K.G. Bansal, A.M.: This appeal of assessee arises out of order of CIT(A)-II, [hereinafter called CIT(A)], Pune, passed on 29th Feb., 2000. corresponding order of assessment was made by Jt. CIT, SR-1, (hereinafter called AO), Pune, on 25th March, 1999, under provisions of s. 143(3) of IT Act, 1961. In appeal filed on 15th May, 2000, assessee had taken three grounds of appeal. first ground of appeal contains four sub-parts and sum and substance of this ground is that learned CIT(A) erred on facts and in law in not allowing claim of Rs. 1.45 crores on account of expenditure incurred by way of damages payable by assessee. sub-parts (b), (c) and (d) are in nature of averments against finding that (i) payments were not made wholly and exclusively for purpose of business, (ii) payments were made for some oblique reasons, and (iii) business expenditure must necessarily emerge from contractual obligation. Ground No. 2 also contain two sub-parts. gist of this ground is that learned CIT(A) erred in confirming arbitrary ad hoc disallowance of Rs. 1 lakh, made by AO, out of miscellaneous expenses. It is also mentioned that learned CIT(A) erroneously relied on assessment order that no such expenditure as mentioned in order, amounting to Rs. 3,49,817, appears in schedule of miscellaneous expenses. Ground No. 3 also contains two sub-parts. This ground is directed against finding of learned CIT(A), in which he upheld disallowance of Rs. 10 lakh, made by AO, from dealers conference expenses, holding same to be in nature of entertainment expenses. It is also mentioned that learned CIT(A) erred in not following judgment of jurisdictional High Court in matter in case of CIT vs. Kirloskar Oil Engines Ltd. (1985) 44 CTR (Bom) 98: (1986) 157 ITR 762 (Bom). assessee took two additional grounds of appeal in course of hearing before us. 1st additional ground was taken up by filing letter dt. 4th July, 2004. This ground states that in event assessee s claim for deduction of sum of Rs. 4,10,61,718, being expenditure on advertising and marketing, is not accepted in asst. yr. 1997-98 on ground that impugned expenditure relates to asst. yr. 1996-97, then, same may be allowed as deduction in this year. second additional ground of appeal was taken up by filing letter dt. 4th July, 2005. This additional ground is that in event assessee s claim for deduction of sum of Rs. 3,37,06,017, being expenditure on service charges, is not accepted in asst. yr. 1997-98 on ground that impugned expenditure relates to asst. yr. 1996-97, then, same may be allowed as deduction in this year. It may be mentioned that appeals for this year and asst. yr. 1997-98 were pending before this Bench, when these additional grounds were taken up. grounds of appeal are bona fide and all facts relating thereto are available in appeals of aforesaid two years. learned Departmental Representative did not take any objection to admission of these grounds. In view of above, additional grounds raised by assessee are admitted. In appellate order, facts of case had been discussed in detail. These facts, in regard to ground of appeal No. 1, may be summarized here. It is mentioned that AO, in course of assessment proceedings, found that assessee had claimed damages of Rs. 1.45 crores. He asked assessee to furnish full particulars of claim and to furnish explanatory note in support of deduction of expenditure. It was submitted that assessee has been carrying on business of manufacturing of and trading in non-alcoholic beverages. It engaged Supreme Industries Ltd. (hereinafter called "Supreme") to manufacture plastic crates as per its specifications for distribution to its bottlers. utilization of these crates was deferred and consequently, it had to pay sum of Rs. 1.38 crores as inventory carrying cost to Supreme. additional sum of Rs. 5 lakhs was also payable on account of interest on said inventory carrying cost. matter was further pursued by AO. It was found that assessee had no subsisting agreement with Supreme so as to make it liable to pay any sum by way of damages to that party. It was further submitted that payments had crystallized after prolonged discussions between assessee and Supreme. Various correspondences between them made in this regard were also furnished to AO. Legal arguments were also made before him regarding admissibility of expenditure. On combined reading of various submissions, made by assessee, it was found by AO that, (i) assessee had never placed any order for purchase of plastic crates from assessee had never placed any order for purchase of plastic crates from Supreme, which, in fact, had been placed by various bottlers in their independent capacity, (ii) assessee placed advances of Rs. 80 lakhs with Supreme to help it in its working capital position. aforesaid advance was placed in two instalments. sum of Rs. 50 lakhs more was placed as advance in December, 1993 and another sum of Rs. 30 lakhs was placed in March, 1994, (iii) there was no subsisting agreement between assessee and Supreme to pay any cost or interest if delivery was not taken in time by bottlers, (iv) plastic crates were not purchased by bottlers and entire material was retained by Supreme, and (v) there was no agreement even between bottlers and Supreme that in case former did not take delivery of crates, cost thereof would have to be borne by bottlers or assessee. It is also mentioned that on basis of aforesaid facts, AO came to conclusion that no evidence was placed on record by assessee that in case of breach of contract between bottlers and Supreme, assessee would have any contractual or legal liability to pay damages to Supreme. According to him, liability, if any, had to devolve upon bottlers and not on assessee. On other hand, he was of view that assessee diverted its borrowed funds to Supreme as interest-free advances to help it in its working capital position. It was also found by him that though payment of Rs. 1.38 crores only was made to Supreme, liability in this respect was debited in books of account at amount of Rs. 1.45 crores. Since liability did not pertain to assessee, same was disallowed in assessment order. Before learned CIT(A), it was represented that AO reduced loss of assessee for this year by amount of Rs. 1.45 crores consisting of; (i) Rs. 1.38 crores paid to Supreme, and (ii) Rs. 7 lakhs paid to M/s Neel Kamal Plastics (hereinafter called Neel Kamal). These amounts were disallowed by AO on ground that, (i) damages were not paid wholly and exclusively for business of assessee, (ii) expenses did not represent any contractual obligation of assessee. It was further represented that assessee engaged Supreme for manufacturing plastic crates as per its specifications for distribution to various bottlers. utilisation of such crates was cancelled and, therefore, assessee had to pay to Supreme inventory carrying cost of Rs. 1.38 crores. Another sum of Rs. 5 lakhs was payable by way of interest on delayed payment of aforesaid amount of Rs. 1.38 crores. whole issue arose when company decided to use full-depth crates in place of half-depth crates as part of its marketing strategy. In view thereof, Supreme was ordered to manufacture full-depth crates. However, half-depth crates were ready for delivery by June, 1994. As per earlier understanding, 2.8 lakhs half-depth crates had been manufactured by Supreme by December, 1994 for purpose of distribution to bottlers. assessee had also advanced Rs. 80 lakhs to Supreme for manufacture of these crates, by way of deposit for blocking its spare capacity for manufacture of plastic crates for purpose of sale to various bottlers. said deposit was covered by inventory carrying cost till that time. On change of marketing strategy, bottlers stopped using such crates and as result thereof, they refused to purchase such crates from Supreme. assessee also deferred usage of such crates. Since crates were manufactured on basis of understanding with assessee, Supreme tried to recover its inventory carrying cost from assessee by way of claiming compensation. assessee had no choice but to compensate Supreme, failing which there would have been protracted litigation in matter. There would also have been loss of valuable supplier. It was also represented that in January, 1995, after long drawn out discussions, it was decided by assessee that half-depth crates may be converted into full-depth crates. This work was also entrusted to Supreme. However, even full-depth crates were not eventually used and, therefore, assessee had to compensate Supreme for its inventory carrying cost and cancellation of order. In view thereof, assessee had to pay sum of Rs. 69 lakhs to Supreme as inventory carrying cost, another sum of Rs. 69 lakhs as compensation for cancellation of order and Rs. 50 lakhs towards interest on delay in settling claims of Supreme. It appears that there is some error in this part of order of CIT(A) in describing facts. In alternative, there could be some error in representation made before him in matter. In ultimate analysis, claim of assessee in respect of this party was only Rs. 1.38 crores, which does not seem to include Rs. 50 lakhs towards payment of interest. arguments of assessee for allowance of aforesaid expenditure, inter alia, were that, (i) assessee is engaged in business of manufacture and sale of non-alcoholic beverages, (ii) this business is carried out through elaborate arrangement of distribution system of which bottlers are integral part, (ii) bottlers were required to follow market strategy laid down by assessee, (iv) as per understanding with bottlers, crates had to be purchased by bottlers from designated supplier, Supreme, (v) arrangement was made with Supreme so as to avail of benefits of bulk order and to maintain consistency, (vi) in view of change in marketing strategy, it was decided to abandon use of half-depth crates. order was therefore cancelled and Supreme was required to convert half-depth crates into full-depth