2012 (8) TMI 241 - HC - Income Tax

Expenditure on foreign travel and medical treatment of the Managing Director and his wife - Tribunal treated it deduction u/s 37(1) - Held that - Managing Director of the assessee company who resigned on 3.11.96 and the above said expenditure was incurred only after this date and that expenditure incurred by M.D. was reimbursed only due to the fact that the said person was main person in the family controlling the business of the assessee company - His wife, who accompanied him was a Director in the company - in the absence of any obligation on the part of the company to meet the medical and traveling expenses, the payment made could not be treated as one of commercial expediency & was purely a personal one - against assessee.

Summary

Issues:
1. Allowability of expenditure on foreign travel and medical treatment of Managing Director and his wife as a deduction under Section 37(1) of the Income Tax Act.

Analysis:
The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's order regarding the disallowance of an expenditure incurred on the medical and traveling expenses of the Managing Director and his wife. The Assessing Officer disallowed the expenditure, stating that there was no obligation on the company to pay such a huge amount for medical expenses, especially since the Director had relinquished his responsibilities. However, the Commissioner of Income Tax (Appeals) held that the expenditure was a commercially prudent decision considering the Director's long service and contributions to the company. The Tribunal, following precedents, upheld the decision, deeming it a commercially viable one. The Revenue contended that the payment lacked commercial expediency, citing a previous court decision. On the other hand, the assessee argued that the payment was made out of commercial expediency, relying on a Supreme Court decision emphasizing the broader scope of "for the purpose of business."

The High Court agreed with the Revenue, emphasizing that the expenditure was not incurred due to a contractual obligation or commercial expediency but rather for personal reasons. The Court noted the lack of evidence supporting the claim of commercial expediency, stating that a commercially viable or prudent decision does not necessarily indicate commercial expediency. Referring to a previous court decision, the High Court highlighted the necessity of establishing a link between expenditure and commercial necessity arising from contractual obligations. Consequently, the Court set aside the Tribunal's order, ruling in favor of the Revenue. The Court clarified that while the Revenue cannot substitute the business judgment of the company, the absence of substantiated commercial expediency precludes granting relief to the assessee.

In conclusion, the High Court allowed the appeal by the Revenue, answering the substantial question of law in favor of the Revenue and setting aside the Tribunal's order. No costs were awarded in this matter.