KOTAK SECURITIES LTD, MUMBAI V. ADDL CIT RG 4(3), MUMBAI

ITA 3494/MUM/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8229 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 04-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEER LA
• Assessee Lawyers: F V IRANI
• Keywords: Business income; Depreciation; Bad and doubtful debts; Commercial expediency; Revenue expenditure
• Section: 37; 28

Judgement Text

3494/M/10(07-08) KOTA K SECURITIES LTD . 1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUM BAI , , BEFORE S/SHRI RAJENDRA, A.M. AND SANJAY GARG,J.M. ./ ././ ./ ITA NO. 3494/MUM/2010 / ASSESSMENT YEAR: 2007- 08 KOTAK SECURITIES LIMITED 1ST FLOOR, BAKTHAWAR 229 NARIMAN POINT,MUMBAI-400 021. PAN: AAACK 3436 F VS. ADDL. CIT RANGE-4(3), AAYAKAR BHAVAN MUMBAI-400 020. ( / // / APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI PAVAN KUMAR BEERLA ASSESSEE BY: SHRI F.V. IRANI / // / DATE OF HEARING: 18.01.2017 !'#$ / DATE OF PRONOUNCEMENT: 22.02.2017 , ,, , 1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , ,, , -PER RAJENDRA,AM: CHALLENGING THE ORDER DT. 17.03.2010 OF CIT(A)-8,MU MBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY,A SHARE BROKER, FILED ITS R ETURN OF INCOME ON 31.10.2007 DECLARING ITS TOTAL INCOME OF RS.390.03 CRORES.THE ASSESSING OFFICER(AO) COMPLETED ASSESSMENT ON 30. 03.2009,DETERMINING ITS INCOME AT RS.401.55 CRORES. 2. FIRST EFFECTIVE GROUND OF APPEAL IS ABOUT DISALLOWA NCE OF BAD DEBTS OF RS.32.93 LAKHS MADE BY THE AO INVOKING THE PROVISIONS OF SECTION 36(1)( VII)OF THE ACT.BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) AND THE DEPARTMENTAL REPRESENTAT IVE (DR) STATED THAT IDENTICAL ISSUE WAS DEALT WITH BY THE TRIBUNAL IN THE EARLIER YEARS, AN D THE HON'BLE BOMBAY HIGH COURT HAS UPHELD THE ORDER OF THE TRIBUNAL FOR AY 2002-03 TO 2004-05. WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL,DT.27 .7.2011 (ITA.S./ 3272/MUM/06, 1501 AND 1052/MUM/2007-AY.S 2002-03 TO 2004-05)AND IT READS AS UNDER: 18. THE AO HAD DISALLOWED BAD DEBTS AMOUNTING TO R S.58,76,826/- WHICH WAS DUE FROM VARIOUS PARTIES FOR THE SECONDARY MARKET TRANSACTIONS AND WAS CLAI MED BY THE ASSESSEE AS BAD DEBTS U/S 36(1)(VII) R. W.S. 36(2) OF THE ACT. ON APPEAL, THE CIT(A) CONFIRMED T HE ACTION OF THE AO BY OBSERVING AS UNDER:- XXXXX 21. AFTER HEARING THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSING THE RECORD, WE FIND THAT THE ITAT IN ASESSSEE'S OWN CASE FOR AY 2001-02, ALLOWED THE BAD DEBTS CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER:- '7 WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE AEEEESEE BY THE DECISION OF THE SPECIAL BE NCH OF THE MUMBAI ITAT IN THE CASE OF SHREYAS S. MORAKHIA (20 10) 40 SOT 440. RESPECTFULLY FOLLOWING THE DECISION OF THE MUMBAI SPECIAL BENCH IN THE CASE OF SHREYAS MORAKH IA, SUPRA, WE ALLOW THE ENTIRE AMOUNT OF RS.34,91,52 8/- WRITTEN OFF BY THE ASSESSEE AS A BAD DEBT U/S. 36(1 )(VII). ASSESSEE'S APPEAL ON THIS ISSUE IS ALLOWED.' 22. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICA L TO THAT OF AY 2001-02, WE RESPECTFULLY FOLLOW TH E DECISION OF ITAT IN THAT YEAR AND IN THE LIGHT OF THAT WE SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE BAD 3494/M/10(07-08) KOTA K SECURITIES LTD . 2 DEBTS CLAIM OF THE ASSESSEE. ACCORDINGLY, THE GROUN D RAISED IN ALL THE THREE YEARS UNDER CONSIDERATION IS ALLOWED. THE HON'BLE HIGH COURT ON 03/04/2012 UPHELD THE ORD ER OF THE TRIBUNAL. RESPECTFULLY, FOLLOWING THE JUDGMENT OF THE HON'BLE HIGH COURT,WE DECIDE GROUND NO.1IN FAVOUR OF THE ASSESSEE. 3. NEXT EFFECTIVE GROUND OF APPEAL (GOA2&3) ARE ABOUT DISALLOWANCE U/S.14A R.W.R.8D OF THE INCOME TAX RULES,1962(RULES).IT WAS BROUGHT TO OUR NOTICE THAT IN THE EARLIER AY. IN ITA NO.1013 & 2028/M/2010 DT.21.05.2012,THE TRIBUNAL H AD RESTORED BACK THE ISSUE TO THE FILE OF THE AO.THE ASSESSEE ALSO REFERRED TO THE CASE O F KOTAK MAHINDRA BANK LTD. (ITA/ 8523/ M/2011);KOTAK MAHINDRA ASSET MANAGEMENT CO.LTD. (IT A/940/M/2010); TATA CONSULTING ENGINEERS LTD.(ITA NO.265/M/2011). AFTER CONSIDERING THE ABOVE,WE ARE OF THE OPINION T HAT MATTER SHOULD BE RESTORED BACK TO FILE OF AO FOR FRESH ADJUDICATION.HE IS DIRECTED TO CONS IDER ORDERS OF THE TRIBUNAL RELIED BY THE ASSESSEE BEFORE US AND THE DIRECTIONS GIVEN BY THE TRIBUNAL FOR THE EARLIER YEAR. GROUND NO.2 &3 STAND ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART . 4. FOURTH GROUND IS ABOUT ALLOWABILITY OF DEPRECIATION ON UNINTERRUPTED POWER SUPPLY (UPS). REPRESENTATIVES OF BOTH THE SIDES AGREED THAT ISSUE HAD BEEN DELIBERATED UPON BY THE TRIBUNAL WHILE ADJUDICATING APPEALS FOR AY.S 2006-07(SUPRA), AND 2010-11(ITA NO.2096&1232/M/ 2014).RESPECTFULLY,FOLLOWING THE ABOVE GROUND NO.5 IS DECIDED IN FAVOUR OF THE ASSESSEE. 5. LAST GROUND OF APPEAL IS ABOUT CONFIRMING DISALLOWA NCE OF RS.2.62 CRORES.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT ASSESSEE H AD PAID A SUM OF RS. 2,62,90,536/-TO VARIOUS CLIENTS IN VALSAD REGION ON ACCOUNT OF IS R EGULARITIES COMMITTED BY ONE OF ITS SUB BROKERS.HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO W HY THE SAID AMOUNT SHOULD BE ALLOWED AS REVENUE EXPENDITURE.AFTER CONSIDERING THE SUBMISSIO N OF THE ASSESSEE DATED 25/03/2009, THE AO HELD THAT THE ASSESSEE HAD ENTERED INTO A MEMBER SUB BROKER AGREEMENT WITH CHETAN DINESH MODI (CDM), PROPRIETOR OF MODI FINANCIAL SER VICES (MFS)THAT SUB BROKER WAS SOLELY RESPONSIBLE FOR ANY LOSS OR DAMAGES ARISING OUT OF THE SUB GROUPS ACTIVITIES/ MISAPPROPRIA - TIONS,THAT CDM ALONG WITH HIS EMPLOYEE COMMITTED FR AUD BY TRANSFERRING THE SHARES OF MARKET ON THE BASIS OF BLANK DEMERIT SLIPS GIVEN BY THE CLIENTS,THAT CDM HAD ADMITTED COMMITTING THE FRAUD,THAT THE ASSESSEE COULD NOT ST EP INTO THE SHOES OF SUB BROKER AND OWN THE LIABILITIES TO PAY COMPENSATION TO THE CLIENTS,THAT CONTRACTUALLY THE LOSS WAS TO BE BORNE BY CDM,THAT BUSINESS LOSS CLAIMED BY THE ASSESSEE UNDE R SECTION 28 OF THE ACT WAS NOT ALLOWABLE, THAT MERE PAYMENT OF COMPENSATION DURING THE YEAR UNDER CONSIDERATION WOULD NOT SATISFY THE TEST OF WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THAT EXPENDITURE 3494/M/10(07-08) KOTA K SECURITIES LTD . 