crates, and (vii) use of full-depth crates was also postponed. In view of these facts, Supreme demanded compensation for inventory carrying cost and cancellation of order for manufacture of half-depth crates. Coming to legal issues, it was pointed out that damages were disallowed on ground that those were not paid wholly and exclusively for purpose of business, arising out of contractual obligation of assessee. Therefore, issues to be decided by CIT(A) were whether, (i) expenses related to business of assessee, and, if yes, (ii) quantum of expenses was justified or not. In respect of first issue regarding expenses being business expenses, it was argued that soft drink could only be sold in bottles and bottles had to be stored in crates for purpose of their transportation. Without storage medium, it would not have been possible to transport soft drink for distribution purposes. It was pointed out that Hon ble Supreme Court of India had examined scope of words "for purpose of business", finding place in s. 37(1) of Act. Hon ble Court held that on number of occasions that this expression is of wide import and it does not include in its ambit merely day-to-day running expenses but also expenses integrally connected with business of assessee. In this connection reliance was placed on cases of, (i) CIT vs. Malayalam Plantation Ltd. (1964) 53 ITR 140 (SC); (ii) Sree Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC); and (iii) CIT vs. Birla Cotton Spinning & Weaving Mills Ltd. (1971) 82 ITR 166 (SC). Further, reliance was placed on decision of Hon ble Madras High Court in case of CIT vs. Textool Co. Ltd. (1982) 27 CTR (Mad) 133: (1982) 135 ITR 200 (Mad). It was also argued that in deciding issue whether expenditure is admissible for deduction or not, one has to take into account question of commercial expediency, and principles of ordinary commercial trading. If it is found that payment was made or expenditure was incurred for purpose of business of assessee, it would not be material that impugned payment or expenditure also enured some benefit to third party or to assessee in different capacity. In this connection, reliance was placed on decision of Hon ble Supreme Court in case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC); and CIT vs. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC). It was also argued that for expenditure to be admissible, it is not necessary to prove that such payment was obligatory on part of assessee. But, what has to be seen was whether payment was made by way of commercial expediency for purpose of business. For this proposition, reliance was placed on decision of Hon ble Supreme Court in case of Sri Venkata Satyanarayana Rice Mills Contractor Co. vs. CIT (1997) 137 CTR (SC) 267: (1997) 223 ITR 101 (SC). assessee placed great reliance on decision of Hon ble Gujarat High Court in case of CIT vs. Pure Beverages Ltd. (1994) 120 CTR (Guj) 193: (1994) 209 ITR 131 (Guj), in which, according to assessee, Hon ble Court had occasion to examine link between expenditure incurred by assessee for its distributors in respect of beverages sold by it. matter was decided by Hon ble Court in favour of assessee. other issue was whether expenditure was justified or not as it did not arise out of any contractual liability. In this connection, it was pointed out that bottlers had to use bottles and crates as per specifications of assessee and they were not free to decide technical specifications in this matter. assessee thought it expedient to get crates manufactured by Supreme as per its own specifications. deposit of Rs. 80 lakhs was placed with it, which would have been reduced with passage of time on purchase of half- depth crates by bottlers. Due to untimely change in marketing strategy, such crates were rendered unfit for use. Therefore, bottlers refused to bear cost as it had occasioned by change in marketing strategy of assessee. company thought it fit to meet such cost with view to avoid straining of relationship with bottlers. Therefore, it was prayed that impugned amount of Rs. 1.45 crores may be allowed in full. It appears prima facie that either no argument was made in respect of expenditure of Rs. 9 lakhs provided in case of Neel Kamal or learned CIT(A) omitted to bring such arguments on record in his order. learned CIT(A) considered facts of case and various arguments advanced by assessee. It was pointed out by him that it was not assessee s case that it was liable to make payments for purchase of crates. In fact, assessee had never placed any order for purchase of crates with Supreme. These crates were to be purchased by bottlers, who were also responsible for payment of their respective purchase considerations. Coming to argument regarding liability arising on account of change in marketing strategy, learned CIT(A) pointed out that assessee had submitted letter dt. 16th March, 1999 to AO in course of assessment proceedings, informing, inter alia, that loss of conversion of half-depth crates into full-depth crates would not be material in nature. In such scenario, even if it is assumed that loss to Supreme had occurred due to decision of assessee and, therefore, it would be fair to compensate it, loss would be nominal and not of huge amount of Rs. 1.38 crores. half-depth crates would naturally have been recycled by Supreme for converting them into full-depth crates, causing some processing loss as admitted by assessee in its letter dt. 16th March, 1999. Such loss stood covered by element of interest on interest-free advance of Rs. 80 lakhs placed by assessee with Supreme. Therefore, he held that impugned payment was not made in course of business. It was also not contractual liability. In this scenario, he was of view that impugned payment was made only to help and promote Supreme for some oblique reasons. In view thereof, impugned provision of Rs. 1.45 crores was not allowed to be deducted in computing income of assessee. In course of hearing before us, assessee filed paper book consisting of 176 pages. It consisted of representations made before CIT(A), assessment order on 23rd Dec., 1998 and order of CIT(A) for asst. yr. 1997-98. Revenue also filed paper book consisting of 85 pages. yr. 1997-98. Revenue also filed paper book consisting of 85 pages. learned counsel of assessee pointed out that assessee manufactures concentrate which is sold to about 58 bottlers all over India. bottles are required to be stacked in crates for their distribution to bottlers. assessee also manufactures beverages, which are required to be stacked in crates. Therefore, crates are essential for transportation of concentrates and beverages. In order to obtain advantage of bulk production, company decided to get crates manufactured from Supreme. bottlers were required to place orders with Supreme as per their requirements. payments for these crates were to be made by bottlers. In order to assist Supreme to handle bulk order, assessee placed advances aggregating to Rs. 80 lakhs with it. In course of business, assessee changed its marketing strategy and it was decided to use full-depth crates in place of half- depth crates. In view of this change, bottlers stopped placing orders or lifting of half-depth crates from Supreme. This resulted in accumulation of inventory of half-depth crates with Supreme. In view thereof, Supreme raised invoices of Rs. 1.45 crores on assessee as inventory carrying cost. Subsequently, use of full-depth crates was also deferred and ultimately scrapped. assessee paid sum of Rs. 1.45 crores to Supreme. Neither aforesaid facts, nor payment were doubted either by AO or by CIT(A). Supreme was not in any way connected with assessee except that two had long-standing business relationship. Since use of half-depth crates was abandoned at instance of assessee, bottlers were not willing to lift half-depth crates or pay inventory carrying cost to Supreme. Therefore, in order to protect business interest, assessee decided to pay impugned amount. learned counsel referred to observations of learned CIT(A) on p. 2 of his order, to effect that representation was made by assessee before him that it had to pay sum of Rs. 1.38 crores to Supreme as inventory carrying cost. In this connection, learned counsel drew our attention to pp. 48 to 60 of paper book filed by Revenue, in which various documents in relation to impugned matter were placed. Page 48 consists of letter dt. 16th March, 1994 from assessee to Supreme, in which, inter alia, (it was) mentioned that indication was given that bottlers will require approximately 2.80 lakhs crates during year 1994. Refundable advance of Rs. 50 lakhs was also placed with you to help you in working capital position. Further demand draft of Rs. 30 lakhs is enclosed. These advances will be refunded as and when bottlers purchase crates from you. Page 49 consists of letter from Supreme to assessee informing it that they have some problem with two bottlers, namely, Spectra Industries and VBC Group, who are not asgreeing to pay interest amounting to Rs. 3 lakhs and Rs. 2,14,193, respectively. It was requested that matter may be taken up with these bottlers to settle its rightful claim. Page 50 consists of letter from Diamond Beverages Ltd. to assessee to effect that though quantity of breakage is low, but plastic crates are becoming brittle and started breaking. crates were guaranteed for period of 5 to 7 years. Therefore, it was requested that matter may be taken with Supreme. intent and purpose of referring to these pages was stated to be that bottlers and Supreme were maintaining contact with assessee for any deficiency in service or payment, as case may be, even though assessee had no written agreement with any one of them for purchase or payment thereof for crates. Page 51 is letter from Supreme to assessee stating, inter alia, that (i) it has received sum of Rs. 80 lakhs towards half-depth crates, (ii) sum of Rs. 1.40 crores is due to it as inventory carrying cost, and (iii) further sum of Rs. 22.80 lakhs is due as on 31st Dec., 1995 towards interest on aforesaid unpaid amount. Page 52 is letter dt. 9th Jan., 1996 from Supreme to assessee reiterating facts regarding advance of Rs. 80 lakhs and carrying cost of Rs. 1.40 crores. It also contains narration about interest on Rs. 60 lakhs from 1st Jan., 1995 to 31st Dec., 1995 of Rs. 16 lakhs, @ 18 per cent and interest of Rs. 12 lakhs due from Moon Beverages. At this stage, it may be mentioned that sometimes reference to Rs. 80 lakhs is made as advance and sometimes as payment towards half-depth crates. Page 54 is letter from Supreme to assessee dt. July, 1996 regarding possibility of export of full-depth crates and their collection from various centres. Considering costs, FOB price works out to USD 300/crate. Page 55 is letter dt. 29th July, 1996 from Supreme to assessee that as on 31st Dec., 1995, amount receivable from assessee towards inventory carrying cost of half-depth and full-depth crates was Rs. 1.40 crores and as against this, it was holding amount of Rs. 80 lakhs which will be refunded on receipt of Rs. 1.40 crores. It may be mentioned here that this letter also clarifies that liability, if any, in respect of Supreme was not paid during relevant previous year but was provided in books of account. Page 58 is debit note dt. 31st Dec., 1996, raising demand of Rs. 69 lakhs, being settlement of compensation against order of cancellation of 2.80 lakhs half-depth crates. Page 59 is again debit note dt. 31st Dec., 1996, raising demand of Rs. 69 lakhs regarding settlement of carrying cost of full-depth crates. In this debit note, number of crates is not mentioned, as was done in earlier debit note regarding half-depth crates. Both these debit notes were dt. 31st Dec., 1996, from which it transpires that liability of Rs. 1.38 crores, if payable, crystallised on 31st Dec., 1996. Page 60 is letter dt. 24th Jan., 1999 from Supreme to assessee regarding two receipts of Rs. 69 lakhs each in respect of 2.80 lakhs half-depth crates, and full- depth crates, respectively. Pages 61 to 84 contain various presentations of assessee made before t h e AO regarding admissibility of impugned expenditure. learned counsel referred in particular to pp. 80 and 81, being part of letter dt. 14th March, 1999 addressed to AO, in which it was, inter alia, mentioned that, (i) in January, 1995, after protracted discussions, management of company decided that half-depth crates may be converted into full-depth crates. work of such conversion was also entrusted to Supreme. At that point of time, it was agreed that assessee was not required to bear any carrying cost, recycling cost or compensation as delay was attributable to normal course of business. In any case, loss on recycling would not be material in nature, (ii) in May, 1995, Supreme informed that full depth crates were ready for dispatch to distributors, (iii) in July, 1995, Supreme asked assessee to request bottlers to take delivery of full-depth crates, (iv) in November, 1995, Supreme informed that inventory has still not been lifted by bottlers, (v) in December, 1995, issue regarding cancellation of order for half-depth crates and consequential compensation was also raised by Supreme, and (vi) in end of March, 1996, it became clear that assessee would be required to pay amount demanded by Supreme so as to amicably resolve dispute between assessee and Supreme. learned counsel relied on decision of Hon ble Bombay High Court i n case of Godavari Sugar Mills Ltd. vs. CIT (1985) 46 CTR (Bom) 197: (1985) 155 ITR 306 (Bom). In that case, assessee was carrying on business of manufacture and sale of sugar. It purchased sugarcane from "S" farms, firm in which assessee was partner. ITO found that price paid was higher than minimum price fixed by State Government. Therefore, he disallowed excess payment. Tribunal upheld disallowance. Hon ble Court held that it had not been shown that transaction of sale was not bona fide or that price was different from price shown in books of account. Therefore, it was held that assessee was entitled to deduction. learned counsel drew attention of observations of Court on p. 309 to effect that unless it has been shown that transaction in question was sham one or unless value shown was not value recorded in books of account or unless, it was not bona fide transaction, it is not open to taxing authorities to disregard figure of transaction shown in books of account of assessee. learned counsel argued that one of three conditions mentioned by Hon ble Court should be satisfied before figures of transactions recorded in books of account are disregard by Revenue. We have considered facts of that case. We find that ratio of that case is not applicable on facts and in circumstances of instant case. reason being that in that case, transaction of purchase of sugar was taken up by assessee with M/s "S" Farms, pursuant to which sugarcane was purchased. In instant case, assessee had no agreement to buy any goods from Supreme. value of transaction of purchase of goods from Supreme was not required to be recorded and consequently was not recorded; and in fact could not have been recorded in books of account. question here is quite different, namely, whether assessee was justified in deducting certain amounts from profit in respect of liability of its bottlers, arising on account of change in its marketing strategy. learned counsel further relied on decision of Hon ble Gujarat High Court in case of Marghabhai Kishabhai Patel & Co. vs. CIT 1976 CTR (Guj) 262: (1977) 108 ITR 54 (Guj). facts of that case are somewhat similar to facts of case of Godavari Sugar Mills (supra) except that assessee-firm purchased tobacco from seven partners of firm and father of three partners of firm. Hon ble High Court came to same conclusion as arrived at by Hon ble Bombay High Court, namely, that unless it has been shown that transactions in question were sham one or unless value shown was not value in books of account or unless they were not any bona fide transactions, AO could not have disregarded value of transactions recorded in books of account. learned counsel also relied on decision of Hon ble Allahabad High Court in case of Addl. CIT vs. Symonds Distributors (P) Ltd. 1975 CTR (All) 251: (1977) 108 ITR 947 (All). In that case, assessee, sole selling agent of manufacturing company, reduced its commission to 10 per cent from 20 per cent as manufacturing company was in difficulty. It also agreed to pay Rs. 24,000 per annum towards expenses of manufacturing company for two years. claim regarding deduction of aforesaid amount was disallowed by AO. Tribunal allowed claim. On reference at instance of CIT, Hon ble Court pointed out that whether amount is deductible under s. 37 or not, involves application of law to peculiar facts of case. For allowance, it is not necessary that expenditure ought to have been incurred directly for carrying on business or earning profits. It would be deductible even when it is incurred indirectly so as to facilitate carrying on of business or to preserve existing source of income. We have considered facts of that case also. We are of view that ratio of decision of that case is also not applicable to facts of instant case. reason being that in that case, manufacturing company was source of income of assessee. In year of difficulty, assessee reduced commission receivable from it and also paid certain amounts towards expenses of company for two years. expenditure was incurred voluntarily but on ground of commercial expediency with view to preserve source of income. In instant case, Supreme was not source of income of assessee, while bottlers may be source of its income. There was no tripartite agreement or even bilateral agreement or understanding between assessee on one hand and bottlers on other that in case of any default committed by them in lifting bottles, assessee would pay either inventory carrying charges or damages to Supreme. However, question would remain whether, in view of business association of assessee s bottlers with Supreme, damages paid by assessee to it would still be admissible expenditure on ground of business expediency. learned counsel of assessee had also relied on decision of Hon ble Supreme Court in case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383: (1979) 118 ITR 261 (SC). In that case, in scheme of takeover of assessee-company, which was investment company, by Tatas from Davids, it was, inter alia, provided that it would pay certain sums to t h e managing director. assessee-company claimed deduction of Rs. 1,64,899 as business expenditure. Tribunal held that expenditure had not been incurred for purpose of business but purely as result of bargain between Tatas and Davids. Assuming that payments were beneficial to assessee, no deduction could be allowed since they had been made to benefit of third party. Hon ble Court allowed two amounts of Rs. 16,188 and Rs. 21,200 and disallowed balance amount of Rs. 1,27,511 on ground that expenditure had not been incurred for commercial reasons. On appeal, Hon ble Supreme Court pointed out that assessee continued to function even after its control passed on to Tatas. It further pointed out that expenditure was laid down for purpose of assessee s own trade and not f o r trade of Tatas, who were merely shareholders. result of expenditure was that company was benefited by reduction of wage bill. Therefore, expenditure was incurred on ground of commercial expediency and with indirect view to facilitate carrying on its business. Accordingly, it was held that expenditure was deductible. We have considered facts of that case also. We find that payments were made by assessee to its own employees, in lieu of notice, termination of pension allowance, or compensation for loss of job. In instant case, payments are made to third party in respect of liabilities of set of business associates, namely, bottlers. While, test of