The Commissioner Of Income Tax vs Micromatic Machine Tools P.Ltd.
2010 Latest Caselaw 2655 Del

              THE HIGH COURT OF DELHI AT NEW DELHI


%                                Judgment Delivered on: 19.05.2010

+            ITA 587/2010


THE COMMISSIONER OF INCOME TAX                             ... Appellant


                                 - versus -


MICROMATIC MACHINE TOOLS P.LTD.                           ... Respondent


Advocates who appeared in this case:
For the Appellant   : Mr Sanjeev Sabharwal
For the Respondent  :

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN


     1.    Whether Reporters of local papers may be allowed to
           see the judgment?                                   Yes
     2.    To be referred to the Reporter or not?                    Yes

     3.    Whether the judgment should be reported in Digest? Yes

V.K. JAIN, J. (ORAL)

1. This is an appeal impugning the order dated

30.01.2009, passed by the Income Tax Appellate Tribunal,

whereby it dismissed the appeal filed by the Revenue, being

ITA No.1253/Del/2007, against the order passed by the

Commissioner of Income Tax (Appeals), allowing the appeal

filed by the assessee, against the assessment order for the

Assessment Year 1998-99.

2. The assessee-company is engaged in the business of

marketing machine tools for certain manufacturers. During

the year in question, the assessee incurred expenses,

amounting to Rs 20.42 lakhs for participating in the exhibition

IMTEX-1998. The vouchers in respect of the aforesaid

expenditure were produced before the Assessing Officer, who

noticed that the expenditure incurred on the exhibition during

the Assessment Year 1997-98 being only Rs 2,67,162/- there

was an eight fold increase in the expenditure, though the

commission income earned from the sale had decreased to Rs

2.15 crore in the Assessment Year 1998-99, as against Rs 2.43

crores earned in the Assessment Year 1997-98. The Assessing

Officer, therefore, added back Rs. 18 lakhs out of the aforesaid

expenditure, to the income of the assessee-company. In the

appeal filed by the assessee, the Commissioner of Income Tax

(Appeals) confirmed the disallowance only to the extent of Rs 9

lakhs.

3. Cross appeals against the order of the Commissioner

of Income Tax (Appeals) were filed by the Revenue and the

assessee. The Tribunal restored the issue back to the CIT

(Appeals), taking the view that the basic question, which

needed to be addressed, was whether the expenditures were

wholly for the business purposes or not. It was held that if the

expenses were found to be incurred exclusively and wholly for

the business of the assessee, it would be irrelevant that they

have increased eight times.

4. During the course of hearing before the Commissioner

of Income Tax (Appeals), after the matter had been remanded

by the Tribunal, it was submitted on behalf of the assessee

that as per the agreement of the assessee-company with its

Principals, whose products were being marketed and serviced

by it, the assessee-company had incurred expenditure on

technical exhibition, to promote the products of the Principal

Companies and part of the expenditure was to be borne by the

assessee-company. It was pointed out that the assessee-

company had borne only 31.6% of the expenses incurred on

the exhibition and there was increase in the sale of the

products, on account of sale promotion activities such as

participation in the exhibitions. The eight fold increase in the

expenses was attributed to the exhibition being held every

three years. It was pointed out that in the past also, there was

increase in the expenditure during Assessment Years 1992-93

and 1995-96, when exhibitions were held.

5. It was noted by the Commissioner of Income Tax

(Appeals) that as per the agreement between the assessee and

its Principals, the assessee was required to meet 50% of the

expenditure incurred on exhibition, whereas it had contributed

only 31.6% of the same, the balance having been contributed

by the Principals. It was also noted that the IMTEX exhibition

was held every three years and there was steep increase in the

exhibition expenditure. He was of the view that since there was

a direct co-relation between the commission earned by the

assessee and the sale of the products of the Principals, any

expenditure for the purpose of increasing sale would be a valid

business expenditure in the hands of the assessee.

6. While dismissing the appeal filed by the Revenue, it

was noted by the Tribunal that nothing had been brought on

record, by the Assessing Officer, to suggest that the

expenditure was not incurred for the business purpose of the

assessee. In the opinion of the Tribunal, if somebody, other

than the assessee, benefited from the expenditure incurred by

it, that would not be a relevant factor if the expenditure was

incurred wholly and exclusively for the business of the

assessee.

