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TMI Blog2015 (4) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... e decided from the point of view of the businessman and not by subjective standard of reasonableness of the Revenue. Also in case of Bombay Steam Navigation Co., it was held that Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts an circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regard as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. In view of the above discussion, and facts and circumstances of the case, we find that the payment of compensation was a business contractual obligation of the assessee and therefore, the expenditure was incurred for business as well as commercial expediency of the assessee. Accordingly the payment is an allowable business expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant-assessee invites our attention to paragraph 5 of the impugned order, wherein the Tribunal records as one of the undisputed facts for the consideration of appeal before it was that the appellant-assessee had terminated its toll manufacturing agreement with M/s. Colour Chem Ltd w.e.f. 24.03.2006. While, at paragraph 10.2 of its order, the Tribunal records that had the toll manufacturing agreement with M/s. Colour Chem Limited been terminated by the appellant then the situation would have been totally different. Thus, it appears that there is inherent contradiction on the facts recorded, which certainly makes the conclusion prima facie suspect. 3. Tejveer Singh, Counsel for the revenue does not dispute that there is inconsistency in paragraph 5 and paragraph 10.2 of the impugned order. However, he states that the appellant-assessee has filed a Miscellaneous application for rectification before the Tribunal and the same is pending. In the above circumstances, it is his submission that the appeal should not be entertained at this stage. 4. We find that the Miscellaneous application for rectification is pending with the Tribunal since 03.8.2012 and has not yet been dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for any business requirement and it is against the terms of the agreement. Thus the DRP confirmed the disallowance on the ground that the expenditure cannot be held to be exclusive and necessarily for the business of the assessee. 3.2 Before us, the Ld. AR of the assessee submitted that the assessee entered into agreement with CCL for purchase of raw material produced by CCL for and on behalf of the assessee. The agreement contained the provision of compensation in case of prior termination or on expiry. He referred to various clauses of the agreement and submitted that during the tenure of the agreement CCL shall produce exclusively for the assessee as per the specification and requirement of the assessee. All the terms and conditions of manufacturing of the product were put and incorporated by the assessee in the agreement as per its requirement. The quality control confirmation as well as the standard of the product were mutually agreed between the parties. He has referred to clause-13 of the agreement and submitted that either party may terminate the agreement by giving 12 months prior notice. In case of termination in part, with respect to a specific product, the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to act in any manner which is likely to jeopardize or affect the business of the assessee which is transferred under deed of assignment. Thereafter, in a separate Toll Agreement dated 18/09/2003, it is agreed to relocate production from Thane to Roha. The agreement was terminated on account of amalgamation of CCL with various other companies. Therefore, the CCL decided to terminate the TMA and there was no question of paying any compensation by the assessee. The compensation paid by the assessee is not for termination of TMA but shifting of assets which is taken over. Thus, the ld. DR submitted that it cannot be allowed as revenue expenditure. He has relied upon the orders of authorities below and submitted that the breach of agreement was not because of the assessee but because of CCL who took a unilateral decision of amalgamation. 4.1 In the rejoinder the ld. AR submitted that vide Business Transfer Agreement (BTA), the assessee purchased business, textile dyes and not plant and machinery of CCL that's why the TMA for production of the product was entered into between the parties and it was only for the assessee's requirement. The CCL could not do business of textile d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and agreeing not to compete with the Assignee in terms of clause E(i) and E(ii) of this agreement. 5.2 Further clause-M of the BTA stipulates the respective obligations for Toll Manufacturing Agreement as under :- M. The Assignee hereby agrees and undertakes to the Assignor that on and from the date of the assignment of the said business, the Assignee shall carryout and comply with all obligations that are required to be carried out and complied with by it as per the terms and conditions of the Toll Manufacturing Agreement and the Assignee shall indemnify from and against all claims and from and against all costs, charges and expenses that the Assignor may incur, suffer or be put to on account of any claim made on the Assignor on account of the Assignee not carrying out or complying with the obligations that are required to be carried out by the Assignee. 5.3 Thus, it is clear that it was a condition of BTA that the parties to enter into a Toll Manufacturing Agreement. Clause-P of BTA again provides for compensation in the event of termination or expiry of Toll Agreement which reads as under:- P. It is hereby agreed by and between the parties hereto that on the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o continue until 31.8.2002 but not to be terminated before 31.8.1999. Thereafter, this Agreement will continue to be effective for further periods of one year each unless terminated by either party to the /agreement giving twelve months prior notice. 13.2 Either party may terminate this agreement in part with respect to a specific Agreement Product with six months advance written notice or by mutual agreement. 13.6 It is hereby agreed by and between the parties hereto that on the expiry or termination or sooner determination of the Toll Manufacturing Agreement referred to herein above, the Principal shall be bound and liable to pay to the Processor remanant cost for discharging personnel and any other costs and liabilities incidental thereto and arising out of such termination or sooner determination of the Toll Manufacturing Agreement. The remanant cost will be determined by a professional Accountant acceptable to the parties hereto and the fees of the Accountant shall be paid by the Principal alone. The value so determined by the professional Accountant shall be final and binding on the parties hereto and the amount so determined by the professional accountant shall be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure having regard to the circumstances of the case. No businessman can he compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 5.7 Thus, the tax authorities must not look at the matter from their own view point, but that of prudent businessman. In any case if the assessee took a decision to discontinue the arrangement under the TMA with CCL in its best business interest then, such decision of the businessman cannot be questioned without doubting the genuineness of the arrangement and consequent payment of compensation. It is none of the job of the tax authorities to see how the assessee does business, in the best interest of its business. The payment in question has a direct nexus with the business activity of the assessee and, therefore, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial expediency or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the Revenue. As observed by the Supreme Court in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52, the question must be viewed in the larger context of business necessity or commercial expediency. No abstract or pedantic view can be taken in the matter. Applying these tests to the facts of the present case, it is clear that the payment of compensation made by the assessee to its erstwhile sole selling agents for loss of the sole selling agency is allowable as a deduction under section 37 of the Act in the computation of the income of the assessee. 5.8 The Hon'ble High Court held that the question whether it was necessary for commercial expediency or not, is a question that has to be decided from the point of view of the businessman and not by subjective standard of reasonableness of the Revenue. 5.9 In view of the above discussion, and facts and circumstances of the case, we find that the payment of compensation was a business contractual obligation of the assessee and therefore, the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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