commercial expediency will have to be applied, yet, it is clear that facts of this case are not in pari materia with facts of that case. learned counsel greatly relied on decision of Hon ble Gujarat High Court in case of CIT vs. Pure Beverages Ltd. (supra). In that case, assessee was dealer in soft drinks. It had made arrangement with bank for giving advances to its dealers for purchase of electric coolers in year 1969. Prior to that, it used to purchase and supply coolers to retailers for keeping beverages. assessee-company agreed with bank to reimburse any loss which may arise to it on account of non-recovery of such advances. assessee reimbursed sum of Rs. 65,000 to bank, which was claimed as deduction. AO disallowed this amount. CIT(A) and Tribunal allowed deduction. Hon ble Court pointed out that Department had not challenged finding given by CIT(A) that it was common knowledge that soft drinks did not taste good unless they were chilled and, therefore, it was in interest of assessee to ensure that chilled soft drinks were supplied to clients. Hon ble Court held that expenditure was incurred in course of carrying on business and, therefore, it was deductible as held by Tribunal. However, matter was remanded to Tribunal to determine that part of expenditure which related to relevant previous year and allow that amount. facts of this case are quite similar to facts of instant case except that in that case, assessee had formal understanding with bank to reimburse any loss occasioned to it on account of non-payment of loan taken by dealers for purchase of coolers. However, there is no formal understanding in instant case that assessee would pay any amount to Supreme if dealers fail to take delivery of crates. However, it is common ground that in order to take benefit of scales of economy and to maintain uniformity, specifications for crates were given by assessee to Supreme from time-to-time and specifications were also changed on basis of instructions from assessee. question whether existence of formal agreement makes any difference in allowance of expenditure shall be discussed at appropriate place (infra). It may be mentioned here that assessee had relied on number of decisions before learned CIT(A), which may also be discussed here for sake of completeness of order. In regard to meaning of expression "for purpose of business", occurring in s. 37, assessee had relied on three decisions. first case was decided by Hon ble Supreme Court in case of CIT vs. Malayalam Plantations Ltd. (supra). In that case, certain amounts were paid by way of estate duty by resident company incorporated outside India on death of shareholders not domiciled in India. Hon ble Court held that liability had nothing to do with conduct of assessee, though Revenue may realize amounts from business assets. That did not make expenditure any more expenditure incurred in conduct of business. liability was statutory liability but it was unconnected with business. Therefore, it was not deductible as business expenditure. However, Hon ble Court pointed out that words "for purpose of business" are wider in scope than words "for purpose of earning profits". It may include expenses incurred even in rationalizing administration or modernising machinery. It may further include measures for preservation of business or protecting its assets and property from expropriation, coercive process or assertion of hostile title. It was held that there are implicit limits on this expression, namely, that purpose shall be for business and it shall be incurred by him in his capacity as trader. It may not include sum spent by assessee as agent of third parties, where agency is voluntary or statutory. It may be mentioned here that question to be seen is whether expenditure has been incurred as trader for preservation of business or as agent of third party. If it is former, expenditure is deductible, otherwise not. assessee had also relied on decision of Hon ble Supreme Court in case of Shree Meenakshi Mills Ltd. vs. CIT (supra). In that case, expenditure was incurred in civil proceeding challenging measures, which imposed restriction on carrying on of business by assessee by way of distributing yarn to weavers outside factory. assessee lost in civil proceedings. However, Hon ble Court pointed out that for expenditure to be deductible under s. 10(2)(xv) of 1922 Act, it is not necessary that prime motive should be to earn income directly from expenditure. What is required to be seen is whether it can be said that expenditure was incurred reasonably and only to promote interest of business. assessee had also relied on decision of Hon ble Supreme Court in case of CIT vs. Birla Cotton Spinning & Weaving Mills Ltd. (supra). In that case also, expenditure was incurred for engaging eminent lawyers and conducting proceedings before investigation commission for its case relating to asst. yrs. 1941-42 to 1947-48. It was found that expenditure was incurred in opposing coercive action of Government with view to save tax and safeguard business. Therefore, expenditure was held to be deductible on ground of commercial expediency. On reading of this case, it can be said that when assessee had incurred expenditure for preservation of its business or safeguarding its business interest by opposing limitation imposed upon it, expenditure was held to be deductible. However, when expenditure was not connected with business as in case of Malayalam Plantation Ltd. (supra), expenditure was not held to be deductible. Therefore, words "for purpose of business" have to be interpreted accordingly. In connection with question of commercial expediency also, assessee had relied on number of cases before learned CIT(A), which may be discussed in brief. assessee had relied on decision of apex Court in case of CIT vs. Chandulal Keshavlal & Co. (supra). facts of that case were similar to facts of case of Symonds Distributors (supra). assessee remitted part of its commission when managed company was passing through lean phase. It was held that remission was not bounty, it was made in interest of business and, therefore, it was deductible. assessee had also relied on decision of apex Court in case of CIT vs. Royal Calcutta Turf Club (supra). club, AOP was carrying on business of holding race meetings on commercial basis, which neither owned any horse nor employed any jockey. It started training school for training Indian boys as jockeys, as it was of view that non-availability of jockeys would affect its business. sum of Rs. 62,818 was spent in relevant previous year on running school and it was claimed as deductible expenditure. Hon ble Court held that (i) issue whether expenditure has been incurred wholly and exclusively for purpose of business must be decided on facts of each case, (ii) amounts spent in running school was not in nature of capital expenditure, and (iii) as amount was spent for preservation of its business, as it was laid out fully and exclusively for purpose of business of turf club. Therefore, it was deductible under s. 10(2)(xv). It may be seen that in that case, assessee was neither owning any horse nor any jockey and its business was to hold race meetings on commercial basis. Even then, Hon ble Court held that amount was deductible as it was incurred qua trader in business of turf club. question to be decided by us also is whether expenditure was incurred by assessee qua trader in course of its business. assessee had also relied on decision of Madras High Court in case of CIT vs. Textool Co. Ltd. (supra). In that case, certain amounts were written off as assessee was not able to fully utilize its quota of imports granted by Indian Cotton Mills Federation. amount was claimed as business loss. Tribunal found that loss was in course of business. Hon ble Court held that loss was allowable as it was incurred in course of business. We find that facts of that case are not in pari materia with facts of instant case inasmuch as in this case expenditure was not incurred for purchase or sale of raw material or goods of assessee. In connection with words "wholly and exclusively for purpose of business", assessee had also relied on certain cases, which may be discussed here. Reliance was placed on decision of Patna High Court in case of Jamshedpur Motor Accessories Stores vs. CIT (1974) 95 ITR 664 (Pat). Briefly speaking, facts of case were that assessee paid commission over and above salary to its branch manager at Cuttack. question was whether commission paid Rs. 100 per vehicle was admissible. Hon ble Court held that, unless limitation is placed on any expenditure, incurred on ground of commercial expediency, and in order to directly or indirectly facilitate carrying on of business, same cannot be disallowed because assessing authority thinks that assessee could have managed its business by paying lesser amount. facts of that case are also not on all fours with facts of instant case as in that case commission was paid to own employee for carrying out his duties more efficiently. It also had direct nexus with sales of assessee at branch office. However, apart from commercial expediency, case lays down another principle, namely, that it is for assessee to see what amount would be enough for furthering its business and assessing authority cannot sit in judgment that business could have been carried on with payment of lesser amount. assessee had also relied on decision of Hon ble Supreme Court in case of Sasson J. David (supra) which has already been discussed. assessee had also relied on decision of Hon ble Madhya Pradesh High Court (Jabalpur Bench) (sic) (Full Bench) in case of Addl. CIT vs. Kuber Singh Bhagawandas (1979) 9 CTR (MP) 94: (1979) 118 ITR 379 (MP). assessee had made voluntary donations to Chief Minister s Drought Relief Fund with view to obtain permits. There was direct correlation between amount of donation and quantity of food grains for which permit was applied for and granted. Court