TaxTMI 
TaxTMI 
2003 (1) TMI 66
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....nch, at the instance of the assessee, has referred the following question of law for the decision of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred on the foreign tour of the wife of a director of the company is not an allowable deduction under the Income-tax Act, 1961 ?" The brief facts are as follows : The assessee is a public limited company, mainly engaged in the business of growing tea. In the assessment for the year 1990-91, the assessee, inter alia, claimed deduction of an amount of Rs. 5,80,570 being expenditure incurred on the foreign travel of a director and his wife. The assessing authority took the view that the expenditure incurred in relation to the wife of the director cannot be considered to be wholly and exclusively for the purpose of business. He accordingly disallowed a sum of Rs. 2,90,285 being one half of the said expenditure. The first appellate authority, in appeal by the assessee, had allowed the said claim relying on the decision of the Commissioner of Income-tax (Appeals) and the Tribunal in the case of the assessee itself for an earlier year. However, the Inco....
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....r nor the two appellate authorities had considered the factual situation and that all of them went by the decision in the case of the assessee for the earlier assessment year. Counsel also relied on the decisions of this court in Aspinwall and Co. Ltd.'s case [1999] 235 ITR 106 and Appollo Tyres Ltd.'s case [1999] 237 ITR 706 which according to counsel support the assessee's case. He also submitted that the very question in the case of the assessee for the year 1985-86 is now pending consideration by the Tribunal pursuant to the judgment of this court in I. T. R. No. 197 of 1996 (CIT v. Ram Bahadur Thakur Ltd. [2003] 261 ITR 388) and, therefore, this case must also be remitted to the Tribunal for entering a specific finding on the facts regarding the allowability of the claim. Sri George K. George, learned standing counsel for the Revenue, submitted that the question regarding the deduction of the expenditure incurred on the foreign tour of the wife of the director of the assessee-company under the Act was considered by this court in I. T. R. No. 9 of 1998 (Ram Bahadur Thakur Ltd. v. CIT [2002] 257 ITR 289). By judgment dated June 5, 2002, the court had upheld the disallowance o....
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....or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." In order that a particular item of expenditure may be deductible under this sub-section the following conditions should concur : (1) the expenditure should not be of the nature described in sections 30 to 36 ; (2) it should have been incurred in the accounting year; (3) 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; (4) it should not be in the nature of personal expenses of the assessee ; (5) it should have been laid out or expended wholly and exclusively for the purpose of such business; and (6) it should not be in the nature of capital expenditure. The dispute in this case is only regarding the fulfilment of condition No. 5 mentioned above, i.e., the expenditure should have been laid out or expended wholly and exclusively for the purpose of the business of the assessee. In other words, the sole question that arises for consideration is as to whether....
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....nt of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company, the Supreme Court in Sassoon J. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 observed, at page 275 of the report, as follows : "It has to be observed here that the expression 'wholly and exclusively' used in section 10(2)(xv) of the Act does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition fo....
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....gard to commercial considerations or expediency and therefore the High Court erred on the facts and in the circumstances of the case in holding that the sum of Rs. 1,27,511 was not deductible under section 10(2)(xv) of the Act. The Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 observed that apart from the conditions specified in section 37(1) of the Act there are other principles which are also fundamental. It was observed thus : "The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not tak....
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....revenue authorities and the latter must examine these and make up its mind as to whether the expenditure was justified by commercial expediency. The question regarding the allowability of the expenditure incurred on the foreign tour of the wife of a partner of a firm or the wife of a director of a company or the wife of an executive of the company came up for consideration before the Gujarat, Madras and Madhya Pradesh High Courts in Bombay Mineral Supply Co. (P) Ltd. v. CIT [1985] 153 ITR 437 (Guj) (Appex.) followed by CIT v. Shahibag Entrepreneurs (P.) Ltd. [1995] 215 ITR 810 (Guj) ; CIT v. T. S. Hajee Moosa and Co. [1985] 153 ITR 422 (Mad) and CIT v. Steel Ingots (P.) Ltd. [1996] 220 ITR 552 (MP). The said question had also come up for consideration before this court in CIT v. Aspinwall and Co. Ltd. [1999] 235 ITR 106; CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 and in Ram Bahadur Thakur Ltd. v. CIT [2002] 257 ITR 289. In Bombay Mineral Supply Co. (P.) Ltd.'s case [1985] 153 ITR 437 (Guj) (Appex.), the Gujarat High Court considered the question regarding the allowability of the foreign tour expenses of the wife of the managing director of the assessee-company. In that case th....
