TaxTMI 
TaxTMI 
2026 (5) TMI 612
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....elected for scrutiny assessment on the issue of "Business expenses". The Ld. AO issued notices u/s 143(2)/142(1) and called for various details, to which the assessee responded. On examination of the details furnished by assessee, the Ld. AO noted that under the head "Employee Benefit Expenses" of Rs. 57,38,357/-, a sum of Rs. 15,57,557/- had been claimed as "Medical Expenses Reimbursement". On further scrutiny, the AO found that a reimbursement of Rs. 15,24,457/- made to "Shri Ravi Mohan" is included therein. The assessee explained that the said payment of Rs. 15,24,457/- represented a partial reimbursement of the medical expenditure incurred by "Shri Ravi Mohan", a full-time employee and promotor-director (holding 52.30% shares) of assessee-company, towards his critical heart surgery at Bombay Hospital, Mumbai, a hospital recognised by the Central Govt. for the purposes of Rule 3A(2)(d) of Income Tax Rules. The total expenditure on the surgery was Rs. 48,38,200/-, of which the assessee-company reimbursed Rs. 15,24,457/-, the mediclaim policy settled Rs. 4,72,700/-, and the balance of Rs. 28,41,043/- was borne personally by "Shri Ravi Mohan". The assessee submitted that the said p....
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....umbai, an approved hospital under Rule 3A(2)(d) of the Income Tax Rules, covering critical heart surgery as a prescribed ailment. (v) That, after successful heart surgery, the Board of Directors passed a resolution in their meeting dated 16.12.2019, copy of resolution is filed at Page No. 2 of Paper-Book and our attention is drawn to same. According to resolution, the management approved to make payment of Rs. 15,00,000/- towards expenditure on medical treatment. (vi) That, the reimbursement made by assessee-company was debited to P&L A/c under the head "Employee Benefit Expenses" alongwith other components of employee payments, like Salary, HRA, LTA, Ex-gratia, etc. aggregating to Rs. 57,38,357/-. Ld. AR submitted that the said reimbursement is very much allowable as a business expenditure u/s 37(1) in the same manner as other components like Salary, HRA, LTA, Ex-gratia, etc. paid or reimbursed to employees, which stand allowed by Ld. AO. (vii) That, the section 37(1) allows any expenditure incurred by an assessee wholly and exclusively for the purpose of business. That "Shri Ravi Mohan" was a key person of assessee-company managing the line of business ....
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....s and circumstances of the case, in Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758, the Bombay High Court held as under: ". . . In view of the facts and conclusions arrived at by the Tribunal regarding the basis on which the resolution was passed by the company, the entire amount of medical expenses occasioned by M's illness which were borne by the assessee-company pursuant to the resolution, should be allowed as a deduction on the footing that the decision to reimburse was taken on the principle of commercial expediency and that no part of such expenses was held to be not proved or arbitrarily, excessive or unreasonable." (p. 760) 11. The importance of services being rendered by the Financial Director, Shri R.R. Agrawal can be appreciated in the backdrop of the position that other directors, namely, Shri K.S. Trivedi, Shri V.P. Gupta and Shri Airen and the wives of Shri Trivedi and Shri Gupta toured USA to look after the proper medical treatment of Shri R.R. Agrawal. It is different matter that the assessee before the Tribunal did not press any claim regarding allowance of foreign tour expenses with regard to the aforesaid directors and their wives a....
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.... referred to us for our opinion, in the affirmative, i.e., in favour of the non-applicant/assessee and against the department." (ii) Hon'ble Bombay High Court in Mehboob Productions Private Limited Vs. Commissioner of Income-tax (1977) 106 ITR 758 (BOM): "10. I propose to deal first with the second question referred to us, which question pertains to the disallowance of 1/3rd of the expenses for the medical treatment of Mehboob Khan in the U.S.A. This is because question is not capable of any elaborate discussion as seems to be required for answering the first question. The findings of the Tribunal pertaining to this claim have already been indicated earlier. According to the Tribunal Mehboob Khan's visit to the U.S.A. was for the purpose of the company's business, and it was noted that his air-fare to that country had been allowed as expenditure incurred by the assessee on that footing. Further, it was observed that whilst there was no agreement regarding such medical expenses, absence of such agreement was not conclusion of the matter inasmuch as it was a special contingency which would not normally arise and, therefore, would not be required to be provid....
