Business expenditure : Section 37(1) : A. Y. 2003-04: Landlord incurred expenditure on construction as per assessee’s requirements: Compensation paid to landlord for nonoccupation of premises, in lieu of withdrawing all claims against assessee: Was in the course of business and was allowable as revenue expenditure:

The assessee had contracted with a landlord to take premises on lease for opening its branch, but no formal agreement was entered into. The landlord started the construction of the premises as per assessee’s requirements. However, before completion of construction, assessee came to know of the proposed construction of an overbridge over the said property which would cause hindrance to conduct its business and services. The assessee, therefore, terminated the understanding with the landlord and paid compensation to the landlord for the work done, in lieu of withdrawing all claims against the assessee. In the A. Y. 2003-04, the assessee claimed such amount paid as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal deleted the disallowance as the compensation was paid in the course of business and for the purpose of business, to protect the assessee’s interest and in lieu of the claims that could have been raised by the landlord.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal referred to the case of J.K. Woollen vs. CIT [1969] 72 ITR 612 (SC) in which it was held, that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department.

ii) No question of law arises. Tax appeal is, therefore, dismissed.”