2003 (1) TMI 66 - HC - Income Tax

Foreign travel expenses for director's spouse u/s37(1): business-only purpose disputed; tribunal order set aside, remanded. (1)

Deductibility under Income-tax Act, s. 37(1) of foreign travel expenditure relating to a director's spouse turned on whether the outlay was incurred ... Scope and ambit of section 37(1) - Expenditure incurred in relation to the wife of the director - Allowability of the said expenditure incurred in relation to the wife of the director in the computation of income under the head 'Profits and gains of business' u/s 37(1) - HELD THAT:- It is trite that where an assessee seeks to deduct from his business profits certain items of expenditure the onus of proving that such deductions are permissible falls on the assessee. This is all the more so when the claims are based on facts which are within the exclusive knowledge of the assessee. Thus, the assessee has to place all the facts and circumstances before the revenue authorities and the latter must examine these and make up its mind as to whether the expenditure was justified by commercial expediency. We are of the view that in all cases where an assessee makes a claim for deduction of an expenditure under section 37(1) of the Act the Assessing Officer is bound to consider the said claim, be it in respect of the expenses for the foreign tour of the director of a company or in respect of the expenses for the foreign tour of the wife of the director accompanying him, meticulously keeping in mind the legal principles governing the question and to arrive at a decision either way after affording a reasonable opportunity to the assessee. The appellate authorities are also bound to consider the matter in accordance with law and in the light of the broad legal principles summarised. Of course the burden is on the assessee to furnish all relevant materials to establish its claim that the expenditure on which deduction is claimed falls under section 37(1). Since there is no categoric finding by the Tribunal on the facts as to the requisite condition, viz., the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee, we decline to answer the referred question. We, instead, set aside the appellate order of the Tribunal and direct the Tribunal to dispose of the appeal afresh in accordance with law and in the light of the broad legal principles stated in this judgment. The income-tax reference is disposed of as above. Issues Involved:1. Allowability of expenditure incurred on the foreign tour of the wife of a director of a company under section 37(1) of the Income-tax Act, 1961.Detailed Analysis:1. Conflict in Decisions:A Division Bench referred the case to a larger Bench due to a conflict between the decisions in Ram Bahadur Thakur Ltd. v. CIT [2002] 257 ITR 289 (Ker) and CIT v. Aspinwall and Co. Ltd. [1999] 235 ITR 106 (Ker) and CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 (Ker).2. Tribunal's Reference:The Income-tax Appellate Tribunal, Cochin Bench, referred the question of whether the expenditure incurred on the foreign tour of the wife of a director is an allowable deduction under the Act.3. Factual Background:The assessee, a public limited company engaged in growing tea, claimed a deduction for the foreign travel expenses of a director and his wife. The assessing authority disallowed the expenses related to the wife, considering them not wholly and exclusively for business purposes. The first appellate authority allowed the claim, but the Tribunal restored the assessing authority's disallowance.4. Legal Principles and Precedents:- Section 37(1) of the Income-tax Act, 1961: The expenditure must be laid out wholly and exclusively for business purposes.- Supreme Court Rulings: The expression 'for the purpose of the business' is broader than 'for the purpose of earning profits' and includes various business-related activities.- Gujarat High Court in Bombay Mineral Supply Co. (P.) Ltd. v. CIT [1985] 153 ITR 437: Disallowed expenses for the wife accompanying the director for personal reasons.- Madras High Court in CIT v. T. S. Hajee Moosa and Co. [1985] 153 ITR 422: Disallowed expenses for the wife accompanying the partner for personal care.- Madhya Pradesh High Court in CIT v. Steel Ingots (P.) Ltd. [1996] 220 ITR 552: Allowed expenses for the wife accompanying the director for medical treatment on grounds of commercial expediency.- Kerala High Court in CIT v. Aspinwall and Co. Ltd. [1999] 235 ITR 106: Allowed expenses based on Tribunal's factual finding that the wife's travel was for business purposes.- Kerala High Court in Appollo Tyres Ltd.'s case [1999] 237 ITR 706: Allowed expenses where the wife's travel was deemed beneficial to the business.5. Tribunal's Consideration:The Tribunal must consider whether the expenditure was incurred wholly and exclusively for business purposes, based on the facts and materials provided by the assessee.6. Legal Principles Summarized:1. The expenditure should meet the conditions under section 37(1).2. The expenditure must be for business purposes, not personal.3. The expenditure should be commercially expedient.4. The necessity of the expenditure is irrelevant if it promotes business.5. The benefit to a third party does not disqualify the expenditure.6. The onus of proof lies with the assessee.7. The assessing authority must conduct a thorough enquiry.7. Findings and Directions:The assessing authority and appellate authorities did not conduct a proper enquiry or provide a factual finding. The Tribunal's decision was based on previous years' decisions without considering the specific facts of the current year.8. Conclusion:The Tribunal's order is set aside, and the case is remitted for fresh consideration in light of the legal principles discussed. The Tribunal must ensure a thorough enquiry and factual determination of whether the expenses were incurred wholly and exclusively for business purposes.9. Clarification on Conflict:There is no conflict in the decisions of the Kerala High Court. Each case must be decided based on its specific facts and the materials presented by the assessee. The Tribunal's factual findings, if made in accordance with legal principles, will not be disturbed by the High Court in its advisory jurisdiction.Judgment:The income-tax reference is disposed of with directions to the Tribunal to re-examine the case.