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Income Tax Appellate Tribunal, MUMBAI BENCHES, ‘G’ MUMBAI
Before: Shri Joginder Singh, & Shri Manoj Kumar Aggarwal
Order : 05/04/2017 आदेश / O R D E R Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 08/03/2013, of the Ld. First Appellate Authority, Mumbai deleting penalty of Rs. 1,57,01,779/ - imposed u/s 2 Wadhwa Constructions 271(1)(c) of the Income Tax Act, 1961 (hereinafter the Act) without appreciating the fact that the assessee has not offered any income on the disputed area of 12768 sq. ft., which was given free of cost to HDIL, as per their business settlement for which the assessee has also claimed expenditure charges and thus it was the willful / intentional Act of concealment of the cost of construction and evaded tax thereon.
During hearing Ms. Anupama Singhla, Ld. DR, advance argument which is identical to the ground raised
. It was contended that surrender of constructed area to HDIL Ltd. was in excess of FSI. It was pleaded that this amount was not offered for taxation. Our attention was invited to para 4 & 5 of the impugned order. Reliance was placed upon the decision from Hon'ble Apex Court in 70 taxman.com
37. (SC),
60. ITD 352 (Mad) and 58. ITD
10. (Raj). The crux of the argument is that it is a case of concealment by the assessee, therefore, the penalty was rightly levied by the Assessing Officer. 2.1 On the other hand Shri Jitender Jain, Ld. Counsel for the assessee, defended the impugned order by explaining that the assessee entered into an agreement with HDIL. It was explained that more construction was done by the assessee and to avoid dispute, the assessee surrendered to HDIL for which our attention was invited to page 16 of the paper book. It was explained that the surrendered was free 3 Wadhwa Constructions of cost. Reliance was placed upon the decision in Hughes (Inspector of Taxes) vs Bank of New Zealand 6 ITR 636 (House of Lords) and 38 ITR 601. The cases relied upon by the Ld. DR were argued to be on different fact. The learned counsel further explained the provision of Explanation I to section 271(1)(c) of the Act. Reliance was placed upon the decision in DCIT vs M/ s. Nepa Limited, ITA No. 1457/Del/2010. It was asserted that the claim made by the assessee was merely rejected, therefore, there is no question of imposing penalty for which reliance was placed upon the decision in Reliance Petro Products Pvt. Ltd., 322 ITR 158 (SC). The learned counsel further relied upon the decision in Pr. CIT vs Control and Switchgear Contractors Ltd. (2015) 377 ITR 215 (Del) wherein the decision of MAK DATA P. Ltd. vs CIT (2013) 358 ITR 593 (SC) was also considered. 2.2 We have considered the rival submissions and perused the material available on record. Facts in brief are that the assessee is engaged in the business of builders and developers of real estate. M/s. Housing Development and Improvement India Limited (hereinafter in short HDIL) acquired, lease hold right from MMRDA in a property situated at BKC. Out of the total area acquired, the HDIL, vide development agreement dated 10.05.2005 granted development right of 5,16,000 sq.ft. of the above property at BKC for a consideration of Rs. 159.96 crores to the assessee. Subsequently vide modification deed dated 4 Wadhwa Constructions 17.03.2006 development area of 5,16,000 sq.ft. was reduced to 3,62,000 sq.ft. and thus the total consideration was reduced to 139.92 crores. As per clause 21 of the agreement dated 10.05.2005, it was agreed upon between the parties that if the area constructed by the assessee is more than the area agreed upon i.e. 3,62,000 sq.ft., in that situation, the consideration payable by assessee to HDIL shall stand increased as per the consideration mutually agreed upon between the parties. The assessee constructed a building known as "Trade Centre" on the above plot of land acquired by the assessee from HDIL. The actual area constructed by the assessee, after obtaining various approvals from Slum Rehabilitation Authority (SRA) was 3,77,529 sq.ft. as against 3,62,000 sq.ft. acquired from M/s. HDIL. However, as the HDIL was the owner of the plot and all the permission and approvals from various authorities are to be obtained by the HDIL in their own name, the assessee was under pressure to abide by the direction / terms and conditions of HDIL. At the time of applying for occupation certificate, M/ s. HDIL raised an objection and claimed the additional area of 12,728 sq.ft., built by the assessee, as belongs to them and thus the same was surrendered, free of cost, to settle down the dispute between the parties. The relevant portion of clause 28 reads as under: “The construction stated in clause 5 is based on the user of FSI of 41,684,81 sq. mts. However, as per LOI dated 29th 5 Wadhwa Constructions December, 2004 permissible sales FSI is 42,487,42 sq.mts. It is agreed that if the sub-developers use and consume any FSI over and above 41,4684,81 sq. mts. the consideration shall stand increased @ Rs. 3100/- per sq. ft. built up which means sanctioned FSI multiplied by factor of 1. 15. "
