ITO 3(2)(4), MUMBAI V. PRINCIPAL CONSULTING (INDIA) P. LTD, MUMBAI

ITA 1525/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8775 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 06-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 05-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Keywords: Business expenditure; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 1525/MUM/2009 (ASSESSMENT YEAR: 2004-05) INCOME TAX OFFICER - 3(2)(4) M/S. PRINCIPAL CONSUL TING (I) P. LTD. ROOM NO. 673, 6TH FLOOR APEEJAY HOUSE, 5TH FLOOR AAYAKAR BHAVAN, M.K. ROAD VS. 3, DINESHAW VACCHA ROAD, MUMBAI 400020 CHURCHGATE, MUMBAI 400020 PAN - AABCP 1093 L APPELLANT RESPONDENT APPELLANT BY: SHRI S.K. SINGH RESPONDENT BY: SHRI DHANESH BAFNA O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) III, MUMBAI DATED 24.12.2008. 2. REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITIONS MADE OUT OF ADVERTISEMENT AND PUBLICITY EXPENDITURE WITHOUT APP RECIATING THE FACT THAT THE EXPENDITURE WAS CONNECTED WITH EX PANSION OF BUSINESS AND CONSEQUENTLY, IT WAS NOT DIRECTLY ALLO WABLE U/S. 37(1), SINCE IT WAS INCURRED WITH A VIEW TO BRINGIN G ANY ADVANTAGE OF ENDURING BENEFIT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITIONS MADE OUT OF FOREIGN TRAVEL EXPENDITURE, WITHOUT APPRECIATING THE FACT T HAT THE ASSESSEE DID NOT SUBSTANTIATE THE BUSINESS TRANSACT ED IN ITS MEETING HELD WITH PARENT COMPANY AND ALSO EXPENSES ON TRAVEL OF SPOUSES OF DIRECTOR CANNOT BE ALLOWED SINCE SPOU SES DO NOT CONTRIBUTE TO BUSINESS OF THE COMPANY. 3. GROUND NO. 1 IS WITH REFERENCE TO DELETION OF ADDIT ION MADE OUT OF ADVERTISEMENT EXPENDITURE OF ` 5,18,875/-. THE A.O. WAS OF THE VIEW THAT THE EXPENDITURE WAS NOT INCURRED FOR THE PURPOSE OF FAC ILITATING THE EXISTING BUSINESS OF ASSESSEE OR FOR IMPROVING EFFICIENCY OR PROFITABILITY OF EXISTING ITA NO. 1525/MUM/2009 M/S. PRINCIPAL CONSULTING (I) P. LTD. 2 BUSINESS BUT IN CONNECTION WITH EXPANSION OF BUSINE SS AND ACCORDINGLY THE SAME WAS NOT ALLOWABLE UNDER SECTION 37(1) AS IT HA S AN ENDURING ADVANTAGE. AFTER CONSIDERING THE ARGUMENTS OF THE A SSESSEE AND THE FACTS THE CIT(A) HAS DELETED THE SAME BY HOLDING AS UNDER: - I HAVE PERUSED THE FACTS OF THE CASE AND THE ARGUM ENTS OF THE ASSESSING OFFICER. I DO NOT FIND MERIT IN THE ARGUM ENTS THAT ADVERTISEMENTS ARE CAPITAL EXPENDITURE. ADVERTISEME NTS ARE GIVEN PRIMARILY TO ENHANCE THE EXISTING BASE OF THE COMPA NY IN ITS LINE OF BUSINESS WHICH IN TURN IS TO AUGMENT SALES AND CORR ESPONDINGLY PROFITABILITY OF THE COMPANY. INHERENTLY, IT IS OF REVENUE NATURE. THEREFORE, DISALLOWANCE ON THE LINES MADE BY ASSESS ING OFFICER IS NOT JUSTIFIED, THE SAME IS DELETED AND THE GROUND OF AP PEAL IS ALLOWED. 