Full Judgment Text
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on : 08.08.2008
% Judgment delivered on : 21.08.2008
+ ITA No. 111/2008
COMMISSIONER OF
INCOME TAX, ..... Appellant
-versus-
MICROSOFT CORPORATION
OF INDIA PVT. LTD ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr R D Jolly with Mr Paras Chaudhry
For the Respondent : None
CORAM :-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. This is an appeal under Section 260A of the Income Tax
Act, 1961 (hereinafter referred to as the Act) against the judgment
dated 31.01.2007 passed by the Income Tax Appellate Tribunal
ITA No. 111 of 2008 Page 1 of 15
(hereinafter referred as ITAT). By this judgment the ITAT rejected
the appeal filed by the revenue confirming thereby the order of the
Commissioner of Income Tax (Appeals) allowing the expenses
incurred by the assessee, to the tune of Rs 1,30,60,957/- towards
settlement of a foreseeable liability in respect of premature
termination of an agreement for use of premises entered into with an
entity by the name of, Paharpur Business Centre (hereinafter referred
as to PBC).
1.1 The only issue which arises for our consideration is that
whether settlement expenses paid by the assessee fall within the
provision of Section 37 (1) of the Act. The learned counsel for the
Revenue, Mr R D Jolly contends to the contrary – the basis being,
that since there was no obligation under the contract on the assessee
to pay settlement expenses, it cannot be said that the expenses have
been incurred wholly and exclusively for the purposes of business,
which is a sine qua non for seeking a deduction under Section 37 (1)
of the Act.
2. In order to appreciate the controversy at hand, the
following facts require to be noted :-
ITA No. 111 of 2008 Page 2 of 15
2.1 The assessee in respect of the assessment year 2000-01 had
claimed as business expenditure a sum of Rs1,30,60,957/- which it
had paid to PBC as settlement expenses. The Assessing Officer
while scrutinising the return of the assessee under Section 143 (3) of
the Act, issued a questionnaire dated 14.12.2001 whereby, he
sought to know from the assessee the nature and the details of
settlement expenses debited to the profit and loss account shown in
schedule K under the head “Administrative and Other Expenses”.
2.2 The assessee vide a reply dated 15.01.2002 and followed by
letters dated 27.11.2003 and 14.01.2003 sought to explain the
transaction. The sum and substance of the explanation given by the
assessee is as follows:-
i) on 01.08.1997, the assessee had entered into an
agreement for use of premises provided by PBC for the
purpose of its office. The said agreement was to end on
30.06.1998;
ii) in 1997, the assessee had also exchanged an Aide-
memoir with PBC whereby, it was understood as
between them, that the use of the premises in issue
would continue for a period of three years, and;
ITA No. 111 of 2008 Page 3 of 15
iii) on 01.07.1998 the assessee entered into another
agreement which was to expire on 31.07.1999. The point
to be noted is that as per clause 2 (d) of the agreement
(as noted by the Assessing Officer) the assessee was not
a tenant but was entitled to use the premises only during
office hours. Furthermore, as per clause 2(j), the
assessee was required to give a notice in advance of 180
days in the event it did not require any further use of the
premises.
3. The Assessing Officer also noted that prior to the
assessee‟s exit from the premises, plethora of correspondence was
exchanged by the assessee with the PBC which resulted in the
assessee paying a sum of Rs 1,30,60,957/- to PBC.
4. The Assessing Officer however, by his order dated
31.01.2003 disallowed the claim of the assessee under Section 37 (1)
of the Act for the following reasons :-
“……i) It was a lump sum payments for non user of the premises
rather than for the use of the business premises.
Therefore, it is not for business use.
ITA No. 111 of 2008 Page 4 of 15
ii) As per terms of the agreement assessee was not
contractually bound to make payment for settlement. In
other words there was no liability to pay on the assessee.
It has been held in India Garments Ltd 98 ITR 69 that
even payment in excess of the amount that assessee is
liable to pay is not allowable under Section 37 (1) of the
Act. In this case assessee was not bound to pay at all.
Moreover, the agreements are not even registered
including aide-memoir. …….”