held that donations constitute allowable business expenditure. Though facts of that case are not at all in pari materia with facts of instant case, it was found, as matter of fact, that expenditure was incurred to facilitate carrying on of business. Court pointed out that "commercial expediency is not related to existing practice", yet if, expenditure is justified on commercial expediency, it will have to be taken for purpose of business. fact that it also benefited third party may not be relevant in deciding matter. argument, which was sought to be advanced on basis of that case was that some benefit might have enured to bottlers, that by itself, will not be basis for disallowance of this expenditure, if it is incurred as matter of business expediency. Thus, question again goes back to issue whether impugned expenditure incurred by assessee was in capacity of trader and for furthering interest of business. assessee had also relied on decision of Hon ble Bombay High Court in case of Bralco Metal Industries (P) Ltd. vs. CIT (1994) 120 CTR (Bom) 420: (1994) 206 ITR 477 (Bom). In that case, expenditure was incurred on foreign tour of managing director for purchase of plant and machinery, required for running business, already in existence. Hon ble Court pointed out that it was not case of Revenue that expenditure was personal expenditure of assessee. If tour was undertaken with view to decide whether particular machinery was suitable for business, it will not convert expenditure on foreign tour into expenditure of capital nature. Hon ble Court also pointed out that expression "for purpose of business" is wider than expression "for purpose of earning profits" and expression "wholly and exclusively" does not mean "necessarily". Therefore, apart from consideration of commercial expediency, it is also to be kept in mind that expenditure need not necessarily be wholly and exclusively for purpose of business. If there is expectation of benefit in future, then, on facts and in circumstances of particular case, expenditure may be allowed as business expenditure. learned Departmental Representative drew our attention to p. 7 of his paper book, in which, as per Sch. 13, manufacturing, selling and administrative expenditure of Rs. 1,03,28,13,874 has been debited. details of this expenditure are available on p. 21 of paper book. These details contained, inter alia, sum of Rs. 1.45 crores debited under head "Damages". Thereafter, learned Departmental Representative drew our attention to pp. 9 and 26 of paper book. Page 9 furnishes details of advances recoverable and deposits with others regarding blending division, beverage division and bottling division. Page 26, inter alia, contains narration that during current year, company has started new activity of manufacturing and trading in finished beverages. Therefore, current year s figures are not comparable with previous year s figures. On basis of these documents, it was sought to be established that assessee carries on three distinct businesses, namely, blending, beverages and bottling. Thereafter, Departmental Representative drew our attention to pp. 30 to 47 of paper book. These pages contain agreement of assessee with Supreme, dt. 3rd Feb., 1996. In accordance with this agreement, assessee intimated to Supreme about interim authorization for commercial production and supply of products which conform to technical criteria. authorization could also extend to additional products or territories. Supreme was disabled from making changes in products, design or styling of products. Supreme was also required to conform to all usage requirements specified by assessee in respect of assessee s trademark and not manufacture, sell or deliver any product which included graphics or trade marks which were similar to graphics and trademarks of assessee. Supreme was required to indemnify and hold assessee, its subsidiaries and their respective officers, directors, agents and employees harmless against all claims, against breach of warranties and allegations that products were defective or against infringement of any intellectual property of any third party. Supreme was not vested with any interest or right in intellectual property of assessee which were to remain vested exclusively in it. assessee was not required to purchase any product of Supreme and Supreme s agreements for sale with authorized purchasers were to constitute and remain independent sale agreements. In respect of sales agreements with authorized purchasers, Supreme agreed to advise assessee on coming into existence of agreement, and rights and obligations between Supreme and authorized purchasers. However, assessee was not under any obligation to Supreme for breach of any sub- sale agreement by authorized purchaser and such agreements were not to affect in any manner rights and obligations of assessee and supplier under this agreement. date of expiration of agreement was placed as 2nd Feb., 2001. reason for referring to this agreement was that learned Departmental Representative wanted to point out that in respect of any breach of agreements between Supreme and bottlers, no liability whatsoever was to devolve on assessee. learned Departmental Representative pointed out that in absence of any liability in dealing between Supreme on one hand and bottlers on other, assessee has claimed expenditure in respect of inventory carrying cost without making any enquiry from Supreme about damage caused to Supreme, quantification of claim and liability of assessee in this behalf. learned Departmental Representative referred to pp. 48 to 60 of paper book and in particular to papers, which are being discussed in this sub-para. He referred to p. 48, being letter written by assessee to Supreme in connection with meeting held on 5th March, 1994 regarding manufacturing half-depth crates. letter points out that deposits aggregating to Rs. 80 lakhs have been placed in two instalments of 50 lakhs and 30 lakhs as refundable deposits to help in working capital position. advances were refundable on purchase of crates by bottlers from Supreme. case of learned counsel was that even on 16th March, 1994, assessee had not admitted any liability and, in fact, had placed advances of Rs. 80 lakhs with view to help Supreme in its working capital position. Page 49 refers to letter of Supreme to assessee regarding some difficulty that it was facing with only two bottlers, namely, Spectra Industries and VBC Group, who were not agreeing to make offer due interest payments. assessee was requested to take up matter with bottlers. case which learned Departmental Representative wanted to make from this document was that even Supreme, at least till date of writing this letter, was clearly of view that liability of interest, if any, was payable by bottlers and only two bottlers had defaulted in respect of their obligations. learned Departmental Representative also referred to p. 52, addressed by Supreme to assessee dt. 9th Jan., 1996 regarding inventory carrying cost of Rs. 1.40 crores, interest of Rs. 10 lakhs, and interest on delayed payments by Moon Beverages and Enrich Agro of Rs. 12 lakhs. He pointed out that there is manifest contradiction in two letters of Supreme, one holding bottlers liable for interest and other holding assessee liable for inventory carrying cost and interest thereon. There was also contradiction between assessee s letter dt. 16th March, 1994 written to Supreme regarding deposits of Rs. 80 lakhs and Supreme s letters dt. 9th Jan., 1996 making claim of damages and interest. learned Departmental Representative also referred to pp. 58 and 59, which are debit note Nos. 312 and 313 dt. 31st Dec., 1996 from Supreme. first debit note has quantified compensation against cancelled order in respect of 2,80,000 half-depth bottles, @ approximately Rs. 24.64 per crate, at Rs. 69 lakhs. second debit note, of same date, is rather bland in sense that though it speaks of liability in respect of full-depth crates carrying cost of Rs. 69 lakhs, it does not mention in any manner whatsoever, basis on which liability has been worked out. learned Departmental Representative referred to pp. 61 to 65 of paper book and in particular referred to pages discussed in this sub-para. reference was made to p. 80, which is part of letter dt. 14th March, 1999 written by assessee to AO. It was mentioned in para No. 5 that it was also agreed that company was not required to bear any amount towards inventory carrying cost, recycling or compensation cost, as claimed by Supreme as delay was attributable to normal course of business and in any event, loss on recycling would not be material in nature. case of learned Departmental Representative was that if this paragraph is read in conjunction with earlier para 4 that words used in para 5 "at this juncture" could only mean somewhere in January, 1995, when decision was taken after protracted discussion. Therefore, his argument was that even as late as in January, 1995, stand of assessee was that it was not required to bear any inventory cost or recycling or compensation cost as claimed by Supreme and, in any eventuality, loss would not have been material in nature. Therefore, case of learned Departmental Representative was that no liability devolved upon assessee or was likely to devolve upon assessee as it was of no consequence in money terms. It was also pointed out by him that assessee was acting merely as mediator between supplier on one hand and bottlers on other hand and bottlers were not satisfactorily discharging their liabilities, as shown from follow-up of letter of Supreme to assessee regarding alleged breach of contract by M/s Spectra Industries and VBC group. He also pointed out that Supreme s letters at p. 51, of 4th Jan., 1996, does not furnish any break-up how interest was worked out. On other hand, p. 54 of paper book, being letter dt. 23rd July, 1996 addressed to Supreme clearly shows that even discarded crates had saleable