Tax law is evolving with the times. What should strictly be viewed as personal expenditure is sometimes converted into business expediency. This is what happened in J. K. Industries Ltd vs. CIT 335 ITR 170 (Cal).
The business of J. K. Industries necessitated foreign tours by its Managing Director. In this case, the Managing Director and the Deputy Managing Director went abroad, accompanied by their respective wives. The trip of the two directors was obviously for promoting the company's business. The company, however, incurred a total expenditure of Rs 7,92,000 on the foreign travels of the two wives and the directors claimed deduction of the said amount as business expenditure. Naturally, the Departmental Officer turned down the claim, holding that the two women were not employees of the company and their expenditure could not be allowed as relating to business. The first two appellate authorities agreed with this view of the Assessing Officer. The company appealed to the Calcutta High Court.
Before the High Court, it was argued for the company that the business necessity has to be judged from the point of view of the company, and hence it was not for the Revenue Department to ascertain if the incurring of the expenditure was justified. It was pointed out that the Board of Directors had passed a Resolution to the effect that if the Managing Director is accompanied by his wife on foreign tours, it would definitely go a long way in creating a favourable image of the company since cordial human interactions at a social level promote better business understanding. The wife is often required to accompany the Director as a matter of reciprocity in international business. The company, therefore, authorised the Managing Director to take his wife on his foreign tours for the business of the company. It was decided by the company that it should bear the travel expenses of his wife.
The Calcutta High Court agreed with the view that taking the wife on a foreign tour did promote better business understanding and was a matter of reciprocity in international business. The fact that the woman concerned is not an employee of the company will not come in the way of allowance of expenditure incurred on her travel. It is not the law that business expenditure should be limited to the expenditure made for an employee only. The argument is not tenable in the eye of the law. The reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue Department. Hence, it is not a valid argument to say that there should be a corresponding increase in profits. The Board of Directors thought it fit to spend on the foreign tour of the accompanying wife of the Managing Director for commercial expediency. It is hence not for the Income-Tax Officer to sit in judgment over the decision of the Board.
However, the High Court disallowed that part of the claim which related to the travel expenditure of the wife of the Deputy Managing Director, since there was no Board Resolution in support.
The Calcutta High Court Ruling can have limited applications. The matter cannot be decided merely on the basis of a Board Resolution. Courts have taken different views on the subject depending on the factual matrix. Disallowance was upheld in 153 ITR 422, 192 ITR 344 (SC) 215 ITR 810, and 257 ITR 289.
On the other hand, the allowance was upheld in 243 ITR 130, 237 ITR 706, 207 ITR 647 and 220 ITR 552. The Madras High Court considered the question in Sundaram Clyton 240 ITR 271. The company met the travelling expenses of the wife of the Chairman and Managing Director of the foreign holding company. The High Court took the view that the expenditure was incurred for enhancing the goodwill between the two companies.
In Madan vs. CIT 261 ITR 193, the Madras High Court pointed out that if the objective of the foreign tour by the woman was to attend to her husband's personal comfort, the expenditure would not qualify for deduction. If it was for the purpose of business, and she attended to the husband who was, perhaps, a cardiac patient, incidentally, the expenditure would be allowable. There should be a nexus between the incurring of the expenses and the purpose of the business. In other words, one can combine business with pleasure but the predominant objective should be shown to be business promotion and establishment of goodwill with foreign companies. Courts have also upheld the claim for foreign study expenses of the Managing Partner's children on the ground that such education abroad will help the business of the firm in the years to come.
It is not as if the Income-Tax Officer is completely off the beat. Section 40A (2) empowers him to consider the reasonableness of the expenditure, having regard to the legitimate needs of the business or profession and the benefit derived by such expenditure.
(The author is a former Chief Commissioner of Income-Tax.)
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