2015 (4) TMI 975 - HC - Income Tax

Commercial expediency - whether the amount paid by the assessee in terms of the decree passed by the Bombay High Court falls within the words 'commercial expediency' and therefore entitled to deduction? - Held that - The amount paid by the company in terms of a decree passed by the High Court cannot be construed as either prohibited by law or is an offence. Even if the assessee was in no way benefited by the said transaction and even if the Managing Director without the authority has bound the assessee and when once a decree is passed by a competent Court, there is a threat to the business of the company. If the decretal amount is not paid, the decree holder could have executed the decree against the property of the company; could have attached the property of the company and the creditors in the alternative also could have filed for winding up of the company. In those circumstances, to avoid such legal complications, if the decretal amount is paid, it cannot be construed that there was no 'commercial expediency' in payment of such amount. All the appellate authorities on careful consideration of the entire material on record has rightly held that the said expenditure falls within Section 37 of the Act and rightly directed the assessing authority to delete the said amount. - Decided in favour of the assessee

Summary

Issues:
1. Allowability of deduction under Section 37 of the Income-tax Act, 1961 for payment made by the assessee to satisfy a decree passed by the Bombay High Court.
2. Interpretation of 'commercial expediency' in relation to business expenditure.
3. Validity of the payment made by the assessee in connection with the decree obtained against its Director.

Analysis:
1. The case involved a limited company engaged in manufacturing and sale of electric power tools, acting as a drawer of bills of exchange for another company. The Bombay High Court decreed that the assessee was liable to pay a substantial sum to satisfy the decree related to loans obtained by the other company. The assessing authority initially disallowed the deduction claimed under Section 37 of the Income-tax Act, stating lack of business expediency. However, the Appellate Commissioner allowed the deduction, considering the payment as an 'extraordinary loss' incurred in the course of business.

2. The Tribunal affirmed the decision of the Appellate Commissioner, emphasizing the commercial expediency of the payment made by the assessee. It held that the payment was necessary to avoid legal complications such as attachment of property or winding up of the company. The Tribunal concluded that the payment fell within the ambit of business expenditure as per Section 37 of the Act, supporting the business interests of the assessee.

3. The High Court clarified the substantial question of law, focusing on whether the payment made by the assessee to satisfy the decree passed by the Bombay High Court was an allowable expenditure. The Court examined the circumstances leading to the payment, including the actions of the Managing Director in accepting bills of exchange on behalf of the assessee. It highlighted that the payment was made to protect the company's reputation and assets, preventing adverse legal consequences that could harm the business. The Court concluded that the payment was justified under the concept of 'commercial expediency' and upheld the decisions of the lower authorities.

In conclusion, the High Court dismissed the appeal by the revenue, affirming that the payment made by the assessee to satisfy the decree obtained against its Director was an allowable expenditure under Section 37 of the Income-tax Act, 1961. The Court emphasized the importance of commercial expediency in business decisions and upheld the deduction claimed by the assessee, ruling in favor of the assessee and against the revenue.