5. Aggrieved by the order of the Assessing Officer, the
assessee preferred an appeal before the CIT (Appeals). The CIT
(Appeals) by an order dated 17.09.2003 allowed the appeal of the
assessee with respect to the ground in issue. The CIT (Appeals)
noted that the assessee had brought on record sufficient evidence in
the form of correspondence exchanged with the PBC including the
understanding arrived at, as recorded in the aide-memoir, which
suggested that there was a mutual understanding between the
assessee and the PBC that it would continue to use the premises till
July 2000. The CIT (Appeals) further noted that the assessee in
ITA No. 111 of 2008 Page 5 of 15
order to avoid protracted litigation, based on the legal advice
received, that the understanding recorded in the aide-memoir, the
assessee could be sued for the specific performance or, in the
alternative for damages; it settled for a lumpsum payment in
furtherance of its business interest. The CIT (Appeals) significantly,
went into the aspect as to whether the settlement expenses was a
camouflage for a payment for purposes other than commercial
reasons. Towards this end, the CIT (Appeals) called for the list of
directors, of the assessee and PBC, in order to ascertain whether
there were any common directors. As a matter of fact the CIT
(Appeals) recorded in his order that the assessee had certified that
there was no other relationship with PBC. The CIT (Appeals) on
the perusal of evidence on record and material in the form of
agreements of August 1997, August 1998, the aide-memoir of 1997,
correspondence and other relevant material came to the conclusion
that in the absence of any suggestion of fraud, the settlement
expenses satisfied the test of commercial expediency. The CIT
(Appeals) also noted that the assessee‟s decision to pay settlement
expenses was a bonafide commercial call made, after considering the
financial implications relating to damages for breach of contract, and
ITA No. 111 of 2008 Page 6 of 15
the financial liability that would ensue in the event of litigation, as
also, the monetary gains in securing immediate repayment of
security deposits. Accordingly, the CIT (Appeals) allowed the
assessee to take into account the settlement expenses in the
computation of income chargeable under the head „profit and gains
of business‟ as they were incurred wholly and exclusively for the
purpose of business.
6. The Revenue being aggrieved by the order of the CIT
(Appeals) preferred an appeal to the ITAT. The ITAT after a
detailed discussion and on upon a minute examination of the facts
and the law on the subject dismissed the appeal of the Revenue. In
paragraph no. 15 of the impugned judgment, these facts are noted in
great detail.
7. As stated above, Revenue being aggrieved, has preferred
the present appeal. Before us, at the stage of admission of appeal,
the learned counsel for the Revenue, Mr. R D Jolly, has submitted
that the settlement expenses incurred by the assessee in order to pre-
empt litigation, do not fall within the purview of Section 37 (1) of
the Act. It was the learned counsel‟s contention that the expenses
ITA No. 111 of 2008 Page 7 of 15
incurred towards anticipated litigation even before they get
crystalised, cannot be termed as one which are, incurred wholly and
exclusively for the purpose of business.
8. Having heard the learned counsel for the Revenue and
considered the material on record, as also, the findings recorded by
the authorities below, we are of the view that the appeal deserves to
be dismissed in limini for the following reasons:-
8.1 The conditions for all allow-ability of expenses under Section
37 (1) of the Act are :-
(i) the money expended by the assessee is wholly and
exclusively for the purposes of business and;
(ii) the expenditure incurred is not in the nature of a capital
expenses.
8.2 In so far as the second condition is concerned, it has been
fairly conceded, by Mr R D Jolly, the learned counsel for the
Revenue, that, it is not in the nature of a capital expenditure. He
ha s, as noted, above confined himself to the first condition i.e., the
settlement expenses are not incurred wholly and exclusively for the
purposes of business.
ITA No. 111 of 2008 Page 8 of 15
8.3 To determine whether an expense incurred is wholly and
exclusively for the purposes of business – according to us, can be
ascertained only, if it meets the test of commercial expediency, and
that too, from the point of view of the assessee who is engaged in the
business and, not from the point of view of an outsider who is
unaware of the needs of the business.
