Commercial expediency: Reasonableness of an expenditure has to be adjudged from the point of view of the businessman
The expression “wholly & exclusively” used in section 10(2) (xv) of the Income-tax Act, 1922 (Which corresponds to section 37(1) of the Income-tax Act, 1961) does not mean “necessary”. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it 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. (Sasson J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC)). Thought the main objects of business is to earn profits, business purposes are wider than profit-making purposes. Business expediency does not require that expenses should be incurred only for earning immediate profits. Expenses incurred though not directly related to earning to income, may be allowable deductions if they are related to the carrying on of the business vide Birla Cotton Spinning & Weaving Mills Ltd.vVs. CIT (1967) 64 ITR 568 (Cal)). It is for the assessee to decide how best to protect has own interest. It is not open to Income-tax department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure (CIT vs. Dhanrajgiri Raja Narasingiri (1973) 91 ITR 544 (SC)). Expression “commercial expediency” is not a term of art. It mean every thing that serves to promote commerce and includes every means suitable to that end commercial men are best experienced in commercial expediency (Indian Steel & Wire Products Ltd. vs. CIT (1968) 69 ITR 379 (Cal)). In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue (Jamshedpur Motor Accessories Stores vs. CIT (1974) 95 ITR 664 (Pat); J.K. Woollen Manufacturers vs. CIT (1969) 72 ITR 612 (SC).
Recently, in Shah Rukh Khan vs. ACIT, Central Circle 29 (ITA No.623/Mum/2013 and ITA No.4763/Mum/2013, decided on 17.03.2017), one of the ground raised by appellant was in respect of disallowing of an amount of Rs. 10,00,00,000/- being professional fees returned to Star India P. Ltd. The said amount had been incurred by the appellant for the purposes of his profession and on grounds of commercial expediency. As per appellant, the reasons given by both the CIT(Appeals) and the ACIT in this regard, particularly their reading of the agreement dated 30-3-2007, were incorrect, erroneous and invalid.
Facts in brief in respect of the above-mentioned ground:
During the year under consideration, assessee being an Actor by profession, had declared income from profession based on the cash method of accounting. The Assessing Officer(AO) noticed that in the Income and Expenditure Account for the year under consideration, assessee had claimed an expenditure of Rs.10 crores under the head ‘Professional fees returned to Star India Private Limited’. The said amount represented payment by the assessee to Knight Riders Sports Pvt. Ltd. on behalf of Star India Private Ltd. for grant of sponsorship rights for IPL Season -2. On being asked to explain, assessee contended that in terms of an Artist Service Agreement with Star India Pvt. Ltd. dated 30/03/2007, the assessee was liable to act as anchor and host of the programme to be produced by Star India Ltd., namely ‘Kaun Banega Crorepati‘ for a total of 104 Episodes, divided into two seasons of 52 Episodes each. The total consideration payable was Rs.72 cores, which was received by the assessee in advance and the same was offered for tax in an earlier year on receipt basis. It was explained that assessee rendered the services for the first season of 52 Episodes but for second season comprising of the balance 52 Episodes no service was rendered as the programme was discontinued by Star India Pvt. Ltd. for commercial reasons. The assessee explained that as the balance Episodes were not delivered, Star India Pvt. Ltd wanted to recover the value of the unutilized amount from the assessee for non-shooting of the 2nd Season and, therefore, in terms of a mutually agreed arrangement dated 20/03/2009, assessee agreed to get for Star India Pvt. Ltd. the following:- (a) a key sponsorship association with Kolkota Knight Riders team for calendar year 2009 (IPL Season 2); and, (b) other accompanying sponsorship rights and deliverables detailed in the arrangement, copy of which has been placed in the Paper Book. Such accompanying deliverables, inter-alia, included certain ‘Appearances and Promotions’ by the assessee in press conferences in London and Dubai. Notably, the arrangement did not envisage any liability of Star India Pvt. Ltd. in respect of any fee or costs, etc. to be incurred by the assessee or Knight Rider Sports Pvt. Ltd. in relation to the deliverables mentioned and the sponsorship rights. It was explained that for procuring the sponsorship rights of Knight Rider Sports Pvt. Ltd. for IPL Season -2, assessee paid Rs.10 crores on behalf of the Star India Pvt. Ltd. to Knight Rider Sports Pvt. Ltd. This amount was claimed as a professional expenditure. The AO did not accept the plea of the assessee for deduction of the aforesaid amount while computing the taxable income. Firstly, as per the AO the assessee was under no obligation to refund any amount to Star India Pvt. Ltd. because the non-shooting of the balance 52 Episodes was not for reasons attributable to the assessee. In this context, the AO referred to the Artist Service Agreement dated 30/03/2007 between the assessee and Star India Pvt. Ltd. to point out that the assessee was liable to refund the amount only if breach of contract was attributable to the assessee and in the present case the reason for discontinuation was not attributable to the assessee. Secondly, the AO also observed that during the year under consideration no income of any nature had been received by the assessee from Star India Pvt. Ltd. and, therefore, the expenditure of Rs.10 crores debited under the head ‘ ‘Professional fees returned to Star India Pvt. Ltd.’ does not have any nexus or bearing on any of the professional receipts earned during the year under consideration, and therefore, the impugned expenditure could not be allowed as deduction in the year under consideration. Thirdly, the AO has also referred to the response of Star India Pvt. Ltd. to certain queries whereby it was clear that the entire amount of Rs.72 crores paid to the assessee has been accounted for as an expenditure in the hands of Star India Pvt. Ltd. As per the AO none of the amount comprised in the receipt of Rs.72 crores from Star India Pvt. Ltd. was refundable by the assessee. On the basis of the aforesaid, deduction for the expenditure debited under the head ‘professional fees returned to Start India Pvt. Ltd.’ was denied, which resulted in an addition of Rs.10 crores to the returned income of the appellant.
