Section 37(1) of the Income-tax Act, 1961

ITAT, JABALPUR BENCH Rammanohar Singh v. Asstt. Commissioner of Income-tax IT APPEAL NO.39 OF 2006 M.V. NAYAR, ACCOUNTANT MEMBER AND K.S.S. PRASAD, JUDICIAL MEMBER [Assessment year 2003-04] October 18, 2007 Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Under agreements entered into with various parties, assessee took on hire certain machines and in turn paid hire charges to those persons - Assessee claimed deduction of hire charges as business expenditure under section 37(1) - In support of its claim, assessee produced some of payees who admitted having received hire charges as claimed by assessee - Revenue, though admitting geniunety of transactions, partially disallowed claim of assessee on ground that assessee had made higher payment to one of parties - However, assessee proved by way of substantial evidence that by paying higher charges, he had in fact earned substantially which could not have been possible had such higher charges not been paid - Whether in view of such evidence, it could be said that payment made by assessee was made wholly and exclusively for his business and, hence, same was an allowable expenditure - Held, yes FACTS Under various agreements, certain parties leased out their machines to the assessee, who in turn paid hire charges to those persons. The assessee claimed deduction of the hire charges as a business expenditure under section 37(1). The Assessing Officer observed that the assessee was paying hire charges to close relatives at the fag end of the accounting year which, according to him, was simply a method to reduce his own income. Therefore, under section 40A(2)(b), the Assessing Officer disallowed the assessee’s claim. On appeal, the assessee submitted that the Assessing Officer was wrong in applying the provisions of section 40A(2)(b) because none of the persons to whom payment of hire charges had been made were its relatives. Regarding the payment being made at the fag end of the accounting year, it was submitted that the assessee had in fact built up his own capital by delaying payment of hire charges and had saved considerable amount on account of interest. Further, the assessee filed evidence before the Commissioner (Appeals) in form of name of lessors, copies of agreement with them, details of hired machines etc. The assessee also produced two of the lessors and they admitted having received the hire charges as claimed by the assessee. In view of the said evidence, the Commissioner (Appeals) allowed the claim of the assessee. However, in case of one of lessor ‘V’, the Commissioner (Appeals) observed that the assessee had made payment to it at a higher rate and, consequently, he disallowed the claim of assessee in respect of payment made to ‘V’. On cross-appeals: HELD It was an undisputed fact that none of the payees were relatives of the assessee and, therefore, section 40A(2)(b) clearly had no application. The only aspect to be considered was whether the payment in question was allowable under section 37(1). [Para 10] It was further undisputed that the expenditure was not a capital expenditure and not a personal expense and, therefore, the only aspect that was to be seen was whether the expenditure was laid out or expended wholly and exclusively for the purposes of business or profession. From the facts and material on record it was clear that payment had in fact been made, machines had been hired, machines had been used, agreements were executed and expenditure had been incurred. The only question was whether the expenditure in question was wholly and exclusively for the purpose of business. The assessee rightly submitted that expenditure had to be looked into from the view point of businessman. Moreover, the facts on record clearly established the genuinety of the transactions as they had been confirmed by the payee. Further, the payment of hire charges if appeared to be excessive could, only lead to an enquiry but that by itself could not be a ground to disallow any expenditure. This enquiry conducted by the Assessing Officer and the Commissioner (Appeals) had culminated into the assessee proving by way of substantial evidence that by paying higher hire charges the assessee had in fact earned substantially which could not have been possible had such higher charges not been paid. The assessee had also demonstrated built up of capital assets to the tune of Rs. 70,70,380/- by delaying payments of hire charges. The said facts coupled with documentary evidences on record in the form of agreements with the lessors, affidavits of the lessors, confirmation from the lessors, photographs etc. were material evidences on record by which the assessee had been able to demonstrate that payment was made wholly and exclusive for business and, therefore, the said payment was neither hit by section 40A(2)(b) nor by section 37(1). The Apex court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74, while interpreting the words 'for the purpose of business' used in section 37(1) held that such expenditure is to be tested in the light of the commercial expediency, which is one of the wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. It was further held that the expenditure incurred for the purpose of business meant in section 37(1) includes the expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. It is not for the authorities or the court to examine the purpose for which the assessee incurred the expenses for its commercial expediency. What is relevant is whether the amount was spent as a measure of commercial expediency and not from the point of view whether the amount was spent for earning profit. Once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case and no businessman can be compelled to maximize his profits. In view of the supreme court judgment and in view of the facts of the case, the payment of hire charges made by the assessee was an allowable expenditure. Therefore, the impugned disallowance sustained by the Commissioner (Appeals) was not justified and was liable to be deleted. As a result, the assessee’s appeal was allowed and the appeal of the revenue was dismissed. [Para 11] EDITOR’S NOTES As regards the addition made by the Assessing Officer on account of unexplained cash credits, since the capacity, genuineness and credit worthiness of the creditors was proved by the assessee by way of confirmation letters, copy of their respective Income-tax assessment orders and the certificate from the bank and further, since the assessee was not required to prove the source of source, the impugned addition was not justified and had rightly been deleted by the Commissioner (Appeals). As regards the addition made by Assessing Officer on account of interest on REC Bonds, since the assessee received said interest in April, 2003 and on basis of actual receipt, had offered it for tax in the assessment year 2004-05, said interest income was not taxable in assessment year 2003-04. As regards the addition of Rs. 40,000 made by the Assessing Officer on ground that it was unexplained money given by assessee for purchase of shares, inasmuch as the assessee purchased worth Rs. 2,40,000 on 15-4-2001 while only an amount of Rs. 2,00,000 was withdrawn by him from the bank on 9-4-2001, in view of the assessee’s explanation that he had withdrawn Rs. 2,00,00/- on 9-4-2001 and further a sum of Rs.1,00,000 on 18-4-2001 and shares were purchased by virtue of the said two amounts withdrawn and that the got a refund of Rs.60,000 later on, the impugned addition was not justified and had rightly been deleted by the Commissioner (Appeals). CASE REVIEW S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74; CIT v. Metachem Industries [2000] 245 ITR 160 (M.P.); Sumer Chand Jain [2007] 292 ITR 241 (MP) - Followed