2.3 We find that above clause 28 provides that contingency of going for any FSI over and above 41,684.81 sq.mts., the excess, if any has to be regularized with enhanced consideration @ Rs. 3100/ - per sq. ft. This factual' aspect was even considered by the tribunal while recalling the order of the tribunal dated 15th April, 2016 (M.A. No. 150/Mum/2016) order dated 08.11.2016, by holding that by the above remedial provision available over and above the excess construction and the same is not illegal. 2.4 It is also noted that till this stage the assessee has already incurred the expenses of more than 300 crores on the project and received more than Rs. 370 crores as sale consideration from various buyers of the project. Due to delay in occupation certificate and other approvals by HDIL, the assessee was under pressure from customers who were insisting for possession of the property at the earliest. Under these compelling circumstances, the assessee decided to settle the issue amicably with HDIL and thus surrendered the additional area of 12,728 sq.ft., free of cost. The cost of this additional surrendered area to HDIL was Rs. 4,61,95,294/- which was claimed as 6 Wadhwa Constructions deductable revenue expenditure u/s 37 of the Act in the return, filed by the assessee.
2.5 During hearing before us the bench, and another bench (while hearing the miscellaneous application), as is apparent from record, asked the assessee to prove that no illegal construction was done by the assessee. At both stages, the bench was satisfied that the construction of total area of 3,77,529 sq.ft. was constructed by the assessee after complying with the necessary rules and regulation of SRA and thus it was not an illegal construction. The approved plan of trade centre, was approved by SRA and Licensed architect's certificate, certifying the construction of 3,77,529 sq.ft. (i.e. 28748.65 sq. mts. X l.22 X 10.764, is available on record, meaning there by, there was no illegal construction by the assessee. The clause 28 of the development agreement dated 10.05.2005 provides for such eventuality. Thus the construction of 12,728 sq. ft. of area is neither outside the preview of written agreement nor an illegal construction, as per rules and regulations of SRA. In fact, it is also not the case of the Assessing Officer. The construction of 12,728 sq. ft. is a legal construction and the only ground of making disallowance by the Assessing Officer is that construction of 12,728 sq. ft., surrendered to HDIL, free of cost, no corresponding income was recognized by the assessee.
7 Wadhwa Constructions 3. It is noteworthy that, during hearing, the bench asked the learned counsel for the assessee as to why no quantum appeal was filed by the assessee against the addition of Rs. 4,61,95,294/- made in assessment order passed u/s 143(3) of the Act. It was explained, as mentioned in para 7 of the assessment order, that the assessee offered the proportionate construction cost of Rs. 4,61,95,295/-, during assessment proceedings, to buy peace and with a request not to initiate penalty proceedings.
3.1 During hearing, the bench also asked the assessee, to prove "commercial expediency" of surrendering the construction area of 12728 sq. ft., free of cost, to HDIL and allowability of business expenditure. It was explained by the learned counsel of the assessee that the project was built on the land leased to HDIL and the assessee acquired the development right of land from HDIL and further as the land belong to HDIL, all the permissions / approvals, from various authorities for the project were to be obtained by HDIL in their name. It was explained that the assessee developed an area of 3,77,529 sq. ft. as against 3,62,000 sq. ft. acquired from HDIL. As discussed earlier, while applying for occupation certificate, the HDIL raised an objection and claimed that the extra area of Rs. 12,728 sq. ft. belong to HDIL. To settle down the dispute amicably and further since the en tire project was completed and sold by the assessee to various buyers and expenses to the tune of more than Rs. 300 crores had already invested the assessee 8 Wadhwa Constructions and the prospective buyers were pressing hard for possession, the assessee decided to give the additional area of 12,728 sq. ft. free of cost to HDIL. The proportionate expenditure of this extra construction was claimed to be a deductable business expenditure u/s 37(1) of the Act.