In appeal before the CIT(A), assessee/ appellant reiterated the submissions made before the AO and assailed the addition on facts and in law. Before the CIT(A), assessee contended that the AO has not appreciated an established business practice, which stresses on maintaining good relationship with customers while evaluating the deductibility of the impugned expenditure. The assessee canvassed that business practices sometimes entail grant of some concessions to customers in order to enjoy their continued patronage without souring relationships, especially for regular and important customers. It was pointed out before the CIT(A) that during the year under consideration as well as in the two earlier years assessee had received professional fees aggregating to Rs.132 crores, from Star India Pvt. Ltd. for two television series and, therefore, the gesture of securing the sponsorship of The Kolkata Knight Riders cricket team for Star India Pvt. Ltd. on payment of Rs.10 cores was a part of his business strategy of maintaining his goodwill in business. It was also brought out by the assessee that both parties had come to a mutually acceptable compromise formula in order to maintain cordial relationship with each other on account of professional/commercial
Before ITAT, Representative for the assessee had vehemently pointed out that both the lower authorities have not appreciated the facts in proper perspective inasmuch as assessee had a long-standing professional relationship with Star India Pvt. Ltd. and that the impugned expenditure was incurred on account of commercial expediency. The Representative for the assessee pointed out that Star India Pvt. Ltd. was a major client of the assessee inasmuch as between assessment years 2007-08 to 2009-10 almost a sum of Rs.132 cores have been earned by the assessee from Star India Pvt. Ltd. and even for the year under consideration, out of the total gross receipts of Rs.150 crores, approximately a sum of Rs.60 cores has been earned from the said concern. For all the above reasons, the plea of the assessee was that there was sufficient commercial expediency for incurring the impugned expenditure and that it has to be examined from the point of view of a businessman and the AO has misdirected himself. In the course of his arguments, the Representative referred to the propositions laid down in the following judgments in support of the case of the assessee:-
(i) Sassoon J. David & Co. (P) Ltd. vs C.I.T. (Supreme Court of India) 3 May, 1979-Equivalent citations: 1979 AIR 1441, 1979 SCR (3) 878
(ii) S.A Builders vs. CIT  288 ITR 1(SC)
(iii) CIT vs. Dhanrajgiri Raja Narasingiriji(supra)
On the other hand, the Departmental Representative had reiterated the stand of the AO, which we have already noted in the earlier paras. As per the Departmental Representative, there was no breach of agreement by the assessee and, therefore, he was under no obligation to either refund the fees for the non-produced Episodes or spend the amount of Rs.10 crores for grant of sponsorship of Kolkata Knight Riders Cricket Team to Star India Pvt. Ltd. It was therefore, argued that the expenditure in question was not borne out of any business necessity and was, rather, gratuitous in nature. It was also pointed out that the entire fee was received by the assessee upfront and offered for tax in earlier assessment year on receipt basis and therefore, even if the impugned expenditure is in relation to the income from Star India Pvt. Ltd., it cannot be allowed while deducting current year’s income as it is in the nature of prior period expenditure. In sum-and-substance, the Departmental Representative has defended the action of the lower authorities by placing reliance on the respective orders.
