Income Tax Appellate Tribunal - Mumbai
Pharma Search , Mumbai vs Assessee on 26 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "C",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) &SHRI.RAJENDRA (A.M.)
ITA NO. 7303/MUM/2010(A.Y.2007-08)
M/s. Pharma Search, The ACIT 15(3),
B/601, Avalon, Hiranandani Mumbai.
Gardens, Powai, Vs.
Mumbai - 400 076.
PAN:AAIFP 1230H
(Appellant) (Respondent)
Appellant by : Shri Mehul Shah
Respondent by : Shri A.K.Nayak
Date of hearing : 26/04/2012
Date of pronouncement : 02/05/2012
ORDER
PER N.V.VASUDEVAN, J.M
This is an appeal by the assessee against the order dated 16/8/2010 of CIT(A)-26, Mumbai relating to assessment year 2007-08. Ground No.1 raised by the assessee reads as under:
"1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.7,40,646/- made by the learned Income Tax Officer hereafter referred to as Assessing Officer considering the gross receipts as Rs.35,91,680/- against the actual receipts is Rs.32,00,000/-.,)the learned Assessing Officer be directed to consider additional amount only of Rs.3,48,966/-(Rs.32,00,000/- less Rs.28,51,034/- being amount of receipts claimed in the return) and not Rs.7,40,646/- (Rs.3,59,16,680/- less Rs.28,51,034/-) while computing the total income of the appellant."
2. The assessee is a partnership firm engaged in the business of rendering consultation in pharmaceuticals, chemicals and drugs. In the profit and loss account the assessee has shown receipts for rendering 2 ITA NO. 7303/MUM/2010(A.Y.2007-08) consultancy services at Rs.28,51,034/-. It is not in dispute that the actual billed amount was Rs. 32.00 lacs on which service tax at 12.24% was Rs. 3,48,966/-. The Accountant of the assessee erroneously reduced Rs. 3,91,680/- from the consultation charges of Rs. 32.00 lacs receivable by the assessee and had shown in the P&L Account a sum of Rs. 28,51,034/-. This sum was arrived at by the formula 32/ 112.24 x 100, which gives a figure of Rs. 3,48,966/-. This sum was reduced from Rs.32.00 lacs and a sum of Rs.28,51,034/- was reflected in the P&L Account as receipts from consultation. When this was pointed out by the AO in the course of assessment proceedings the assessee admitted the error and offered a sum of Rs. 3,48,966/- as income.
3. Thereafter the AO was of the view that on the sum of Rs. 32.00 lacs which was consultation fee receivable by the assessee service tax at 12.24% which works out to a sum of Rs. 3,91,680/- should be added to the total income. It is not in dispute that the aforesaid sum was included in the invoice raised by the assessee on the person from whom the assesse was to receive service charges. It is also not in dispute that this amount has not been received by the assessee from the person to whom the assessee has rendered services. The AO was of the view that this sum receivable by the Assessee ought also to have been shown as receipts in the profit and loss account on the principle laid down by the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau 82 ITR 542 (SC). Further the AO was of the view that under the provisions of section 43B of the Act the assessee ought to have made payment of the service tax to the Government because the bills were raised on the customers by the assessee in the month of February and March. The AO was of the view that section 43B of the Act will be applicable. The AO also made a reference to provisions of section 145A of the Act which says that all receipts should be accounted on inclusive basis. The AO, therefore, made an addition of Rs. 3,91,680/- to the total income of the assessee.
