Under income-tax law, gross receipts are not taxed. Tax is payable on incomes remaining after deducting the expenses incurred for earning, provided in the Act or deductible on commercial principles. However, some deductions are being rejected partly or wholly on the ground that these relate to personal expenses of the assessee because of narrow approach of Assessing Officers despite liberalisation climate all around and bumper increase in income-tax collections — Rs 5,35,000 crore expected in 2011-12, as against merely Rs 10,000 crore in 1990-91. The mindset in this matter, which continues to be archaic, needs re-orientation not only at the stage of A.O., but also at appellate stages. The judicial thinking in this regard has marched forward somewhat with the times and courts have been taking broader view. ‘For the purpose of business' does not mean for the purpose of earning and expenditure prompted by business or commercial expediency are now held to be deductible.

Areas of dispute

Major areas of dispute have been travelling expenses, medical expenses, club expenses, expenses relating to telephones and conveyance, etc. Frequently disallowances are made for the travel of wives along with husbands on business trips. There are umpteen court decisions where such claims are being disallowed, treating the same as personal expenses despite the courts taking pragmatic views.

In CIT v. Apollo Tyres (Ker) and CIT v. George Wiliams (Guj), the expenses of wife on foreign tour with the Chairman-cum-Managing Director have been allowed on the ground that ‘accompaniment of wife was for fulfilling social aspects and for the advantage of business of the company'. Disallowance of expenses on foreign training for attending seminars and conferences, etc have also been held non-deductible on the ground of the same being not incurred wholly and exclusively for business purposes. Expenses incurred by a doctor on foreign tour was held not allowable as business expenditure as it was considered to have been incurred not for the purposes of business, but primarily for the purposes of attending the conference and the advantage gained for the assessee's business, profession or vocation was secondary and was a remote consequence (see CIT v. Dr. B.V. Raman (1966) 59 ITR 20 (Mys)). Such views are being held even now despite tremendous change in business environment and culture.

Club fees and expenses are also being disallowed on personal grounds though courts have, by and large, taken the view that club membership in present times is an essential business need.

Medical expenses of individual taxpayers are generally considered to be of a personal nature. The Delhi High Court recently in the case of Shanti Bhushan has not allowed expenses of Rs.1,74,000/- on his heart surgery as the same related to ‘body' of the taxpayer and hence, not deductible u/s 31 of the I-T Act though the assessee's income rose substantially after the surgery.

Adhocism

Expenses on telephones, cars, rent, etc., are being disallowed on percentage basis for personal use on ad hoc basis. These are also confirmed by appellate authorities, giving legitimacy to adhocism. Such disallowances of few hundreds and thousands do not lead to great revenue gains, but disappoint honest taxpayers and deny them the satisfaction of their returns being accepted. These also affect voluntary compliance and smooth taxpayer-tax department relationship. Hence, serious thinking by the CBDT needs to be given on the issue whether such irritants should continue unabated.

Though decisions on such matters depend on the facts of the different cases, some broad guidelines can be laid down to avoid disallowances in a routine way without pressing justifications for the same. The test laid down by the Supreme Court in the case of State of Madras v. G.J. Coelho, 53 ITR 186 (SC), where the court has said that personal expenses are those that relate to the person of the assessee to satisfy his personal needs such as clothes, food, etc., for the purpose not related to business, can be benchmark for deciding such claims.

Expenses such as in the case of DCIT v. Salman Khan, 130 ITD 81 (Mum), where claim was made for expenses for self defence from criminal proceedings for shooting a black deer, which had nothing to do with his profession as actor, have to be treated as personal expenses — not to be deducted. But borderline cases need to be dealt with more compassion.

(The author is a former Chairman of CBDT.)

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