In the light of the foregoing discussion, now we shall analyze section 37 of the Act. Broadly speaking, where litigation expenses are incurred for purposes of creating, curing or completing the assessee's title to the capital, then the such expenses are in the nature of capital expenditure. On the other hand, if the litigation expenses are incurred to protect the business of, the assessee, it must be considered as revenue expenditure. This proposition is supported by Hon'ble Apex Court in Dalmia J ain & Co. Ltd. vs CIT (1971) 81 ITR 754 (SC) and Meenakshi Mills Ltd. vs CIT (1967) 63 ITR 207 (SC). To be more precise, the type of litigation, object or purpose of the litigation has to be ascertained from the facts of each case. If the object or purpose is to defend or maintain existing title to the capital asset of the business of the assessee, the expenditure would be of revenue in nature. The ratio laid down in following cases supports our view:- a) CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319, 325 (Cal); b) CIT v. Life Insurance Corporation of India, (1966) 62 ITR 827 (Cal); 9 Wadhwa Constructions c) Premier Construction Co. Ltd. v. ClT, (1966) 62 lTR 176 (Bom); d) Liberty Cinema v. ClT, (1964) 52 lTR 153, 167 (Cal); Transport Co. Pr. Ltd. v. ClT, (1962) 46 lTR e) 1009, 1016 (Mad); Transport Co. Ltd. v. ClT, (1957) 31 lTR 259, 266-7 (Mad); f) G. Veerappa Pillai v. ClT, (1955) 28 lTR 636 (Mad); g) ClT v. Raman & Raman Ltd.,(1951) 19 lTR 558, 569-70 (Mad). Also see, Lachminarayan Modi v. CIT, (1955) 28 ITR 322 (Orissa); h) J. B. Advani & Co. Ltd. v. ClT, (1950) 18 lTR 557 (Born); i) Mahabir Prasad & Sons v. ClT, (1945) 13 lTR 340 (Lah); j) Central India Spinning, Weaving & Manufacturing Co. Ltd. v. ClT, (1943) 11 lTR 266 (Nag); k) CIT v. Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC) 1) Southern V. Borax consolidated Ltd. (1942) 10 ITR (Sup) 1 (KB) m) Associated Portland Cement Manufacturers Ltd. v. Kerr, (1946) 27 Tax Cas 103, 118 (CA) n) Ebrahim Aboobaker v ClT (1971) 81 ITR 664 (Bom.) 4.1 In the cases of defending the criminal litigation, we find that Section 37 (1) does not make any distinction between expenditure incurred in civil litigation and that incurred in criminal litigation. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to assessee's business. Further, it is to be seen whether the expenditure 10 Wadhwa Constructions was bonafidely incurred wholly and exclusively for the purpose of the business [see, Cl'T v. Birla Cotton Spng. & Wvg. Mills Ltd., (1971) 82 ITR 166 (SC); CrT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544,549 (SC)]. 4.2 Now, we shall examine the provision of section 37(1) of the Act, which is reproduced hereunder for ready reference and analysis:-
37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession".
[Explanation 1.]-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] (2) [* * *] 11 Wadhwa Constructions (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. If explanation-l to section 37 (1) is analyzed, it speaks about "any expenditure" incurred by the assessee for the purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. The explanation clearly laid down restriction in a case when such claim is an offence, which is not the case of the Revenue or which is prohibited by law. However, fact remains that the assessee has neither committed any offence nor made the payment which is prohibited by law. Even otherwise, there is a difference between prohibition by law and denial of claimed deduction. While clarifying explanation to section 37(1), the CBDT vide Circular No.772 dated 23/12/1998 clarified as under:- "20.1 Section 37 of the Income Tax Act is amended to provide that nay expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessee in respect of payments on account of protection money, extortion, hafta, bribes, etc. as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. "
In the light of the above, it can be said that explanation to section 37( 1) was to target payments, which by themselves constitutes violation of laws, like payment of extortion money, bribes, protection money, extortion, etc, which by itself constitute offence. There is uncontroverted 12 Wadhwa Constructions finding in para 5 of the impugned order that the facts were analysed by the Ld. Commissioner of Income Tax (Appeals) and in the return of income, filed by the assessee, the expenditure was claimed. It is not the case that the claim of the assessee is contrary to the provision of the Act. Since the offer was made voluntarily by the assessee therefore the claimed expenditure is an allowable deduction. Since the assessee has neither concealed its income nor furnish inaccurate particulars of such income, therefore, we find merit in the contention of the assessee with respect to availability of deduction u/s 37(1) of the Act.