3 ITA NO. 7303/MUM/2010(A.Y.2007-08)4. On appeal by the assessee the CIT(A) confirmed the order of the AO and held as under:
"5. I have considered the facts of the ease, findings of the Assessing Officer and rival submission of the Appellant, carefully. I do not subscribe to the arguments advanced by the Ld. AR that service tax was receivable and it was not to be included in gross receipts. When bills were issued on 12.04.2006, 08.05.2006, 05.06.2006, 26.06.2006, 04.08.2006, 09.09.2006 and 31.09.2006 there was no reason for not including the amount of taxes in gross receipts shown in Profit & Loss A/e. It is very obvious that while filing return of income Appellant has concealed the basic information of difference in amount may be on account of service tax or on account of other reason. Only while making the investigation and inquiry from M/s D.K. Pharma Chem Pvt. Ltd., it was found by the AO that 2 invoices dated 13.12.2007 and 14.03.2007 were issued by the Appellant having mention of Consultation charges of Rs.26,93,760/- and Rs.8,97,920/-. Thus, there was a total bill amount of Rs.39,51,680/- whereas, Appellant had shown only an amount of Rs.28,51,034/-. The facts of the case further reveals that basic consultation charges raised by the Appellant by these two invoices were of Rs.24,00,000/- and Rs.8,00,000/- respectively, means there was a total consultancy basic charges of Rs.32,00,000/- and not an amount of Rs.28,51,034/-. It has been admitted by Ld. AR in written submission dated 12.08.2010 in the Appellate proceeding, proves the furnishing of inaccurate, particulars of income and wrong explanation before the Assessing Officer. Therefore, there is two angle involved in this matter, one is suppression of basic consultation charges of Rs.3,48,996/- and second one is of non-inclusion of service tax of Rs.3,91,680/- in gross receipts. Obviously, the first part is regarding suppression of consultation charges itself by Rs.3,48,996/- which is to be included in total income of the Appellant without any confusion. As such an amount of Rs.3,48,996/- is found to be concealment of income by the Appellant.
5.2 As regards balance amount of Rs.3,91,680/- claimed to be service tax receivable from the principal is not to be includible in gross receipts, it can be seen from the Ledger A/c submitted by the LD. AR through letter dated 12.08.20 10 that there was a service tax receivable as on 01.04.2006 of Rs.13,28.,798/- and thereafter upto 31.10.2006, there has been further credit of Rs.3,48,966/- totaling to Rs. 16,77,764/- out of which Appellant has shown service tax payable by voucher No. 13 of Rs.3,79,493/- which reveals obvious discrepancy of the accounts, it also show the fact that Appellant was accumulating 4 ITA NO. 7303/MUM/2010(A.Y.2007-08) service tax but not offering it in gross receipts even after paying it to the respective department or receiving from the party. It is worthwhile to mention that ledger account of M/s D.K Pharma Chem Pvt. Ltd. has been produced to show that no such actual service tax receipt offered in preceding year or in this year, whereas, the fact remains that Appellant receives such taxes from its principal therefore, it is the responsibility of the Appellant to show it in gross receipts and after paying it to the respective department it can claim deduction of such payments. Here in this case it is very obvious that Appellant has concealed the basic information and thereafter has advanced the arguments of non-applicability of Provision of law u/s 43B Contrary to the arguments of Ld. AR, it is very obvious from the record that even after the bills of Rs.35,91,680/- Appellant has shown only an amount of Rs.2,51,034/- in its Profit & Loss A/c, therefore, obviously has suppressed an amount of Rs.7,40,646/- while furnishing the return of income. As such, I find the substance and propriety in the finding of the Ld. AO for making addition of Rs. 7,40,646/- to the total income of the Appellant. Because of above facts concealment admitted by Ld. AR, the case of CIT Vs. Udaipur Distillery Co. Pvt. Ltd. (1) 2004, 368 ITR 305 (Raj) is not relevant at all as facts of the case is altogether is having different footing. Therefore, the arguments advanced by Ld. AR arc not tenable. Considering the facts and inability f the Appellant to explain less disclosure of consultation charges as pointed out b the Assessing Officer and also found during the course of Appellate proceeding, the addition of Rs.7,40,646/- made by the Assessing Officer is sustained."
5. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.1 before the Tribunal.
6. We have heard the rival submissions. The learned DR relied on the orders of the Revenue authorities. The learned Counsel for the Assessee reiterated submissions made before the Revenue authorities.
7. We have considered the rival submissions. As per the Service Tax Law, Service Tax is payable as and when the payment / fees for underlying service provided are realized. As the appellant firm has not received the sum till the end of the financial year i.e. 2006-07 question of paying the same did not arise at all. As already stated the fact of non-realization of fees is not 5 ITA NO. 7303/MUM/2010(A.Y.2007-08) disputed by the AO in his order. If for any reason the payment for services rendered is not realized (bad debts), there was no liability as to payment of service tax. Thus service tax law stands on a different footing as compared to other laws like Central Excise or VAT.
