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TMI Blog2011 (1) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... Mysore as a guarantor in the face of the fact that the borrower, namely M/s Rudra Industries sister concern of the assessee, had assets to pay the liability which were offered as security by the borrower and the payment was prompted by extraneous considerations and not necessitated by commercial expediency – Held that:- assessee incurred this expenditure to discharge a debt borrowed by the sister concern and thus saved the property which he had offered as security and in turn was able to make out a marketable title in terms of the development agreement. It cannot be said that the payment of the said amount does not constitute business expenditure. Both the appellate authorities on appreciation of the aforesaid material rightly held that the assessee is entitled to a deduction under the head of business expenditure and have rightly set aside the order of the AO disallowing the said deduction. In that, view of the matter, the third substantial question of law is answered in favour of the assessee and against the Revenue, appeal dismissed - IT Appeal No. 3119 of 2005 - - - Dated:- 25-1-2011 - N. Kumar, Ravi Malimath, JJ. Veena Jadhav for the Appellant A. Shankar and M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by others. The balance sheet of M/s Rudra Industries for the years 31st March, 1978 and 31st March, 1980 shows the assessee as debtors in the books of accounts maintained by M/s Rudra Industries. When the assessee started developing the property at Shivanahalli with the help of M/s Unitech Corporation, under the terms of the agreement they were obliged to pass on a clear title to the purchasers of the flats free from all encumbrances. The said property had been mortgaged to State Bank of Mysore and the principal debtor was sick and was not paying the money, when the said property was likely to brought to sale for recovering the money due from M/s Rudra Industries, they thought it commercially expedient to pay the said loan amount due by M/s Rudra Industries along with interest and take back the title deeds and thus they could convey a clear title to the purchasers of the flats. Therefore, they entered into a compromise with the State Bank of Mysore in the pending suit and paid a sum of Rs. 37.25 lakhs being the interest dues and, therefore, they claimed the said amount of Rs. 37.25 lakhs as business expenditure. 3. The assessing authority while assessing the returns filed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the index value to be taken into consideration is the date of handing over of possession of the stock-in-trade and not the date on which registered sale deeds are executed in favour of the flat owners conveying undivided interest in the immovable property. Therefore, the authorities again committed a serious error in holding that only the date of sale deed is crucial in deciding the capital gains payable. 7. Per contra, the learned counsel appearing for the assessee supported the impugned orders. 8. This appeal was admitted on 10th Oct., 2006 to consider the following substantial questions of law:- "(i) Whether, the appellate authorities are correct in adopting for the purpose of computation of income from capital gains, the cost of inflation index for the financial year 1992-93 instead of index for the financial year 1987-88 in view of the provisions, of s. 48 r/w s. 45(2) of the Act? (ii) Whether the AO had correctly worked out the capital gains of the property on the cost of land sold by the assessee as per the index relevant to financial year 1998-99 as this asset had been converted into stock-in-trade on 16th March, 1988 which was not considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." 11. Explanation (iii) to s. 48 defines indexed cost of acquisition which means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later. 12. A harmonious interpretation of these two provisions makes it clear as to how the capital gains is to be taken into consideration. First we have to find out what is the fair market value of the asset on the date of conversion, then to find out what is the market value of the property on the date of transfer. So, in order to compute the capital gains payable, it is the market value on the date of transfer that is relevant and in arriving at that market value the index cost of acquisition as prescribed on the date of transfer is to be taken into consideration and not the date of conversion. In the instant case, the index cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the assessee is entitled to the said payment of interest as business expenses under s. 37(1) of the Act. 14. The apex Court in the case of CIT vs. Chandulal Keshavlal and Co. (1960) 38 ITR 601, 610 (SC) held as under:- "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby but in every case it is a question of fact whether the expenditure was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." 17. Therefore from the aforesaid decisions what emerges is first, in order to claim the benefit of deduction under the head of business expenditure, the assessee has to show that the money is actually expended. Then he has to show the nexus between the expenditure and purpose of the business. In demonstrating this nexus, it is necessary that the said expenditure incurred should necessarily be the expenditure incurred in connection with the business of the assessee. By such expenditure there should be a direct and minimum benefit to the assessee. It must be on account of necessity. In other words, commercial expediency is to be demonstrated. By such expenditure, merely because a third party is also benefited, it cannot be disallowed. 18. In this background if we look at the facts of this case, the assessee has stood as surety for one of its sister concerns. Business of these two firms were intimately connected with each other. Because of nonpayment of loans, the bank had filed a suit for recovery of money both against the sis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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