Case Law Details
ITAT MUMBAI BENCH ‘H’
Harinagar Sugar Mills Ltd.
versus
Assistant Commissioner of Income-tax, Ward-4(2), Mumbai
IT Appeal No. 9037 (Mum.) of 2010
[ASSESSMENT YEAR 2005-06]
NOVEMBER 21, 2012
ORDER
Rajendra, Accountant Member
The present appeal is directed against the order date 18-10-2010 of the CIT(A)-11, Mumbai. Following Grounds of Appeal have been raised by the appellant.
(1a) The Ld. CIT(Appeals) erred in confirming dis allowance of Rs. 13,38,645/- being foreign tour expenses of accompanying spouse of the Directors of the company purported to be personal expenses.
(b) Your appellant prays that, in view of Honorable ITAT Mumbai Bench Orders in Appellant’s own case in assessment years 1991-92 to 1996-97 and other years, the Assessing Officer may be directed to delete the said addition.
2. The assessee- company, engaged in the manufacturing of sugar and biscuits, filed its return of income on 26.08.2006 declaring income of Rs. 3.84 Crores under the normal computation of income. Assessment was finalized on 01.12.2007 u/s. 143(3) of the Income-tax Act, 1961 (Act) by the Assessing Officer (AO) determining total income at Rs. 4.07 Crores under the normal computation. During the assessment proceedings, AO found that wives of the Directors had undertaken visit to foreign countries. The details of journeys undertaken were tabulated by the AO as under:
|
S.N. |
Name of the Person |
Place |
Fare, Visa & Airport Charges |
Other Expenses |
Total (Rs.) |
|
1. |
Smt. Neeta V. Pittie |
Not filed |
4,19,078/- |
4,66,185/- |
8,85,263 |
|
2. |
Smt. D.M. Pittie |
50,019/- |
1,73,250/- |
2,23,269 |
|
|
3. |
Smt. S.M. Pittie |
1,24,503/- |
1,05,610/- |
2,30,113 |
|
| TOTAL: |
5,93,600/- |
7,45,045/- |
13,38,645/- |
After considering the submissions of the assessee, AO held that assessee had not highlighted any business necessity or exigency based on which it was necessary for the spouses of the Directors to undertake the journey in the business interest of the assessee- company, that such expenses were nothing but personal expenses. These expenses could not be turned to have been incurred wholly and exclusively for the purpose of business. Relying upon the order of the Gujarat High Court in the case of Shahibag Entrepreneurs (P)Ltd.,(1995 Tax LR 133), he held that expenditure incurred on foreign tour of wife of Director was not allowable. Finally, he disallowed the expenditure amounting to Rs. 13.38 Lakhs and added back to the income of the assessee.
2.1. Assessee preferred an appeal before the First Appellate Authority (FAA), who called for a Remand Report from the AO. After considering the submissions of the assessee and the Remand Report, he held that the issue of traveling expenses of the wives of the Directors of the company has to be decided on the facts of the case, that in the case under consideration the appellant-company had not been able to establish that any business was conducted by the company, spouses of the Directors during their foreign tours, that expenses incurred on the foreign tour by the company, spouses were personal expenses and not the business expenses. Finally, he held that expenses had not been incurred wholly and exclusively for the purpose of the business of the appellant-company. He upheld the addition made by the AO.
3. Before us, Authorized Representative (AR) submitted that same issue was decided in favour of the assessee by the ITAT vide its order date 30-03-2007 for the AYs 1991-92 to 1996-97, that appeals of the department (AY 1997-98 to AY 2000-01 and AY 2003-04) were dismissed by the Tribunal in which issue of foreign tour of the wives of the Directors was agitated before it. He relied upon the case of CIT v. Alfa Laval (I) Ltd.,[2005] 282 ITR 445, CIT v. Zuari Finance Ltd. [2004] 271 ITR 538. He also relied upon the cases of Hindustan Lever Ltd. v. Dy. CIT ITA No. 4628/Mum/2003 dtd.08-02-2012), J.K. Industries Ltd., (ITA No. 624 of 2004) Mercedes Benz India (P.) Ltd., (WP No. 1614 of 2010) and J.K.T. Fabrics (P.) Ltd. v. Dy. CIT [2005] 4 SOT 84 (Mum). He submitted that spouses of the Directors had accompanied them in the interest of business of company, that visit of Directors involved several social engagements, that Board of Directors had approved the tour of the spouses of the Directors, that earlier year’s order of the Tribunal should be followed. Departmental Representative (DR) submitted that incurred expenses were not for the business of the company, that expenditure on foreign tour of wives of the Directors was not wholly and exclusively for carrying out the business of the assessee, that AO had recorded the statements of the spouses of the Directors, that the wives of the Directors were not aware about the business activities of the company or tours undertaken by them, that in earlier years facts were different. He relied upon the order of the jurisdictional High Court in the case of CIT v. Bhor Industries (P.) Ltd. [2006] 284 ITR 319. He further argued that facts of the case under consideration were different form the facts of the cases relied upon by the AR.