8.4 There are several judgments of the Supreme Court laying down
principles which, need to be applied in determining whether an
expenditure ought to be allowed under Section 37 (1) of the Act. These
principles have emerged over the years by virtue of judicial
interpretation giving meaning to the words „wholly and exclusively for
purpose of business‟ appearing in Section 37 (1) of the Act. The
principles deducible even though not exhaustive are as follows:-
i) the expression „wholly and exclusively for the purpose of
business‟ is of a wide import – as a matter of fact, is wider
than the expression for the purpose of earning profit;
ii) the expense is allowable under Section 37 (1) of the Act if
it is commercially expedient;
ITA No. 111 of 2008 Page 9 of 15
iii) the expense should be commercially expedient from the
perspective of a prudent businessman, and not from the
point of view of the Revenue;
iv) it is not a requisite condition that expense is incurred on
account of compelling necessity, and;
v) last but not the least, the allowability of the expense is not
dependent on the fact that it is incurred to fulfill or
discharge a legal obligation.
See:
(i) Jugal Kishore Baldev Sahai v. CIT : AIR 1967 SC 495;
(ii) Sri Venkata Satyanarayana Rice Mill Contractors Co v.
CIT, AP-II: (1996) 6 SCC 611;
(iii) CIT v. Walchand & Co. Pvt. Ltd : AIR 1967 SC 1435 =
65 ITR 381;
(iv) M/s Sassoon J. David & Co. Pvt Ltd v. CIT Bombay :
1979 (3) SCC 524;
(v) The CIT, West Bengal v. Birla Cotton Spinning &
Weaving Mills & Another : (1971) 3 SCC 344
(vi) SA Builders Ltd v. CIT ; 2007 (1) SCC 781.
8.5 Keeping in mind the aforesaid test, let us examine the facts of
the present case.
ITA No. 111 of 2008 Page 10 of 15
8.6 The assessee had entered into an agreement for use of the
premises of PBC by an agreement dated 01.08.1997. In 1997, the
assessee and the PBC had recorded that the assessee would use the
premises of PBC for a period three years. The relevant extract of the
aide-memoir is as follows :
“………. AIDE-MEMOIR”
The understanding is for a period of 3 years.
The schedule of charges for Office Facilities
are valid from August 1, 1997 to July 31,
1999, subject to the modifications provided
hereunder:
1. The facilities charges will be increased by
10% for Unit 2A w.e.f. August 1 every
year on the last Office Facilities charges
paid as on July 31 of the current year.
Unit 1A & 1B shall be billed using the
prevailing area rate for Unit 2A w.e.f.
August 5, 1998.
2. Fresh Documents containing the terms
and conditions contained :-
a) Membership Application Form.
b) Agreement dated August 1, 1997.
c) Letter dated August 1, 1997.
ITA No. 111 of 2008 Page 11 of 15
Which will be signed before August 1
every year. The Security Deposit will
be increased by 10% calculated on 24
times. The difference in Security
Deposit would be payable on August1,
every year. …………….”
8.7 The aide-memoir was signed on behalf of the assessee by one
Shri Rajiv Nayar on 21.08.1997.
8.8 In August 1998, the assessee entered into another agreement
by virtue of which it could continue the use of the premises till
31.07.1999.
8.9 In the interregnum, in March 1999, the assessee acquired a
new premises, and evidently, entered into a contract with respect to
the same with M/s Great Eastern Shipping Company Private
Limited. The charges payable for the new premises were Rs
20,56,416/- as against Rs 30,87,827/- per month with respect to the
use of the premises of PBC.
8.10 By a communication dated 22.03.1999, the assessee informed
the PBC of its intention to dis-continue the use of the premises with
effect from 31.08.1999, and consequently, demanded return of its
interest free security amounting to Rs 7,46,07,848/-.
ITA No. 111 of 2008 Page 12 of 15
8.11 This communiqué triggered correspondence between the
assessee and PBC on the specific issue of early termination of the
understanding which required continued use of the premises till July,
2000.
8.12 In this background, the assessee sought legal advice. The
assessee was advised that there was a possibility of litigation
ensuing, in respect of, its early exit from the premises. It was
advised that it could be sued for damages for breach of contract and /
or for specific performance, keeping in mind the contents of the
aide-memoir based on the doctrine of promissory estoppel. The
legal advisers of the assessee referred to various judgments of
Supreme Court and the High Court in this regard.