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....dingly held that the need of the managing director of the assessee-company to have the services of his wife who was not a qualified or a trained nurse either to attend on him for his indifferent heal or to prepare food for him since he happened to be a strict vegetarian would not entitle the assessee-company to claim the proportionate expenses as business expenses. In CIT v. T. S. Hajee Moosa and Co. [1985] 153 ITR 422, the Madras High Court considered a claim made by an assessee-firm for deduction of the expenditure incurred by it on the wife of the senior partner accompanying him on a foreign tour for the purpose of attending on him as he was a diabetic patient. The claim made by the assessee was negatived by the Assessing Officer but upheld by the two appellate authorities. The Appellate Assistant Commissioner allowed the claim of the assessee relying upon the correspondence between the assessee and the Reserve Bank of India relating to the release of foreign exchange as well as the medical certificates and recognising what was styled as a modern trend in commercial and business organisations requiring the wives of the top executives to accompany their husbands on foreign tou....
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....he Act. The Madras High Court interpreting the expressions "wholly" and "exclusively" and relying on the decisions of the English courts held that the object of the partner in taking his wife with him on the foreign tour, on the facts of this case, was not exclusively for the purpose of the promotion of the business, but also with the object of securing the company of the wife in order that she may be in a position to attend on him during the course of his tour and even if the business motive was predominant, yet the expenditure does not qualify for the allowance. Again the Gujarat High Court in Shahibag Entrepreneurs (P.) Ltd.'s case [1995] 215 ITR 810, following its earlier decision in Bombay Mineral Supply Co. (P.) Ltd. v. CIT [1985] 153 ITR 437 and the decision of the Madras High Court in CIT v. T. S. Hajee Moosa and Co. [1985] 153 ITR 422 held that the expenditure on the foreign tour of the wife of the director of the assessee-company, in the absence of evidence that the expenditure was incurred for the purposes of the business of the assessee, cannot be allowed as a deduction under section 37 of the Act. In Steel Ingots (P.) Ltd.'s case [1996] 220 ITR 552, the Madhya Pradesh ....
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....ound as a fact that the travel was undertaken by the wife of the senior executive only for the purpose of the business. The court also observed that it is a case where the assessee had incurred expenses for the travel of the employee and the wife of the employee and not the wife of its own partner or director. On the basis of the factual finding of the Tribunal this court did not find any merit in the contention of the Revenue based on the decisions of the Madras and Gujarat High Courts. Again this court in Appollo Tyres Ltd.'s case [1999] 237 ITR 706 considered the correctness of the finding of the Tribunal that the expenditure incurred for the wife of the chairman-cum-managing director of the company for foreign travel is an allowable deduction. The Division Bench noted that neither the Assessing Officer nor the appellate authority has got a case that the foreign tour made by the chairman-cum-managing director is not for any business purposes or that the accompaniment of the wife of the chairman is not for the purpose of fulfilling the social aspects considered by the Special Bench of the Tribunal in Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom). The court....
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....tion referred, against the assessee and in favour of the Department." We have already noted that another Division Bench considered the same question in the case of the assessee itself in respect of the assessment year 1985-86 in the judgment dated September 26, 2002 in I. T. R. No. 197 of 1996 (CIT v. Ram Bahadur Thakur Ltd. [2003] 261 ITR 388). The Division Bench observed that the Tribunal has not given reasons with regard to the travelling expenses of the wives of the directors ; mere statement that the travelling expenses incurred by the wives of the directors were considered to be admissible expenses does not mean that this is personal expenditure ; the assessee has to prove that it is not to be treated as personal expenditure. The Division Bench in the above circumstances took the view that the matter has to be considered by the Tribunal again and had accordingly set aside the order of the Tribunal and remitted the matter to the Tribunal. All these decisions, it must be noted, turned on the facts and circumstances peculiar to those cases and on evidence placed by the parties. The broad principles that can be deduced from the aforesaid discussion on the scope of section 3....
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.... based on facts which are exclusively within the knowledge of the assessee. Thus, it is for the assessee to plead and prove before the authorities that the expenses are incurred wholly and exclusively for the purpose of the business of the assessee. (9) When a claim for deduction of an expenditure under section 37(1) of the Act is made by an assessee the Assessing Officer is bound to conduct an enquiry as to whether the assessee satisfies all the requirements of the section before either allowing or rejecting the claim. The officer cannot mechanically either allow the deduction or deny the same. We make it clear that these are not exhaustive and the application of these principles may vary from case to case and will depend on the facts and circumstances of each case. Let us now examine as to whether the assessing authority and the appellate authorities including the Tribunal had considered the question in the light of the above legal principles. We have already noted in para. 4 of this judgment that the Assessing Officer had allowed the foreign travel expenses of the director of the assessee-company and also rejected the foreign travel expenses of the wife of the director both i....