4. We have heard the rival submissions and perused the material placed before us. Where spouse of a director accompanies her/him on a foreign tour, should the expenditure incurred for his/her travel be treated as a deductible business expenditure or not has been subject matter of numerous decisions with different conclusions mainly depending upon the facts of each case. The Honorable Kerala High Court had allowed the expenses of the foreign tour of wives of executives of the assessee- companies in the cases of CIT v. Aspinwall & Co. Ltd. [1999] 235 ITR 106 (Ker.) and CIT v. Apollo Tyres Ltd. [1999] 237 ITR 706 on the finding that such travel was undertaken for the purpose of business. Later on the matter was considered by the Full Bench of the Honorable High Court of Kerala in the case of Ram Bahadur Thakur Ltd. v. CIT [2003] 261 ITR 390, where the entire gamut of case law was reviewed and expenditure incurred on foreign travel was disallowed. Honorable High Court in that case took note of many a decisions delivered by various Courts. Honorable Bombay High Court has discussed the issue in the cases of Alfa Laval (I.) Ltd. (supra) and Bhor Industries (P.) Ltd. (supra). Honorable Madras High Court in the cases of CIT v. T.S. Hajee Moosa & Co. [1985] 153 ITR 422 and D.B. Madan v. CIT [2003] 261 ITR 193 have discussed the same issue. Honorable High Courts of Gujarat, Gauhati and Madhya Pradesh have also decided the question of allow ability of expenditure incurred on the foreign visit of spouses of executives/ partners of companies/firms.
4.1. As per the well-settled principles of taxation jurisprudence where an assessee seeks to deduct from his business profits certain items, the onus of proving that such deductions are permissible falls on him. The burden of proving a claim to any allowance or deduction or to any exemption is on the assessee especially when the claims are based on facts which are within the special know-ledge of the assessee. Expenditure incurred by an assessee on account of foreign tours of spouses of an executive of a company/partner of a firm is one of such deductions. Expenditure of this nature are covered by the provisions of section 37(1) of the Act. An analysis of section 37(1) of the Act, reveal that the following conditions should exit in order to make an expenditure allowable:
(i) the expenditure should not be of the nature described in sections 30 to 36.
(ii) it should have been incurred in the accounting year.
(iii) it should be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed and should be incurred after the business is set up.
(iv) it should not be in the nature of personal expenses of the assessee.
(v) it should not be in the nature of capital expenditure.
(vi) it should have been laid out or expended wholly and exclusively for the purpose of such business.
While some broad principles have been indicated in various judicial pronouncements in regard to what is an allowable expenditure, yet it is primarily a question of fact. Basic issue to be decided is whether the expenditure is laid out wholly for the purpose of the business?
4.2 It cannot be disputed that before an assessee can become entitled to an allowance under that provision, he must satisfy the AO of the purpose for which the amount is spent. It is true that the taxing authorities are not entitled to go into the reasonableness of the expenses, but they are certainly entitled to be satisfied as to the commercial necessity of expending that amount. In most cases, the question will be as to the nature of the relation between the expenditure and the business, whether the benefit is remote or near, prospective or immediate, imaginary or real and so forth. The capacity in which the assessee spends is also relevant.
Court are of the view that in cases related with expenditure covered by section 37 of the Act question to be decided are whether the finding of fact arrived at by the AO is perverse or based on no material and whether the assessee has succeeded in satisfying as to the purpose for which the amount was spent and the commercial necessity of expending it. Besides, in view of the provisions of section 40A(2) of the Act, so far as a company is concerned, it is open to the AO to go into the reasonableness of the expenses also. The AO is also entitled to be satisfied as to the commercial necessity of spending that amount. In other words, there must be nexus between the expenditure and the business purpose.