8.13 The assessee keeping in mind the legal advice rendered to it,
as also, the following the factors which directly impinged upon its
business, took a decision to pay the settlement expenses to the tune
of Rs 1,30,60,957/- The factors which compelled the assessee to take
a decision to pay the settlement expenses were as follows :-
(i) the assessee could avoid payment of Rs 3,70,53,924/- as user
charges for the unexpired period between August 1999 to July 2000;
(ii) it would get immediate return of its interest free security
ITA No. 111 of 2008 Page 13 of 15
deposit lying with PBC in the sum of Rs 6,15,81,997/- after netting
off the settlement expenses to the tune of Rs 1,60,30,957/- on which
it could earn a return, in the form of interest, or otherwise;
(iii) it would avoid the payment of discount charges of Rs
1,26,35,881/- as demanded by the PBC for immediate payment of
interest free security deposit;
(iv) it would save moneys towards payment of rent not only for
two premises, but would, also save an amount of not less than Rs
10.00 lacs per month by shifting to the new premises offered by
Great Eastern Shipping Company Private Limited and;
(v) last but not the least, it would avoid not only expenditure in
the form of litigation costs, but would also, avoid the attendant
expenses in the form of productive time spent by its officers/
executives looking after the litigation.
9. In our view, the aforementioned factors which the
assessee took into account while taking its decision to pay PBC
settlement expenses for an early exit from PBC‟s premises falls
squarely within the meaning of expression “commercial expediency”
when, seen from the perspective of the assessee‟s business.
ITA No. 111 of 2008 Page 14 of 15
10. In the aforesaid circumstances, we are of the view that
the findings recorded by the authority below are the findings of fact
based on appreciation of evidence placed before them. There is no
demonstrable perversity in the order of the Tribunal. No substantial
question of law, much less a question of law, arises in the instant
case for our consideration.
11. In the result, the appeal is dismissed.
RAJIV SHAKDHER, J
BADAR DURREZ AHMED, J
August 21, 2008
mk
ITA No. 111 of 2008 Page 15 of 15
Judgment reserved on : 08.08.2008
% Judgment delivered on : 21.08.2008
+ ITA No. 111/2008
COMMISSIONER OF
INCOME TAX, ..... Appellant
-versus-
MICROSOFT CORPORATION
OF INDIA PVT. LTD ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr R D Jolly with Mr Paras Chaudhry
For the Respondent : None
CORAM :-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. This is an appeal under Section 260A of the Income Tax
Act, 1961 (hereinafter referred to as the Act) against the judgment
dated 31.01.2007 passed by the Income Tax Appellate Tribunal
ITA No. 111 of 2008 Page 1 of 15
(hereinafter referred as ITAT). By this judgment the ITAT rejected
the appeal filed by the revenue confirming thereby the order of the
Commissioner of Income Tax (Appeals) allowing the expenses
incurred by the assessee, to the tune of Rs 1,30,60,957/- towards
settlement of a foreseeable liability in respect of premature
termination of an agreement for use of premises entered into with an
entity by the name of, Paharpur Business Centre (hereinafter referred
as to PBC).
1.1 The only issue which arises for our consideration is that
whether settlement expenses paid by the assessee fall within the
provision of Section 37 (1) of the Act. The learned counsel for the
Revenue, Mr R D Jolly contends to the contrary – the basis being,
that since there was no obligation under the contract on the assessee
to pay settlement expenses, it cannot be said that the expenses have
been incurred wholly and exclusively for the purposes of business,
which is a sine qua non for seeking a deduction under Section 37 (1)
of the Act.
2. In order to appreciate the controversy at hand, the
following facts require to be noted :-
ITA No. 111 of 2008 Page 2 of 15
2.1 The assessee in respect of the assessment year 2000-01 had
claimed as business expenditure a sum of Rs1,30,60,957/- which it
had paid to PBC as settlement expenses. The Assessing Officer
while scrutinising the return of the assessee under Section 143 (3) of
the Act, issued a questionnaire dated 14.12.2001 whereby, he
sought to know from the assessee the nature and the details of
settlement expenses debited to the profit and loss account shown in
schedule K under the head “Administrative and Other Expenses”.