value by way of export sales. It may be mentioned that this letter informs Supreme that crates had to be collected from various locations, namely, Ludhiana, Amritsar, Chandigarh, etc. for their transmission to Bombay for export. mention was also made at p. 55 of paper book, which is letter written by Supreme to assessee, in which it is mentioned that receivables from assessee towards inventory carrying cost of full and half- depth crates stood at Rs. 1.40 crores, against which they were holding advances of Rs. 80 lakhs. case of learned Departmental Representative was that even in July, 1996, well after close of previous year, Supreme had merely made claim of liability of Rs. 1.40 crores. As per own representation of assessee before AO, till January, 1995, no liability was envisaged by assessee and in any case, liability, if any, was insignificant in monetary terms. learned Departmental Representative referred to discussion on p. 5 and onward of order, in which assessee s written submissions dt. 14th March, 1999 in regard to impugned liability, were summarized. It was pointed out that Supreme had manufactured half-depth crates on assessee s representation on behalf of bottlers and such crates were ready for delivery in June, 1994. As result of delay in purchasing crates, sum of Rs. 70 lakhs was due from assessee as inventory carrying cost. assessee had given advances to extent of Rs. 80 lakhs upto 16th March, 1994 for blocking spare capacity for manufacturing of crates. learned Departmental Representative pointed out that for any expense to be admissible under s. 37, liability ought to have been incurred or paid in relevant previous year. assessee had debited sum of Rs. 1.45 crores in P&L a/c by way of provision towards damages, against which advance was pending with Supreme. AO had disallowed only sum of Rs. 1.38 crores in assessment and in view thereof, it was not clear how liability was computed at Rs. 1.45 crores. In any case, debit note in respect of full-depth crates did not even mention number of crates manufactured by Supreme and, therefore, liability to extent of Rs. 69 lakhs mentioned in that debit note was highly doubtful. It was also argued that Supreme had been charging full amount from bottlers in respect of liability of purchase of crates and interest o n delayed payments and, therefore, liability had not accrued in this year. liability was also not paid in this year. agreement with Supreme was drawn at fag end of year and even as per that agreement, no liability was to devolve upon assessee. learned Departmental Representative also referred to bottlers agreement, filed in assessee s paper book for asst. yr. 1998-99, which clearly casts liabilities on bottlers. On these facts, it was argued that assessee was not required to pay any amount to bottlers as liability. learned Departmental Representative relied on decision of Hon ble Bombay High Court in case of Ramanand Sagar vs. Dy. CIT (2002) 175 CTR (Bom) 220: (2002) 256 ITR 134 (Bom). facts of that case are that assessee had been producing TV serials. He filed his return of income for asst. yr. 1989-90, in which expenses on account of charges paid to five different parties for hire of equipment were claimed. AO made disallowance of about Rs. 7 lakhs. break-up of payment was, (i) New Diamond Rs. 6 lakhs, and (ii) Video Flash Rs. 1 lakh. In regard to New Diamond, it was found that payment was not made by issuing account payee cheque and bills issued by New Diamond did not furnish any correct details. On these facts, it was held that disallowance was proper. However, in respect of payment to Video Flash, it was shown that payment was made by way of account payee cheque. son of proprietor had appeared before AO and deposed regarding supply of equipment on hire. On these facts, it was held that disallowance of payment made in respect of payment to Video Flash was not proper. case of learned Departmental Representative was that in respect of dealings with person in course of business, clear evidence has to be brought on record to show that accrual or payment of liability by way of bills etc. and proof of payment. Such was not case here. Against this, case of learned counsel in rejoinder was that aforesaid case supports assessee s case because amount was disallowed on basis that details for payment made towards equipment hire charges could not be produced. In this connection, he referred to findings of Hon ble Court on p. 38 to effect that AO can only decide whether expenditure is real, it relates to business fully. AO will be well within his jurisdiction to disallow expenditure in excess of reasonable limits. However, this jurisdiction should be exercised judicially, i.e., he must act according to reason and justice and not according to his private opinion, law and not according to humour or fancy. mere fact that assessee had made payment that fact by itself would not be sufficient to claim deduction. reasonableness should be judged on point of view of businessman. However, where element of extra consideration appears, AO should consider all relevant material and decide to what extent it is attributed to bona fide business purposes. learned Departmental Representative relied on decision of Hon ble Supreme Court in case of Dwarka Das vs. State of Madhya Pradesh & Anr. AIR 1991 MP 1031, in which, it was, inter alia, held that claim for damages cannot be disallowed on ground that there was no proof that actual loss to extent of amount claimed on account of breach of contract was not suffered. In that case, 10 per cent of contract price was granted as damages to contractor by lower Court, which was considered to be reasonable by High Court. Hon ble Supreme Court opined that decision of High Court, based upon facts, was reasonable, but also future interest @ 6 per cent per annum payable from date of decree till realization. case of learned Departmental Representative was that only breach of contract could b e base for grant of damages. In instant case, there was no contract between assessee and Supreme in any manner whatsoever regarding supply of crates and, therefore, impugned claim was not based upon any enforceable right vested in Supreme. learned Departmental Representative further relied on decision of Hon ble Delhi High Court in case of Siddho Mal & Sons vs. ITO (1980) 122 ITR 839 (Del). In that case, Hon ble Delhi High Court pointed out that for expenditure to be admissible, test of commercial expediency is required to be satisfied. commercial expediency has to be judged from point of view of assessee who knows best how his business has to be run, but, such point of view has to be prudent and reasonable, which is free from apparent taint of excessiveness, collusiveness or colourable discretion. Thus, on one hand, it is not for ITO to judge whether assessee could have avoided or reduced particular expenditure, but on other hand, unreasonably high or excessive expenditure would caution ITO to examine it more carefully and, if combined with other circumstances, it leads to conclusion that motive behind expenditure was to unduly benefit someone else, he will be within his right to come to finding that expenditure is not exclusively for purpose of business. learned Departmental Representative relied on decision of Hon ble Calcutta High Court in case of CIT vs. Hindustan Motors Ltd. (supra). In context of expenditure incurred by assessee by way of contribution for repair of road, Hon ble High Court held that expenditure was allowable under s. 10(2)(xv) of 1922 Act. learned Departmental Representative pointed out that expenditure was incurred for carrying on assessee s business efficiently, and that is why expenditure was allowed to be deducted on computation of income. Therefore, what is required to be seen for allowance of expenditure is whether assessee had any direct concern or purpose in incurring expenditure. If answer to aforesaid question is yes, expenditure is allowable, otherwise not. learned Departmental Representative also relied on decision of Hon ble Supreme Court in case of CIT vs. Chandulal Keshavlal & Co. (supra). He pointed out towards Court s observation that if expenditure has been incurred to foster business of another, same will not be deductible. In nutshell, case of learned Departmental Representative was that assessee had no liability to pay damages to Supreme. liability, if any, was that of bottlers. In any case, as per assessee s own admission before AO, liability was not significant in monetary terms. Therefore, it was argued that expenditure cannot be deducted in computing income of assessee. In rejoinder, learned counsel of assessee referred to certain papers filed by assessee regarding meaning of words "inventory bearing cost". He pointed out that concept exists regarding inventory carrying cost and assessee s claim of expenditure is also based upon this concept. It was pointed out that existence of claim was not doubted, and if that was case, AO should have summoned Supreme to put issue beyond pale of doubt. It was conceded that assessee had no written agreement with Supreme, and agreement referred to by learned Departmental Representative did not pertain to assessee. Nonetheless, it was argued that expenditure was incurred in interest of business, by way of commercial expediency. reference was made to decision of Hon ble Bombay High Court in case of Tata Sons Ltd. vs. CIT (1950) 18 ITR 460 (Bom), in which, it was, inter alia, held that if benefit enures incidentally to another, that cannot be ground for disallowing expenditure. reference was also made to decision of Hon ble Bombay High Court in case of Addl. CIT vs. Buckau Wolf New India Engineering Works Ltd. (1985) 46 CTR (Bom) 220: (1986) 157 ITR 751 (Bom). learned counsel of assessee read out of observations of Hon ble Court from p. 757 of judgment to effect that year of incurring liability was material year for allowing expenditure provided that assessee has been following