3 INCURRED BY THE ASSESSEE WAS NOT ALLOWABLE AS BUSIN ESS EXPENDITURE AS PER THE PROVISIONS OF SECTION 37 (1) OF THE ACT THAT COMPENSATION PAYMENT S WERE MADE VOLUNTARILY BY THE ASSESSEE, THAT IT WAS UNDER NO OBLIGATION TO SETTLE THE CLAIM OF THE CLIENTS, THAT VOLUNTARY PAYMENTS, EVEN THOUGH MADE FOR THE PURPOSE OF PRESERVING GOODWILL AND REPUTATION, WERE NOT ALLOWABLE UNDER THE ACT.HE FURTHER OBSERVED THAT THE ASSESSEE HAD R ECOVERED A SUM OF RS. 25.55 LAKHS FROM CDM, THAT THE ASSESSEE HAD PARKED THE SAID AMOUNT I N THE LIABILITY SIDE OF THE BALANCE SHEET, THAT THE NET LOSS, IF AT ALL ADMISSIBLE,WAS RS. 2.3 7 CRORES ONLY, THAT IT HAD CLAIMED THE FULL REDUCTION OF RS. 2.62 CRORES IN ITS PROFIT AND LOSS ACCOUNT.FINALLY, HE MADE THE DISALLOWANCE OF THE DISPUTED AMOUNT. 5.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA)AND MADE ELABORATE SUBMISSI ONS.HE DIRECTED THE ASSESSEE TO FILE COPIES OF THE LETTERS OBTAINED FROM THE INVESTORS, COPY OF FIR.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND DOCUMENTS PRODUCED BY THE ASSESSEE,THE FAA HELD THAT CDM WAS AFFILIATED AS A BROKER TO THE ASSESSEE WIDE AGR EEMENT DATED 25/11/2004, THAT THE SUB BROKER HAD TO ASSIST THE CLIENTS IN BUYING/SELLING/ DEALING IN SECURITIES THROUGH THE ASSESSEE, THAT AS PER THE AGREEMENT THE SUB BROKER HAD TO TRA NSFER ALL THE SECURITIES SOLD BY THE CLIENTS IN DEMATERIALISED FORM TO THE ASSESSEES THE DEMAT POO L DIRECTLY FROM THE CLIENTS THE DEMAT ACCOUNTS, THAT CDM FRAUDULENTLY TRANSFER THE SHARES OF THE CLIENTS WITHOUT THEIR CONSENT AND THEIR KNOWLEDGE, THAT THE CLIENTS OF MFS SUFFERED L OSSES, THAT ONE OF THE CLIENTS FILED CRIMINAL COMPLAINT AGAINST CDM AND THE OFFICIALS OF THE ASSE SSEE, THAT THE ASSESSEE NEGOTIATOR WITH THE CLIENTS MFS AND SETTLE THE ACCOUNT BY PAYING MONETA RY COMPENSATION OF RS. 2.62 CRORES CASE,THAT THE ASSESSEE HAD SUBMITTED DETAILED WORKI NG OF THE PAYMENT MADE TO VARIOUS CLIENTS, THAT IT HAD FILED CIVIL SUIT AGAINST CDM IN THE HON ORABLE BOMBAY HIGH COURT. 5.2. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ORDER OF THE AO,THE FAA HELD THAT PAYMENT FOR SETTLEMENT OF CLAIM OF VARIOUS CLI ENTS OF ITS SUB BROKER WAS NOT AN EXPENDITURE BUT A DEBT,THAT IT HAD FILED A SUIT AGA INST CDM AND HAD TREATED THE AMOUNT AS A DEBT BY ISSUE OF A DEBIT NOTE, THAT THE SETTLEMENT WAS ARRIVED ONLY TO ENSURE THAT CLIENTS WOULD WITHDRAW THE NAME OF THE ASSESSEE AND ITS DIRECTORS FROM THE POLICE COMPLIANT, THAT CDM WAS ARRESTED ON 25.11.06, THAT THE REPUTATION OF THE AS SESSEE WAS NOT AT STAKE THAT IT WAS WELL KNOWN THAT THE SUB BROKER WAS INVOLVED IN THE FORGE RY, THAT AS A PRINCIPLE THE ASSESSEE WAS NOT RESPONSIBLE FOR ACTS AND OMISSIONS OF ITS AGENT S, THAT CLAIM MADE BY THE ASSESSEE WAS NOT ALLOWABLE U/S. 28 OR 37 OR 36(1)(VII) OF THE ACT. 3494/M/10(07-08) KOTA K SECURITIES LTD . 