4.3. Now, we shall deal with the cases and the ratio laid down therein, where particular decisions were taken with respect to the issue in hand: (1) by a shareholder-assessee In suits filed against directors respecting matters of internal management of the company [Transport Co. P. Ltd. v. CIT, (1962) 46 ITR 1009 (Mad)]; 2) in an appeal with regard to the correctness of a ruling given by the president in the general meeting, with reference to the relative rights of the shareholders and the board of directors under the Companies Act, which had nothing to do with the company's business [Premier Construction Co. Ltd. v. ClT, (1966) 62 lTR 176 (Born), where the expenses of the original suit were held allowable as the plaintiff had claimed for reliefs which, if granted, would have 13 Wadhwa Constructions affected the carrying on of the business of the company];
(3) in defending an application to the court by the shareholders under section 153C of the Indian Companies Act, 1913, questioning the appointment of some of the directors of the company [CIT v. Shiwalik Talkies Ltd., (1967) 63 ITR 83 (Punj));
(4) in a suit for amending the articles of association of the company and thereby acquiring the voting rights in respect of each and every share [CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal));
(5) in proceedings for compelling a company to register its shares in the name of the assessee, which were purchased earlier in an auction sale (CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal)].
(6) in connection with the dispute between the partners of the old managing agency Firm and for obtaining sanction of the Central Government for appointment of there constituted firm as its managing agents [Rampooria Cotton Mills Ltd. v. CIT, (1974) Tax LR 395 (Cal)]; (7) in paying to Chartered Accountants giving advice regarding the scheme of amalgamation [New 14 Wadhwa Constructions Commercial Co. Ltd. v. Addl. CIT, IT Ref. o. 40 of 1972 decided by the Gujarat High Court on 30-11-1973]; (8) in defending disciplinary proceedings against the auditor [CIT v. Deccan Sugar & Abkhari Co. Ltd., (1976) 104 ITR 458 (Mad)]; (9) by the assessee-lessor-company In conducting winding up proceedings started against the lessee- company [Associated Bombay Cinema P. Ltd. v. CIT, (1978) III ITR 942 (Bom)]; (10) in resisting transfer of shares without assigning or disclosing reasons [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 Bom)]; (11) in attempting to prevent investigation into the affairs of the company [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 (Bom)]; (12) by the assessee-amalgamated-company in reimbursing the amount of legal expenses incurred by the shareholders who attempted stayal of declaration of dividends [Raza Buland Sugar Co. Ltd. v. CIT, (1980) 122 ITR 817 (All)];
(13) for the purposes of the amalgamation of two companies [Raza Buland Sugar Co. Ltd. v. CIT, (1980)
15 Wadhwa Constructions 122 ITR 817 (All); Raza Buland Sugar Co. Ltd. v. CIT, (1980) 123 ITR 24 (All)];
(14) in defending a suit instituted by certain shareholders seeking an injunction restraining the company from proceeding to distribute dividends in specie [Buland Sugar Co. Ltd. v. CIT, (1981) 130 ITR 434 (Del));
(15) by the company in defending a suit instituted by a director against another director [Albert David Ltd. v. CIT, (1981) 131 ITR 192 (Cal)];
(16) in legal proceedings in connection with a scheme of amalgamation which did not materialise [Bengal & Assam Investors Ltd. v. CIT, (1983) 142ITR 156 (Cal));
(17) by the assessee, a major shareholder, in connection with application under section 186 of the Companies Act for calling meeting of its subsidiary company for removal of existing directors and appointment of new directors, etc. [United Breweries Ltd. v. CIT, (1986) 162 ITR 527 (Karn)]; (18) by the assessee towards fees for conducting an appeal before the Company Law Board in connection with the refusal of registration of certain shares in a company [Jaya Hind Industries (P.) Ltd. v. CIT, (1986) 161 ITR 842 (Bom)]; 16 Wadhwa Constructions (19) in connection with seeking legal advice in the matter of certain irregularities and fictitious transactions as revealed in the auditors' reports [CIT v. Mcleod & Co. Ltd., (1987) 164 ITR 681 (Cal)]. (20) in defending the appeal filed by B Co. in the Supreme Court challenging the order of the Company Law Board ordering the transfer of shares of B Co. to the assessee [CIT v. Jaya Hind Industries (P.) Ltd., (1993) 201 ITR 934,938 (Bom)].
(21) in connection with amalgamation of company M with the assessee-company which resulted in a radical alteration in the framework of the business of the as-sessee-company [Godfrey Phillips India Ltd. v. CIT, (1994) 206 ITR 23,35 (Born)]. Also see, Lalitmani Pvt. Ltd. v. CIT, (1997) Tax LR 543,544 (Bom).
