2015 (4) TMI 918 - AT - Income Tax

Claim of expenditure against payment of compensation - revenue expenditure or capital expenditure or otherwise - Short notice payment for termination of Toll Manufacturing Agreement - Held that - The tax authorities must not look at the matter from their own view point, but that of prudent businessman. In any case if the assessee took a decision to discontinue the arrangement under the TMA with CCL in its best business interest then, such decision of the businessman cannot be questioned without doubting the genuineness of the arrangement and consequent payment of compensation. It is none of the job of the tax authorities to see how the assessee does business, in the best interest of its business. The payment in question has a direct nexus with the business activity of the assessee and, therefore, it was incurred for the business of the assessee and for commercial expediency. In the case of Sales Magnesite Pvt. Ltd. 1994 (11) TMI 38 - BOMBAY High Court , it was held that the question whether it was necessary for commercial expediency or not, is a question that has to be decided from the point of view of the businessman and not by subjective standard of reasonableness of the Revenue. Also in case of Bombay Steam Navigation Co., it was held that Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts an circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regard as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. In view of the above discussion, and facts and circumstances of the case, we find that the payment of compensation was a business contractual obligation of the assessee and therefore, the expenditure was incurred for business as well as commercial expediency of the assessee. Accordingly the payment is an allowable business expenditure. - Decided in favour of assessee.

Summary

Issues Involved:
1. Assessment of Total Income.
2. Disallowance of Rs. 2.20 crores towards "Short Notice Pay for termination of Toll Manufacturing Agreement" (TMA).
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Assessment of Total Income:
The Deputy Commissioner of Income Tax (DCIT) assessed the total income of the appellant at Rs. 8,35,47,520/- as against the returned income of Rs. 6,15,47,524/-. The appellant challenged this assessment, particularly focusing on the disallowance of Rs. 2.20 crores related to the termination of the Toll Manufacturing Agreement (TMA).

2. Disallowance of Rs. 2.20 crores towards "Short Notice Pay for termination of TMA":
- Facts and Background:
- The appellant had entered into a Toll Manufacturing Agreement (TMA) with Colour Chem Limited (CCL) on 29/08/1997 for the production of textile dyestuff. This agreement was initially for five years and could not be terminated before two years.
- The TMA was terminated on 29/04/2006, and the appellant debited Rs. 2.20 crores towards short-notice payment for this termination.
- The Assessing Officer (AO) disallowed this amount, treating it as capital expenditure, which was confirmed by the Dispute Resolution Panel (DRP).

- Appellant's Argument:
- The appellant argued that the payment was a deductible revenue expenditure under section 37 of the Income Tax Act, as it was incurred exclusively for business purposes.
- The appellant also contended that if not considered as revenue expenditure, it should be treated as capital expenditure, and depreciation should be allowed.

- Revenue's Argument:
- The revenue argued that the compensation was not for the termination of TMA but for shifting assets, which were taken over. They contended that the expenditure was not incurred for business purposes but was against the terms of the agreement.

- Tribunal's Analysis:
- The Tribunal noted that the business of manufacturing, producing, and dealing in textile dyes was transferred to the appellant without the fixed assets. The TMA was a commercial arrangement to utilize CCL's facilities for the appellant's production needs.
- The Tribunal emphasized that the payment of compensation was a business contractual obligation and was incurred for the business and commercial expediency of the appellant.
- It was highlighted that the tax authorities should not question the business decisions of the appellant unless the genuineness of the transaction is in doubt. The Tribunal cited the Supreme Court's judgment in S.A. Builders, emphasizing that the authorities must view the matter from a prudent businessman's perspective.

- Conclusion:
- The Tribunal concluded that the payment of Rs. 2.20 crores was an allowable business expenditure. The orders of the authorities below were set aside, and the appeal on this issue was allowed.

3. Initiation of Penalty Proceedings under section 271(1)(c):
- The DCIT had initiated penalty proceedings under section 271(1)(c) of the Income Tax Act. However, the Tribunal did not provide a detailed analysis or conclusion on this issue within the provided judgment text.

Final Judgment:
The appeal of the assessee was allowed, and the Tribunal set aside the orders of the lower authorities regarding the disallowance of Rs. 2.20 crores, treating it as an allowable business expenditure. The order was pronounced in the open court on 14.1.2015.