4 5.3. DURING THE COURSE OF HEARING BEFORE US,THE AR ARGUE D THAT EXPENDITURE HAS TO BE ALLOWED EVEN IT IS NOT ARISING OUT OF LEGAL OBLIGATION, THA T THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES AND BECAUSE OF CO MMERCIAL EXPEDIENCY,THAT TO DECIDE NECESSITY AND THE COMMERCIAL EXPEDIENCY WAS NOT THE DOMAIN OF THE AO, THAT ASSESSEE HAD MADE PAYMENT TO PROTECT ITS REPUTATION AND ITS BRAN D NAME,THAT IT WANTED TO COME OUT OF THE ADVERSE PUBLICITY GIVEN TO THE INCIDENT BY THE LOCA L NEWSPAPERS, THAT THE PAYMENT MADE BY THE ASSESSEE WAS NOT EXCESSIVE.THE AR RELIED UPON THE F CASES OF NAINITAL BANK LTD.(62ITR638); F.E.DINSHAW LTD.(36ITR114);SALES MAGNESITE PVT.LTD. (214 ITR 1),EASTERN INVESTMENTS LTD. (20ITR1);SASSON J. DAVID AND CO. PVT.LTD.(118 ITR 2 61);F.M. CHINOY AND CO. PVT.LTD. (74 ITR780);GLAXO LABORATORIES(INDIA)PVT.LTD.(114ITR110 );DHANRAJGIRI RAJA NARASINGIRJI (91 ITR 544);TATA SONS LTD.(18 ITR 460);DELHI SAFE DEPO SIT CO.LTD.(133ITR756) AND WALCHAND AND CO. PVT. LTD.(65ITR381(SC).THE DR RELIED UPON T HE ORDER OF THE FAA. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT CDM, PROPRIETOR OF MFS WAS AFFILIATED AS A BROKER T O THE ASSESSEE VIDE AGREEMENT DATED 25/ 11/2004, THAT THE SUB BROKER HAD TO ASSIST THE CLIE NTS IN BUYING/SELLING/DEALING IN SECURITIES THROUGH THE ASSESSEE,THAT AS PER THE AGREEMENT THE SUB BROKER HAD TO TRANSFER ALL THE SECURITIES SOLD BY THE CLIENTS IN DEMATERIALISED FORM TO THE A SSESSEES THE DEMAT POOL DIRECTLY FROM THE CLIENTS THE DEMAT ACCOUNTS, THAT CDM FRAUDULENTLY TRANSFERRED THE SHARES OF THE CLIENTS WITHOUT THEIR CONSENT AND THEIR KNOWLEDGE, THAT THE CLIENTS OF MFS SUFFERED LOSSES, THAT ONE OF THE CLIENTS FILED CRIMINAL COMPLAINT AGAINST CDM AN D THE OFFICIALS OF THE ASSESSEE, THAT THE ASSESSEE NEGOTIATED WITH THE CLIENTS MFS AND SETTLE D THE ACCOUNT BY PAYING MONETARY COMPENSATION OF RS. 2.62 CORRES,THAT THE ASSESSEE H AD SUBMITTED DETAILED WORKING OF THE PAYMENT MADE TO VARIOUS CLIENTS,THAT IT HAD FILED C IVIL SUIT AGAINST CDM IN THE HONBLE BOMBAY HIGH COURT,THAT THE FAA HAD CONFIRMED THE DI SALLOWANCE MADE BY THE AO. BEFORE PROCEEDING FURTHER,WE WOULD LIKE TO LIST SOM E OF THE RECOGNISED PRINCIPLES GOVERNING ALLOWABILITY OF EXPENDITURE U/S.37 OF THE ACT. I. AN EXPENDITURE TO BE COVERED BY THE AMBIT OF SECTIO N 37 OF THE ACT,SHOULD BE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS.THE TRUE TE ST FOR AN EXPENDITURE, LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IS THAT IT IS INCURRED BY THE ASSESSEE AS INCIDENTAL TO ITS TRADE FOR THE PURPOSE OF KEEPING ITS TRADE GOING ON AND THAT THE EXPENDITURE MUST BE INCURRED BY THE ASSESSEE AS A TRADER AND NOT IN ANY OTHER CA PACITY. THE WORD WHOLLY REFERS TO THE QUANTUM OF EXPENDITURE AND THE WORD EXCLUSIVELY R EFERS TO THE MOTIVE, OBJECTIVE AND 3494/M/10(07-08) KOTA K SECURITIES LTD . 