2.2 The assessee vide a reply dated 15.01.2002 and followed by
letters dated 27.11.2003 and 14.01.2003 sought to explain the
transaction. The sum and substance of the explanation given by the
assessee is as follows:-
i) on 01.08.1997, the assessee had entered into an
agreement for use of premises provided by PBC for the
purpose of its office. The said agreement was to end on
30.06.1998;
ii) in 1997, the assessee had also exchanged an Aide-
memoir with PBC whereby, it was understood as
between them, that the use of the premises in issue
would continue for a period of three years, and;
ITA No. 111 of 2008 Page 3 of 15
iii) on 01.07.1998 the assessee entered into another
agreement which was to expire on 31.07.1999. The point
to be noted is that as per clause 2 (d) of the agreement
(as noted by the Assessing Officer) the assessee was not
a tenant but was entitled to use the premises only during
office hours. Furthermore, as per clause 2(j), the
assessee was required to give a notice in advance of 180
days in the event it did not require any further use of the
premises.
3. The Assessing Officer also noted that prior to the
assessee‟s exit from the premises, plethora of correspondence was
exchanged by the assessee with the PBC which resulted in the
assessee paying a sum of Rs 1,30,60,957/- to PBC.
4. The Assessing Officer however, by his order dated
31.01.2003 disallowed the claim of the assessee under Section 37 (1)
of the Act for the following reasons :-
“……i) It was a lump sum payments for non user of the premises
rather than for the use of the business premises.
Therefore, it is not for business use.
ITA No. 111 of 2008 Page 4 of 15
ii) As per terms of the agreement assessee was not
contractually bound to make payment for settlement. In
other words there was no liability to pay on the assessee.
It has been held in India Garments Ltd 98 ITR 69 that
even payment in excess of the amount that assessee is
liable to pay is not allowable under Section 37 (1) of the
Act. In this case assessee was not bound to pay at all.
Moreover, the agreements are not even registered
including aide-memoir. …….”
5. Aggrieved by the order of the Assessing Officer, the
assessee preferred an appeal before the CIT (Appeals). The CIT
(Appeals) by an order dated 17.09.2003 allowed the appeal of the
assessee with respect to the ground in issue. The CIT (Appeals)
noted that the assessee had brought on record sufficient evidence in
the form of correspondence exchanged with the PBC including the
understanding arrived at, as recorded in the aide-memoir, which
suggested that there was a mutual understanding between the
assessee and the PBC that it would continue to use the premises till
July 2000. The CIT (Appeals) further noted that the assessee in
ITA No. 111 of 2008 Page 5 of 15
order to avoid protracted litigation, based on the legal advice
received, that the understanding recorded in the aide-memoir, the
assessee could be sued for the specific performance or, in the
alternative for damages; it settled for a lumpsum payment in
furtherance of its business interest. The CIT (Appeals) significantly,
went into the aspect as to whether the settlement expenses was a
camouflage for a payment for purposes other than commercial
reasons. Towards this end, the CIT (Appeals) called for the list of
directors, of the assessee and PBC, in order to ascertain whether
there were any common directors. As a matter of fact the CIT
(Appeals) recorded in his order that the assessee had certified that
there was no other relationship with PBC. The CIT (Appeals) on
the perusal of evidence on record and material in the form of
agreements of August 1997, August 1998, the aide-memoir of 1997,
correspondence and other relevant material came to the conclusion
that in the absence of any suggestion of fraud, the settlement
expenses satisfied the test of commercial expediency. The CIT
(Appeals) also noted that the assessee‟s decision to pay settlement
expenses was a bonafide commercial call made, after considering the
financial implications relating to damages for breach of contract, and
ITA No. 111 of 2008 Page 6 of 15
the financial liability that would ensue in the event of litigation, as
also, the monetary gains in securing immediate repayment of
security deposits. Accordingly, the CIT (Appeals) allowed the
assessee to take into account the settlement expenses in the
computation of income chargeable under the head „profit and gains
of business‟ as they were incurred wholly and exclusively for the
purpose of business.
