2010 (5) TMI 59 - HC - Income Tax

Deduction under section 30 / 37(1) - The assessee had paid certain settlement expenses. The Assessing Officer had disallowed an amount of Rs 29, 05, 678/- on account of rent. CIT(A) had also confirmed the disallowance both under Section 30 as well as 37 (1) of the Income Tax Act 1961 - ITAT came to the conclusion that though the amount was not allowable under Section 30 of the said Act the same could be allowed under Section 37(1) as it had been incurred for a business purpose Held that an expense would be allowed under Section 37(1) of the said Act if it is shown to have been commercially expedient and that commercial expediency must be viewed from the perspective of a prudent businessman and not from the point of view of the revenue. - Tribunal came to the conclusion that the settlement in the present case was also by way of commercial expediency and the amount was paid in terms thereof. The Tribunal particularly noted that in fact the assessee in the present case was in a better footing than in the case of Microsoft Corporation (2008 -TMI - 30427 - HIGH COURT DELHI) because the liability to pay the rent for a minimum period of nine months was a contractual liability and the amount finally settled was actually less than the amount which would have been payable by it as per the agreement. Deduction u/s 37(1) allowed.

Summary

Issues:
1. Allowance of settlement expenses under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The appeal in question was against the order of the Income Tax Appellate Tribunal concerning the disallowance of an amount on account of rent paid as settlement expenses by the assessee. The Assessing Officer and the Commissioner of Income Tax (Appeals) had disallowed the amount under Section 30 and 37(1) of the Income Tax Act, 1961. However, the Income Tax Appellate Tribunal allowed the expenses under Section 37(1) as it was incurred for a business purpose. The Tribunal relied on the decision in the case of CIT v. Microsoft Corporation of India Private Limited, where it was established that expenses could be allowed under Section 37(1) if shown to be commercially expedient. The Tribunal concluded that the settlement in the present case was a commercial expediency, and the amount paid was less than the contractual liability, making it deductable under Section 37(1) as it was incurred wholly and exclusively for the business.

The Tribunal's decision was based on the principle that commercial expediency must be viewed from the perspective of a prudent businessman, not from the revenue's point of view. It was noted that the assessee was in a better position compared to the Microsoft Corporation case, as the liability to pay rent was a contractual obligation, and the settled amount was lower than the contractual amount. Therefore, the Tribunal found that the compensation paid by the assessee was deductable under Section 37(1) as it was incurred wholly and exclusively for the purpose of its business. The Tribunal's application of the law was deemed correct, and no interference was warranted with its factual findings as no perversity was identified. Consequently, the appeal was dismissed by the High Court of Delhi.

This judgment clarifies the interpretation and application of Section 37(1) of the Income Tax Act, 1961 concerning the allowability of expenses incurred for business purposes. It emphasizes the importance of commercial expediency and the perspective of a prudent businessman in determining the deductibility of such expenses. The decision provides guidance on how settlement expenses can be treated under the Income Tax Act, highlighting the need for expenses to be incurred wholly and exclusively for the business to be considered deductable under Section 37(1).