5 PURPOSE OF THE EXPENDITURE. THE EXPRESSION WHOLLY AND EXCLUSIVELY APPEARING IN SECTION 37,DOES NOT MEAN NECESSARILY. II. AN EXPENDITURE NEED NOT HAVE BEEN INCURRED WITH THE OBJECT OF GAINING A DIRECT AND IMMEDIATE BENEFIT ; IT WOULD BE, RATHER,SUFFICIENT EVEN IF IT WAS INCURRED IN ORDER TO INDIRECTLY FACILITATE THE CARRYING ON OF THE BUSINESS. III. AN EXPENDITURE,INCURRED FOR COMMERCIAL EXPEDIENCY I S ALLOWABLE U/S.37 OF THE ACT.THE TERM COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPO SE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASU RES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS. IV. A VOLUNTARY PAYMENT AND NOT NECESSARILY A PAYMENT U NDER AN OBLIGATION CONTRACTUAL OR OTHER -WISE COULD BE ALLOWED AS A DEDUCTION. IF THE ASSESSEE, WHICH CARRIES ON A BUSINESS FINDS THAT IT IS COMMERCIALLY EXPEDIENT TO INCUR CERTAIN EXPENDITURE DIRECTLY OR INDIRECTLY, IT WOULD BE OPEN TO SUCH AN ASSESSEE TO DO SO NOTWITHSTANDIN G THE FACT THAT A FORMAL DEED DOES NOT PRECEDE THE INCURRING OF SUCH EXPENDITURE. V. IN CONSIDERING THE QUESTION OF COMMERCIAL EXPEDIENC Y IT HAS TO BE FOUND OUT AS TO WHETHER THE EXPENDITURE WAS SUCH AS WOULD FALL WITHIN THE D EDUCTIBLE ITEMS IN THE COMPUTATION OF PROFITS. VI. THE COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPOS E AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASU RES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS. VII. IT IS NOT NECESSARY FOR AN ASSESSEE TO PROVE THE NE CESSITY OF EXPENDITURE.IT IS ALSO IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. IT IS NOT FOR THE AUTHORITIES OR THE COURT TO EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE INCURRED THE EXPENSES FOR ITS COMMERCIAL EXPEDIENCY.WHAT IS RELEVANT IS WHETHER THE AMOUNT W AS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIE W WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF T HE CASE AND NO BUSINESSMAN CAN BE COMPELLED TO MAXIMISE HIS PROFIT. 3494/M/10(07-08) KOTA K SECURITIES LTD . 6 NOW,WE WOULD LIKE TO TAKE NOTICE OF THE MATTER OF N ANITAL BANK(SUPRA).IN THAT CASE THERE WAS A DACOITY IN ONE OF ITS BRANCHES AND ORNAMENTS PLE DGED WITH THE BANK,BY ITS CUSTOMERS,WERE STOLEN BY THE DACOITS.THE ASSESSEE,IN ORDER TO PRES ERVE THE GOODWILL OF ITS CUSTOMERS AND TO AVOID LOSS OF BUSINESS REPUTATION, SET OFF THE VALU E OF THE LOANS AGAINST THE VALUE OF THE PLEDGED ORNAMENTS AND PAID TO THE CUSTOMERS THE EXC ESS VALUE OF THE ORNAMENTS PLEDGED, AND CLAIMED THE AMOUNTS SO PAID AS A DEDUCTION FROM ITS BUSINESS INCOME.DECIDING THE MATTER THE HONBLE COURT HELD AS UNDER: THE SUMS IN QUESTION WERE NOT ALLOWABLE UNDER SEC TION 10(1) OF THE INCOME-TAX ACT AS THE LOSS DID NOT ARISE DIRECTLY FROM THE CARRYING ON OF THE BUSINESS NOR WAS IT INCIDENTAL TO IT;.THE AMOUNTS WERE, HOWEVER, ALLOWABLE AS BUSIN ESS EXPENDITURE UNDER SECTION 10(2)(XV) OF THE ACT AS THE EXPENDITURE WAS INCURRED