4.2.1 However wide the meaning of the expression ‘for the purpose of the business’ may be, its limits are implicit in it. Courts are of the view that the purpose must be for the purposes of the business, that is to say, the expenditure incurred must be for the carrying on of the business and the assessee should incur it in his capacity as a person carrying on business. The first adverb wholly refers to the quantum of the expenditure and the term exclusively refers to the motive, objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. The expression wholly and exclusively laid out for the purpose of business emphasizes the nexus between the trade and the expenditure. 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 that of a trader. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way in which it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure as the case may be. By using the words wholly and exclusively, the Legislature has cast a duty on the assessee to establish that the expenditure was to earn income and not for any other purpose. The effect of the words, wholly and exclusively for the purpose cannot not be diluted. By using three words, i.e. wholly, exclusively and purpose the Legislature had made it mandatory to find out the reason behind the expenditure.
4.2.2 In the case under consideration the dispute between the Revenue authorities and the appellant-company is as to whether the expenditure incurred by it on the foreign tours of spouses of the Directors can be said to have been incurred wholly and exclusively for the purpose of the business of the assessee or not ? AO and the FAA have given a categorical finding that expenditure incurred by the assessee- company was not for carrying out of business of the appellant. AO had recorded the statements of the wives of the Directors and has clearly held that they were not aware about the basic facts of the foreign tour undertaken by them. In the earlier years AO had made additions without making in depth-investigation, whereas in the year under consideration AO has made inquiry and then arrived at a definite conclusion. FAA has confirmed the facts found by the AO. Assessee has not produced any evidence to show that the expenditure incurred by it was wholly and exclusively for the business purposes. Burden of proof required that assessee should have produced some documentary evidence to show that foreign trip of the spouses of the Directors was not an expenditure of personal nature. Invitations received by the assessee or the Directors of the company do not prove that foreign tours of the spouses of the Directors had any relation with the business of the company. Expenditure incurred by the appellant for sending Directors to attend meetings organized by International sugar organization can definitely be held an expenditure incurred wholly and exclusively for the purpose business. But, with regard to foreign tours of wives of the Directors there is no material on the file to prove that their trips had any relation with the business of the company. In these circumstances, we do not want to disturb the order passed by the AO and confirmed by the FAA. In our opinion, order of the FAA does not suffer from any legal or factual infirmity. As the facts and circumstances of the case under consideration are different from the facts of the earlier AYs., so, in our opinion cases of earlier years are of no help to the assessee. It is a well settled principle of taxation law that resjudicata does not apply in tax matters-especially when the facts of two AYs. are not similar. In earlier years in absence of scrutiny and recording of statements of spouses of the Directors, if a particular conclusion was drawn then it would not mean that same would be applicable in different set of facts also. Every assessment year is a separate unit and facts go on changing, so, in changed circumstances different conclusions have to be arrived at. In our opinion present case falls in that category.
4.3 Now we would like to discuss the cases relied upon by the AR and the DR. Alfa Laval (I) Ltd., (supra) and Zuari Finance Ltd. (supra) are the matters that were decided by the Hon’ble jurisdictional High Court. In the case of Alfa Lavel (I.) Ltd. (supra) expenditure amounting to Rs. 44,966 was incurred by the assessee- company on a foreign trip of the wife, who had accompanied her husband, the president of the assessee- company, who was invited to attend an advanced management programme at Harward ‘along with his wife’. In that case FAA had recorded a categorical finding of fact that the said expenses were incurred for the purposes of the business of the assessee. That finding of the fact was affirmed by the Tribunal. Deciding the appeal filed by the Department Hon’ble High Court held as under :
“Considering the concurrent finding of fact recorded by both the authorities below, in our view, the expenditure would be allowable as deduction while computing the profits and gains of the business. Before concluding, we wish to clarify that the case needs to be decided on its own facts primarily considering the business expediency. That, per se, the expenses incurred by the assessee on the foreign trip of the wife may not always be allowable as deduction in computing the profits and gains of the business unless it is connected with the business of the assessee. We are, therefore, confining our judgment to the facts of this case which we have decided in the light of the concurrent findings of fact recorded by both the authorities below.” From the above it is clear that matter was decided ‘in the light of the concurrent findings of fact recorded by the authorities below’ and that judgment was ‘confined to the facts of the case’. In the case under consideration both the authorities have clearly mentioned that the foreign tours of the wives of the Directors were not for business purposes. We have not come across any material that could prove that claim made by the assessee was supported by any evidence.