4. AFTER HEARING THE LEARNED D.R. AND LEARNED COUNSEL, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). A S SEEN FROM THE DETAILS OF EXPENDITURE WHICH ARE IN FACT DISCUSSED BY THE A.O. IN THE ORDER ITSELF, THE EXPENDITURE IS MOSTLY WITH REFERENCE TO SPONSORSHIP OF ITEF PENSION SECTOR SUMMIT AND GROUND EVENT SPONSORSHIP WHICH CREATES A WARENESS ABOUT THE ASSESSEES EXISTING BUSINESS OF MANAGEMENT CONSULTA NCY INCLUDING INVESTMENT SERVICES. AFTER CONSIDERING THE NATURE O F THE EXPENDITURE WE ARE OF THE OPINION THAT THERE IS NO NEED TO DISALLOW TH E SAME AS CAPITAL EXPENDITURE. ACCORDINGLY THE GROUND IS REJECTED. 5. GROUND NO. 2 PERTAINS TO THE ISSUE OF FOREIGN TRAVE LLING EXPENDITURE OF ` 6,48,980/- DISALLOWED BY THE A.O. IN MAKING THE DIS ALLOWANCE THE A.O. ARGUED THAT ALTHOUGH EVIDENCE IN THE FORM OF VOUCHE RS OF PAYMENTS ISSUED BY THE TRAVEL AGENT HAVE BEEN FURNISHED THE ASSESSE E DID NOT SUBSTANTIATE THE BUSINESS TRANSACTED IN THE MEETING HELD WITH TH E FOREIGN COMPANY. A.O. ALSO ARGUED THAT THE EXPENSES ON TRAVEL OF SPOUSE O F THE DIRECTOR CANNOT BE ALLOWED SINCE THE SPOUSE DID NOT CONTRIBUTE TO THE BUSINESS OF THE COMPANY. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE T HE CIT(A) DELETED THE ADDITION BY STATING AS UNDER: - I HAVE PERUSED THE FACTS OF THE CASE AND I FIND TH AT ASSESSING OFFICER HAS IN FACT ADMITTED THAT THE EXPENSES ARE ACTUALLY INCURRED. HE HAS NOT CHALLENGED THE FACT OF MEETING WITH THE PRINCIPAL OF THE PARENT COMPANY. HE HAS ALSO CATEGORICALLY OBSERVED THAT THE THIRD PARTY EVIDENCE IN THE FORM OF TICKETS, VOUCHERS, BI LLS, ETC. HAVE BEEN FURNISHED. THEREFORE I DO NOT SEE ANY RATIONALE UND ER WHICH SUCH ITA NO. 1525/MUM/2009 M/S. PRINCIPAL CONSULTING (I) P. LTD. 3 EXPENSES CAN BE DISALLOWED PARTICULARLY WHEN TRAVEL HAS BEEN UNDERTAKEN IN CONNECTION WITH THE MEETING WITH THE PRINCIPALS OF THE COMPANY IN USA. AS FAR AS TRAVELLING OF SPOUSES OF THE DIRECTOR IS CONCERNED IT IS A FACT THAT IN THE BUSINESS SCENARI O OF TODAY THE PRESENCE OF SPOUSE IS FREQUENTLY NECESSITATED BY TH E NORMS OF BUSINESS AND IS THEREFORE COMMERCIALLY EXPEDIENT FO R THE SPOUSES TO TRAVEL. IN SUCH A SITUATION, DISALLOWANCE IS NOT JU STIFIED. THE ADDITION MADE IS CONSEQUENTLY DELETED. 6. THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE DID NO T JUSTIFY THE BUSINESS UNDERTAKEN IN MEETING WITH THE PRINCIPALS AND FURTHER THE CIT(A) ALSO ERRED IN ALLOWING THE EXPENDITURE OF TRAVEL OF SPOUSE WHEN, IN FACT, THE TRAVEL WAS UNDERTAKEN ONLY TO MEET THE PRINCIPALS, IF AT ALL IT IS TREATED AS BUSINESS EXPENDITURE. HE SUPPORTED THE ORDER OF THE A.O. 7. THE LEARNED COUNSEL RELIED ON THE ORDER OF THE CIT( A) AND SUBMITTED THAT THE EXPENDITURE IS BUSINESS IN NATURE AND IS A LLOWABLE AS REVENUE EXPENDITURE. 