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2016 (2) TMI 411 - HC - Income TaxCompensation for loss suffered by CPT due to occupation of land in excess of what was demised - whether the aforesaid expenditure is an amount expended fully and exclusively for business purposes within the meaning of Section 37(1)? - Held that - The payment was made to compensate the loss suffered by CPT due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty. The payment could not partake the character of a capital expenditure because contention of the CPT was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land which had or could have nothing to do with a grant of lease in future.- Decided in favour of the assessee
Issues Involved:
1. Whether the damages paid by the appellant to the Calcutta Port Trust (CPT) are covered by the Explanation to Section 37(1) of the Income Tax Act, 1961. 2. Whether the payment to CPT was an expenditure incurred wholly and exclusively for the appellant's business and thus allowable as a deduction under Section 37(1). 3. Whether the expenditure incurred as damages to CPT for contravention of contractual obligations is capital in nature and thus not allowable under Section 37(1). 4. Whether the Tribunal misdirected itself in law by considering the expenditure as covered by the Explanation to Section 37(1) or as capital in nature, thus not allowable under Section 37(1). Detailed Analysis: Issue 1: Applicability of Explanation to Section 37(1) The Tribunal upheld the disallowance of Rs. 6,67,266/- paid by the assessee to CPT, considering it an expenditure covered by the Explanation to Section 37(1) of the Income Tax Act, 1961. The Explanation disallows any expenditure incurred for any purpose which is an offence or prohibited by law. The Revenue argued that the payment was for encroachment, an act prohibited by law, thus disallowable. However, the appellant contended that the payment was for breach of contract, not an infraction of law, and therefore should be admissible as a business expense. Issue 2: Expenditure Wholly and Exclusively for Business The appellant argued that the payment was for business purposes, as it was for the use of adjacent land for business activities, thus qualifying as a deductible expense under Section 37(1). The court referred to the principle that if an expenditure is incurred for promoting business and earning profits, it is deductible even if not necessarily incurred. The Supreme Court and other High Courts have held that damages for breach of contract, if incurred in the ordinary course of business, are deductible. Issue 3: Nature of Expenditure (Capital or Revenue) The assessing officer and Tribunal considered the expenditure capital in nature, arguing it was made to obtain a long-term lease. However, the appellant claimed it was a revenue expenditure, as the land remained CPT's property. The court examined precedents where compensatory payments for business activities were considered revenue expenditures. The court concluded that the payment was compensatory for the use of land and not for acquiring a capital asset. Issue 4: Tribunal's Misdirection in Law The court found that the Tribunal misdirected itself by not distinguishing between compensatory and penal payments. The payment to CPT was compensatory for the use of land and did not have a penal character. The court emphasized that only payments for contraventions of law are disallowable, not compensatory payments for business activities. Conclusion: The court held that the payment of Rs. 6,67,266/- was compensatory and incurred wholly and exclusively for business purposes, thus deductible under Section 37(1). The expenditure was not capital in nature, and the Tribunal erred in its judgment. The appeal was allowed, and the questions were answered in favor of the assessee. Each party was to bear its own costs.
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