Commercial expediency under business expenditure rules allows deduction for voluntary payment made to release attached buses and continue operations.

Payment of the predecessor transport company's income-tax arrears, made to secure release of attached buses and continue the transport business, was treated as deductible business expenditure under section 37(1). Although the assessee was not legally liable for the tax dues, the court applied the test of commercial expediency and held that a voluntary payment made to facilitate business operations may still be incurred wholly and exclusively for business purposes. The amount was therefore characterised as revenue expenditure rather than capital expenditure, and deduction was allowed.

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Issues: Whether the payment made by the assessee towards the income-tax arrears of the predecessor transport company, in order to secure release of the attached buses and enable continuation of the business, was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The buses were attached by the tax department for recovery of the arrears of the erstwhile owner. The assessee was not legally liable for those tax dues, but the possession of the buses was necessary for carrying on the transport business. The governing test under section 37(1) is commercial expediency, and a voluntary payment made to facilitate business operations may still qualify as expenditure incurred wholly and exclusively for the purpose of business. On that principle, the payment was treated as business expenditure rather than capital expenditure.

Conclusion: The payment was deductible under section 37(1) and the question was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: A payment not legally obligatory upon the assessee may still be allowable as business expenditure if it is made on grounds of commercial expediency to facilitate the carrying on of the business and is incurred wholly and exclusively for that purpose.

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