High Court Of Bombay
CIT, Panaji-Goa vs. Salitho Ores Ltd.
Assessment Year : 1989-90
Section : 37(1)
D.G. Karnik And F.M. Reis, JJ.
Tax Appeal No. 18 Of 2005
September 29, 2010
JUDGMENT
D.G. Karnik, J. – This appeal, at the instance of the revenue, is directed against the order dated 27-12-2004, passed by the Income-tax Appellate Tribunal, Panaji Bench, Panaji (for short “ITAT”).
2. By an order dated 22-8-2005, the appeal has been admitted by this Court on the following substantial question of law :—
“Whether on the facts and in the circumstances of the case, the finding of the ITAT as well as CIT(A) that a business decision of the assessee could not be challenged by the Assessing Officer, is a perverse finding particularly in view of the fact that no prudent businessman will keep machinery idle and pay huge lease rentals as well as maintenance/servicing charges, without any benefit?”
3. The assessee is engaged in the business of extraction and sale of iron ore. For the assessment year 1989-90, the assessee filed a return of its income, declaring a loss of Rs. 1,39,89,493. The Assessing Officer, after disallowing several items of expenditure and/or deductions, assessed the total business loss of the assessee to be Rs. 65,102 only. The Assessing Officer, amongst the others, rejected the claim of the assessee for expenditure of Rs. 25,90,448, representing the lease rental in respect of 3 dozers, on the ground that the 3 dozers were not used at all during whole of the previous year. According to the Assessing Officer, the expenditure on the lease rent for 3 out of 4 dozers which were not used at all, was not a justifiable expenditure. The Commissioner of Income-tax (Appeals) (for short “the CIT”), while partly allowing the appeal, held that the business decision taken by the assessee of hiring dozers, though erroneous, the same could not be questioned by the Assessing Officer and the expenditure which was made by the assessee even on a wrong business decision had to be allowed by the Assessing Officer. The other grounds of challenge raised by the assessee were rejected. Aggrieved by the decision of the CIT, the assessee as well as the revenue filed appeals before the ITAT. The ITAT allowed the appeal in respect of some other parts of the order of the CIT, but confirmed the decision of the CIT as to the deduction of Rs. 25,90,448 towards the lease rentals of all 3 dozers. Aggrieved by the decision of the ITAT, the revenue is in appeal.
4. During the relevant previous year, the assessee had taken on lease four Comatsu Dozers from New Century Leasing & Investment Ltd., Bangalore vide Agreements dated 27-2-1988 and 6-5-1988. The dozers were taken on lease for the purpose of the business of the assessee of extraction of iron ore from the mines. It appears that during the relevant previous year, the assessee did not use 3 out of 4 dozers taken on lease and only one dozer was put to actual use of extraction of iron ore. The Assessing Officer held that no prudent businessman would take on lease 4 dozers when only one could be put to actual use. Accordingly, the Assessing Officer held that the rent paid for 3 dozers was not a prudent business expenditure incurred by the assessee and he, therefore, disallowed the proportionate rent attributable to the 3 dozers which were not used during the year. It may be noted that it is not the case of the revenue that the lessor-New Century Leasing and Investment Ltd., and the assessee are related to each other or that there has been any diversion of the funds by the assessee in paying the rent towards the dozers. The transaction of leasing is not challenged on the ground of it is not a genuine or bona fide. The only reason for which the claim of expenditure was rejected by the Assessing Officer was on the ground of prudence. According to him, it was imprudent for the assessee to have taken on rent 4 dozers when it did not use 3 dozers – the majority- for the purpose of actual iron ore extraction. He concluded that this was an imprudent expenditure and accordingly, rejected the claim on that ground.
5. In our view, the decision of the Assessing Officer was totally erroneous and has rightly been reversed by the CIT and the reversal has rightly been confirmed by the ITAT. Supporting the decision of the ITAT, learned Counsel for the assessee referred us to a decision of the Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. AIR 1967 SC 1435. While interpreting the provisions of section 10(2)(xv) of the Act of 1922, the Supreme Court held that the Income-tax Authorities were required to decide whether the expenditure claimed as a deduction was incurred by the assessee on the ground of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly or necessarily incurred for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. In that case, the question was regarding whether the remuneration paid to an employee was a deductible expenditure and the Supreme Court held that an employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business and host of other related circumstances. [Emphasis supplied]. The test to be applied in considering is whether any expenditure claimed as an allowance/deduction in computing the business profit, all the expenses which are considered as necessary and expedient by the businessman are required to be allowed. Test of reasonableness of an expenditure is to be understood in the light of perception of the businessman and the benefit of that expenditure for the business as pursuit by the assessee and not as pursuit by the Assessing Officer.
6. In the case of CIT v. Dhanrajgiri Raja Narasimgirji [1974] 3 SCC 520, the issue which was referred to at the instance of the Commissioner of Income-tax to the High Court was “whether on the facts and circumstances of the case any expenditure incurred by the assessee in connection with the criminal proceedings initiated and conducted by the Government against Shri Ramgopal Ganpatrai was an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.” In that case, the assessee invited one Shri Ramgopal Ganpatrai to finance the company. Subsequently, Ramgopal Ganpatrai moved a resolution for removal of the assessee as the Chairman of the Board of Directors of the company. The resolution was accepted and the assessee was removed from the office of the chairman. The assessee then lodged a complaint to the police alleging misappropriation of the company funds, as well as other fraudulent acts on the part of Ramgopal Ganpatrai. In pursuance of the complaint, the Government instituted a criminal case against Ramgopal Ganpatrai. The assessee employed his own lawyer to prosecute the criminal case and incurred certain expenditure in that connection. While considering the question whether the expenditure was incurred by the assessee could be allowed as a deduction under section 10(2)(xv) of the Income-tax Act, 1922, the High Court accepted the conclusion reached by the Tribunal that the expenditure was incurred for the purpose of the business carried out by the assessee, but at the same time, asked the Tribunal to re-examine the exact amount expended by the assessee in connection with the criminal litigation. In an appeal, the Supreme Court held that it was not open to the department to prescribe what expenditure the assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.
7. In the present case, it is not disputed that the dozers were required for the business of extraction and sale of iron ore which was the business of the assessee. How many dozers should be engaged was a question which could be best to be considered by the assessee. It is not the case of the revenue that the expenditure was not bona fide and/or it was incurred by way of diversion of profits to a related person or a sister concern of the assessee. As such, the revenue could not have gone into the question of expediency of the expenditure incurred and/or expediency of hiring of the 4 dozers. That was a matter of commercial expediency and the assessee was the best judge of it.
8. A businessman, sees an opportunity and smells of money which often is light years away. He sees an opportunity which is not seen by others. He incurs an expenditure in pursuit of a business opportunity. Sometimes the judgment as to the existence of a business opportunity turns sour. But the expenditure incurred for pursuit of the business and/or exploitation of a business opportunity cannot be denied by the tax authorities on the ground that the business decision was imprudent. As long as the expenditure is incurred bona fide in pursuit of a business and not by way of diversion of funds, the expenditure has to be allowed as a deduction.
9. For all these reasons, we see no error in the view taken by the ITAT, allowing the entire lease rent paid for hire of the dozers by the assessee as a business expenditure. Consequently, the appeal is dismissed with costs.
[Citation : 344 ITR 161]