mercantile method of accounting. allowance did not depend upon entries in books of account, but on actual incurring of liability, even if payment thereof is partly or fully postponed. We have considered facts of case and rival submissions. facts and rival arguments may be summarized here. assessee has been carrying on business of distribution of concentrate, beverages, and soft drinks. In course of carrying on business, assessee s products have to be transported to various bottlers situated all over India. These goods are to be carried in crates. In order to achieve economy of skills, it was thought fit by assessee to have some kind of arrangement with Supreme for supply of crates to its bottlers. This method was found expedient for achieving uniformity in crates for purpose of their identification as well as use of trademarks. There was no understanding that assessee will either buy crates or will be responsible in any manner to Supreme in respect of manufacture and sale of crates directly to bottlers. However, in order to boost working capital of Supreme, advances aggregating Rs. 80 lakhs were placed with it. It also appears that assessee requested its bottlers to source crates from Supreme. For this purpose, various bottlers entered into separate agreements with Supreme. It also appears that assessee acted as kind of mediator between Supreme and bottlers in respect of purchase of crates and payment on one side and quality of crates on other side. assessee decided to change over to full-depth crates as against half-depth crates as used earlier. Therefore, bottlers did not lift requisite numbers of crates of half-depth, leading to accumulation of inventory. It is also claim of assessee that it again reversed its decision of using full-depth crates and reverted to half-depth crates, which led to accumulation of inventory of full-depth crates with Supreme. There were certain discussions between assessee and Supreme regarding compensation for loss arising to Supreme on account of inventory carriage. Finally, matter seems to have been settled when assessee accepted liability of two amounts as per consecutively numbered debit notes of Rs. 69 lakhs each. first debit note quantifies inventory piled up with supreme while second debit note makes no mention whatsoever about number of crates in inventory. It also appears that assessee did not make any verification with Supreme regarding actual state of affairs about inventory carriage insofar as full-depth crates are concerned. However, assessee agreed to pay both these amounts and made provision for liability in books of account. Insofar as this year is concerned, facts are that assessee has shown advances aggregating Rs. 80 lakhs to Supreme. It has made provision of sum of Rs. 1.45 crores in books of account in respect of this liability against actual liability of Rs. 1.38 crores. question is whether any of amount in two debit notes is admissible as expenditure deductible in computation of income. case of assessee is that payment was made in furtherance of i t s commercial interest for retaining Supreme with it for purpose of manufacture of crates. As against this, case of Department is that there was no legal liability fastened on assessee for non-lifting of crates by bottlers and in any case, even if any amount was payable to Supreme on this account, it was not of any significant monetary value even as per assessee s own admission. case of Department was based largely on argument that there was no contractual liability to pay amount. It was also its case that in any case quantification in respect of damages in respect of full-depth crates do not have any proper basis. There was no written agreement between assessee and Supreme that in case bottlers do not lift crates or that they do not pay in time, assessee will be liable to compensate Supreme for such failures. whole of liabilities was that of bottlers; it did not t k e into account arguments of assessee to effect that expenditure was provided in books of account on ground of commercial expediency. Therefore, what we have to actually decide is whether impugned amount was expended by assessee in course of business, for furthering business interest. perception of assessee, as articulated by learned counsel, was that in case matter was not amicably settled with Supreme, it may start working for assessee s competitors, leading to disturbance in timely supply of crates. We are of view that impugned argument is not wholly correct. assessee is not ordinary person for Supreme. assessee had placed advances to extent of Rs. 80 lakhs with Supreme with no interest liability in order to help it in its working capital. Therefore, according to assessee s own perception, Supreme was not sufficiently k in financial terms to meet its own working capital requirements. In such case, it would be fallacious to presume even for assessee that Supreme would would be fallacious to presume even for assessee that Supreme would have abandoned manufacturing of crates for bottlers of assessee and gone over to other manufacturers, who are competitors of assessee. To put it o n other words, commercial expediency in this case was two-way traffic. assessee may be desiring to have exclusive manufacturer for its bottlers, but it is equally true that, looking to its financial weakness, Supreme would and could not have broken up its business relations with bottlers of large company like Coca Cola, or assessee who has large number of bottlers located all over India. Therefore, argument of commercial expediency has to be examined in proper perspective. We have seen that Supreme was not source of income to assessee. source of income of assessee are bottlers, who use crates for transporting goods. Under principle of commercial expediency, any incidental benefit accruing to bottlers may not be ground for disallowance of expenditure. But it must be examined whether payments were made qua trader, with view to further business interest of assessee. payment must have some genuine basis. It cannot merely be ruse. It must also not be gratis to enrich another or to help another to set up its business. Therefore, amounts provided without any proper basis cannot be allowed to be deducted in computation of income. Such amount would amounts gratis payment to Supreme. When we examine facts of case in light of aforesaid discussion, it is seen that two debit notes were raised by Supreme. first debit note No. 312, dt. 31st Dec., 1996, on p. 58 of paper book, is regarding compensation against cancellation of order of 2,80,000 half-depth crates, amounting to Rs. 69 lakhs. This debit note clearly mentions number of crates which ought to have been, but which were not lifted by bottlers. damages are worked out on basis of excess production of 2,80,000 crates. W e have already seen that assessee had been acting sort of mediator between Supreme and its bottlers regarding lifting of crates and quality of crates, respectively. It was thought fit, by way of commercial expediency to compensate Supreme for non-lifting of crates manufactured by it as per understanding with assessee, but not lifted by bottlers. Looking to overall facts, we are of view that provision made in this regard may be said to be expenditure incurred, as per method of accounting regularly followed by assessee, in course of business arising out of commercial expediency to compensate Supreme for probable loss incurred by it in keeping aforesaid crates ready for delivery, while such crates were not lifted by bottlers in view of change in strategy by assessee. This decision will be in line with decision of Hon ble Gujarat High Court in case of Pure Beverages Ltd. (supra). absence of formal arrangement, to our mind, does not make any difference in determination of this issue. However, second debit note No. 313, dt. 31st Dec., 1996, does not mention even number of full-depth crates manufactured by Supreme. We also find that there is no real or tangible evidence on record, except letter regarding collection and export of such crates regarding piling up of inventory. aforesaid crates had been lifted by bottlers and were to be collected from them for purpose of export sales. There is no evidence about number of such crates manufactured, lifted by bottlers and not paid for, and inventory with Supreme. debit note is also bland in sense that it does not provide number of crates manufactured by Supreme. narration is "being settlement of carrying cost for full-depth crates Rs. 69 lakhs". There is not even whisper about number of crates manufactured by it. assessee has provided this amount without verification of any fact regarding manufacture of such crates, number of such crates manufactured by Supreme and inventory. It is not clear what happened to proposal of export of these crates. In such circumstances, it will be contrary to reason to hold that impugned provision for payment was also made as matter of commercial expediency, because sufficient facts do not exist on record for basis of computation of compensation payable by assessee. Therefore, we are of view that even principle of commercial expediency does not warrant deduction of impugned amount of Rs. 69 lakhs in computation of income of assessee. finding of learned CIT(A) that provision to this extent was made for some "oblique" purpose should, therefore, be read as non-commercial purpose. Thus, it is held that assessee is entitled to deduction of Rs. 69 lakhs only from its income in respect of provision made towards liability by way of damages payable to Supreme. No argument was adduced by learned counsel in respect of liability of Rs. 7 lakhs, referred to in para 3.2 (supra). It appears that liability does not pertain to this year. matter has been discussed in order of Tribunal in case of assessee for asst. yr. 1997-98. Thus, allowance of compensation is restricted to Rs. 69 lakhs. result of aforesaid discussion is that ground No. 1 of appeal is partly allowed, as indicated