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....to the effect that such decision of the board of directors of the company was based on the principle of commercial expediency is in any way improper or perverse. Now, if the decision by the assessee to bear these medical expenses of its director is held justifiable and sustainable on the principle of commercial expediency, I do not see any basis for disallowing 1/3rd of these expenses on the footing that the Tribunal has adopted. Either the entire medical expenses have to be properly reimbursed on the principle of commercial expediency or no part of such reimbursed expenses is allowable to the assessee-company. 11. In the question as posed, the Tribunal has referred to section 10(4A) of the Act which was the basis on which the Income-tax Officer and the Appellate Assistant Commissioner had rejected the assessee's claim that these expenses be allowed as a deduction. Under the relevant statutory provisions, nothing in sub-section (2) of section 10 of the Act shall be deemed to authorise the making of any allowance in respect of any expenditure which result directly or indirectly in the provision of any remuneration or benefit or amenity to a director or a person who has ....
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.... juristic person, cannot incur "personal expenses"; therefore, disallowance on that ground was misconceived. Reliance was placed on several judicial precedents before CIT(A). 6.3.3 The learned CIT(A), however, concurred with the AO's findings, holding that personal medical expenses of directors do not fall within the ambit of section 37(1) unless covered under a contractual or statutory obligation. 6.3.4 The learned AR reiterated the submissions before the CIT(A) and also placed reliance on decision of Co-ordinate Bench in case of Dy. CIT v. Paradeep Oxygen (P.) Ltd. [2001] 71 TTJ 662 (Cuttack), wherein the Co-ordinate Bench held that reimbursement of medical expenses to the managing director, duly authorized by a bona fide Board Resolution, is allowable u/s 37(1) as expenditure wholly and exclusively for business purposes. 6.3.5 We have carefully considered the rival submissions, perused the orders of the authorities below, and examined the material placed on record including the Board Resolution dated 12.04.2011 (Pg. 175 of PB-2). On consideration, we note that the assessee has indeed placed on record the copy of the Board Resolution dated 12.04.201....
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....ged indispensability, the commission income of the company had in fact decreased by approximately Rs. 9 lakh during the year under consideration as compared to the preceding year, negating any direct nexus between the reimbursement and enhancement of business income. (vi) A strong reliance is placed on the findings recorded by Ld. AO and Ld. CIT(A). 8. With above submissions, Ld. DR prayed to uphold the disallowance made/upheld by lower-authorities. 9. In re-joinder, Ld. AR made following submissions: (i) Shri Ravi Mohan promoted this company and that is why he is holder of 52.30% shares since beginning but his shareholding is not a relevant point at all. "Shri Ravi Mohan" is an employee/advisor of assessee-company; giving his full time and working to the assessee company and receiving salary of Rs. 1,50,000/- per month from assessee-company. There is no other source of income for him. (ii) The expenditure incurred for welfare or benefit of an employee is certainly for the purpose of business of employer; it cannot be construed as "personal" expenditure for employer. This is more so in present case where the assessee is a company. The expression "pe....
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....concerned, we find that this objection stands conclusively answered by settled judicial precedents. Firstly, any expenditure made by an employer for the welfare or benefit of its employee including medical reimbursement, is a business expenditure and cannot be characterised as "personal" expenditure to the employer. Secondly, a company is an artificial person and, by its very nature, cannot incur "personal expenses" within the meaning of section 37(1). The expression "personal expenses of the assessee" in section 37(1) must be read qua the assessee's own persona and the assessee herein is a corporate entity incapable of having personal exigencies. This proposition is well accepted in numerous cases. (iv) The Ld. DR has pointed out a decrease of approximately Rs. 9 lakh in commission income during AY 2020-21 to negate nexus between reimbursement and business. We are unable to accept this contention. A key employee's incapacitation on account of critical heart surgery would naturally and foreseeably affect business revenues in current year. In fact, as demonstrated by Ld. AR, the revenue and profit during pre-surgery and post-surgery were higher and it is only during....