4.4. We are usefully mentioning a case from house of Lords in Hughes *Inspector of Taxes) vs. Bank of Newzealand (1938)6 CCH 0021 HL;( 1938)6 ITR 0636 order dated 4th March 1938 wherein on the issue of allowability of business expenditure it was observed / held as under:- "In. order to ascertain the authoritised deductions, it is right to turn this into positive form. In this view, it seems to me to be incontrovertible that, in the present case, the investments in question were part of the business of the trade. Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for 17 Wadhwa Constructions the purpose of the trade. It does not required the presence of a receipt on the credit side to justify the deduction of an expense. I agree on this question with the decision of the Courts below.
So far as, issue of quantum of the expenditure to be incurred is concerned, we are of the view, it is for the assessee to decide how best to protect his own interest. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. The ratio laid down in ClT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view, wherein their Lordship observed as under: "It is true that in some of the cases this court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of section 10(2)(xv)*. Those decisions were rendered on the facts of those cases. That is not the position in this case. " Criminal litigation may be prosecuted to put pressure on the accused to make good the loss caused to the assessee, and expenditure incurred therefore, if having nexus with the profits or business, are allowable deduction Saharanpur Electric Supply Co. Ltd. v. ClT, (1971) 82 lTR 405 (All). Assessee defending himself and the expenses incurred by a person exercising a trade or profession in defending himself in a criminal prosecution, which arises out of his business or professional activities, cannot be deducted as business expenditure in the computation of 18 Wadhwa Constructions his business income CIT v. H. Hirjee, (1953) 23 ITR 427, 431 (SC); CIT v. Gasper & Co., (1940) 8ITR 100 (Rang)]. In Hirjee's case [23 ITR 427], the assessee incurred expenditure in defending prosecution under the Hoarding and Profiteering Ordinance, 1943 (No. 35 of 1943), for selling goods at black market prices. Such expenditure was held not allowable. Similarly, expenditure incurred by a firm carrying on export and import business in defending one of its partners for having acquired foreign exchange and not fully utilising it for import were held not allowable although the partner was utlimately acquitted [CIT v. Chaman Lal & Bra .(1970) 77 ITR 383 (Delhi)]. This case was, however, distinguished in CIT v. Ahmedabad Controlled Iron & Steel Assn. Pr. Ltd., (1975) 99 ITR 567 (Guj), where expenses incurred by company in defending its managing director were held allowable. In order to make such claim / such expenditure the assessee has not only to prove that the expenditure was incidental to the business but also to show that the expenditure was laid out or expended wholly and exclusively for the purpose of the business [Indermani Jatia v. CIT, (1951) 19 ITR 342 (All) on appeal, see, (1959) 35 ITR 298 (SC)]. 5.1 In a case where the assessee was defending an employee, etc.-When an employee is prosecuted in respect of transaction in the course of his employment, the expenditure incurred for his defence was held to be incurred for the protection of the good name of the 19 Wadhwa Constructions business and thus was held to be an allowable business expenditure [ J.B. Advani & Co. Ltd. v. CIT & EPT, (1950) 18 ITR 557 (Born) considered in CIT v. H. Hirjee, (1953) 23 ITR 427 (SC), where the correctness of its ultimate decision was not doubted; J.N. Singb & Co. Pr. Ltd. v. CIT. (1966) 60 ITR 732 (Punj)]. Legal expenses incurred by assessee- company, a sugar mill, in defending a criminal prosecution launched against its director-manager and some employees on charge of conspiracy between the assessee and the railway employees to give and accept bribes in regard to transport of sugarcane from various stations to mill were held to be allowable deductions [Lakshmiji Sugar Mills Co. Ltd. v. CIT, (1967) ITR (Sh N) 21 (Delhi)]. Similarly, expenditure incurred in defending a criminal case against the directors and principal officers of the assessee- company on the allegation that the vegetable oil produced by the company did not contain 5% til oil as required by the Government rule was held to be an expenditure incurred with a view to proving the quality and standard of the manufactured goods produced by the assessee and, therefore, held to be deductible expenditure [Rohtas Industries Ltd. v. CIT, (1968) 67 ITR 361 (Pat)].
5.2 In Ananda Marga Pracharaka Sang ha v. CIT [(1996) 218 ITR 254, 258, 2 (Cal)] , the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges have been held 20 Wadhwa Constructions allowable as a permissible expenditure while computing the income of the assessee. However, on the question of allowability of legal expenses incurred by the assessee for defending criminal charges arising out of the person civil rights and unconnected with the alms and objects of the assessee-organisation such, has been remanded to the Tribunal to determine that whether such expenses were related to the society's activity and then to decide such question about their allowability.