8. FOR A SPECIFIC QUERY WHETHER THE TRAVEL BY SPOUSE W ITH DIRECTOR IS FOR THE PURPOSE OF BUSINESS, AS THE PURPOSE OF TRAVEL I TSELF IS ONLY FOR MEETING WITH THE PRINCIPALS FOR DISCUSSION ABOUT BUSINESS E XPANSION THE LEARNED COUNSEL RELIED UPON THE FOLLOWING CASE LAWS: - I. CIT VS. ALFA LAVEL (I) LTD. 282 ITR 445 (BOM) II. GLAXO LABORATORIES (INDIA) LTD. VS. ITO 18 ITD 226 (MUM) III. ITO VS. A.F. FERGUSON & CO. 19 ITD 620 (MUM) IV. LINCOLN PHARMACEUTICALS LTD. VS. ITO 38 SOT 376 (AH D) 9. WE HAVE CONSIDERED THE ISSUE. THE EXPENDITURE ON TR AVEL HAS TWO COMPONENTS AS CAN BE SEEN FROM THE ORDER OF THE A.O . AND DETAILS ON RECORD. AN AMOUNT OF ` 4,20,150/- WAS SPENT ON THE DIRECTOR, SHRI SANJAY S ACHDEVS TRAVEL TO USA FOR THE PURPOSE OF ATTENDING BUSINESS MEETINGS HELD BY THE PARENT COMPANY, PRINCIPAL INTERNATIONAL INC. BASED IN USA. AS PER THE EXPLANATION OF THE ASSESSEE THE MEETINGS WERE HELD TO DISCUSS THE BUSINESS STRATEGIES OF THE COMPANY AND FUTURE COURSE OF ACTI ON TO BE IMPLEMENTED BY THE COMPANY. CONSIDERING THIS EXPLANATION, WE ARE I N AGREEMENT WITH THE FINDING OF THE CIT(A) IN ALLOWING THE TRAVEL UNDERT AKEN BY THE DIRECTOR, SHRI SANJAY SACHDEV AS FOR THE PURPOSE OF BUSINESS. WITH REFERENCE TO THE EXPENDITURE OF ` 2,28,190/- INCURRED ON SMT. SACHDEV, THE ASSESSEES ITA NO. 1525/MUM/2009 M/S. PRINCIPAL CONSULTING (I) P. LTD. 4 EXPLANATION WAS THAT SMT. SACHDEV ACCOMPANIED HER H USBAND TO USA FOR THE PURPOSE OF FULFILLING THE SOCIAL-CUM-BUSINESS O BLIGATION. IT WAS SUBMITTED THAT IT IS CUSTOMARY IN WESTERN COUNTRIES THAT SENI OR EXECUTIVES OF COMPANIES ARE ACCOMPANIED BY THEIR WIVES IF THE VIS IT IS FOR THE PURPOSE OF BUSINESS AND THUS THE FOREIGN TRAVEL EXPENDITURE OF SHRI SACHDEV AND WIFE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS OF THE COMPANY. EXCEPT RELYING ON THE PRINCIPLES ESTABLISH ED BY VARIOUS CASES, THERE IS NOTHING ON RECORD TO ESTABLISH THAT THE SP OUSE HAS ACCOMPANIED BY THE NECESSITY OF BUSINESS/ COMMERCIAL EXPEDIENCY. I N ALL THE CASES RELIED UPON BY THE LEARNED COUNSEL, IT WAS FACTUAL FINDING THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON FOREIGN TRIPS OF THE WI VES OF DIRECTORS/PRESIDENT/EMPLOYEE WAS WHOLLY AND EXCLUSI VELY INCURRED FOR THE PURPOSE OF ASSESSEES BUSINESS. EITHER THERE IS A C USTOM ESTABLISHED BY THE LONG PRACTICE OR THERE ARE SEPARATE INVITATIONS ALO NG WITH SPOUSE. IN FACT IN THE CASE OF CIT VS. ALPHA LAVEL (I) LTD. 282 ITR 44 5 (BOM) THE FACT AS STATED IN PARA 3 OF THE ORDER WAS THAT IT RELATES TO THE E XPENDITURE OF ` 44,966/- INCURRED