4.3.1 In the case of Zuari Finance Ltd. (supra) Industries Honorable Bombay High Court found that company had incurred expenditure on foreign tour of the wife of the vice-chairman of the company. AO called upon the assessee- company to explain and furnish evidence as to how the foreign travel expenses were incurred wholly and exclusively for the business of the company. The assessee did not file any explanation or evidence in response to the said letter. As no evidence was adduced before him, so the AO rejected the claim for foreign travel expenses and the finding was confirmed by the FAA. Tribunal set aside the findings of the AO and the FAA. In paragraph No. 42 of its order, Tribunal observed that the mere fact that no tangible business came out of the foreign visits was not a ground for disallowing the foreign travel expenditure, because it is possible that in the first meeting only business discussions would take place and nothing tangible might come out. Honorable High Court held that the said reasoning was ‘correct’. With regard to the specific contention was raised before the Tribunal: that the foreign travel expenditure on travel of Mrs. S. P. Hede, the wife of the vice-chairman, was not for the purpose of business, as she was neither a director, nor concerned with the company; Honorable High Court held that the Tribunal had not recorded any finding of fact whether Mrs. S. P. Hede was required to travel for the business of the company, that the Tribunal had not considered any evidence for allowing the foreign travel expenditure specially of Mrs. S. P. Hede, the wife of the vice-chairman of the assessee, that finding was thus not based on appreciation of evidence and that the well-reasoned findings of the AO and the Commissioner (Appeals) were set aside without any discussion and on no evidence. Thus, the case of Zuari Industries does not help the assessee in any manner. In the case of Zuari Industries Honorable Court has emphasized the principle that onus of proving the fact of incurring of expenditure on foreign travel of wife of an executive is on assessee and assessee has also to prove that such expenditure was incurred wholly and exclusively for the purpose of business. We find that in the case under consideration assessee has failed on both the counts. After considering the facts of the cases-of Hindustan Lever Ltd., (supra), J.K. Industries Ltd., (supra) Mercedes Benz India (P.) Ltd., (supra) and J.K.T. Fabrics (P.) Ltd., (supra) relied upon by the AR we are of the opinion that they are not applicable to the facts of the case under consideration. As far as orders for the earlier AYs. delivered by the Tribunal are concerned we are of the opinion that in those years no investigation was made by the AO about the foreign tours of the wives of the Directors. We have also perused the order delivered by the Bombay Tribunal in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom.) (SB) that was relied upon by the AR of the assessee. We find that in that case Chairman and chief executive of ‘Glaxo Holdings’ had extended invitation to the Director and his wife of Glaxo Laboratories (India) Ltd. Thus, the facts of the case under consideration are clearly distinguishable from the case of Glaxo. Secondly, the decision of Bhor Industries (P.) Ltd. (supra) was not available at the time of decision of Glaxo. Even in the case of Zuari Finance Ltd. (supra) Honorable jurisdictional High Court has held that ‘per se, the expenses incurred by the assessee on the foreign trip of the wife may not always be allowable as deduction in computing the profits and gains of the business unless it is connected with the business of the assessee’. Primary condition for allowing the expenditure u/s.37 of the Act on foreign tours of spouse of a Director is its ‘Connection with the business’ of the assessee- company. Until and unless same is proved by the assessee with some proof same is not allowable in light of recent judgments of the Honorable Bombay High Court. In the case under consideration assessee has not produced any evidence with regard to business of the assessee and the expenditure incurred on foreign tours of wives of the Directors. Neither before the AO and FAA nor before us assessee- company has discharged his burden of proof.
4.3.2 In the case of Bhor Industries (P.) Ltd. (supra), relied upon by the DR, Hon’ble jurisdictional High Court has considered the ratio propounded in the decision of Alfa Lavel (I.) Ltd. (supra). In Bhor Industries (P.) Ltd. (supra) question before the Honorable Court was whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the assessee’s claim in respect of foreign travel expenses of Smt. L. R. Patel, who accompanied her husband Shri R.M. Patel, the director of the assessee- company ?Question was answered by the Honorable High Court as under :
“Having heard the rival parties, it is not in dispute that the Commissioner of Income-tax (Appeals) has recorded a categorical finding that the expenditure on the travel of Mrs. Patel was not for the business purposes. The Tribunal could not have reversed its finding without holding that the finding to be erroneous with further finding that the expenditure on foreign tour of Mrs. Patel was incurred for the purposes of business of the assessee- company.
