Commercial expediency allows settlement payment for a corporate guarantee liability as business expenditure under section 37(1).

Expenditure incurred to settle a liability under a business-related corporate guarantee was held allowable as revenue expenditure under section 37(1) of the Income-tax Act, 1961. The Tribunal applied the principle of commercial expediency and accepted that the liability had crystallised through arbitration and settlement in connection with the assessee's group business interests. It held that the payment flowed from a business decision made to protect commercial interests and resolve litigation, and could not be disallowed merely because the Revenue later questioned the guarantee. The disallowance was deleted.

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Issues: Allowability of expenditure of Rs. 47.64 crores incurred on settlement of a corporate guarantee invoked against the assessee, as business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee had entered into a corporate guarantee in connection with its group business interests and the liability crystallised through arbitration and subsequent settlement. The expenditure arose from a business-linked arrangement made to protect commercial interests and settle litigation, and the liability could not be denied merely because the Revenue questioned the guarantee at a later stage. The Tribunal treated the payment as flowing from the assessee's business decision and applied the principle that commercial expediency is to be judged from the businessman's point of view, not from the Revenue's substitution of its own view.

Conclusion: The expenditure was allowable as business expenditure under section 37(1), and the disallowance of Rs. 47.64 crores was deleted in favour of the assessee.

Ratio Decidendi: An expenditure incurred to discharge a liability arising from a business-related corporate guarantee, where the payment is made pursuant to settlement of litigation and is commercially expedient, is allowable as revenue expenditure under section 37(1) of the Income-tax Act, 1961.

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