2014 (8) TMI 10 - HC - Income Tax

High Court affirms disallowance of foreign travel & interest expenses under Income Tax Act

The High Court upheld the disallowance of 10% of foreign travel expenses and interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961. The ... Interest expenses on borrowed funds u/s 36(1)(iii) – Held that:- Tribunal was of the view that the interest paid on the borrowals utilized for investments in a foreign company namely M/s Kemsol Ltd could not be allowed as deduction as it was not in the course of Assessee’s business - there was no evidence placed on record by the Assessee to support the argument of commercial expediency in acquiring 60% of the shares of M/s Kemsol Ltd. - the interest paid on borrowed funds was not for the purpose of the business of the Appellant/Assessee – tribunal was correct in its approach, both legally and factually in passing the order that it did. The investments made by the Assessee Company in its subsidiary were for furthering the business interests of the Assessee - there was no justification to disallow the deduction, which was otherwise eligible u/s 36(1)(iii) of the Act - the authorities below have come to a categorical finding that the investment made in M/s Kemsol Ltd from borrowed funds was not for the purpose of business of the Assessee. Foreign travel expenses – Held that:- The approach of the Tribunal in restricting the disallowance of the foreign travel expenses to 10% of the amount claimed by the assessee is more than a reasonable approach - It cannot be said to be vitiated either on the ground of perversity or error of law apparent on the face of the record – Decided against assessee. Issues Involved:1. Disallowance of foreign travel expenses.2. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.3. Alternative submission regarding disallowance of interest expenses under Section 57 of the Act.Detailed Analysis:1. Disallowance of Foreign Travel Expenses:The appellant/assessee challenged the disallowance of 10% of the foreign travel expenses incurred, which was upheld by the ITAT. The Assessing Officer initially disallowed 20% of the total travel expenses, concluding that the expenses were not for the appellant's business but related to the incorporation of Kemsol Ltd. The ITAT reduced the disallowance to 10%, considering the factual aspects. The High Court agreed with the ITAT's approach, finding it reasonable and not vitiated by any error of law.2. Disallowance of Interest Expenses under Section 36(1)(iii):The appellant/assessee argued that the interest paid on borrowed funds used for investment in Kemsol Ltd should be deductible under Section 36(1)(iii) of the Act. The Assessing Officer disallowed the interest deduction, stating that the borrowed funds were used for investment purposes, not for the appellant's business. The ITAT upheld this view, noting the lack of evidence for commercial expediency in acquiring shares of Kemsol Ltd. The High Court supported the ITAT's conclusion, emphasizing that the borrowed funds were not utilized for the appellant's business and thus did not qualify for deduction under Section 36(1)(iii).3. Alternative Submission Regarding Disallowance of Interest Expenses under Section 57:The appellant/assessee raised an alternative ground that the interest expenses should be considered under Section 57 of the Act. However, this issue was not raised or argued before the lower authorities. The High Court did not allow this point to be argued, as it was not part of the original proceedings.Conclusion:The High Court dismissed the appeal, stating that the ITAT's findings were based on factual assessments and did not involve any substantial question of law. The disallowance of foreign travel expenses and interest expenses was upheld, and the alternative submission under Section 57 was not entertained. The court found no merit in the appeal and dismissed it without any order as to costs.