The learned Members of the ITAT carefully considered the rival submissions. They observed that the dispute in the above-mentioned Ground revolved around the import of the provisions of section 37(1) of the Act. This section, inter-alia, relates to deduction of an expenditure laid out or extended wholly and exclusively for the purpose of business or profession while computing the income chargeable under the head “profits and gains of business or profession”, precisely put, it has to be decided whether the expenditure of Rs.10 crores incurred by the assessee by way of payment to Knight Riders Sports Pvt. Ltd. for obtaining sponsorship rights in favour of Star India Pvt. Ltd. would constitute an expenditure expended wholly and exclusively for the purpose of assessee’s business or profession so as to be deductible in terms of section 37(1) of the Act. Be that as it may, it would suffice to note that assessee, who is an Actor by profession, entered into an Artist Service Agreement on 30/03/2007 with Star India Pvt. Ltd. for acting as anchor and host of a programme – “Kaun Banega Crorepati”, which was to be produced by Star India Ltd. The agreement was for a total of 104 Episodes divided into two seasons of 52 Episodes each. The total consideration payable was Rs.72 crores, which was received by the assessee in advance and the same has also been offered to tax in an earlier assessment year on receipt basis. It transpires that after production of 52 Episodes in the first season, the Star India Pvt. Ltd. decided not to produce the balance 52 Episodes for commercial reasons. It further emerges that since the balance Episodes were not produced, Star India Pvt. Ltd. wanted to recover the value of the unutilized amount from the assessee for non-shooting of the second season. In terms of a mutually agreed arrangement, assessee, inter-alia, agreed to secure for Star India Pvt. Ltd. a sponsorship association with Kolkata Knight Riders Cricket Team for IPL Season -2. For securing such sponsorship, assessee paid Rs.10 crores to Knight Riders Sports Pvt. Ltd. and in return sponsorship rights were awarded to Star India Pvt. Ltd. The said expenditure has been claimed as deductible while computing the income chargeable under the head “profits and gains of business or profession”.
The Learned Members further observed that there was no dispute that assessee and Star India Pvt. Ltd. share a business relationship, inasmuch as, the assessee has earned substantial professional receipts from Star India Pvt. Ltd. not only in this year but also in the past years, the AO had wrongly noted that assessee has not received any professional receipt from the said concern in the instant assessment year. On the contrary, the details on record reveal that assessee has earned a sum of Rs.60 crores from Star India Pvt. Ltd., which is a part of the total professional receipts for the year under consideration. In fact, the Representative for the assessee submitted that the amount of Rs.60 crores received from Star India Pvt. Ltd. during the year under consideration constituted almost 40% of the total receipts. Be that as it may, what we are trying to emphasize is that there is a subsisting professional relationship between assessee and Star India Pvt. Ltd. and the impugned arrangement has to be viewed from the prism of a Principal – client relationship. In terms of the Artist Service Agreement dated, assessee was to shoot for 104 Episodes but no shooting took place for 52 Episodes on account of a decision of Star India Pvt. Ltd., whereas the consideration for the entire Episodes was paid to the assessee in advance. In such a situation, intention of Star India Pvt. Ltd to obtain or recover the value of the unutilized amount from assessee for non-shooting of the balance 52 Episodes is quite plausible. As per the Revenue, the Artist Service Agreement dated 30/03/2007 did not obligate the assessee to refund the unutilized amount because the non-shooting on a decision taken by Star India Pvt. Ltd. No doubt, the point made by the Revenue may be correct in the context of the terms and conditions of the Artist Service Agreement dated 30/03/2007 but the allowability of the impugned expenditure has to be examined in the context of its commercial expediency. The assessee entered into an arrangement with Star India Pvt. Ltd. on a mutually agreed basis whereby the loss suffered by Star India Pvt. Ltd. was sought to be recouped with the earnings from the sponsorship of Kolkata Knight Riders Cricket Team for which assessee incurred Rs.10 crores on behalf of Star India Pvt. Ltd. It is not the legal necessity to spent the expenditure which is determinative of its allowability; rather, it is the existence or otherwise of commercial expediency which guides the allowability of expenditure under Section 37(1) of the Act. From the point of view of commercial expediency, it is abundantly clearly that assessee had a long-standing professional relationship with Star India Pvt. Ltd. and there is a nexus between the impugned expenditure and the purpose of business. The Representative for the assessee has rightly relied upon the judgment of Dhanrajgiri Raja Narasingiriji (supra) to contend that it was not for the Revenue to prescribe what expenditure should an assessee incur and under what circumstances. In the present case, the Members of the ITAT observed, that there was no challenge to the bonafides of the expenditures incurred and the same can be understood to have been incurred wholly and exclusively for the purposes of business within the meaning of section 37(1) of the Act. In fact, the Hon’ble Supreme Court in the case of Sassoon J. David (supra) has held that the expression “wholly and exclusively” used in section10(2)(xv) of the Income Tax Act, 1922 ( which is pari-materiato section 37(1) of the Act ) does not mean that expenditure has to be “necessarily” incurred. As per Hon’ble Supreme Court, an expenditure incurred voluntarily and without any necessity would be allowable so long as it has been incurred for promoting the business of the assessee. The Learned Members of the ITAT opined that the commercial expediency canvassed by the assessee in the instant case clearly establishes that the impugned expenditure falls within the scope of the expression “wholly and exclusively for the purpose of business or profession” within the meaning of section 37(1) of the Act. Therefore, on this aspect, assessee has to succeed.
Accordingly, the Learned Members of the ITAT set-aside order of the CIT(A) and directed the AO to delete the addition of Rs.10 crores.