COMMERCIAL EXPEDIENCY |
Business income ID - 20, Partnership Firms ID 26 001 (JBC-034) |
The test of commercial expediency cannot be reduced to the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a strait-jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. In the ultimate analysis the matter would depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved - CIT V/s. Panipal Woolen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC).
Commercial expediency must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees - Shahzada Nand & Sons V/s. CIT [1977] 108 ITR 358 (SC)
Gratuity paid in excess of limits prescribed under the Payment of Gratuity Act need not be disallowed merely on that ground. It was so held in CIT v. Associated Cement Companies Ltd. [2001] 249 ITR 3 (Bom) following CIT v. Hindustan Motors Ltd. [1989] 175 ITR 411 (Cal). It is established law that any payment to an employee even if it is gratuitous and therefore non-contractual could not be disallowed as was found in the case of Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC) in the following words "It is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure. Such expenditure would ordinarily fall within the scope of section 37(1) of the Act."
Construction of roads
Where a sugar manufacturer made contribution under a statutory obligation towards the construction and development of roads between the sugarcane -producing centres and the sugar mills, and the roads were at all times the property of the Government, the contribution so made was revenue in nature, since it was incurred for reasons of commercial expediency and it did not evoke any benefit of an enduring nature to the manufacturer - Lakshmiji Sugar Mills Co. (P) Ltd. V/c. CIT [1971] 82 ITR 376 (SC).
Where a sugar manufacturer made a contribution under the Sugarcane Development Scheme promoted by the State Government for the construction of roads in the area around the sugar factories, and though there was no statutory obligation to make the contribution the construction of the roads was considerably advantageous to the business of sugar manufacturer, the contribution was deductible as revenue expenditure - L.H.Sugar Factory & Oil Mills (P) Ltd. V/s. CIT [1980]125 ITR 293 (SC).
Ransom Money is commercially expedient
Recently the Madhya Pradesh High Court considered an interesting question in the case of CIT v. Khemchand Motilal Jain Tobacco Products (P.) Ltd. [2011] 13 taxmann.com 27 - whether it would be fully justifiable, in law, in holding that the ransom money paid to the kidnappers for release of one of the directors of the company would be an allowable deduction under section 37(1) ?
The High Court in the instant case endorsed the views that were expressed by the Apex Court and also followed the ratio of the Full Bench’s judgment of its earlier verdict in a similar case as referred to above and affirmed the ruling of the both CIT (Appeals) and the Tribunal by answering the question of allowance of expenses under section 37 of the Income-tax Act, 1961 in favour of the taxpayer-company and against the tax authorities. Thus, the Court held that the expenses incurred were for a commercial expediency and, prima facie were wholly and exclusively for the purpose of business.
Commercial expedient
The expression ‘commercial expediency’ is an expression of 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, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.
In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, the Supreme Court held that the expression ‘for the purpose of business’ occurring under the provision of section 36(1)(iii) is wider in scope than the expression ‘for the purpose of earning income, profits or gains’, and this has been the consistent view of the Supreme Court. In Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on of the business.
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