above. Ground No. 2 of appeal is against ad hoc disallowance of Rs. 1 lakh from miscellaneous expenses. It is also mentioned that learned CIT(A) erroneously relied upon assessment order and did not examine details submitted by assessee before him. No expenditure of Rs. 3,49,817 appears in schedule of miscellaneous expenses. aforesaid matter has been dealt with by learned CIT(A) in paras 7.1, 7.2 and 7.3 of his order on p. 15. It is mentioned that AO had asked for details of other administrative expenses. details filed by assessee showed expenditure of Rs. 13,51,543 included under head "Selling expenditure". details of these expenditure were also called for. details included further miscellaneous expenses of Rs. 3,49,817 in respect of bottling and beverages division. break-up of aforesaid expenditure was not furnished and, therefore, AO made ad hoc disallowance of Rs. 1 lakh. Before learned CIT(A), assessee relied on its letter dt. 17th Dec., 1998 filed before AO in matter and on that basis, it was urged that disallowance may be deleted. After considering letter, learned CIT(A) mentioned that details of miscellaneous expenditure of Rs. 13,51,543 are not available thereon. In absence of details, he confirmed disallowance of Rs. 1 lakh made by AO. Before us, learned counsel of assessee referred to p. 7 of paper book filed by Department, which is P&L a/c of assessee for year ended on 31st March, 1996. In this account, sum of about Rs. 103 crores is debited under head "Manufacturing, selling and administrative expenses". Sch. 13 on p. 21 of paper book, contains break-up of aforesaid expenses. In this Schedule, sum of Rs. 1,19,68,934 is debited under head "Other administrative expenses". Para 30 of assessee s letter dt. 17th Dec., 1998, addressed to AO, on pp. 61 to 65 of paper book of Department states that details of other administrative expenses incurred by assessee-company during year are vide statement attached herewith. However, accompaniments to letter are not enclosed in paper book of Department. case of learned counsel of assessee was that books of account have been audited and various details called for were supplied to AO. However, thereafter he left matter to Bench for decision. learned Departmental Representative referred to p. 71 of assessee s paper book, which gives details of miscellaneous expenses of Rs. 13,51,543 under heads, namely, TSL consumables; uniform for contract labour; visa fee; factory survey expenses; testing expenses for flavours; sundry expenses at bottling division, sundry expenses of beverage division and sundry expenses at blending division. After pointing out these details, learned Departmental Representative also left matter to Bench for decision. We have considered facts of case. We find that books account o f assessee have been audited. details of miscellaneous expenses of Rs. 13,51,543 had been filed before AO under broad heads. nature of these heads is such that they can be termed as revenue expenses. expenses are of minor amounts, compared to overall expenditure incurred by assessee under head "Manufacturing, selling and administrative expenses". books of account have been audited. In these circumstances, we are of view that learned CIT(A) was not justified in upholding any ad hoc disallowance. Thus, ground No. 2 of appeal is allowed. Ground No. 3 is against disallowance of Rs. 10 lakhs from dealers conference expenses holding same to be in nature of entertainment expenses. It was also mentioned that learned CIT(A) erred in not following decision of jurisdictional High Court in case of CIT vs. Kirloskar Oil Engines Ltd. (supra). matter has been dealt with by learned CIT(A) in paras 8.1, 8.2 and 8.3. In para 8.1, learned CIT(A) dealt with method of disallowance followed by AO, namely, that (i) from expenditure of Rs. 41,45,153 incurred on dealers conference, amount of Rs. 25 lakhs was considered as entertainment expenditure, (ii) 10 per cent of canteen expenses, amounting to Rs. 1,63,351, was considered as entertainment expenditure, and (iii) Rs. 40,920 debited under head "Other administrative expenses" was held to be in nature of entertainment expenses. Thus, total amount of Rs. 27,04,271 was considered as entertainment expenditure, leading t o disallowance of Rs. 13,47,136 under s. 37(2) of Act. Before learned CIT(A), it was pointed out that seminar expenses were fully allowable in view of decision in case of Kirloskar Oil Engines Ltd. (supra). It was further pointed out that only 10 per cent of such expenditure was considered as entertainment expenditure in immediately preceding assessment year. In regard to canteen expenses, it was pointed out that factory is located at distance of 35 kms. from city and it is meant to provide tea and snacks to employees. It was further pointed out that in immediately preceding assessment year, 7.5 per cent of such expenditure was considered as entertainment expenditure. No argument was made before him regarding expenditure of Rs. 40,920. learned CIT(A) considered these matters. He ordered that only 7.5 per cent of canteen expenses may be treated as entertainment expenditure. In earlier appellate order for asst. yr. 1995-96, learned CIT(A) had confirmed action of AO in treating 10 per cent of expenditure incurred on dealers conference as entertainment expenditure. However, according to learned CIT(A), that did not amount to saying that he had restricted that disallowance to 10 per cent of expenditure. Considering facts in immediately preceding year and on perusal of vouchers, he indicated that most of expenditure had been incurred in entertaining dealers in five-star hotels. Therefore, he held that it will be fair to treat sum of Rs.10 lakhs as entertainment expenditure. Before us, learned counsel of assessee merely pointed out to various sub-paragraphs of para 8 of order of CIT(A). learned Departmental Representative also referred to these very sub-paragraphs. We have considered facts of case. As no arguments were made by either side on this issue, we may refer to decision of Hon ble Bombay High Court in case of CIT vs. Kirloskar Oil Engines Ltd. (supra), referred to in grounds of appeal. In that case, assessee had arranged seminar for grounds of appeal. In that case, assessee had arranged seminar for foreign and local distributors with view to boost sales, particularly in foreign market. accommodation was arranged in hotels and clubs. It was claimed that expenditure incurred in arranging seminar should be allowed as business expenditure. ITO held that certain items of expenditure, namely, payments of Rs. 60,308 to hotels and clubs, Rs. 46,709 expended on presentation articles given to foreign distributors and Rs. 11,000 incurred on inland travel of foreign distributors amounted to entertainment expenditure. On reference, it was held by Hon ble Court that seminar was arranged in connection with assessee s business. Therefore, expenditure incurred for travel, boarding and lodging of distributors, who attended seminars, and expenditure incurred for purchase of presentation articles given to foreign distributors constituted expenditure incurred in connection with business of assessee. Accordingly, it was further held that expenditure was allowable as deduction in computing income. Respectfully following aforesaid decision, it is held that expenditure incurred on dealers conference is allowable expenditure. We are also of view that expenditure incurred on canteen for providing tea, and snacks was incurred exclusively on employees as it will not be feasible to entertain guests in canteen, which is located 35 kms. away from city. Thus, this expenditure is also held as business expenditure. No argument was made in respect of Rs. 40,920 either before us or before learned CIT(A). Therefore, this amount is taken as expenditure covered under s. 37(2A) of Act, from which inadmissible amount may be computed by AO as per section. result of aforesaid discussion is that ground No. 3 of appeal is partly allowed. With regard to two additional grounds, relating to, (i) deduction of sum of Rs. 4,10,61,718, being expenditure on advertising and marketing, and (ii) deduction of sum of Rs. 3,37,00,617, being expenditure on service charges, it is observed that aforesaid expenditure along with expenditure of asst. yr. 1997-98 was claimed in that year. Both these matters have been considered in detail in our order for asst. yr. 1997-98. On basis of discussion there, it transpires that amounts of expenditure under both heads are likely to undergo changes on full verification of details of expenditure furnished by assessee. In regard to service charges, it is clear that sum of Rs. 9.09 crores was claimed in that year on basis of invoice No. 004. This expenditure pertains to period 1st Jan., 1996 to 31st March, 1996 and, thus, expenditure pertains to asst. yr. 1996-97. Certain expenditure on advertisement, details of which were furnished in Annex. C of assessee s letter to AO may also be pertaining to assessment year under consideration. In order of asst. yr. 1997-98, both these matters have been restored to file of AO with direction to segregate expenses of that year and this year, examine expenses under various heads in detail and determine whether any part of expenditure is not allowable in computing income of assessee. In line with that finding, matter regarding admissibility of expenditure under both heads claimed by way of additional grounds of appeal is restored to file of AO with direction that he will determine expenditure pertaining to this year under both heads, examine various kinds of expenditure debited in books under both heads and decide matter of admissibility of expenditure after giving reasonable opportunity of being heard to assessee. result of aforesaid discussion is that these grounds of appeal are treated as allowed for statistical purposes. In result, appeal of assessee is partly allowed. *** COCA COLA INDIA LTD. v. JOINT COMMISSIONER OF INCOME TAX