6. The Revenue being aggrieved by the order of the CIT
(Appeals) preferred an appeal to the ITAT. The ITAT after a
detailed discussion and on upon a minute examination of the facts
and the law on the subject dismissed the appeal of the Revenue. In
paragraph no. 15 of the impugned judgment, these facts are noted in
great detail.
7. As stated above, Revenue being aggrieved, has preferred
the present appeal. Before us, at the stage of admission of appeal,
the learned counsel for the Revenue, Mr. R D Jolly, has submitted
that the settlement expenses incurred by the assessee in order to pre-
empt litigation, do not fall within the purview of Section 37 (1) of
the Act. It was the learned counsel‟s contention that the expenses
ITA No. 111 of 2008 Page 7 of 15
incurred towards anticipated litigation even before they get
crystalised, cannot be termed as one which are, incurred wholly and
exclusively for the purpose of business.
8. Having heard the learned counsel for the Revenue and
considered the material on record, as also, the findings recorded by
the authorities below, we are of the view that the appeal deserves to
be dismissed in limini for the following reasons:-
8.1 The conditions for all allow-ability of expenses under Section
37 (1) of the Act are :-
(i) the money expended by the assessee is wholly and
exclusively for the purposes of business and;
(ii) the expenditure incurred is not in the nature of a capital
expenses.
8.2 In so far as the second condition is concerned, it has been
fairly conceded, by Mr R D Jolly, the learned counsel for the
Revenue, that, it is not in the nature of a capital expenditure. He
ha s, as noted, above confined himself to the first condition i.e., the
settlement expenses are not incurred wholly and exclusively for the
purposes of business.
ITA No. 111 of 2008 Page 8 of 15
8.3 To determine whether an expense incurred is wholly and
exclusively for the purposes of business – according to us, can be
ascertained only, if it meets the test of commercial expediency, and
that too, from the point of view of the assessee who is engaged in the
business and, not from the point of view of an outsider who is
unaware of the needs of the business.
8.4 There are several judgments of the Supreme Court laying down
principles which, need to be applied in determining whether an
expenditure ought to be allowed under Section 37 (1) of the Act. These
principles have emerged over the years by virtue of judicial
interpretation giving meaning to the words „wholly and exclusively for
purpose of business‟ appearing in Section 37 (1) of the Act. The
principles deducible even though not exhaustive are as follows:-
i) the expression „wholly and exclusively for the purpose of
business‟ is of a wide import – as a matter of fact, is wider
than the expression for the purpose of earning profit;
ii) the expense is allowable under Section 37 (1) of the Act if
it is commercially expedient;
ITA No. 111 of 2008 Page 9 of 15
iii) the expense should be commercially expedient from the
perspective of a prudent businessman, and not from the
point of view of the Revenue;
iv) it is not a requisite condition that expense is incurred on
account of compelling necessity, and;
v) last but not the least, the allowability of the expense is not
dependent on the fact that it is incurred to fulfill or
discharge a legal obligation.
See:
(i) Jugal Kishore Baldev Sahai v. CIT : AIR 1967 SC 495;
(ii) Sri Venkata Satyanarayana Rice Mill Contractors Co v.
CIT, AP-II: (1996) 6 SCC 611;
(iii) CIT v. Walchand & Co. Pvt. Ltd : AIR 1967 SC 1435 =
65 ITR 381;
(iv) M/s Sassoon J. David & Co. Pvt Ltd v. CIT Bombay :
1979 (3) SCC 524;
(v) The CIT, West Bengal v. Birla Cotton Spinning &
Weaving Mills & Another : (1971) 3 SCC 344
(vi) SA Builders Ltd v. CIT ; 2007 (1) SCC 781.
8.5 Keeping in mind the aforesaid test, let us examine the facts of
the present case.
ITA No. 111 of 2008 Page 10 of 15
8.6 The assessee had entered into an agreement for use of the
premises of PBC by an agreement dated 01.08.1997. In 1997, the
assessee and the PBC had recorded that the assessee would use the
premises of PBC for a period three years. The relevant extract of the
aide-memoir is as follows :
“………. AIDE-MEMOIR”
The understanding is for a period of 3 years.