8. The Assessing Officer opined that, as per section 145A of the Income-tax Act 1961, taxes and duties should form part of the Gross Receipts. Application of section 145A is restricted to purchase and sale of goods only, and does not extend to service contracts. Thus, application of said section is completely misplaced in the case under consideration. The provisions of section 145A of the Income-tax Act 1961 that read as under:
"Notwithstanding anything to the contrary contained in Section 145, the valuation of purchase and sale o4qoods')and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be-
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation."
It is clear from the above provisions that it applies only in respect of valuation of purchase and sale of goods and inventory and not to service contracts. Therefore the action of the Assessing Officer in invoking provisions of section 145A of the Act and adding Service Tax to Gross Receipts is incorrect in as much as against the very basic principles of section 145A.
9. Apart from the above, we find that the payment for services rendered was received in financial year 2007-08. Therefore the liability of service tax arose 6 ITA NO. 7303/MUM/2010(A.Y.2007-08) on that date; and the same was discharged on 06/07/2007 amounting to Rs. 64,792/- and on 09/11/2007 amounting to Rs.343,325/-.
10. The provisions of Section 43B of the Act reads as under:
"Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b)......................"
Reading of this section makes it clear that any deduction claimed of any amount paid by way of an tax, duty, cess, etc. will be allowed only if the said sum is paid. In the present case the liability to pay service tax itself has not, crystallized owing to non receipt of payment. Thus, the question of claiming deduction of such tax does not arise. The Chennai Bench of ITAT in the case of Assistant Commissioner of Income-tax , Media Circle-II, Chennai v. Real Image Media Technologies (P.) Ltd. [2008] 114 ITD 573 (CHENNAI) had an occasion to examine identical case. It was held that, the rigor of the provision of section 43B would be attracted only to a case where an item is allowable as deduction but because of the failure to make payment, such deduction would not be allowed. The rigor of section 43B might be applicable to the 'case of sales-tax or excise duty but the same could not be said to be the position in case of service-tax because of two reasons.Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Government and is paid to the Government account, accordingly. Therefore, a service provider is merely acting as an agent of the Government, and is not entitled to c/aim deduction on account of service tax Hence, on this account a/one addition under section 43B could not have been made, and the same had been correctly deleted by the Commissioner (Appeals). Secondly, section 43B(a) uses the express on 'any sum payable'. For making any disallowance, first of all it has to be 7 ITA NO. 7303/MUM/2010(A.Y.2007-08) established that such sum is payable. The word 'payable' used in section 438 means that there is a kind of obligation on the part of payee to make the payment which is already due. A plain reading of rule 6 of the Service Tax Rules would show that service provider becomes liable to make the payment of service tax by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable service. The first proviso provides for an exception in case of individuals or proprietary firms or partnership firms, and in such cases, service tax has to be paid to the credit of the Central Government by the 5th of the month immediately following the quarter of calendar year in which the payments are received. The only difference is that in case of individual or proprietary or partnership firm, payment has to be made on 5th of the following month after the following quarter of calendar year whereas in the case of other organizations it has to be paid on the 5th of the month immediately following the calendar month. But in both the cases, the liability arises to make the payment only after the service provider has received the payments.If there is no liability to m ake the payment to the credit of the Central Government because of non-receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of clause
(a) of section 438 because that clause specifically mentions 'sum payable by the assessee'.
