1987 (7) TMI 60 - HC - Income Tax

Court rules trip expenses for new business venture not deductible as business expenditure

The High Court of Madhya Pradesh ruled that the expenditure incurred by the managing director and chief executive of a company on a trip to Mauritius for ... Co-operative Society, Cottage Industry, Special Deduction Issues:Interpretation of business expenditure for a trip to Mauritius by managing director and chief executive.Applicability of clauses in the memorandum of association for determining business connection.Validity of the expenditure as allowable business expenditure for the assessment year 1979-80.Analysis:The High Court of Madhya Pradesh addressed a reference under section 256(1) of the Income-tax Act, 1961, regarding the justification of the expenditure incurred by the managing director and business executive of an assessee-company on their tour to Mauritius as a business expenditure for the assessment year 1979-80. The company, engaged in manufacturing flour mill products, claimed the amount of Rs. 20,270 as business expenditure for the Mauritius trip. The Inspecting Assistant Commissioner disallowed the claim, considering the work done as consultancy service not authorized by the memorandum of association. The Commissioner of Income-tax (Appeals) upheld the disallowance based on the trip's nature and lack of submission of a report. The Tribunal, however, allowed the appeal, citing clauses IA and ID of the memorandum of association, which were inserted after the assessment year in question. The High Court noted that consultancy was not part of the company's business at the relevant time, emphasizing that the trip aimed at initiating a new business, constituting capital expenditure, as per a company resolution. Consequently, the court held that the expenditure was not allowable as business expenditure for the assessment year 1979-80, ruling in favor of the Revenue.The primary issue revolved around the interpretation of the business expenditure incurred on the Mauritius trip by the managing director and chief executive. The court analyzed the nature of the trip, emphasizing that it was for initiating a new business venture rather than expanding the existing business activities of the company. This distinction led to the conclusion that the expenditure was capital in nature and not allowable as business expenditure for the assessment year in question. The court highlighted the resolution authorizing the trip, which clearly indicated the purpose of negotiating a new business deal, further supporting the capital expenditure classification.Another critical aspect examined by the court was the applicability of clauses IA and ID of the memorandum of association in determining the business connection of the expenditure. While the Tribunal relied on these clauses to establish a link between the expenditure and the company's business, the court pointed out that these clauses were not in existence during the assessment year under consideration. This discrepancy led the court to conclude that the Tribunal's reliance on these clauses was misplaced, as they were not applicable to the relevant period, thereby undermining the justification for considering the expenditure as intimately connected with the business of the company.In conclusion, the court's detailed analysis focused on the nature of the expenditure, the timing of relevant clauses in the memorandum of association, and the specific purpose of the Mauritius trip as outlined in the company resolution. By dissecting these elements, the court determined that the expenditure was capital in nature and not allowable as business expenditure for the assessment year 1979-80, ultimately ruling against the assessee and in favor of the Revenue.