It is no doubt true that this court has allowed similar type of expenditure in the case of Alfa Laval (I.) Ltd. [2006] 282 ITR 445 (Bom).However, in that case, the Tribunal had recorded a clear cut finding of fact that the expenditure incurred on the foreign tour of the wife of the president of the assessee- company was for the purposes of business. In view of this categorical finding of fact recorded by the authorities below, this court had treated the expenditure on foreign travel of the wife of the company’s president as of revenue nature. In the case on hand, there is categorical adverse finding recorded by the Commissioner of Income-tax (Appeals) that no business purpose was involved in the foreign tour of Mrs. Patel. Consequently, the expenditure incurred was rightly disallowed, in toto, by the Commissioner of Income-tax (Appeals). The finding of fact recorded by the Commissioner of Income-tax (Appeals) was never set aside by the Tribunal. If foreign tour was not for the purposes of business, then it cannot be an allowable expenditure. In the above view of the matter, the above question referred is answered in the negative, i.e., in favour of the Revenue and against the assessee.”
4.3.3. We have also gone through the principles enumerated in the decisions of Vithal Overseas v. CIT [2011] 334 ITR 229D.B. Madan (supra) and T. S. Hajee Moosa & Co. (supra) CIT v. Shahibag Entrepreneurs (P.) Ltd. [1995] 215 ITR 810 (Guj.), Bombay Mineral Supply Co. (P.) Ltd. v. CIT [1985] 153 ITR 437 to arrive at a logical conclusion about allow ability of expenditure of foreign tours of spouses/relatives of Directors/partners of the companies/firms. But, for deciding the present appeal we are considering the facts of the case under consideration only. Because, as stated earlier, we are of the opinion that whether the expenditure is allowable or not depends upon the facts of each case. But, basic principle remains same i.e. it is only after satisfying the condition that the foreign tour is undertaken not for personal purpose, but wholly and exclusively for the purpose of the business, the expenditure can be allowed. In other words whenever spouse/son of a director/partner undertakes a foreign tour along with the director/father, it cannot be presumed that the expenditure on the spouse/son of the director/partner is incurred wholly and exclusively for the purpose of the business.
4.3.4 Here, it would be appropriate to reproduce a paragraph form the decision delivered by the Hon’ble Gujarat High Court in the case of Bombay Mineral Supply Co. (P.) Ltd. (supra) that lays down a general principle with regard to foreign tours of spouses of Directors in following words:
“We are sure that tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes nor to deprive them of the company of their wives in such tours, but for that we do not think that, in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of the personal needs of those executives.”
5. After considering the facts of the case, we are of the view that the expenses incurred by the assessee on the foreign tour of spouses of the Directors were wholly gratuitous and for a purpose outside the course of its business. As the incurred expenditure was for extra-commercial reasons, so, same is not deductible under section 37(1) of the Act. Secondly sanction of foreign exchange by the Reserve Bank authorities is of no help to decide the question of foreign tours undertaken by the spouses of the Directors of a appellant-company. In our opinion at best the fact of sanction of Foreign Exchange by the Reserve Bank Authorities may indicate that the assessee has made out a case before them for sanctioning the requisite exchange for the foreign tour of spouses of the Directors. However, that would not indicate that the Reserve Bank authorities had, in any manner, decided the question as to whether the visit of spouses is wholly and exclusively for the purposes of business of the assessee. To look in to the issue of incurring of an expenditure ‘wholly and exclusively for the purposes of business’ is outside the purview and powers of the RBI. Tax ability or otherwise of an item of expenditure is sole domain of the AO.
5.1 As, there is nothing on the record to indicate that the expenditure in question was incurred by the assessee- company in order to facilitate the carrying on of the business directly or indirectly and, therefore, in our opinion, the AO and the FAA were right in not allowing the claim advanced by the assessee under section 37 of the Act. On the facts and in the circumstances of the case, a sum of Rs. 13.38 lakhs incurred by the appellant company on the foreign tours of spouses of the Directors has rightly been disallowed by the Revenue Authorities. Hence, this Ground is decided against the assessee.
Appeal filed by the assessee stands dismissed.
Foreign travelling expenses incurred by the company on travel of directors and their family members is general in present business scenario and globalization of marketing policies. Through travelling the businessman learn market development policies applied in different areas considering the environment and its effect on consumer product. So while deciding the allowability of these type of expenditure the Department should have consider all aspect as true businessman. Further the principle laid down in the case of Bombay Mineral Supply Co. (P.) Ltd is good law to understand both side:
“We are sure that tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes nor to deprive them of the company of their wives in such tours, but for that we do not think that, in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of the personal needs of those executives.”