7. Section 37(1) of the Income Tax Act, to the extent it is

relevant, provides that any expenditure, not being in the

nature of capital expenditure or personal expenses of the

assessee, laid out or expended wholly or exclusively for the

purpose of the business or profession would be allowed in

computing the income chargeable under the head "Profit and

Gains of the Business or Profession."

8. In the case before us, there is no dispute that the

assessee-company had actually incurred the expenses claimed

by it for participating in the exhibition. The only question,

which the Assessing Officer could examine, was whether the

expenditure had been incurred solely for the purpose of

business of the assessee-company or not. Admittedly, the

assessee-company was the sole Selling and Servicing Agent for

the products being manufactured by its Principals. The

assessee-company was also engaged in selling the spare parts

of the machinery being manufactured by its Principals. As

noted by both, the Commissioner of Income Tax (Appeals) and

the Income Tax Appellate Tribunal, the agreement, between the

assessee-company and its Principals, obliged the assessee-

company to contribute 50% of the expenditure incurred on

participation in the exhibition, though during the year in

question, the assessee-company contributed only 31.6% of that

expenditure, the balance having been contributed by its

Principals. Therefore, the assessee-company was under a

contractual obligation to contribute half of the expenses

incurred on participation in the exhibition. It would be difficult

to say that the expenses incurred in performance of the

contractual obligation of the assessee-company would not be

expenditure for the business of the assessee-company. An

obligation incurred, while entering into a commercial contract,

has to be taken as a business expenditure within the meaning

of Section 37 (1) of the Act unless it is shown that the contract

itself was a sham document and was made with an ulterior

motive. What is required to be established is a nexus between

the expenditure incurred and the business purpose of the

assessee. It is not permissible for the Assessing Officer to place

himself in the position of the management of the assessee and

take it upon himself to decide how much would be a

reasonable expenditure for a particular business purpose. The

matter has to be seen purely from the viewpoint of the

management of the assessee, taking its commercial interests

into consideration.

9. In the case before us, the genuineness of the contract

between the assessee-company and its Principals for sharing

the expenditure incurred on participation has not been

disputed by the Assessing Officer. In any case, since the

assessee-company was the sole agency appointed for

marketing and servicing, etc. of the machines manufactured by

its Principals, participation in the exhibition was likely to be

beneficial to the assessee-company, since increase in the sale

of the product on account of promotional activities undertaken

during the exhibition is to result in proportionate increase in

the commission, being paid to the assessee-company, by its

Principals. So long as the participation in the exhibition

ensued to the benefit of the assessee-company in the form of

increased commission on the products sold and serviced by it,

it would be immaterial that part of the benefit on account of

promotional activities undertaken during the exhibition would

also accrue to the manufacturers of the machines being sold

and serviced by the assessee-company. In any case, in the

case before us, the Principals of the assessee-company have

contributed more than 68% of the expenditure incurred on

participation in the exhibition.

10. In CIT vs. Chandulal Keshavlal & Co.: 38 ITR 601,

the assessee, which was the Managing Agent, getting

commission under an agreement with the managed company,

had waived a portion of the commission payable to it.

Upholding the part waiver of the commission, it was held by

the Supreme Court that if the payment or the expenditure is

incurred for the purpose of the trade of the assessee, it does

not matter that the payment may inure to the benefit of a third

party. The Court was of the view 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

grounds of commercial expediency and in order indirectly to

facilitate the carrying on of the business may yet be expended

wholly and exclusively for the purpose of the trade.

11. In Sassoon J. David and Co. Pvt. Ltd., vs. CIT,

Bombay: 118 ITR 261, the Supreme Court observed that

ordinarily it is for the assessee to decide whether any

expenditure should be incurred in the course of its business

and that such expenditure may be incurred voluntarily and

without any necessity. The Court was of the view that if the

expenditure is incurred for promoting the business and to earn

profits, the assessee can claim deduction even though there

was no compelling necessity to incur such expenditure.

Relying upon its decision in the case of Chandulal Keshavlal

& Co. (supra), it was held that the fact that somebody, other

than the assessee, also benefited by the expenditure should

not come in the way the expenditure being allowed by way of a

deduction. The case of the assessee before us stands on a

stronger footing since, besides the expenditure being in the

business interest of the assessee-company, it was also a

contractual obligation incurred by it under the agreement it

had with its Principals

12. For the reasons given in the preceding paragraphs, we

find no reason to interfere with the view taken by the Income

Tax Appellate Tribunal. No substantial question of law arises

for our consideration.

The appeal is accordingly dismissed.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE MAY 19, 2010 bg/