Whether expression 'wholly and exclusively' appearing in Sec 37 does not mean necessarily - YES: HC

GUWAHATI, AUG 05, 2013: THE issues before the Bench are - Whether when an expenditure is claimed to have been incurred by an assessee for promotion of his business, there is a legal obligation to prove that the expenditure was necessary for promotion of his business; Whether for the allowability of an expenditure u/s 37, it is relevant as to whether the benefit, expected to be accrued out of an expenditure incurred, is to accrue immediately or after a lapse of time, whether directly or indirectly; Whether the expression "wholly and exclusively", appearing in Section 37, does not mean necessarily; Whether expenditure incurred on foreign visits by directors and garden managers for promoting the sales of tea can be questioned, merely because the assessee has appointed a selling agent abroad and Whether expenditure incurred in connection with the travels of the wives of the tea estate managers can be allowed, when it is customary in the European countries for the wives to accompany their husbands. And the verdict goes against the Revenue.
Facts of the case

The assessee, M/s Williamson Tea (Assam) Limited, is a company registered under the Companies Act, 1956, and engaged in the business of growing, manufacturing and selling of tea. The assessee had claimed several deductions as business expenditure which were disallowed by the AO. This disallowance became the issue of dispute in this matter.

Foreign Travel Expenses

The directors and executives of the assessee had undertaken foreign travels for promoting the sales of the business. The AO observed that the assessee had appointed its selling agent, in London, for sale of tea in overseas market and used to pay commission, brokerage, etc, to its selling agent. Further, the three non-resident Directors of the assessee company were permanently residing in U. K. looking after the assessee company's overseas business. Therefore, as per the AO, these foreign tours were unnecessary and liable to disallowed as non trading expenditure. The AO also disallowed the expenditure incurred on the spouse travelling along with the employees of the company. The CIT(A) upheld this order and directed the AO to initiate penalty proceedings. On further appeal, the Tribunal reversed the finding of the CIT(A) and allowed the substantial part of this expenditure to be claimed as deduction. The Tribunal gave its reasoning that when for promoting export senior executives of the company undertook foreign travel then the expenditure could not be considered for non-business purposes. Further, it noted that the visits to UK and Kenya were undertaken by garden managers who were actively associated with growing and manufacture of tea and were competent to study the methods of competitors and effectively interact with foreign customers for export promotion. The Tribunal also terminated the penalty proceedings.

Erection of fencing

The assessee company had also claimed a sum of Rs. 46,54,687 as 100% depreciation on the expenditure incurred in connection with erection of fencing at their tea garden. The AO observed that the purpose of fencing was to protect tea bushes from being transgressed upon by cattle or stray animals and that the assessee company had acquired assets (tea bushes) with lasting value and, therefore, the respondent company was not entitled to 100% depreciation but to normal depreciation. The CIT(A) allowed the claim on this account. On appeal, the Tribunal allowed the claim of deduction.

Publicity expenditure

The assessee had claimed deduction on an amount of Rs 11,65,000 in connection with centenary celebrations of the clubs whose membership was held by the directors and the employees of the assessee. The assessee had claimed this expenditure on the head of publicity of the company and for promoting the interest of the company. The AO disallowed Rs 9,00,000 out of the total expenditure on the ground that the assessee company could not show any business connection with the business organizations to whom the concerned amount was shown to have been paid. The CIT(A) confirmed the disallowance to the extent of Rs 900,000 and allowed Rs 2,65,000 as publicity expenditure. On appeal, the Tribunal allowed the entire amount of Rs 11,65,000 as publicity expenditure.

Aggrieved on these grounds, the Revenue has filed this appeal before the High Court.

Contentions of the Revenue

The DR submitted that each and every expense, incurred in course of business, is not allowable u/s 37 and, in order to enjoy the benefit of exemption under the Act, the expenditure must be proved, by adducing substantial evidence, that it was laid out wholly and exclusively for business. In the instant case, the DR contended that the assessee had not produced evidence in support of its claim that the expenditure, claimed on account of foreign trips, was wholly and exclusively for business purpose, though it was incumbent, on the part of the respondent company, to give details as to what the representatives of the company did in the foreign countries for the business of the respondent company. Regarding the other claims of deduction, the DR supported the reasoning of the AO for disallowing the same.

