2001 (9) TMI 48 - HC - Income Tax

Commission paid to distributor deductible under Section 37 as wholly and exclusively for business; commercial expediency judged from taxpayer's view

HC held that commission paid to a distributor was deductible under section 37 as expenditure laid out wholly and exclusively for business. The court ruled ... Commercial expediency of commission paid to Cement Distributors Ltd. - expenditure claimed u/s 37 - expenses laid out or expended wholly and exclusively for the purpose of the business - HELD THAT:- Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 37 of the Act if it otherwise satisfies the tests laid down by law. In Sassoon's case [1979 (5) TMI 3 - SUPREME COURT], reference was made to the legislative history of section 37 of the Act. It was noted that an attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37 of the Act. 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 judged from the point of view of the businessman and not the Revenue. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the Revenue. Thus, the inevitable conclusion is that the Tribunal was justified in its conclusion. The second question is answered in favour of the assessee and against the Revenue. Issues Involved:1. Commercial expediency of commission paid to Cement Distributors Ltd.2. Deletion of interest payment disallowed by the Assessing Officer.Summary:Issue 1: Commercial Expediency of Commission Paid to Cement Distributors Ltd.The first issue pertains to whether the commission of Rs.1.75 per M.T. paid to Cement Distributors Ltd. (CDL) was incurred for commercial expediency. The Assessing Officer had allowed only Re.1 per M.T., deeming the rest excessive and not for commercial expediency. The Commissioner of Income-tax (Appeals) [CIT (A)] and the Income-tax Appellate Tribunal (the Tribunal) upheld the assessee's claim, stating that the expenditure was for business purposes u/s 37 of the Income-tax Act, 1961. The court affirmed this view, emphasizing that the reasonableness of the expenditure should be judged from the perspective of the businessman, not the Revenue. The court cited precedents like Sassoon J. David and Co. P. Ltd. v. CIT and CIT v. Chandulal Keshavlal and Co., concluding that the expenditure was indeed for commercial expediency. The first question was answered in the affirmative, in favor of the assessee.Issue 2: Deletion of Interest Payment Disallowed by the Assessing OfficerThe second issue concerns the deletion of Rs.4,73,000 out of the interest payment of Rs.14,59,816 made to CDL. The Assessing Officer disallowed this amount, arguing that the assessee could have saved interest by utilizing funds available with CDL. The CIT (A) and the Tribunal disagreed, noting that the funds with CDL were related to disputed sales tax liabilities and were not available for business use. The court supported this view, referencing section 36(1)(iii) of the Act and cases like Madhav Prasad Jatia v. CIT and CIT v. Bombay Samachar Ltd. The court held that the interest was allowable as it was incurred for business purposes, and the Revenue's disallowance was unjustified. The second question was answered in favor of the assessee.Conclusion:Both issues were resolved in favor of the assessee, affirming the Tribunal's conclusions on the commercial expediency of the commission paid and the allowability of the interest payment. The reference was accordingly disposed of.