment year 2000-01 had claimed as business expenditure a sum of Rs1,30,60,957/- which it had paid to PBC as settlement expenses. The Assessing Officer whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT (Appeals). The CIT (Appeals) by an order dated 17.09.2003 allowed the appeal of the assessee with respect to the ground in issue. The CIT (Appeals) noted that the assessee had brought on record sufficient evidence in the form of correspondence exchanged with the PBC including the understanding arrived at, as recorded in the aide-memoir, which suggested that there was a mutual understanding between the assessee and the PBC that it would continue to use the premises till July 2000. The CIT (Appeals) further noted that the assessee in order to avoid protracted litigation, based on the legal advice received, that the understanding recorded in the aide- memoir, the assessee could be sued for the specific performance or, in the alternative for damages; it settled for a lumpsum payment in furtherance of its business interest. The CIT (Appeals) significantly, went into the aspect as to whether the settlement expenses was a camouflage for a payment for purposes other than commercial reasons. Towards this end, the CIT (Appeals) called for the list of directors, of the assessee and PBC, in order to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e money expended by the assessee is wholly and exclusively for the purposes of business and; (ii) the expenditure incurred is not in the nature of a capital expenses. 8.2 In so far as the second condition is concerned, it has been fairly conceded, by Mr R D Jolly, the learned counsel for the Revenue, that, it is not in the nature of a capital expenditure. He has, as noted, above confined himself to the first condition i.e., the settlement expenses are not incurred wholly and exclusively for the purposes of business. 8.3 To determine whether an expense incurred is wholly and exclusively for the purposes of business ? according to us, can be ascertained only, if it meets the test of commercial expediency, and that too, from the point of view of the assessee who is engaged in the business and, not from the point of view of an outsider who is unaware of the needs of the business. 8.4 There are several judgments of the Supreme Court laying down principles which, need to be applied in determining whether an expenditure ought to be allowed under Section 37 (1) of the Act. These principles have emerged over the years by virtue of judicial interpretation giving meaning to the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sit will be increased by 10% calculated on 24 times. The difference in Security Deposit would be payable on August1, every year." 8.7 The aide-memoir was signed on behalf of the assessee by one Shri Rajiv Nayar on 21.08.1997. 8.8 In August 1998, the assessee entered into another agreement by virtue of which it could continue the use of the premises till 31.07.1999. 8.9 In the interregnum, in March 1999, the assessee acquired a new premises, and evidently, entered into a contract with respect to the same with M/s Great Eastern Shipping Company Private Limited. The charges payable for the new premises were Rs 20,56,416/- as against Rs 30,87,827/- per month with respect to the use of the premises of PBC. 8.10 By a communication dated 22.03.1999, the assessee informed the PBC of its intention to dis-continue the use of the premises with effect from 31.08.1999, and consequently, demanded return of its interest free security amounting to Rs 7,46,07,848/-. 8.11 This communiqué triggered correspondence between the assessee and PBC on the specific issue of early termination of the understanding which required continued use of the premises till July, 2000. 8.12 In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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