JUDGMENT : K.S. Jhaveri, J. 1. By way of these Appeals, the Appellant - assessee has challenged the judgment and order of the Income Tax Appellate Tribunal, Ahmedabad as per the following details:- Tax Appeal ITA No. Assessment Year 828/2006 2925/Ahd./2002 1999-2000 829/2006 2956/Ahd./2002 1999-2000 830/2006 1224/Ahd./2004 2000-2001 831/2006 3689/Ahd./2004 2001-2002 832/2006 3402/Ahd./2004 2001-2002 2. While admitting the matter on 24.01.2007, the following common substantial question of law was framed by the Court for consideration:- "Whether in the facts and under the circumstances of the case, the Income Tax Appellate Tribunal was right in law in disallowing the loss suffered by the appellant on account of collapse of the steel piles installed in deep sea?" 3. Learned Senior Counsel Mr. S.N. Soparkar for the appellant - assessee has submitted that the appellant was awarded the contract of establishing liquid Chemical Handling Jetty at Dahej by the Gujarat Chemical Port Terminal Company Ltd. on the one hand and the very same contract was awarded by the appellant to one - M/s. K.C. India on sub-contract basis on a back-to-back contract arrangement with an understanding that the technical designs and drawing shall be supplied by the appellant and the said sub-contractor shall carry out the actual work as per these designs and drawings. 3.1. It is submitted that the above aspect has not been appreciated by the Tribunal and thereafter, arrived at a conclusion that the appellant was not to give the design and drawings for the purpose of erecting the steel piles and hence, the loss suffered on account of faulty drawings and designs cannot be claimed by the appellant. 3.2. It is further submitted that the loss suffered on account of the collapse of steel piles installed in the sea is that of the appellant and not that of sub-contractor M/s. K.C. India. 3.3. Learned Senior Counsel further submitted that the appellant herein is the contractor and therefore, losses suffered while executing the work have to be treated as business loss and therefore the same has to be borne by the appellant. Even the Insurance Company sanctioned the insurance claim in the later year, which was offered as income. 3.4. It is also submitted that the assessee herein has already raised counter claim against the contractee, i.e. Gujarat Chemical Port Terminal Company Ltd. which is pending determination. Even the Insurance Company sanctioned the insurance claim in the later year, which was offered as income. 3.4. It is also submitted that the assessee herein has already raised counter claim against the contractee, i.e. Gujarat Chemical Port Terminal Company Ltd. which is pending determination. In short, it is submitted that the losses were also borne by the assessee - Contractor and the insurance claim was also received by the assessee - Contractor. 4. Learned Senior Counsel Mr. S.N. Soparkar has referred to assessment order of the Assessing Officer and relevant part of the same reads as under:- "The above note does not disclose income of additional claims of contractor debited to Profit and Loss A/c., but as per details filed with letter dt. 7.3.2001, the amount is Rs. 9,13,58,997/- such claim is not allowable for following reasons: (i) When an accident results in loss and assessee held insurance policy/claim in respect of this loss, it is not correct to account for loss in first place and then account for income when claim materializes. In substance and effect, there is no loss at all in first place. (ii) The assessee has given back-to-back contractor to sub contractor. If claim for additional work is not received or receivable by assessee from GCPTCL, there is no liability to pay claim of sub contractor for the same." 4.1. Learned Senior Counsel for the appellant has also taken this Court to the findings of the CIT (Appeals), which reads as under:- "Therefore, in my view the correct profit for the year could be computed by not allowing for the year under consideration, the liability of Rs. 9,13,58,997/- being loss on account of collapse of steel piles and thereafter applying a reasonable rate of profit to the turn over. Therefore, keeping in view the large turn over and nature of the project, average profit margin in this line of business of civil construction which normally varies upto 2# of turn over, subcontractor's profit rate in the past and also in view of the fact that this is the appellant's first project in India, I hold that flat net profit rate of 1.80% will be quite reasonable, to be applied to the turnover of Dahej project. The claim of Rs. 9,13,58,997/- is to be allowed in the year in which the insurance amount is receivable." 4.2. At this stage, learned Senior Counsel Mr. The claim of Rs. 9,13,58,997/- is to be allowed in the year in which the insurance amount is receivable." 