FOR PRES ERVING THE CONFIDENCE OF THE CUSTOMERS AND MAINTAINING THE GOODWILL OF THE BUSINESSEVEN THOU GH THERE WAS NO LEGAL OBLIGATION TO INCUR AN EXPENDITURE, IF IT WAS INCURRED IN THE INT ERESTS OF THE BUSINESS, E.G., FOR PRESERVING THE GOODWILL OF THE BUSINESS, IT CAN BE ALLOWED AS BUSI NESS EXPENDITURE. IT IS ALSO NOT NECESSARY THAT EXPENDITURE SHOULD HAVE BEEN INCURRED IN CASH; IT MAY BE INCURRED BY SETTING OFF AMOUNTS DUE TO THE ASSESSEE AGAINST AMOUNTS PAYABLE BY HIM. WE WOULD ALSO LIKE TO REFER TO THE CASE OF CALCUTTA LANDING & SHIPPING CO. LTD.(65ITR1).IN THAT MATTER,THE BOARD OF DIRECTORS OF THE ASSESSEE- COMPANY, WHOSE EMPLOYEE WAS MURDERED WHILE ON THE COMPANY'S BUSINESS, SANCTIONED PAYMENT OF PENSION TO HIS WIFE AT GRADED RATES FOR A NUMBER OF YEARS AS ALSO PASSAGE MONEY AND RAI LWAY FARE FOR HER AND CHILDREN TO PROCEED TO ENGLAND AS WELL AS OTHER SUMS. THE ASSESSEE'S CL AIM FOR DEDUCTING THE PAYMENTS UNDER SECTION 10(2)(XV) WAS NEGATIVED BY THE DEPARTMENT A ND THE TRIBUNAL.ON A REFERENCE,THE HONBLE CALCUTTA HIGH COURT HELD AS UNDER: THE EXPRESSION ' COMMERCIAL EXPEDIENCY ' IS AN EXPR ESSION OF WIDE IMPORT AND EXPENDITURE IN COMMERCIAL EXPEDIENCY INCLUDES SUCH EXPENDITURE AS A PRUDENT MAN MAY INCUR FOR THE PURPOSE OF BUSINESS. PAYMENT MADE TO EMPLOYEES IN T HE EXPECTATION OF CREATING IMPETUS OR ENCOURAGING THEM TO PUT IN SELFLESS WORK FOR THE EM PLOYER IS A PAYMENT MADE OUT OF COMMERCIAL CONSIDERATIONS AND COMMERCIAL EXPEDIENCY AND HAS TO BE REGARDED AS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. THE PAYMENT OF PENSION TO THE WIFE OF THE DECEASED EMPLOYEE WAS AN EXPENDITURE SOLELY LAID OUT FOR THE PURPOSE OF THE BUSINESS AND HENCE ALLOWABLE. COMING BACK TO THE FACTS OF THE CASE,WE FIND THAT T HE ASSESSEE HAD CLAIMED THAT THE PAYMENT WAS MADE TO THE CLIENTS FOR PRESERVING ITS GOODWILL AND REPUTATION.IT IS A FACT THAT EXPENDITURE IN QUESTION WAS NOT INCURRED FOR FOSTERING THE BUSI NESS OF ANOTHER PERSON.IT WAS ALSO NOT GRATUITOUS OR FOR SOME IMPROPER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF THE BUSINESS. PRESERVING BUSINESS REPUTATION BY AN ASSESSEE IS AL LOWABLE EXPENDITURE UNDER THE HEAD COMMERCIAL EXPEDIENCY. OLD BUSINESS WISDOM STATES THAT EVEN AT THE COST OF LAKHS CREDIT/ REPUTATION/GOODWILL SHOULD BE PRESERVED( JAAYE LAAKH,RAHE SAAKH ).IN SHORT,EXPENDITURE INCURRED BY THE ASSESSEE EVEN VOLUNTARY AND WITHOUT ANY LEGAL OBLIGATION HAS TO BE ALLOWED AS IT WAS INCURRED FOR PRESERVING THE REPUTATION OF IT S BUSINESS.ALTERNATIVELY,IT IS ALLOWABLE AS 3494/M/10(07-08) KOTA K SECURITIES LTD . 7 BUSINESS LOSS ALSO.CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE,WE ARE UNABLE TO ENDORSE THE ORDER OF THE FAA.WE DECIDE LAST GROU ND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND FEBRUARY, 2017. 22 2017 SD/- S D/- ( /SANJAY GARG) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 22.02.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.