11. In the present case, since service tax was not payable by the assessee, the rigor of section 43B of the Act could not be applied to its case. Apart from the above, we find the Delhi High Court in the case of CIT Vs. Noble and Hewitt (I) Pvt.Ltd. 305 ITR 324 (Delhi) has on identical issue taken the view that provisions of Sec.43B cannot be invoked unless the Assessee has claimed by way deduction the amounts specified u/s.43B without making actual payment. The following were the relevant observations of the Court in this regard:
8 ITA NO. 7303/MUM/2010(A.Y.2007-08)"5. Learned counsel for the Revenue urges that the decision of the Calcutta High Court in Chowringhee Sales Bureau P. Ltd. [1977] 110 ITR 385, covers the point in its favour. We are unable to agree. In that case, it was held that the liability to pay sales tax arose the moment a sale or purchase was effected and if an assessee was maintaining accounts on the mercantile system it would be entitled to deduction of the estimated liability of sales tax, even though such sales tax had not been paid to the sales tax authorities. The question there concerned was the entitlement of the assessee to deduction under section 10(1) and 10(2)(xv) of the Indian Income-tax Act, 1922. The decision is clearly distinguishable in its application to the present case. Here we are concerned with an assessee who has not even claimed any deduction on the ground of service tax and has not debited the amount to its profit and loss account. Moreover, the provisions of section 43B of the Act are quite clear in this regard. The decision of the Calcutta High Court in Chowringhee Sales Bureau P. Ltd's case [1977] 110 ITR 385 was not in the context of the applicability of section 43B of the Act.
6. In our opinion, since the assessee did not debit the amount to the profit and loss account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise.
7. Learned counsel for the Revenue submits that the assessee has sought to evade tax under the mercantile system of accounting. We are of the view that it is not for the Revenue authorities to tell the assessee how to maintain its accounts."
In the case of Chowringhee Sales Bureau 110 ITR 385 (Cal), the Hon'ble Calcutta High Court has held that unpaid sales tax liability has to be included as part of receipts of an Assessee but at the same time the Assessee would be entitled to deduction of the same under mercantile system of accounting even without actual payment. But this position would now stand modified because of provisions of Sec.43B of the Act. But as far as Service Tax is concerned, as per the law prevailing during the previous year, the liability to pay the same arises only on receipt by the Assessee. Since the liability to pay service tax does not exist in the present case, the service tax 9 ITA NO. 7303/MUM/2010(A.Y.2007-08) cannot be said to be "payable" and therefore provisions of Sec.43-B of the Act could not also be invoked.
12. For the reasons given above, we direct that addition of Rs. 3,91,680 sustained by the CIT(A) be deleted. Gr.No.1 of the Assessee is thus allowed.
13. Ground No.2 raised by the assessee reads as follows:
"2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in partly allowing the insurance premium to the extent of Rs.3,60,000/- out of an entire premium amount of Rs.42,00,000/- paid on the life of the partners treating the balance of Rs.38,40,000/- as non business expenditure. The learned Assessing Officer be directed to allow the entire expense of Rs.42,00,000/- while computing the total income of the appellant."
14. The Assessee claimed deduction on account of insurance premium paid of Rs.42 Lacs. The Assessee had taken 25 insurance policies by paying a premium of Rs.200000 per annum on the lives of two key persons of the firm viz., Shri.Vikas Puri and Smt.Chitra Iyer Puri, who were partners of the Assessee firm. The Assessee was the proposer of the policies. The beneficiary of the policies were the proposer, life assured or assignees where there is valid assignment. The premiums were payable for three years. The nomenclature of the policy was shown as "Keyman Insurance Policy". The AO disallowed the claim of deduction on account of premium paid on such policies of an amount of Rs.42,00,000 paid by the appellant firm for effecting insurance on the life of the working partners treating the same as expense in the nature of expenses incurred for the enjoyment of personal benefits of the partners. The Assessing Officer opined that, since the words 'Key man Insurance" are not printed over the policy document, the same cannot partake character of a "Key Man Insurance Policy." This apart, the Assessing Officer opined that, since the policies under question were assignable in nature, they could not be treated as "Key Man Insurance Policies."
10 ITA NO. 7303/MUM/2010(A.Y.2007-08)15. Before CIT(A), the Assessee submitted that the Key Man Insurance Policy was taken in the financial year 2005-06 wherein Gross Receipts of your Appellant was Rs. 3.17 Crore. In the fist year, premium paid was Rs. 5,000,000/-, and thereafter, the Assessee made a net profit of Rs. 20,514,046 before remuneration to partners. After remuneration to partners, the net profit was Rs.13,314,046/-. It was pointed out that Vikas Pun and Chitra Aiyer were educationally qualified. Mr. Vikas Puri, was an expert in Chemical Technology and had completed masters in Chemical Technology UDCT (UICT) at Mumbai in 1996 and Mrs. Chitra Aiyer Puri, an expert in Chemical Technology and had completed bachelor in Chemical Technology in the year 1996. It was also pointed out that they were successful in generating gross receipts of approximately Rs.3 crores for the firm in the F.Y. 2005-06. In order to sustain such growth of the business in the future in case of casualty of partners' life, the firm proposed to insure the lives of the working partners with the ICICI Prudential Life Insurance Co. The insurance policy was proposed by the Assessee firm i.e. Pharma Search and the life assured was that of the partners i.e., Vikas Purl and Chitra Aiyer, and it was clearly mentioned on the face of the policy that the benefits of the policy on the death of the partners will be retained by the proposer i.e. the Assessee.