BY THE ASSESSEE COMPANY ON A FOREIGN TRIP OF THE WIFE, WHO HAD ACCOMPANIED HER HUSBAND, THE PRESIDENT OF THE ASSES SEE COMPANY, WHO WAS INVITED TO ATTEND AN ADVANCED MANAGEMENT PROGRAMME AT HARVARD UNIVERSITY ALONG WITH HIS WIFE. IN THE CASE OF GLAX O LABORATORIES (INDIA) LTD. VS. ITO 18 ITD 226 (SB) THE FINDING WAS THAT IN THE MODERN AGE, AND MORE SO IN THE WESTERN COUNTRIES, THE SENIOR EXECUTIVE ARE, AS A MATTER OF SOCIAL CUSTOM, ACCOMPANIED BY THEIR WIVES WHEN THEY VISIT, THOUGH FOR BUSINESS PURPOSES. HERE THE FACT WAS THAT THE DIRECTORS WIF E VISIT TO THE FOREIGN COUNTRY WAS NOT IN DOUBT, BUT THE ASSESSEE HAS NOT PLACED ON RECORD ANY REQUIREMENT OF ATTENDING A SOCIAL GATHERING OR SOCI AL/ BUSINESS MEETING SO AS TO EXAMINE WHETHER IT IS CUSTOMARY TO ATTEND SUC H MEETING. IN FACT, WHILE CONSIDERING THE EXPENDITURE OF THE DIRECTOR ITSELF, THE A.O. EVEN DISALLOWED THE EXPENDITURE AS NOT FOR THE PURPOSE OF BUSINESS. WITHOUT ANY EVIDENCE ON RECORD TO ESTABLISH THAT THE SPOUSE HAS ACCOMPANIED HER HUSBAND TO ANY PARTY OR BUSINESS MEETING, IT IS DIFFICULT TO EXAMI NE AND ALLOW THE EXPENDITURE JUST BECAUSE THERE WERE JUDICIAL PRINCI PLES IN ALLOWING THE EXPENDITURE. IN THIS CASE, EXCEPT RELYING ON THE JU DICIAL PRINCIPLES THAT THE ITA NO. 1525/MUM/2009 M/S. PRINCIPAL CONSULTING (I) P. LTD. 5 EXPENDITURE IS FOR THE PURPOSE OF BUSINESS AS IT IS CUSTOMARY, NO EVIDENCE WAS PLACED ON RECORD TO EXAMINE THIS ASPECT. MOREOV ER THE MEETINGS ARE ONLY WITH THE PRINCIPALS BY THE DIRECTOR FOR THE PURPOSE OF BUSINESS EXPANSION BUT THERE SEEMS TO BE NO MATERIAL, EVIDENCING THAT THE DIRECTOR AND SPOUSE ATTENDED ANY CUSTOMARY OR SOCIAL GATHERING, PLACED ON RECORD TO EXAMINE THE NECESSITY OF ALLOWING SPOUSES EXPENDITURE AS FOR T HE PURPOSE OF BUSINESS. FOR THESE REASONS, WE ARE UNABLE TO AGREE WITH THE FINING OF THE CIT(A) IN ALLOWING THE EXPENDITURE ON THE PRESUMPTION THAT I T IS CUSTOMARY TO TAKE THE SPOUSE. SINCE NOTHING WAS PLACED ON RECORD TO E STABLISH THE NECESSITY OF TAKING THE SPOUSE ALONG WITH THE DIRECTOR, IN OUR V IEW THE EXPENDITURE CANNOT BE ALLOWED JUST BECAUSE THE SAME WAS ALLOWED IN OTHER CASES ON CERTAIN JUDICIALLY ACCEPTED PRINCIPLES BASED ON FAC TS IN EACH CASE. ACCORDINGLY, TO THE EXTENT OF ` 2,28,740/- THE DISALLOWANCE MADE BY THE A.O. IS TO BE CONFIRMED. TO THAT EXTENT THE ORDER OF THE CIT(A) IS MODIFIED. THE GROUND 2 IS PARTLY ALLOWED 10. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH JANUARY 2011. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 19 TH JANUARY 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) III, MUMBAI 4. THE CIT III, MUMBAI CITY 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.