2010 (9) TMI 849 - HC - Income Tax

Disallowance of expenditure - AO after disallowing several items of expenditure and/or deductions assessed the total business loss of the assessee - finding of AO that no prudent businessman will keep machinery idle and pay huge lease rentals as well as maintenance/ servicing charges without any benefit Held that - In applying the test of commercial expediency for determining whether the expenditure was wholly or necessarily incurred for the purpose of business reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. In the present case it is not disputed that the dozers were required for the business of extraction and sale of iron ore which was the business of the assessee. How many dozers should be engaged was a question which could be best to be considered by the assessee. It is not the case of the Revenue that the expenditure was not bonafide and/or it was incurred by way of diversion of profits to a related person or a sister concern of the assessee. As such the Revenue could not have gone into the question of expediency of the expenditure incurred and/or expediency of hiring of the 4 dozers. That was a matter of commercial expediency and the assessee was the best judge of it. In favour of assessee.

Summary

Issues:
Interpretation of business decision challenge by Assessing Officer regarding lease rental expenditure for unused machinery.

Analysis:
1. The appeal before the Bombay High Court involved a challenge by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) regarding the business decision of the assessee to hire machinery. The primary issue was whether the Assessing Officer could challenge the business decision of the assessee regarding the lease rental expenditure for machinery not used during the assessment year.

2. The assessee, engaged in the extraction and sale of iron ore, filed a return declaring a loss, which was significantly reduced by the Assessing Officer disallowing various expenditures, including lease rental for 3 out of 4 dozers not used during the year. The Commissioner of Income Tax (Appeals) partly allowed the appeal, stating that even if the business decision was erroneous, the Assessing Officer could not question it. The ITAT upheld the decision of the CIT, leading to the Revenue's appeal.

3. The Assessing Officer contended that it was imprudent for the assessee to lease 4 dozers when only one was utilized for extraction. However, the Court disagreed, citing the principle of commercial expediency. Referring to precedents, the Court emphasized that the reasonableness of expenditure should be judged from a businessman's perspective, not the Revenue's. The Court highlighted that as long as the expenditure is incurred genuinely for business purposes, it should be allowed as a deduction.

4. Drawing parallels with past judgments, the Court emphasized that the business decision-making process should be left to the assessee, as every businessman knows their interests best. The Court stressed that unless the expenditure is not bona fide or involves diversion of funds, tax authorities should not question the commercial expediency of business decisions made by the assessee.

5. Ultimately, the Court upheld the decision of the ITAT, dismissing the Revenue's appeal and affirming the allowance of the entire lease rent paid for the dozers as a legitimate business expenditure. The judgment emphasized the importance of recognizing genuine business expenditures made in pursuit of opportunities, even if the outcome of the business decision may not be favorable.

In conclusion, the Bombay High Court's judgment centered on upholding the principle of commercial expediency in business decision-making, emphasizing that tax authorities should not challenge genuine business expenditures made by the assessee unless there are clear indications of mala fide intentions or diversion of funds.