16. The CIT(A) accepted that, the underlying policies were "Key Man Insurance Policies" by partly allowing the claim, and accepting that it was not necessary that words "Key Man Insurance Policy" should be printed over it, or otherwise, it should not be assignable in nature. However, he restricted the disallowance of Rs. 4,200,000/- to Rs. 3,840,000 by allowing premium of two policies (one policy for each of the two partners) to the extent of Rs. 360,000 only considering the balance as non business expenditure. Learned Commissioner of Income-tax (Appeal) opined that, since gross receipts of Rs. 3 Crore in financial year 2005-06 have reduced to Rs. 32 Lac in the relevant financial year 2006-07, there was no business expediency under section 37 to claim such deduction.
11 ITA NO. 7303/MUM/2010(A.Y.2007-08)17. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.2 before the Tribunal. The learned DR relied on the orders of the Revenue authorities. The learned counsel for the Assessee reiterated submissions made before CIT(A).
18. We have considered the rival submissions. The maturity proceeds of the Key Man Insurance Policy is taxable and premium paid on such policies is deductible. The CBDT in Circular No. 762 dated February 18, 1998 has made this aspect very clear. It is not necessary that a key man insurance policy should be only in the name of the employees and not partners Mumbai ITAT in the case of ITO v. Mod! Motors (ITA No.6900/MUM./2006, DATED 12-12-2008)(MUM-ITAT) 31 DTR Trib 347/27 SOT 476 (Mum.) had to deal with a case where the Assessee, a partnership firm, claimed deduction u/s 10(1OD) of the Act on account of Keyman Insurance Policy premium paid on the life insurance policies of two of its working partners. The AO disallowed the claim on the ground that partnership firm in not a separate legal entity. The CIT(A) allowed the assessee's claim holding the firm and its partners as separate persons. The tribunal held that for the purposes of the Act, partnership firm is a separate entity than that of its partners under the Income-tax Act and if there exist any specific provision in the Income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same. It was further held that Sec. 10(1OD) recognize the existence of other types of relationship apart from employer-employee relationship for claiming deduction on account of premium paid on Keyman Insurance Policy as business expenditure. The Hon'ble Bombay HC in the case of B. N. Exports 323 ITR 178 also held that allowability of expenditure incurred on premium paid towards a Keyman Insurance Policy cannot be confined only to a situation where policy is in respect of life of an employee.
12 ITA NO. 7303/MUM/2010(A.Y.2007-08)The Hon'ble Court held that Keyman Insurance Policy obtained on life of a partner to safeguard firm against a disruption of business that may result due to premature death of a partner and expenditure which is laid out for payment of premium on such a policy is allowable as business expenditure.
19. On the issue of assignable nature of the policy, the Hon'ble Delhi HC in the case of Commissioner of Income-tax v. Escorts Health Institute & Research Centre Ltd. ITA 398/ 2009 held that expenditure incurred on Keyman insurance premium is to be allowed as business expenditure. The High Court also emphasized that the entire arrangement cannot be considered as a "colourable device" adopted for tax evasion merely because it results in reduction of taxes if the same was within the ambit of law. The department cannot question the business expediency of a particular transaction if it specifically permitted by the tax laws. The HC made following significant observations:
(i) The Department has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as business expenditure under Section 37 of the Act. Right from 1991-92 upto 1993-94 and thereafter even in respect of Assessment Year 1997-98, the expenditure was allowed. Though thereafter, the expenditure was disallowed, but again the claim was accepted for the Assessment Years 2001-02 and 2002-03.