Contentions of the Assessee

The AR contended that it is for an assessee, to decide, in the interest of promoting its business, whether any expenditure is to be incurred, in the course of business, and whether such expenses are to be incurred voluntarily. The counsel for the assessee submitted that the assessee can incur certain expenditure and claim deductions of the same u/s 37 even though there was no necessity to incur such expenditure. He further clarified that it is not necessary that the primary motive to incur the expenditure has to be directly earn income thereby. He strongly argued that while applying the test of commercial expediency for determining as to whether an expenditure is wholly and exclusively laid out for the purpose of business, the reasonableness of the expenditure has to be judged from the point of view of businessman and not of the Income Tax Department

Having heard the parties, the High Court held that,

True test of business expenditure

+ the true test for an expenditure, laid out wholly and exclusively for the purpose of business, is that it is incurred by the assessee as incidental to its trade for the purpose of keeping its trade going on and that the expenditure must be incurred by the assessee as a trader and not in any other capacity. The word “wholly†refers to the quantum of expenditure and the word “exclusively†refers to the motive, objective and purpose of the expenditure. The expression “wholly and exclusively†, appearing in Section 37, does not mean necessarily. It is important to note, in this regard, that the word, “necessarily†, found place in the Income Tax Bill, 1961, but it was dropped at the Legislative anvil. It may be noted here that Viscount Cave L. C., in Atherton vs. British Insulated & Helsby Cables Ltd., observed â€œâ€¦ a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purpose of trade†. The same test was applied in Cooke vs. Quick Shoe Repair Service,.;

+ What necessarily follows from the above discussion is that when an expenditure is claimed to have been incurred by an assessee for promotion of his business, there is no legal obligation imposed on the assessee to prove that the expenditure was necessary for promotion of his business. So long as the expenditure is incurred by an assessee for promotion of sale of product, the assessee is entitled, under Section 37(1) of the Act, to claim exemption from tax on such amount of expenditure. For the allowability of an expenditure under Section 37 of the Act, it is not relevant as to whether the benefit, expected to be accrued out of an expenditure incurred, is to accrue immediately or after a lapse of time, whether directly or indirectly;

Foreign Travel Expenses

+ the Foreign Directors of the respondent company visited India in order to attend Board meetings and monitoring business operations. Besides representatives and consultants of the respondent company, representatives of holding company from U.K. also visited India for coordinating exports and monitoring functioning of the tea gardens. The garden managers visited U. K. and Kenya for business purposes. Visits to U. K. were necessary as the respondent company exported its tea to London for sale in the European market. The garden managers visited UK also to meet foreign customers and selling agents to promote the respondent company's exports. Visits to Kenya by the Directors/ Executives/Managers were necessary, because the said country is the largest exporter of tea in the world. The respondent company had sent its senior garden Manager for conducting study on Kenyan tea manufacturers so that the respondent company survives in the international competition in tea export. Under such circumstances, the finding of the Income Tax Appellate Tribunal that the expenditure, on the visits by the garden managers, was wholly and exclusively for business purposes cannot be said to be suffering from any illegality and infirmity;

+ as regards the question on the expenditure incurred in connection with the travels of the wives of the tea estate managers, we find force in the submission of Ms. Hawelia, Counsel for the respondent company, that since it is customary in the European countries for the wives to accompany their husbands, the travelling of the wives along with their husbands cannot be said to be personal visits of the wives, but such a visit has to be regarded as having been undertaken for the purpose of business of the respondent company. The Tribunal, as a fact finding authority, having come to the finding that the expenditure, on the visits by the representative of the company abroad and expenditure as well as the visits to India by the London based officials of the respondent company, in view of the respondent company's substantial exposure to overseas trade and large holdings of the respondent company with foreign promoters, were business expenditures, is a finding of fact and the same cannot be interfered with in an appeal under Section 260A of the Act;

Publicity expenditure

+ the expenditure, incurred in connection with sponsoring of the Centenary celebrations of Cotton College, at Guwahati, by Anand Bazar Patrika Ltd. and the sponsoring the State Level National Children Congress in Assam, were also allowable, because the respondent company's banners, as sponsors of the events, were displayed at the said functions. Therefore, the said expenditures were held by the Tribunal to be wholly and exclusively incurred in connection with business. While allowing the respondent company's claim, the learned Tribunal relied on a decision of the Calcutta High Court, in Assam Brooke Ltd. wherein a sum of Rs. 5,00,000/- was paid by the assessee to a club;

+ in view of the above propositions of law, we are of the considered view that it is for the assessee (respondent company in the present case) to decide where and in what manner publicity of its business is to be done and what benefit it will derive for its business by making such publicity. Consequently, we do not find any infirmity in the order of the Income Tax Appellate Tribunal, while deleting the disallowance on account of publicity expenses.