2017 (8) TMI 444 - AT - Income Tax

Allowable business expenditure - disallowance of non-contractual payment /gratuitous payment for the purpose of business - business expediency - Held that - Whatever test may be applied in deciding whether any expenditure is allowable as a deduction under section 37, the essential requirement must in every case be as to whether the expenditure was either in reality or as a measure of business expediency necessary either for the purpose of earning profit or for protecting and safeguarding the business assets of the assessee including goodwill or in connection with some transaction or activity which is directly and substantially connected with the running of the business of the assessee or is intimately connected with the assessee business activities. It has to be shown in every case that not only the expenditure was wholly and exclusively laid out, but it was so laid out for the purpose of the business of the assessee, that is, some purpose directly connected with or attributable to the assessee normal business activities or the protection of its business interest, in the instant case the expenses incurred in connection with the accident occurred in course of the business where 7 lives of divers were lost, thus the expenditure incurred was wholly and exclusively for the purpose of the company s business. In view of the above legal and factual position we are of the view that compensation paid by the assessee to the family members of deceased divers was in course of the assessee business, and the assessee had rightly considered the business expediency and there after incurred the said legitimate business expenses - Decided against revenue

Issues Involved:
1. Disallowance of non-contractual/gratuitous payment for the purpose of business under Section 37 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of Non-Contractual/Gratuitous Payment for Business Purposes:

The core issue in this appeal is whether the non-obligatory, gratuitous, non-contracted payments made by the assessee company can be considered as deductible business expenditure under Section 37 of the Income Tax Act, 1961. The Revenue contended that such payments are in the nature of the application of income and not deductible under the Act.

Facts and Background:
The assessee company operates in the business of sub-sea diving, job work, and equipment hiring. During the assessment year 2012-13, the company claimed a deduction for compensation paid to the families of freelance divers who died in a marine accident. The Assessing Officer (AO) disallowed this claim on the grounds that there was no contractual obligation to make such payments, as the agreement with the divers did not include a clause for compensation in case of death or damage.

AO's Reasoning:
The AO noted that the divers were engaged on a contractual basis and the agreement explicitly stated that the freelancer would not be entitled to any benefits beyond those mentioned in the contract. The AO concluded that the payment made by the assessee was not a liability of the company and hence could not be claimed as a business expense. Furthermore, the AO observed that a significant portion of the compensation was borne by another company, Adsun Middle East FZE, and thus, the assessee was taking on someone else's liability.

CIT(A)'s Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, stating that the expenditure was incurred to protect the business interest of the assessee and to avoid further litigation in international courts, which would have been more costly than the compensation paid. The CIT(A) cited judgments from the Hon'ble jurisdictional High Court in the case of CIT vs. Sinnar Bidi Udyog Ltd. and Gujarat High Court in the case of CIT vs. UTI Bank Ltd. to support the decision.

Tribunal's Analysis:
The Tribunal examined the facts and circumstances of the case, noting that the assessee had a long-standing association with the freelance divers and that the compensation was paid to maintain goodwill and reputation within the diving community. The Tribunal emphasized that the expenditure was incurred wholly and exclusively for business purposes, as it was necessary to avoid litigation, maintain business operations, and uphold the company's reputation.

The Tribunal also addressed the AO's argument that the payment was an "application of income," clarifying that the expenditure was a genuine business expense and not a diversion of income. The Tribunal referenced the case law of Urmila & Co. Ltd vs. DCIT, where compensation paid to local fishermen was allowed as a business expenditure despite being non-contractual.

Conclusion:
The Tribunal concluded that the compensation paid by the assessee was a legitimate business expense incurred to safeguard business interests and maintain good relations with the diving community. The expenditure was deemed necessary for the continuity of business operations and was thus allowable under Section 37 of the Income Tax Act. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance and dismissed the Revenue's appeal.

Final Judgment:
The appeal of the Revenue is dismissed, and the order of the CIT(A) is confirmed. The compensation paid by the assessee to the families of the deceased divers is recognized as a deductible business expenditure under Section 37 of the Income Tax Act, 1961.

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