Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee, owner of a hotel, entered into an agreement, with one 'J' and handed over bar and restaurant of hotel to be managed and conducted by him against a monthly payment as royalty - As litigation ensued between them, a suit was instituted before City Civil Court and a consent decree was passed - Thus, assessee paid certain sum to 'J' as settlement charges and incurred some legal expenses - He claimed deduction of these expenses - However, said claim was disallowed by lower authorities - Whether since settlement charges were paid for removing obstruction or hindrance in conducting and managing restaurant, same must be regarded as a matter of commercial expediency and, therefore, these were clearly allowable - Held, yes [In favour of assessee] FACTS The assessee, owner of a hotel, handed over to one 'J' bar and restaurant of the hotel to be managed and conducted by him against a monthly payment as royalty as per the agreement. Litigation ensued between the assessee and the conductor. Therefore, a suit was instituted before the City Civil Court and a consent decree was passed. Under the consent terms, the assessee paid a total sum of Rs. 10 lakhs to J as settlement charges and also incurred legal expenses. The assessee claimed deduction of these two items. However, said claim was disallowed by the departmental authorities, but was allowed by the Tribunal. On reference: HELD Under the agreement dated 11-7-1976, the assessee granted a licence and permission to the conductor to conduct and manage the restaurant business. The agreement records that the assessee had been carrying on the business of running the restaurant for some years and had acquired goodwill therein. Under the agreement, the assessee granted to the conductor a licence and permission to conduct and manage the restaurant together with benefits of existing permits, licences, registration certificates and the furniture and fixtures and other items belonging to the business. This was on payment of royalty of Rs. 8,500 per month. The assessee was required under the terms of the agreement to comply with all the terms…

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