Reasonableness of Business Expenditure Must Be Judged From the Businessman’s Perspective, Not the Revenue’s: Bombay High Court Dismisses Assessee’s Appeal in Infrastructure Fee Dispute

“It is not the function of the Tribunal to re-write contracts or determine what remuneration ought to be paid”— In a decision Bombay High Court dismissed Income Tax Appeal, holding that the Income Tax Appellate Tribunal (ITAT) had rightly upheld the disallowance of infrastructure fee based on actual advertising receipts and not gross billed amounts. The Division Bench, led by the Chief Justice, affirmed that contractual clauses govern such claims and held that courts cannot re-interpret commercial contracts unless the findings are perverse or unsupported by evidence.

The case pertained to Assessment Year 1993–94, where the assessee had entered into an agreement dated 27th July 1992 with Prime Time Media Services Pvt. Ltd., under which it agreed to pay 5% of its “total receipts from advertising” as infrastructure fees.

The assessee filed returns disclosing total income of ₹7,57,746 and claimed a deduction of ₹22,36,544 as infrastructure fees. However, the Assessing Officer restricted this deduction to ₹2,93,870, calculating it as 5% of the actual receipts of ₹58,77,412 (not the billed ₹4.47 crores), as per the profit and loss account.

The Commissioner of Income Tax (Appeals) partly allowed the claim and determined a more “reasonable” fee at 15% of ₹58,77,412, which amounted to ₹8,81,611. The assessee’s subsequent appeal before the Tribunal was dismissed, and the present appeal was filed under Section 260A of the Income Tax Act, 1961.

Whether the assessee was entitled to infrastructure fee on the basis of total gross advertising bills raised (₹4.47 crores) or on actual receipts (₹58.77 lakhs)?

The Court considered Clause 3 of the agreement, which stated: “STARTIME will pay to PRIMETIME 5% of the total receipts of STARTIME from advertising.”
The Court found no ambiguity in this clause and ruled: “As per the terms and conditions of the agreement, the assessee was required to pay 5% of the receipt of the assessee and not 5% of the gross advertising bills.”

Rejecting the assessee’s argument that such a view rewrote the contract, the Court cited the Supreme Court in Walchand & Co. (Pvt) Ltd.: “In applying the test of commercial expediency, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue.”

However, it also emphasized: “It is not the function of the Tribunal to determine the remuneration, which in their view, should be paid… The Tribunal must confine itself to findings based on the terms of the agreement and evidence on record.”

The Court held that the Assessing Officer, CIT (Appeals), and the Tribunal had all based their findings on the undisputed profit and loss figures submitted by the assessee itself, stating: “The findings of fact recorded... do not, by any stretch of imagination, call for interference… nor are they perverse or unsupported by evidence.”

The Court relied on well-established judicial principles from Walchand & Co., J.K. Woollen Manufacturers, and other cases to hold that the Tribunal acted within its jurisdiction and did not re-write the agreement.
It further held that: “The scope of appeal under Section 260A of the 1961 Act is well settled… Findings of fact can only be interfered with if shown to be perverse.”

Ultimately, the Court concluded: “The substantial question of law is answered in the affirmative and against the assessee.”

The Bombay High Court’s decision in M/s. Star Time Communication (I) Pvt. Ltd. vs. CIT reaffirms that claims for business expenditure must align with contractual language and disclosed financial records. It also limits judicial interference in fiscal matters unless there is a clear legal or factual perversity, keeping intact the principles of contractual sanctity and commercial prudence.

Date of Decision: 22nd April 2025