MIHIR BIPIN PAREKH,MUMBAI vs. DCIT CIR 16(2), MUMBAI

The Ld. CIT(A), despite noticing the fact that the payment challans were in the name of the assessee and the amounts were withdrawn from Shri Mihir Bipin Parekh Assessment Years: 2006-07 & 2008-09 its Bank account to make the aforesaid payments, confirmed the disallowance. Aggrieved, the assessee is in further appeal before us.

We have carefully heard the arguments advanced by respective representatives and perused relevant material on record including documents placed in the paper-book. We have also gone through the written submissions made by Ld. Authorized representative for assessee. The judicial pronouncements as cited before us, have been deliberated upon. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 5.1 The Ld. AR, explaining the circumstances that led to payment of additional import duty, submitted that the assessee was made to pay additional custom duty on the allegation that it imported higher grade of material, which would attract more custom duty. The assessee had done indenting for 3 firms viz. Shri Yamuna Impex, M/s M.H.International & Shri Impex, whose imports were also accounted for as assessee’s import by DRI on the reasoning that the goods had first come to assessee’s godown. The other 3 entities disowned the liability and did not pay any duty. Therefore, with a view to settle the dispute, the assessee approached settlement commission and paid duty for himself as well as for 3 other entities also. The said duty was paid by the assessee himself and accordingly, the deduction of the same was claimed during the year. The Ld. AR submitted that as per the provisions of Sec.37(1), any expenditure laid out or expended wholly and exclusively for the purpose of the business shall be allowable and therefore, since the expenditure was incurred during the course of business out of commercial Shri Mihir Bipin Parekh Assessment Years: 2006-07 & 2008-09 expediency, the deduction of the same would be allowable to the assessee. 5.2 The Ld. AR, explaining the circumstances which led to payment of duty by the assessee, submitted that the business premises as well as Godowns were sealed by DRI and it was obligatory on the part of the assessee to make the payment as demanded by the authorities. The failure to do so would have adversely impacted assessee’s business as well as its goodwill / reputation in the market. The Ld. AR also submitted that genuine efforts were made to recover the additional duty from stated parties and demand notices were issued by legal counsels against the 3 entities. However, nothing could be recovered from them and it became irrecoverable loss for the assessee. The supporting documents, in this regard, has been placed on record. The Ld. AR fortified the submissions that out of payment of Rs.93 Lacs, the payment challans to the extent of Rs.67 lacs were in assessee’s name. Reliance has been placed on the decision of Hon’ble Calcutta High Court rendered in CIT V/s Shree Krishna Gaynoday Sugar Ltd. (186 ITR 541) wherein it was observed that in determining whether an expenditure was deductible, the essential test which has to be applied was whether the expenses were incurred for the preservation and protection of the assessee’s business from any such process or proceedings which might have resulted in the reduction of its income and profits. The said decision has been rendered after considering the decision of Hon’ble Supreme Court rendered in CIT V/s Birla Cotton Spinning and weaving Mills Ltd. (82 ITR 166) wherein it was observed that the essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the Shri Mihir Bipin Parekh Assessment Years: 2006-07 & 2008-09 assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. It was not possible to understand how the expenditure on the proceedings in respect of the Investigation Commission by the assessee would not fall within the above rule. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. The earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which results in more funds being left for the purpose of carrying on the business there is always a possibility of higher profits. 5.3 Au Contraire, Ld. DR opposing the submissions drew attention to the fact that the expenditure incurred by the assessee on his own account has already been allowed and therefore, the stand of lower authorities was fair and reasonable.

Upon careful consideration, the undisputed position that emerges is the fact that the assessee has paid certain duty pursuant to action carried out by DRI. The matter of duty was finalized by Hon’ble Settlement Commission and the assessee made the payment as determined. The payment so made amounted to Rs.197.60 Lacs out of which deduction to the extent of Rs.104.47 Lacs has already been allowed to the assessee. The basis of disallowance of Rs.93.12 Lacs is the fact that the payment is not in assessee’s account. However, as rightly pointed out by Ld. AR, the said payment was made by the Shri Mihir Bipin Parekh Assessment Years: 2006-07 & 2008-09 assessee himself out of his own funds and substantial payment challans were in the name of assessee’s proprietorship concern namely M/s M.B.Sales Corporation. The other entities denied their liability and despite legal action, the stated amount could not be recovered from them and the amount eventually became irrecoverable for the assessee. Therefore, the said loss, in our considered opinion, was incurred in the course of business being carried out by the assessee and non-payment of the duty would have resulted into substantial losses for the assessee and damaged assessee’s reputation in the market. This being the case, the said loss would be allowable to the assessee as a business loss out of commercial expediency. The ratio laid down in the cited judicial pronouncements clearly support the case of the assessee. Therefore, we hold that the said expenditure would be an allowable expenditure. The appeal stands allowed. AY 2008-09 7. Facts are pari-materia the same in this year. The assessee is before us with similar grounds of appeal