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
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 “… 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,.;
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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.