Principle of consistency would, therefore, by applicable in such a case.
(ii) The Tribunal has rightly referred to and relied upon CBDT's circular dated 18.2.1998. This Circular is binding on the Income Tax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses. The assessee would, naturally, take into consideration such clarifications issued by the CBDT.
(iii) The nature of expenditure incurred on keyman insurance policy has even been judicially considered and Bombay High Court has held in B.N. Exports (supra) that this expenditure is to be allowed as business expenditure.
13 ITA NO. 7303/MUM/2010(A.Y.2007-08)(iv) The argument of Mr. NP. Sahni, learned counsel for the Revenue that taking such keyman insurance policy every year and thereafter assigning the same to the beneficiaries may be treated as colourable device, may not be correct. Though this argument appears to be attractive when we look into the fact that the assessee had been taking the policies and thereafter assigning the same year after year in favour of the beneficiaries, what cannot be ignored that this course of action is permitted by the Department itself as stated in the Circular dated 18.2.1998.
(v) The expenditure incurred has to be tested on the touchstone of Section 37 of the Act and to see as to whether such expenditure is permissible or not. No doubt, the object of a keyman insurance policy is to enable business organizations to insure the life of a keyman in order to protect the business against the financial loss which may occur in the likely eventuality of premature death. Such expenditure is treated as business expenditure by the Department itself and recognized as such in Circular dated 18.2.1998. The expenditure is to be seen at the time it is incurred. Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the flavor of it being business expenditure.
(vi) Once the legal provisions and the outlook of Department itself based on such legal provisions permit the assessee to have the tax planning of this nature, and the course of action taken by the assessee is permissible under law, the argument of colourable device cannot be advanced by the Revenue. When expenditure of this nature is treated 'business expenditure' per se by the Department itself, there cannot be any question of raising the issue of want of business expediency. The learned counsel for the respondent is right in his submission that the Department could not sit on the armchair of the assessee and decide as to whether it was appropriate on business expediency for the assessee to incur such an expenditure or not, If the transaction is otherwise valid in law and is a part of tax planning, merely because it has resulted in reduction of tax, such expenditure cannot be ignored raising the issue of underlying motive of entering into this type of transaction. Various judgments cited by the learned counsel for the respondents clearly get attracted to this Court.
20. The next aspect that requires consideration is as to whether the disallowance can be partly upheld as was done by the CIT(A) on the ground of business expediency. In all the decisions referred to above it has been held that payment of premium on Key Man Insurance Policy is expedient and in the interest of business. We also find force in the argument of the learned counsel for the Assessee that in the year 05-06 the profits were 14 ITA NO. 7303/MUM/2010(A.Y.2007-08) Rs.2,05,14,046 and payment of Rs.50 Lacs premium was found to be expedient. In this year the profits were less but the fact remains that a business decision cannot be taken for one year, but it has to be taken with reference to years to come. In the year of proposal, there were sufficient profits. Insurance is a period contract. Just because in the subsequent year there is no profit, it cannot be terminated. If that is done, the premium paid in first year will go in vein. Thus continuing with the policy in next year even in the loss situation was a business necessity, and thus, learned Commissioner of Income-tax (Appeal) grossly erred in ignoring this aspect while judging the business expediency of this expenditure.
21. It is also seen that the Assessee paid premium even in the subsequent financial year (FY 2007-08), which was the last year of payment as per the terms of insurance contract: and the same has been allowed as deduction. In Financial Year 2008-09, the Assessee made profit of Rs. 1,937,815/-. We are also of the view that business expediency needs to be viewed from a businessman's view point. An expenditure may not be incurred under any legal obligation but yet it is allowable as business expenditure if it is incurred on ground of commercial expediency. In view of the aforesaid legal position we are of the view that disallowance of Rs. 3,840,000 sustained by learned Commissioner of Income-tax (Appeal) deserves to be deleted. We order accordingly and allow Gr.No.2 raised by the Assessee.
22. In the result, the appeal by the assessee is allowed.
Order pronounced in the open court on the 2nd day of May, 2012
Sd/- Sd/-
(RAJENDRA) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated 2nd May 2012
15 ITA NO. 7303/MUM/2010(A.Y.2007-08)
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"C" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.