2016 (9) TMI 953 - HC - Income Tax

Court Decision on Business Expenses and Deductions: Key Points and Rulings

The court allowed the business expenditure on articles presented to dealers, interest from others, and IDBI was included as business profit for deduction. ... Expenses on foreign travel of Directors wives - Held that:- The issue cannot be decided on the basis of the result of the assessment proceedings relating to the same question in another assessment year. Whether a Director’s spouse has traveled with him for business purpose or not, is essentially a question of fact not only in respect of each year but in respect of each tour. One visit may be for business purpose and another visit may not be for any business purpose whatsoever. The decision of the Tribunal, therefore, is incorrect for the nature and purpose of the visits that the Tribunal considered in respect of the assessment year 1990-91, would be different from the visits that the Tribunal had to consider in respect of the present assessment year. We hasten to add that there may be cases where the tour in a given year may be of the same nature in another year or other years. That would also depend upon the facts of each case. The burden of proving the same is, however, on the assessee. The respondent has not established such a case. Question is, therefore, answered in favour of the appellant/Department. The decision of the Assessing Officer to delete the disallowance is upheld. Proportionate management expenses allocated against dividend income for purpose of computation of deduction u/s 80M - Held that:- The deductions under section 80M must be computed in accordance with the provisions of section 80M. If the Appellate Authorities find that the expenses liable to be deducted have been considered under the wrong head, they must direct the Assessing Officer to rectify that error for all purposes. We have by our judgment passed in Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycles Ltd. Ludhiana [2016 (9) TMI 901 - PUNJAB AND HARYANA HIGH COURT ], held that where income is considered under the wrong head in the computation of income, the Assessing Officer must be directed to pass a fresh assessment order after considering it under the correct head for all purposes including for the purpose of computation of income for deductions under section 80HHC. It would follow then that the same rule ought to apply also to expenses which are entitled to be deducted. They must be deducted qua/in respect of the correct head of income. In the present case the expenditure incurred to yield dividend under section 80M must be deducted under section 57(i)(iii) of the Act. Issues Involved:1. Allowability of business expenditure on articles presented to dealers.2. Deletion of expenses on foreign travel of Directors' wives.3. Inclusion of interest from others and IDBI as business profit for deduction under section 80HHC.4. Deletion of addition on account of advances of interest-free loans to associated concerns.5. Deletion of proportionate management expenses allocated against dividend income for deduction under section 80M.6. Deletion of addition made on account of closing stock, spares, tools, etc.Issue-wise Detailed Analysis:Re: Question No. (i)Allowability of Business Expenditure on Articles Presented to Dealers:The court agreed that the question is liable to be answered in favor of the assessee based on previous judgments of the court in similar cases, including Commissioner of Income Tax v. Avery Cycle Industries Ltd., Avon Cycles Pvt. Ltd. v. Commissioner of Income Tax, and Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycles Ltd. Ludhiana. Therefore, the amount of Rs. 1,18,408/- spent on articles presented to dealers is an allowable business expenditure.Re: Question No. (iii)Inclusion of Interest from Others and IDBI as Business Profit for Deduction under Section 80HHC:The court followed its decision in the assessee's case in ITA No. 52 of 2003, Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycle Ltd. Ludhiana, and answered the question in favor of the department. The Assessing Officer is directed to pass a fresh assessment order considering the interest under the head 'Income from other sources' for all purposes.Re: Question No. (iv)Deletion of Addition on Account of Advances of Interest-Free Loans to Associated Concerns:The court followed the decision dated 30.01.2015 in ITA No. 119 of 2004, Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycles Ltd. Ludhiana. The order of the Tribunal setting aside the disallowance is set aside, and that of the CIT(A) is restored. The Assessing Officer is directed to consider the disallowance in terms of the order of the CIT (A) after examining the nexus between the borrowed funds and the diversion thereof in the form of interest-free loans.Re: Question No. (vi)Deletion of Addition Made on Account of Closing Stock, Spares, Tools, etc.:The court agreed that this question should be answered in favor of the appellant and against the assessee based on the judgment of the Division Bench dated 30.01.2015 in ITA No. 68 of 2001, Commissioner of Income Tax (Central) v. M/s Highways Cycle Indus. Ltd. Ludhiana. However, it is clarified that the assessee shall be entitled to any adjustment or benefit on account thereof.Re: Question No. (ii)Deletion of Expenses on Foreign Travel of Directors' Wives:The court observed that traveling expenses of a Director’s spouse may constitute business expenses if business expediency for the same is established. However, the assessee had not produced any evidence to establish this. The Tribunal's decision to delete the disallowance based on similar issues in another assessment year was deemed incorrect. The court emphasized that each tour's nature and purpose must be examined individually. Therefore, the question is answered in favor of the appellant/Department, and the decision of the Assessing Officer to delete the disallowance is upheld.Re: Question No. (v)Deletion of Proportionate Management Expenses Allocated Against Dividend Income for Deduction under Section 80M:The court referred to Sections 80(M)(1)(ii) and 80AA of the Act and the Supreme Court's judgment in Distributors (Baroda) P. Ltd. vs. Union of India and others. It concluded that the net dividend is to be determined for the purpose of Section 80M. The Assessing Officer’s decision to deduct proportionate management expenses was upheld based on the judgment in Commissioner of Income-Tax vs. Mahavir Spinning Mills Ltd. The court emphasized that the Assessing Officer must estimate the expenditure if the assessee does not provide a bifurcation of the expenses. The manner in which the expenditure was computed by the Assessing Officer was found to be correct. The question is answered in favor of the department and against the assessee.Conclusion:The appeal is disposed of with the questions answered as follows:- Questions (i) and (vi) in favor of the assessee.- Questions (ii), (iii), (iv), and (v) in favor of the department.