9911796707
TMI Blog2005 (12) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ith welfare activities. To maintain the office in its proper decorum, flowers and plants are to be put therein or nearby. The assessee has also to entertain its guests or the officials from the lessee. Hence, such entertainment expenses are also inevitable and is to be considered as incurred wholly and exclusively for earning the income. The assessee has also to visit places and hence, vehicle has to be maintained. Similarly, the assessee has also to communicate with several agencies as well as the lessee. For this purpose, telephone, telex expenses are also to be incurred. Other general expenses like advertisement, interest on purchase of car, rent for executive s residence are also spent out of necessity to indirectly facilitate or earning of the income. Insurance is also necessarily to be paid to effectively safeguard the assets. When the expenses are incurred which are either under compulsion or obligatory on the ground of commercial expediency, it is not for Assessing Officer to decide as to what can be the reasonability or necessity for the same. What is to be seen is whether such expenses are incurred wholly and exclusively for the purpose of earning the income. Hon ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce common issues are involved, all these appeals are disposed of by this common order. 2. The first ground of appeal of assessee is against reopening of assessment under section 147. 2.1 It is contended in the ground that the condition precedent for reopening of assessment is absent and hence assessment is bad in law. 3. At the time of hearing, this ground was not pressed and hence, the same is dismissed for want of prosecution. 4. The next ground of appeal by assessee for all the years is against treatment of income from lease rent received by assessee. 4.1 The assessee was carrying on hotel business at Bangalore. Since it was running into loss, the management was changed and new management decided to lease out the entire asset, as it would have been advantageous in the situation. Accordingly, the assessee entered into an agreement dated 1-6-1997 with Indian Hotels Company Ltd. (Taj Group) under which the hotel building etc. was given on lease for a period of 33 years. The lease was renewable/expandable for a further period of 33 years. The assessee was to receive licence fee, which was either minimum guaranteed or percentage of net sales, whichever is higher. The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of driver s salary, bonus, gratuity, road tax, car insurance, security charges, staff welfare expenses and vehicle maintenance expenses. He also disallowed perquisite to Managing Director, expenses on flowers and plants and entertainment expenses, miscellaneous expenses, garden expenses, telephone expenses and subscription to club in its entirety. The assessee as well as the revenue are in appeal before us. 5.1 Learned counsel for assessee submitted that the assessee is a Limited Company. It was once a listed company at Bangalore Stock Exchange. The assessee has to fulfil its obligation legally and statutorily. As per the agreement, the assessee is entitled to licence fee based on percentage of net sales. For effectively working out such licence fee, the assessee has to employ certain staff. As per the Company Law requirement, the assessee has to appoint a Managing Director and pay him remuneration. The remuneration payable is contractual and hence it is obligatory to pay not only the remuneration but also the perquisite as per the terms of appointment. The assessee has entered into agreement with Taj Group of Hotels. Thus, for certain negotiation and other purpose, the staff has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable. The words wholly and exclusively for the purpose of making or earning such income are narrower than the words wholly and exclusively for the purpose of business appearing in section 37(1) of the Act. If the expenses are not for the purpose of earning the income, the same cannot be allowed. The expenses like perquisite to Managing Director, travelling expenses of Directors and others, security charges, vehicle maintenance expenses, advertisement expenses and general expenses like power, fuel, repairs, stationery, staff welfare, meeting expenses, vehicle expenses, legal expenses etc. are not for earning the income and hence are not to be allowed. For this proposition, he relied upon the following cases : J.K. Traders Ltd. v. CIT [2004] 271 ITR 69 (All.) East India Agencies (P.) Ltd. v. CIT [1991] 189 ITR 44 (Ker.) 5.3 In reply, learned counsel for assessee submitted that both the cases relied by learned DR represents to earning of dividend income and not the income of the nature earned by assessee and the circumstances under which it is earned. For earning the divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined; ( ii ) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; ( iii ) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning income from other sources ; ( iv ) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose; ( v ) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure; ( vi ) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o incur an expenditure in order to make the earning of the income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2). In the instant case, it was clear that the assessee had no other option except to incur expenditure in order to make the earning of an income possible and that the exercise of the option, in the circumstances of the case, was compulsory. The Tribunal had observed that the trustees could either have disposed of the shares and securities immediately regardless of the consideration whether the ruling rates were favourable or not, or they could have waited till a suitable time came for disposal of shares and in the meantime borrowed the money to meet the estate duty liability and the trustees considered the latter course to be the expedient one, thereby maintaining the income at its old level subject to the amount payable on money borrowed from the bank. It was, therefore, clear that the expenditure is the form of interest paid on the borrowings during the concerned years would have to be regarded as expenditure incurred solely for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessarily to be paid to effectively safeguard the assets. When the expenses are incurred which are either under compulsion or obligatory on the ground of commercial expediency, it is not for Assessing Officer to decide as to what can be the reasonability or necessity for the same. What is to be seen is whether such expenses are incurred wholly and exclusively for the purpose of earning the income. Hon ble Supreme Court in the case of CIT v. Rajendra Prasad Moodi [1978] 115 ITR 519 held that it is not necessary that income should be derived in the year under consideration. Even though income is not received, yet if the expenses are incurred for earning the income, the same are allowable under section 57( iii ) of the Act. We accordingly hold that the expenses claimed by the assessee for these years are to be allowed under section 57( iii ) of the Act. None of the expenses can be classified as not incurred wholly and exclusively for the purpose of earning the income. 6.2 We shall discuss the decisions relied by learned counsels. Hon ble Allahabad High Court in the case of CIT v. Rampur Timber Turnery Co. Ltd. [1981] 129 ITR 58 held thus : For an expenditure to come within the ambit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has to be paid for its continued existence. The limited company has to carry on its activities in regard to allotment of shares, transfer of shares and to record proper entries in proper registers, and file returns as required by the statute. It has to discharge its statutory obligations so long as it is in operation whether or not it carries on any business. Failure to comply with the statutory obligation will visit the company and its principal officers and directors with civil and penal consequences. The company has to obtain trade licence, incur general charges, printing and stationery and also to pay directors fees. It is a statutory requirement that the accounts of the limited company should be audited for which the company has to incur expenditure on audit fees. Such expenditure is in connection with and in relation to the earning of income from property and other sources. 8. Hon ble Calcutta High Court in the case of CIT v. Ganga Properties Ltd. [1993] 199 ITR 94 held that expenditure incurred in complying with statutory obligations is deductible under section 57( iii ) of the Act. The High Court held thus : That a company, even if it derives income from other sources , ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