The schedule of charges for Office Facilities
are valid from August 1, 1997 to July 31,
1999, subject to the modifications provided
hereunder:
1. The facilities charges will be increased by
10% for Unit 2A w.e.f. August 1 every
year on the last Office Facilities charges
paid as on July 31 of the current year.
Unit 1A & 1B shall be billed using the
prevailing area rate for Unit 2A w.e.f.
August 5, 1998.
2. Fresh Documents containing the terms
and conditions contained :-
a) Membership Application Form.
b) Agreement dated August 1, 1997.
c) Letter dated August 1, 1997.
ITA No. 111 of 2008 Page 11 of 15
Which will be signed before August 1
every year. The Security Deposit will
be increased by 10% calculated on 24
times. The difference in Security
Deposit would be payable on August1,
every year. …………….”
8.7 The aide-memoir was signed on behalf of the assessee by one
Shri Rajiv Nayar on 21.08.1997.
8.8 In August 1998, the assessee entered into another agreement
by virtue of which it could continue the use of the premises till
31.07.1999.
8.9 In the interregnum, in March 1999, the assessee acquired a
new premises, and evidently, entered into a contract with respect to
the same with M/s Great Eastern Shipping Company Private
Limited. The charges payable for the new premises were Rs
20,56,416/- as against Rs 30,87,827/- per month with respect to the
use of the premises of PBC.
8.10 By a communication dated 22.03.1999, the assessee informed
the PBC of its intention to dis-continue the use of the premises with
effect from 31.08.1999, and consequently, demanded return of its
interest free security amounting to Rs 7,46,07,848/-.
ITA No. 111 of 2008 Page 12 of 15
8.11 This communiqué triggered correspondence between the
assessee and PBC on the specific issue of early termination of the
understanding which required continued use of the premises till July,
2000.
8.12 In this background, the assessee sought legal advice. The
assessee was advised that there was a possibility of litigation
ensuing, in respect of, its early exit from the premises. It was
advised that it could be sued for damages for breach of contract and /
or for specific performance, keeping in mind the contents of the
aide-memoir based on the doctrine of promissory estoppel. The
legal advisers of the assessee referred to various judgments of
Supreme Court and the High Court in this regard.
8.13 The assessee keeping in mind the legal advice rendered to it,
as also, the following the factors which directly impinged upon its
business, took a decision to pay the settlement expenses to the tune
of Rs 1,30,60,957/- The factors which compelled the assessee to take
a decision to pay the settlement expenses were as follows :-
(i) the assessee could avoid payment of Rs 3,70,53,924/- as user
charges for the unexpired period between August 1999 to July 2000;
(ii) it would get immediate return of its interest free security
ITA No. 111 of 2008 Page 13 of 15
deposit lying with PBC in the sum of Rs 6,15,81,997/- after netting
off the settlement expenses to the tune of Rs 1,60,30,957/- on which
it could earn a return, in the form of interest, or otherwise;
(iii) it would avoid the payment of discount charges of Rs
1,26,35,881/- as demanded by the PBC for immediate payment of
interest free security deposit;
(iv) it would save moneys towards payment of rent not only for
two premises, but would, also save an amount of not less than Rs
10.00 lacs per month by shifting to the new premises offered by
Great Eastern Shipping Company Private Limited and;
(v) last but not the least, it would avoid not only expenditure in
the form of litigation costs, but would also, avoid the attendant
expenses in the form of productive time spent by its officers/
executives looking after the litigation.
9. In our view, the aforementioned factors which the
assessee took into account while taking its decision to pay PBC
settlement expenses for an early exit from PBC‟s premises falls
squarely within the meaning of expression “commercial expediency”
when, seen from the perspective of the assessee‟s business.
ITA No. 111 of 2008 Page 14 of 15
10. In the aforesaid circumstances, we are of the view that
the findings recorded by the authority below are the findings of fact
based on appreciation of evidence placed before them. There is no
demonstrable perversity in the order of the Tribunal. No substantial
question of law, much less a question of law, arises in the instant
case for our consideration.
11. In the result, the appeal is dismissed.
RAJIV SHAKDHER, J
BADAR DURREZ AHMED, J
August 21, 2008
mk
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