PARISONS MILLING COMPANY PVT LTD vs. COMMISSIONER OF INCOME TAX,CENTRAL REVENUE BUILDING

The question of law that arises for consideration, as re-framed by us, are thus: i) Whether the Tribunal was justified in coming to the conclusion that the expenditure claimed by the appellant is not by way of commercial expediency ? ii) Whether the Tribunal was justified in disallowing the expenditure claimed by the assessee on the ground that it was not wholly and exclusively for the purpose of the business ?

The assessee-company is involved in the business of manufacturing of wheat products. Though it had not started commercial production during the subject year, it has indulged in the activity of trading in wheat during the period. It procured wheat from a company named M/s Cargill India Pvt.Ltd., a trading company. The contract for purchase was not with the assessee, but with its sister concern, namely, M/s Parisons Estate and Industries Pvt.Ltd. (PEIPL). It so happened that PEIPL could not lift the contracted quantity of wheat in full, and part of it, was therefore, lifted by the assessee. M/s Cargill India Pvt.Ltd. debited the warehousing and other connected expenses incurred in pursuance of the supply contract in the name of PEIPL; which in turn was passed over to the assessee.

A sum of Rs.23,19,547/- expended by the assessee was directly connected with the quantity purchased as per the agreement. The assessee would therefore, contend that there is justification in claiming the aforesaid amount as expenditure, being the penal charges raised in the debit note by M/s Cargill India Pvt.Ltd., the supplier.

The A.O. observed that the assessee had not entered into any agreement with the supplier and therefore, concluded that the penal charges referred to above was not a liability relating to the business of the assessee and therefore disallowed it. The CIT (Appeals) also concurred with the finding of the A.O.

In appeal before the Tribunal, it was attempted to be impressed upon by the assessee that the claim was genuine and properly accounted for. The argument raised by the Revenue was that the expenditure does not pertain to the assessee and was not its liability. The assessee therefore, could not claim that amount as expenditure. It is pointed out that as per Annexure D agreement, which is between the supplier M/s Cargill India Pvt.Ltd. and PEIPL, there was a penal clause at 3.9.3, 3.9.4 and 3.9.5 pertaining to warehousing charges, etc. The fact that the assessee also lifted some amount of goods supplied and that PEIPL had passed on the debit note to the assessee is not a reason for them to honour the debit note and claim that amount as expenditure.

In view of the fact that there is no contractual agreement between the assessee and the supplier, nor is there any agreement between the PEIPL and the assessee, they could not have compelled the assessee to meet the said liability. The Tribunal agreed with the contention raised by the Revenue holding that the trading transaction is an independent one and that the penal charges is something agreed upon to be paid by the associate company of the assessee and that there was no contract, whatsoever, between the parties to Annexure D agreement and the assessee. As there was no contractual obligation on their part to discharge such amount, there was no commercial expediency in incurring the same.

Heard the learned Counsel for the appellant, and the learned Senior Counsel, Government of India (Taxes).

The question that arises before us is whether there was justification in the authorities disallowing the amount that is claimed by the assessee as expenditure incurred wholly and exclusively for the purpose of the business.

The learned Counsel appearing for the assessee relies on the decision in Catalysts and Chemicals India (West Asia) Limited v. C.I.T., [1987] 166 ITR 769 in support of their arguments. A Division Bench of this Court had in the aforesaid decision held as thus: “The learned counsel for the Revenue, however, submitted that in the absence of a written agreement between Coromandel Fertilizers and the assessee-company,

We are of the opinion that this decision cited above by the assessee in support of their argument is not identical on facts and according to us would not straight away, apply it to the facts and circumstances of the case in hand. In the above cited case, the assessee-company had an agreement with a foreign Company, a Colloborator for supply of catalysts. Pursuant to an agreement of supply by the Colloborator to one Coromandel Fertilizers, the assessee-company had volunteered to bear the freight and customs duty for the catalysts supplied and returned on grounds of the quality standards having not been met. In a subsequent transaction with the assessee the Coromondal Fertilizers claimed set off of the customs duty & freight relating to the goods returned. The A.O. declined the claim of business expenditure on the premise that it had no connection with the business of the assessee and was not incidental to its business. The principle of commercial expediency was succinctly stated by the Division Bench, following a decision of the Supreme Court, in the following words: “The law applicable in such circumstances is well settled as is seen from the decisions of the Supreme Court in Eastern Investments Ltd v. CIT, [1951] 20 ITR 1 and CIT v. Chandulal Keshavlal & Co.,[1960] 38 ITR 601 and Sasoon J.David and Co.(P) Ltd. v. CIT, [1979] 118 ITR 261. Viscount Cave L.C. in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 Tax Cas 155 (HL), has stated thus (at page 191): “It was made clear in the above cited cases of Usher's Witshire Brewery v. Bruce [194] 6 Tax Cas 399 and Smith v. Incorporated Council of Law Reporting [1914] 6 Tax Cas 477 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the 'carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade; .....” This observation has been noted with approval by the Supreme Court and, therefore, the said observation is also relevant in the context. The principles deducible from these rulings are: The payment made or expenditure incurred, though not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and principles of ordinary commercial trading and in order indirectly to facilitate the carrying on of the business will be treated as money expended wholly and exclusively for the purpose of the trade. It is immaterial even if a third party also benefits thereby. However, the claim will be disallowed if the expenditure was incurred to foster the business of another only or was “made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business”. This Court agreed with the Tribunal's view that it was sufficient to show that the expenditure was one made voluntarily and on grounds of commercial expediency, in order to facilitate the carrying on of the business and there was no need to establish a necessity or an immediate, direct benefit. There the assessee was a collaborator of the foreign supplier and Coromandal was expected to be the assessee's customer.

In the instant case, may be, PEIPL was a sister concern, or an associate concern of the assessee, but the assessee did not have any privy to Annexure D agreement, which was between M/s Cargill India Pvt.Ltd. and PEIPL. It cannot therefore be said that the expenditure was incurred by the assessee for the purpose of their business. The authorities were justified in disallowing the expenditure and we find no reason to interfere with the concurrent finding of the appellate authorities. The questions of law are answered in favour of the Revenue. The appeal stands rejected. No order as to costs. K.VINOD CHANDRAN JUDGE ASHOK MENON dkr JUDGE