In the light of the above now we shall analyze whether the expenditure was incurred out of "commercial expediency" and also it is allowable u/s 37 of the Act. There was no dispute that on the construction the assessee had already expended / incurred more than Rs. 300 crores on the project and had already sold the project to the prospective purchaser for Rs. 370 crores and the prospective purchaser were pressing hard to take the possession, therefore, it was felt "commercially expedient" to give the extra area of 12,728 sq. ft. to HDIL to settle the matter amicably. The ratio laid down in Sasson J. David & Co. P. Ltd. vs. CIT 118 216 (SC), wherein the Hon'ble Apex Court observed that the expression "wholly and exclusively" used in section 10(2) (xv) of the Indian Income Tax Act, 1922, does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and 21 Wadhwa Constructions if it is incurred for promoting the business and to earn profits, the assessee can claim deduction u/s 10(2)(xv) of the Act even though there was no compelling necessity to incur such an expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction u/s 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. (Emphasis Supplied). Likewise Hon'ble Jurisdictional High Court in CIT vs Sales Magnesite (Pvt) Ltd. 214 ITR 1 (Born) identically observed / held as under: "We have carefully considered the facts of the case. We have also noted the finding of the Tribunal that the payment made by the assessee to its sole selling agents as compensation for termination of the sole selling agency was a business expenditure which was incurred by the assessee after proper consideration of the facts and circumstances of the case and on the basis of legal opinion of its solicitors. The Tribunal has also recorded a clear finding of fact that the payment was made for commercial expediency. In view of this clear finding that the payment for termination of the sole selling agency was wholly on business considerations, we do notfind any cogent reason to hold that the claim of the assessee was not allowable as a business deduction.
The principles governing the allowance of deduction in respect of such expenditure are well-settled by now by a catena of decisions of the Supreme Court and the various High Courts. Such deductions are ordinarily claimed and allowed under section 37 of the Act which is a residuary section extending the allowance of deduction to items of business expenditure not covered by any of the preceding sections (sections '10 to 3.Q) and section 80 W. The only conditions are that: (i) it is not an expenditure, (a) in the nature of capital expenditure, or (b) personal expenses of the assessee, and (ii) it is laid out or expended wholly and exclusively for the purposes of the business or profession.
Various tests have been evolved by the courts from time to time to decide whether an expenditure is incurred for the purposes of business. One of the tests often applied is whether it is incurred by the assessee in his character as a trader. To hold it to be an expenditure allowable as a deduction under section 37. it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditure incurred voluntarily on the ground of commercial expediency and in 22 Wadhwa Constructions Order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary for commercial expediency or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the Revenue. As observed by the, Supreme Court in Bombay Steam Navigation Co. (1953) Put. Ltd. v. CIT [19651 56 ITR 52, the question must be viewed in the larger context of business necessity or commercial expediency. No abstract or pedantic view can be taken in the matter.
Applying these tests to the facts of the present case, it is clear that the payment of compensation made by the assessee to its erstwhile sole selling agents for loss of the sole selling agency is allowable as a deduction under section 37 of the Act in the computation of the income of the assessee. This is particularly so in view of the following findings of fact arrived at by the Tribunal which are not the subject-matter of challenge in this reference application:
(i) The factum of payment is proved; (ii) There is, nothing on record to show that the payment was illusory or that the assessee's claim was malafide; (iii) There is no evidence on record to show that the transaction was a got-up affair to hoodwink the Revenue; (iv) The claim of the sole selling agents is not sham; (v) The compensation has been given in the light of the opinion of the solicitors, who advised the assessee to pay the same; (vii) The payment was for business or commercial expediency. (vi) The amount paid by way of compensation more or less corresponds to the amount of remuneration that would have been payable for the unexpired period of the agency; 11. Learned counsel for the Revenue placed reliance upon the provisions of section 294AA(2) of the Companies Act, 1956, in support of his contention that the sale selling agency stood automatically terminated in the absence of the approval of the Central Government. It was urged that there being no legal obligation on the assessee to pay any compensation to the said sole selling agents,the payment made by the assessee by way of compensation for loss of office of sole selling agents cannot be held to be for commercial considerations. We are not impressed by these submissions. So far as the second contention regarding payment for extra-commercial considerations is concerned, we find that it is wholly untenable in view of the clear finding of the Tribunal to the contrary. The Tribunal, on consideration of the totality of the facts and circumstances of the case, has come to a clear findings of fact that the payment was dictated by commercial expediency. This finding of fact having not been challenged on the ground of perversity or the like, it is not open to the Revenue at this stage to contend that the payment of compensation by 23 Wadhwa Constructions the assessee was not for business considerations but was a payment for extra-commercial considerations. On the facts also, there does not appear to be anything wrong or unusual in the payment of the sum of Rs. 1,55,855 by way of compensation to the sole selling agents for loss of office which they had been holding for more than three decades and in claiming deduction of the same in the computation of its total income. We, therefore, answer the first question also in the affirmative and in favour of the assessee.
