COMMISSIONER OF INCOME TAX Vs. RAJARAM BANDEKAR

JUDGEMENT

(1.) THE following questions are referred to us under S. 256(1) of the IT Act :

(2.) AS far as the first question is concerned, which is at the instance of the Department, in view of the decision of this Court in CIT vs. Rajaram Bandekar (1993) 113 CTR (Bom) 281 : (1993) 202 ITR 514 (Bom), the question will have to be answered in the negative and in favour of the Revenue. The first question is answered accordingly.

(3.) THE Supreme Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 756 (SC) has considered when expenditure can be considered as laid out on purely business considerations and wholly for the purpose of the assessee's business. The Supreme Court has observed that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The Supreme Court has observed that the question should be decided on ordinary principles of commercial trading and commercial expediency. The mere fact that to some extent, the expenditure may enure to a third party's benefit cannot, in law, defeat the effect of the finding as to the purpose of the expenditure. Such expenditure can have a wide ranging purpose. It may cover not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery. It may include measures for the preservation of the business and for the protection of its hostile title. It may also comprehend payment of statutory dues and taxes imposed as a pre condition to commence or for carrying on of a business. Looked at in this light, it is clear that the sum of Rs. 3,00,000 has been paid by the assessee firm to Vinayak in order that it may get rid of its obligation to supply iron ore at certain specified prices for a period of six years to Vinayak. In fact, since the benefit of the mining concession has been enjoyed by the assessee firm, the cessation of the hostile claim by Vinayak to this concession was also a matter in which the assessee had been directly interested. Therefore, although the original settlement of 17th July, 1970, was between Vinayak and Rajaram, it directly affected the business of the assessee firm. It was on this count that the assessee firm had agreed to the said settlement and had agreed to supply iron ore to Vinayak by its agreement dt. 15th July, 1990 with Rajaram. Similarly, the assessee firm paid Rs. 3,00,000 to Vinayak to terminate its obligation to supply iron ore to Vinayak at specified prices under the settlement dt. 17th July, 1970 r/w the agreement of the assessee firm with Rajaram dt. 15th July, 1970. The Tribunal, therefore, was not right when it held that the arrangement of payment of Rs. 3,00,000 was only between Rajaram and Vinayak and that the assessee firm had no connection with it. The assessee firm's business was directly affected by the arrangement and in fact, the letter of Dr. Hede which is addressed to the assessee firm makes it quite clear that it was at the instance of the assessee firm that he had made a commitment for payment of Rs. 3,00,000 to Vinayak for getting rid of the inconvenient contractual obligations. In these circumstances, the payment of Rs. 3,00,000 by the assessee firm is expenditure wholly incurred for the purposes of business of the assessee firm and it is revenue expenditure.