SETTLEMENT EXPENSESAN ALLOWABLE EXPENSE

The Delhi High Court has held that where expenditure is incurred on account of commercial expediency , it would be an allowable business expense though it has not arisen explicitly based on contract. The assessee incurred settlement expenditure so as to avoid the possibility of the litigation ensuing, in respect of its early exit from the premises it had obtained on lease. The nonpayment of the same could have resulted in suit of damages for breach of contract and/or specific performance. The assessee claimed the same as business expenditure under section 37. The assessee paid the said amount considering various factors like avoiding higher user charges for unexpired lease period, getting back immediate payment of the interest free security period, etc. The AO was of the view that under the contract there was no legal obligation of the assesee to pay the settlement expense and hence, the same was not wholly and exclusively laid out for the purpose of the business. The court observed that the settlement expense paid in relation to early exit from the premises falls squarely within the meaning of the expression “commercial expediency” when seen from the perspective from an assessee’s business. Accordingly, the same is an allowable expense under section 37.