4.2. At this stage, learned Senior Counsel Mr. S.N. Soparkar has drawn the attention of the Court to the relevant part of the contract (i.e. General Obligations of the Subcontractor and Instructions to Subcontractor) entered by the assessee which is reproduced hereunder:- "2. General Obligations of the Subcontractor (1) The Subcontractor shall execute, complete and maintain the Subcontract works and otherwise perform the Subcontract in accordance with the Subcontract and to the satisfaction of the Contractor, the Engineer and the Employer. (2) The Subcontractor shall provide all labour services, materials, tools, Subcontractor's Equipment, Temporary Works, transport to and from and in about the Site and every thing whether of a permanent or temporary nature required for the execution, completion and maintenance of the Subcontract Works or performance of the Subcontract. (3) the Subcontractor shall be fully responsible for the design of the Subcontract Works and all references in the Subcontract to the Subcontractor's obligations to execute and complete the Subcontract Works shall be construed to include such design responsibility. (4) Without prejudice to the generality of Clause 2(3) the Subcontractor warrants and undertakes to the Contractor that: (a) It will properly design, manufacture, test and execute the subcontract Works. (4) Without prejudice to the generality of Clause 2(3) the Subcontractor warrants and undertakes to the Contractor that: (a) It will properly design, manufacture, test and execute the subcontract Works. (b) the Subcontract Works will, when completed, comply with the requirements of the Subcontract including any performance specification or requirement included or referred to in the documents specified in the Second Schedule hereto as the same may be varied under the Subcontract; (c) the Subcontract Works will be designed using up-to-date good engineering practice and to the best international standards available at the date of commencement of the Subcontract works which are consistent with the intended use of the Subcontract Works; (d) no goods or materials generally known to be deleterious or otherwise not in accordance with good engineering practice have been or will be specified or selected by the Subcontractor or any one acting on its behalf and no goods or material which, after their specification or selection by or into the Subcontract Works, become generally known to be deleterious or otherwise not in accordance with good engineering practice, will be incorporated into the Subcontract works; (e) the design of the Subcontract Works has taken or will take full account of the effects of the intended construction methods, Temporary Works and Subcontractor's Equipment. (5) Notwithstanding anything to the contrary expressed in or to be implied from the Subcontract, the documents referred to in Clause 1(1)(i) as comprising the subcontract contain the entire agreement between the parties which supersedes any and all previous agreements and understanding between the parties in relation to the subject matter of the Subcontract, and the Subcontractor acknowledges that in submitting its tender it has relied on any statements, representations, warranties or undertakings which are not expressly set out in the documents comprising the Subcontract including, without limitation to the generality of the foregoing, any statements representations, warranties or undertakings contained in the instructions to tenderers issued by the Employer or the other documents made available by the Employer or the Contractor prior to execution of the Subcontract. (6) Without prejudice to any other provisions of the Subcontract, the Subcontractor shall be fully responsible for the Temporary Works design and shall assume the obligations and liabilities of the Contractor for such design. (6) Without prejudice to any other provisions of the Subcontract, the Subcontractor shall be fully responsible for the Temporary Works design and shall assume the obligations and liabilities of the Contractor for such design. (7) Without prejudice to any other provisions of the Subcontract the Contractor shall delegate to the Subcontractor such authority as it may reasonably require in order to undertake his obligations under the Subcontract. (8) Without prejudice to the generality of Clause 2 the Subcontractor shall liaise and cooperate with the Contractor on all matters relating to the proper management of the Works and shall ensure that it is suitably represented and involved in any decisions taken by the management committee which relate to the execution of the Works." "7. Instructions to Subcontractor (1) The Subcontractor shall in relation to the Subcontract Works comply with all instructions and decisions of the Engineer or the Employer which are notified and confirmed in writing to the Subcontractor by the Contractor. (2) The Contractor shall have the like powers in relation to the Subcontract Works to give instructions and make decisions as the Engineer or the Employer has in relation to the Works under the Contract. The Subcontractor shall have the like obligations to comply with such decisions and instructions and all procedures incidental thereto prescribed under the Contract and shall have the like rights in relation thereof as the Contract has under the Contract. The said powers of the Contractor shall be exercisable in any case irrespective of whether the Engineer or the Employer has exercised like powers in relation thereto under the Contract. (3) The Subcontractor shall not act upon an unconfirmed instruction of the Employer, the Engineer or any person other than the Contractor when such instruction is given directly. If the Subcontractor shall receive any such direct instruction, the Subcontractor shall forthwith inform the Contractor's site representative and shall supply him with a copy of such." 5. On the other hand, learned Counsel for the respondent - Department Mr. K.M. Parikh has placed reliance on the decision of the Hon'ble Apex Court in the case of Commissioner of Income-tax v. Delhi Safe Deposit Co. On the other hand, learned Counsel for the respondent - Department Mr. K.M. Parikh has placed reliance on the decision of the Hon'ble Apex Court in the case of Commissioner of Income-tax v. Delhi Safe Deposit Co. Ltd. reported in [1982] 8 Taxman 1 (SC) wherein relevant paragraph of the said decision reads as under:- "The first question which needs to be examined is whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under section 37 of the Act. It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses. The managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one of its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out 5 litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been benefited to some extent. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been benefited to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case whether it would make any difference at all is the point for consideration. Dealing with the question whether an expenditure incurred by a brewery in aid of their tenants of tied houses as a necessary incident of the profitable working of the brewery business was an admissible expenditure in the computation of the income-tax liability of the brewery, Lord Summer upholding the above claim observed in Usher's Wiltshire Brewery Ltd. v. Bruce thus: "Where the whole and exclusive purpose of the expenditure is the purpose of the expender's trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, say that of the publican, or that the brewer incidentally obtains some advantage, say in his character of landlord cannot in law defeat the effect of the finding as to the whole and exclusive purpose." In British Insulated and Helsby Cables Ltd. v. Atherton Lord Cave observed. "It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce, [1915] A.C. 433 and Smith v. Incorporated Council of Law Reporting for England and 6 Wales, [1914] 3 K.B. 674 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on the business, may yet be expended wholly and exclusively for the purposes of the trade." Rowlatt, J. in Mitchell v. B.W. Noble Ltd. held that the money spent on getting rid of a director and saving the company from scandal was deductible. Affirming the above view, the Court of Appeal (whose judgment appears at page 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfettered by the presence of the retiring director, which might have had a bad effect on the credit of the company, it must be treated as the income and not as capital expenditure and was deductible as such for income-tax purposes. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. In Commissioner of Income-tax, Kerala v. Malayalam Plantation Ltd. Subba Rao, J. (as he then was) summarised the legal position at page 705 thus:- "5. The aforesaid discussion leads to the following result: The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. 6. However wide the meaning of the expression may be, its limits are implicit in it. 6. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business that is to say, the expenditure incurred shall be for carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." In the instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under section 37. We, therefore, reject the contention of the Revenue that the amount in question could not be claimed as a deduction under section 37 of the Act. The next contention of the Department is that the payment in question should have been first assessed as a loss in the assessment proceedings of the firm and in the absence of any claim made in the course of such proceedings by the firm, it was not possible to allow its deduction in the assessment of the assessee. Reliance is placed on sections 187 and 67 of the Act in support of this submission. It is seen that the expenditure in question had not been incurred by the firm. Even if the amount had been paid through the firm by the assessee, it would not be payment of the firm's funds. In the accounts of the firm, there would be a credit and debit entry cancelling each other showing a receipt from the assessee and a payment to the managed company, not in any way affecting the capital structure of the firm. In the accounts of the firm, there would be a credit and debit entry cancelling each other showing a receipt from the assessee and a payment to the managed company, not in any way affecting the capital structure of the firm. If the amount had been paid by the assessee directly to the managed company which appears to be more probable then the expenditure is obviously one incurred by the assessee itself though on account of the firm. In any view of the matter, the fact that the firm has not claimed the 8 expenditure as its own does not affect the right of the assessee to claim deduction in respect of the amount in question in its assessment proceedings which it is legitimately entitled to do. It is not shown how in the peculiar circumstances of the case there is any statutory bar to the claim made by the assessee." It is further contended that in the facts of the case, the design of the work was the responsibility of the contractor more particularly in view of Clause 14 of the terms of the contract which is about liabilities and related insurances. 6. We have heard learned Counsel for the respective parties and perused the records of the case. Before proceeding with the assessee, after the designs were approved. Therefore, we are of the opinion that the designs were approved by the principal employer. After the contract was entered into by the assessee, another sub-contract was entered into by the assessee with its Indian subsidiary company. Even the insurance for the month in question was taken by the assessee, the insurance claim amount was paid to the contractor. In that view of the matter, the liability has to be considered of the assessee and expenses have to be allowed for the relevant year. Consequently, the issue raised in the above Appeals is answered in favour of the assessee and against the Department. The Appeals stands disposed of accordingly.