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12yt-0 ~ an income of -f1221.40 lacs, Thus. it is not a case of 'no profits'. The neat question is as to how one is to determine as to whether the profits are less than the ordinary profits which might be expected to arise in the business? Obviously, this can be round only when exercise is undertaken comparing the income of the assessee with other comparable business enterprises in India. However. the AO did not do this exercise at all. He did not bring on record any comparable case to find out what is ordinary profit in this type of business, Definitely, onus in this behalf urlder the provisions of Section 92 of the Act lay on the AO. This pertinent aspect coupled with the fact that price fixed is acceptable as Arm's Length Price by the TPO under Section 92 of the Act itself is sufficient to clinch the issue '-' ... in favour of the assessee. 18. In this backdrop. we have to examine whether such an expenditure could still be disallowed and the opinion of the AO was correct that in the aforesaid scenario, the payment made cannot be treated to be wholly and exclusively for business purpose of the assessee to enable it to cover the same under Section 37(1) of the Act. As noted above, Ms. Bansal, learned counsel for the Revenue had argued that since the payment of royalty on TPO was not the genuine basis as the goods had not '--', • been sold at IPP, but at much lesser price. payment of royalty on IPP rather than on actual sales is superfluous and not ITA No.383 ofl009 Page 16 of19
12.'-t IL ~Qj & permissible under Section 37(1) of the Act. It is difficult to accept such an argument, Once it 1s held that the payment of royalty by the assessee to its parent company is not hit by the proviSions of Section 92 of the Act and the price fixed is ALP as determined by the TPO himself, there is no reason to hold that the expenses would not be allowed under Section 37(1) of the Act, This provision reads as under; "Section 37: Generat (l) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capita! expenditure or personal expenses of the assessee), Jaid 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 u , '-' 19. It is, thus, clear that what is to be seen is that the expenditure ... was incurred by the assessee in the course of business and had nexus with the business of the assessee. It could not be disputed that the payment of royalty is a business expenditure, which was expended wholly and exclusively for the purpose of .. ~,~-. ,,~' '~-'<'- ." business of the assessee, The nature of the expenses is also not such Which would fall in any of the exceptions carved out under Section 30 and 36 of the Act. Once these conditions are satisfied, the expense is to be arJowed in toto as business , V'" expenditure, and the Revenue cannot sit in the arm's chair of the assessee and decide as to how affairs of the business are to~ ITA No.383 of 2009 Page 17 ot 19
tt..'1L..-0 ~ be run and wasteful or excessive expenditure is to be curtailed, The question of commercial expediency is to be judged by the assessee and not by the AO. Following test was laid down in the case of Atherton Vs. British Insulated lit Helsby Cables Ltd. reported as 10 TC 155. 191 (HL) in the following terms: "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 grounds of commercial expediency and 1n order indirectly to facilitate the carrying on the business, may yet be expended wholly and exclusively for the purposes of the trade." The above test was quoted with approval and applied by the Supreme Court in the case of Eastern Investments Ltd. Vs. Commissio(i'er of Income Tax, 20 ITR 1, 20. It is well-settled that it is not open to the Department to adopt '-' .... a subjective standard of reasonableness and disallow a part of business expenditure as being unreasonably large, or decide what type of expenditure the assessee should incur and in what circumstances. This was so he!d by the Supreme Court in the case of' Commlss{.C!ner of Income Tax Vs. Walchand, 65 ITR 381 which principle has thereafter been often repeated , and remains the bedrock of Section 37 of the Act till date. Thus, the jurisdiction of the AO is only confined to dekide "Profits and gains of business or profession", Le" whether the " \,..." expenditure claimed was actually and factually expended or not and whether it was wholly and exclUSive for the purposes of Page 18 of 19 ITA No.383 of 2009
!;L 'i L .-(!j business. Reasonableness of the expenditure can be@) considered only from this limited angle for the purpose of determining whether in fact amount was spent or not 21. Mr, Syali, learned Senior Counsel was right In his SUbmission that Section 37 was expenses oriented in nature and the focus of this provision was to see whether expenses incurred were wholly or exclusively for the purpose of business to entitle the same for deduction. The AO committed serious error in mixing the provisions of Section 92 and Section 37 of the Act. 22. The upshot of the aforesaid discussion leads us to conclude that the Tribunal was justified in law in allowing the deduction \,.,. ... disallowed by the AO being royalty paid by the assessee to its holding company. Resultantly, these appeals warrant to be dismissed, but there shall be no orders as to cost. tr0"'t L (AIR. SIKRI) JUDGE ~~ JUDGE MARCH 30, 2011 v eme ITA No.383 of 2009 Page 19 of 19