In the facts and circumstances of the case, parties shall bear their own costs."
In the aforesaid decision the Hon'ble Jurisdictional High Court has duly examined the word "Commercial Expediency" and the circumstances wherein the assessee can claimed deduction. The Hon'ble High Court has also considered various tests along with the decision from Hon'ble Apex Court in Bombay Steam Navigation Co. 56 ITR 52 wherein it was held the question was to be viewed in the larger context of business necessity or commercial expediency. It the ratio laid down in the aforesaid decision is analysed there is no dispute to the fact that the additional area of 12,728sq.ft.was surrendered, free of cost by the assessee, to HDIL to safeguard the business interest of the assessee. The cost of construction to additional area was Rs. 4,29,37,200/- and in the return this cost of construction was voluntarily offered to tax in order to buy peace with the department and claimed as expenses by the assessee. The Ld. A.O. invoked explanation (1) to section 271(1)(C) of the Act and consequently imposed penalty of Rs.1,57,01,779/-. Before the Ld. Commissioner of Income Tax (Appeals) and also before this tribunal identical argument were advanced / considered. The stand of the assessee before the Ld. First appellate authority as well as before this tribunal is that if the additional area would not have been surrendered the goodwill and reputation of the assessee 24 Wadhwa Constructions would have been affected drastically affecting future business prospect and profitability, therefore, the agreement with HDIL was entered, keeping in view, the commercial expediency, therefore, the expenditure is allowable. There is no dispute to the fact that this expenditure was offered for taxation in order to buy peace with the department. Thus the aforesaid decision from Hon'ble Jurisdictional High Court clearly supports the case of the assessee. So far as buying peace with the department is concerned, it has been held by the Hon'ble Madhya Pradesh High Court in the case of Addl. CIT vs. Bhartiya Bhandar(122 ITR 622) that when a surrender is made to purchase peace or for other similar reasons or to avoid botheration, the surrender cannot amount to an admission constituting evidence of concealment in penalty proceedings. It would be a wrong notion deciding the penalty proceedings that once a surrender is made of any amount, the assessee can be straightaway penalized without asking by the Assessing Officer to bring some other material and further proof establishing the dishonest concealment of the undisclosed income and the falsity of the return and without affording the assessee an opportunity to show that the surrendered amount was in reality his undisclosed income or that it was for certain other reasons that the assessee had made surrender of the amount. Mere fact of surrender could not necessarily be an admission of assessee that amount surrendered was undisclosed income and liable to be subjected to penalty. The decisions In the cases of CIT of CIT vs. Punjab Tyres (162 ITR 517)(MP), Krishan Lal Shivchand Rai (88 ITR 293) (P&H) and S. V. Electrical Pvt. Ltd. (274 ITR 334) (MP) clearly support the case of appellant that no penalty u/s. 271(1)(c)
25 Wadhwa Constructions can be levied when the assessee has surrendered certain amount in the assessment proceedings. In the case of Gumani Ram Siri Ram Vs. CIT 5 ITR 67), the Hon'ble Punjab and Haryana High Court has held that in the only circumstances that the amount was surrendered by the assessee, an inference had been drawn that the amount represented the income of the assessee. This conclusion was not inevitable. There might be hundred reasons for the assessee to surrender this amount irrespective of the fact whether it was his income or not and it was incumbent, in view of the observations of the Supreme Court in CIT v. Anwar Ali case (76 ITR 696). for the ITO to find on evidence that the amount represented the Income of the assessee. Therefore, the requirements of sections 271(1)(C) had not been satisfied so as to bring the case of the assessee within the same. Thus, the penalty could not be levied on the amount surrendered by the assessee, unless there was material on the record to show that the surrendered item was his income. In the light of above judicial rulings and the facts of this case, we find that there was no case of furnishing of inaccurate particulars of income so as to make the appellant liable for penal consequences. 7.1 On the analysis of section 271 (l )( c) of the Act, we are of the view that for attracting the said provision for imposing penalty either there should be concealment of income or furnishing of inaccurate particulars of such income. However, in the present appeal, the assessee has surrendered excess construction to HDIL for commercial expediency. It is not the case that the assessee hide something. At best, it is a case of wrong claim/excess claim /excess deduction, made by the assessee, therefore, the decision from Hon'ble Apex Court in CIT vs Reliance 26 Wadhwa Constructions Petro Products Ltd. (2010) 189 taxman 322 (SC) comes to the rescue of the assessee, wherein, it was held as under.- Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under s. 271 (l) (c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by A 0 for any reason, the assessee will invite penalty under s. 271 (l)(c). That is clearly not the intendment of the legislature. In the light of the aforesaid observation and the provision of section 271 (1)( c) of the Act, it would suggest that in order to be covered under the provision there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. Present is not the case of concealment of the income. That is not the case of the Revenue either. However, the learned counsel for Revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word "particular" is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word "particulars" used in the s. 271 (1)( c) of the Act would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In CIT vs. Atul Mohan Bindal (2009)
27 Wadhwa Constructions 225 CTR (SC) 248 : (2009) 28 DTR (SC) 1 : (2009) 9 SCC 589, wherein Hon'ble Apex Court considered the same provision, the Court observed that the AO has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. While coming to this conclusion, the Hon'ble Apex Court also referred to another decision of this Court in Union of India vs. Dharamendra Textile Processors (2007) 212 CTR (SC) 432 : (2008) 13 SCC 369, as also, the decision in Union of India vs. Rajasthan Spinning & Weaving Mills (2009) 224 CTR (SC) 1 : (2009) 23 DTR (SC) 158 : (2009) 13 SCC 448 and reiterated in para 13 that: "13. It goes without saying that for applicability of s. 271 (l)(c), conditions stated therein must exist. " Therefore, it is obvious that it must be shown that the conditions under s. 271 (l)( c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. After quoting from s. 271 extensively and also considering s. 271 (l)( c), the Court came to the conclusion that since s. 271 (1 )( c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of s. 271(l)(c) r/w Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under s. 276C of the Act. The basic reason why decision in Dilip N. Shroffvs. Jt. CIT & Am. (cited supra) was overruled 28 Wadhwa Constructions by this Court in Union of India vs. Dharamendra Textile Processors (cited supra), was that according to Hon'ble Court the effect and difference between s. 271 (l)(c) and s. 276C of the Act was lost sight of in case of Dilip N. Shroff vs. It. CIT & Anr. (cited supra). However, it must be pointed out that in Union of India vs. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff vs. It. CIT & Anr. (cited supra), where the Court explained the meaning of the terms "conceal" and "inaccurate". It was only the ultimate inference in Dilip N. Shroff vs. Jt. CIT & Anr. (cited supra) to the effect that mens era was an essential ingredient for the penalty under s. 271 (l)( c) that the decision in Dilip N. Shroff vs. Jt. CIT & Anr. (cited supra) was overruled. Reading the words in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. Our view finds supports from the decision of Delhi Bench of the tribunal in the case of Tristar Intech (P) Ltd. vs ACIT (ITA No. 1457/De1/2010, order dated 07.09.2015, Price Water House Coopers Pvt. Ltd. vs CIT (2012) 348 ITR 306 (SC) and DCIT vs M/s. Nepa Ltd. ( order dated l3.10.2014, Laxmi Vilas Bank, 303 ITR 428 (Mad), CIT vs Societex, ITA No. 1497/2006 (Del), Indian Pesticides vs Income Tax Officer, 16 TTJ 101 (Chd), ACIT vs A.H.Wheeler, 132 ITD 34 (All), CIT vs S.P.K. Steels, 270 ITR 156 (MP), CIT vs Harparshad & Co. Ltd. (2010) 328 ITR 53 (Del), CIT vs New Sorathia Engineering Co. vs CIT (2006) 282 ITR 642 (Guj), Pr. CIT vs Control and Switchgear Contractors Ltd. (2015) 377 ITR 215 (Del), wherein the decision in CIT vs. Zoom Communication P Ltd. (2010) 327 ITR 510 (Del) was distinguished and considered CIT vs Escorts Finance Ltd. (2010) 328 ITR 44 (Del) and 29 Wadhwa Constructions MAD Data P. Ltd. vs CIT (2013) 358 ITR 593 (SC). The assessee also gets shelter from Hon'ble Delhi High Court in DCIT Nepa Ltd. (2015) 58 taxmann.com 137 (Del). So far as the case is relied upon by Ld. DR is concerned, we have perused the same and find that in those cases the facts are all together different, therefore, may not help the revenue. Even otherwise in the light of the foregoing discussion and various case laws, discussed hereinabove, the assessee is having a good case in its favour, consequently, there is no error in the conclusion of the Ld. Commissioner of Income Tax (Appeal). We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under s. 271(l)(c) of the Act.
Finally the appeal of the Revenue is dismissed.