2019 (2) TMI 721 - HC - Income Tax

Expenditure incurred wholly and exclusively for the purpose of the business - allowable business expenditure - A.O. declined the claim of business expenditure on the premise that it had no connection with the business of the assessee and was not incidental to its business - principle of commercial expediency - Held that - This Court agreed with the Tribunal s view that it was sufficient to show that the expenditure was one made voluntarily and on grounds of commercial expediency, in order to facilitate the carrying on of the business and there was no need to establish a necessity or an immediate, direct benefit. There the assessee was a collaborator of the foreign supplier and Coromandal was expected to be the assessee s customer. In the instant case, may be, PEIPL was a sister concern, or an associate concern of the assessee, but the assessee did not have any privy to Annexure D agreement, which was between M/s Cargill India Pvt.Ltd. and PEIPL. It cannot therefore be said that the expenditure was incurred by the assessee for the purpose of their business. The authorities were justified in disallowing the expenditure and we find no reason to interfere with the concurrent finding of the appellate authorities. The questions of law are answered in favour of the Revenue.

Summary

Issues:
1. Addition of ?23,19,547 as expenditure by the Assessing Officer.
2. Justification of disallowing the claimed expenditure by the authorities.

Issue 1: Addition of ?23,19,547 as expenditure by the Assessing Officer

The assessee appealed against the Income Tax Appellate Tribunal's order regarding the addition of ?23,19,547 by the Assessing Officer, which was upheld by the Commissioner of Income Tax (Appeals) and the Tribunal. The expenditure in question was related to penal charges raised by the supplier, M/s Cargill India Pvt.Ltd., for goods not fully lifted by the assessee. The Assessing Officer disallowed the expenditure as there was no direct agreement between the assessee and the supplier. The Tribunal concurred, stating that the trading transaction was independent, and there was no contractual obligation for the assessee to bear the charges, leading to a lack of commercial expediency in incurring the expenditure.

Issue 2: Justification of disallowing the claimed expenditure by the authorities

The Tribunal found that since there was no contractual agreement between the assessee and the supplier, nor with the sister concern PEIPL, the expenditure could not be justified as being wholly and exclusively for the purpose of the business. The Revenue argued that the expenditure did not pertain to the assessee and was not its liability. The Tribunal agreed, emphasizing that the penal charges were agreed to be paid by the associate company of the assessee, and there was no contractual obligation on the part of the assessee to discharge the amount. The authorities were justified in disallowing the expenditure, as there was no direct benefit to the trade and the expenditure was not incurred for the business of the assessee. The decision cited by the assessee in support of their argument was deemed not directly applicable to the case at hand, leading to the rejection of the appeal and the questions of law being answered in favor of the Revenue.

This judgment highlights the importance of contractual agreements in justifying business expenditures and the concept of commercial expediency in determining the allowability of claimed expenses for income tax purposes.