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TMI Blog2015 (6) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case, the learned CIT(A) has erred in deleting disallowance of Rs. 4 Cr. claimed as compensation paid to M/s L&T for not honouring its commitment for procuring 'seat frame' and 'trim covers' from Vendors M/s L&T ignoring that the said payment is not admissible under section 37(1) and is capital expenditure in view of the following: a) The assessee company strengthened and consolidated its business by way of assimilating all the processes itself which were earlier outsourced to other parties. b) Actual dues in respect of supplies by L&T to assessee Company which form part of the compensation, have not been stated. c) The assessee company certainly benefited of enduring nature by cessation of the agreement. d) Ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006. A copy of agreement/settlement dated 18.06.2003 between Shri Mohan V. Kamat and M/s Leather & Trim (Referred to as L&T), a proprietary concern of Shri Mohan V. Kamat, was also filed. The details of payment vide letter dated 19.05.2004 addressed to Shri Mohan V. Kamat, in pursuance of the agreement were also filed. The expenditure was claimed as revenue item and admissible deduction under section 37(1) of Income Tax Act, 1961. Whereas written submission is based on certain judicial pronouncements without stating the background of the settlement, the copy of the settlement reveals a few relevant facts. L&T was supplier of seat frames & trim covers to the assessee company. The business arrangement between the two parties was discontinued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the stand so taken by the A.O., the assessee carried the matter in appeal before the ld. CIT(A). 4. The ld CIT(A) upheld the contentions of the assessee and reversed the stand of the A.O. and held that the compensation was paid to the erstwhile vendor which is required to be treated as revenue expenditure. While holding so, the ld. CIT(A) observed as follows :- "Rival contentions have carefully been considered. After considering the rival submissions I find a substantial support in the contention of the ld. A.R. of the appellant. It is an undisputed fact that Rs. 4 crore has been paid by the assessee company to M/s L&T as a compensation which is business expenditure only. The only issue is to be decided whether the compensation amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies from M/s L&T, no new capital asset has been generated by the assessee company. There has not been any preservation of any capital asset on account of discontinuation of the Procurement Deed entered by the assessee company with M/s L&T. Therefore, the observation of the Assessing Officer that the discontinuation of the Deed has resulted into benefit to the assessee company of enduring nature, is contrary to the facts. Making a lump sum payment which would eliminate a disadvantageous payment can not be disallowed on the ground that an enduring benefit has been obtained by the assessee. This principle has been laid down by various courts of law. Reliance is placed on the decision of Western India Oil Distributing Company Ltd. vs. CIT - 77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation for volume loss of Rs. 1.34 crores has been held as a revenue expenditure, the interest paid on these outstanding amount is also considered as a revenue expenditure only. In the conclusion, I am of the considered view that the expenditure of Rs. 4 crores incurred by way of compensation by the assessee company is revenue in nature which is allowable under section 37(1) of the Income Tax Act, 1961. Appellant's succeed on this ground of appeal." 5. The A.O. is aggrieved and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. We have noticed that there is no dispute about the bonafides and commercial expedien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the A.O. has alleged that the assessee company was "certainly benefited by enduring nature" by the virtue of this agreement. We are unable to see any factual support for this allegation. As the ld. CIT(A) has rightly noted, the existence of such an enduring benefit was merely a presumption and based on nothing on record to demonstrate any such enduring benefit. As to whether the payment is capital or revenue is determined by the purpose for which the payment is made and when, as in this case, the payment is clearly relatable to the revenue field such as supplies by vendors, the purpose of payment is clearly revenue in nature. In these circumstances, unless there is any cogent material or evidence to demonstrate that the payment is c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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