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2013 (9) TMI 794 - AT - Income TaxExpenditure on spouse/ relatives of Director of the company is disallowed u/s 37 of the Income Tax Act - Sanctioning of foreign exchange by the Reserve Bank authorities does not conclude that the expenses on foreign tours with relatives is wholly and exclusively for the purpose of business Held that - Expenses incurred by the assessee on the foreign tour of spouses of the directors were wholly gratuitous and for a purpose outside the course of its business - As the incurred expenditure was for extra-commercial reasons, so, same is not deductible under section 37(1) of the Act - Secondly sanction of foreign exchange by the Reserve Bank authorities is of no help to decide the question of foreign tours undertaken by the spouses of the directors of a appellant-company. At best the fact of sanction of foreign exchange by the Reserve Bank authorities may indicate that the assessee has made out a case before them for sanctioning the requisite exchange for the foreign tour of spouses of the directors. However, that would not indicate that the Reserve Bank authorities had, in any manner, decided the question as to whether the visit of spouses is wholly and exclusively for the purposes of business of the assessee - To look in to the issue of incurring of an expenditure wholly and exclusively for the purposes of business is outside the purview and powers of the RBI. Taxability or otherwise of an item of expenditure is the sole domain of the Assessing Officer. Assessing Officer and the first appellate authority were right in not allowing the claim advanced by the assessee under section 37 of the Act. On the facts and in the circumstances of the case, a sum of Rs. 13.38 lakhs incurred by the appellant-company on the foreign tours of spouses of the directors has rightly been disallowed Decided against the Assessee.
Issues Involved:
1. Disallowance of foreign tour expenses of accompanying spouses of the directors as personal expenses. Issue-wise Detailed Analysis: 1. Disallowance of Foreign Tour Expenses: The primary issue in this case is whether the foreign tour expenses incurred by the assessee-company for the spouses of its directors should be allowed as business expenses under section 37(1) of the Income-tax Act, 1961. The assessee argued that these expenses were in the interest of the business and cited previous favorable judgments in similar cases. However, the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (FAA) disagreed, stating that the expenses were personal in nature and not incurred wholly and exclusively for business purposes. Assessment Proceedings: During the assessment, the AO noted that the spouses of the directors had undertaken foreign trips and tabulated the expenses, which totaled Rs. 13,38,645. The AO disallowed these expenses, citing the lack of business necessity and relying on the Gujarat High Court's decision in Shahibag Entrepreneurs P. Ltd. v. CIT [1995] 215 ITR 810 (Guj). The FAA upheld this disallowance after considering the remand report and submissions from the assessee, concluding that the expenses were personal and not for business purposes. Arguments Before ITAT: The assessee's authorized representative (AR) argued that similar expenses had been allowed in previous years by the Income-tax Appellate Tribunal (ITAT) and cited several cases, including CIT v. Alfa Laval (I.) Ltd. [2006] 282 ITR 445 (Bom) and CIT v. Zuari Finance Ltd. [2004] 271 ITR 538 (Bom). The Departmental representative (DR) countered that the expenses were not for business purposes and highlighted the AO's findings that the spouses were unaware of the business activities or tours undertaken. ITAT's Analysis: The ITAT reviewed the relevant case law and principles under section 37(1) of the Act, which requires that expenses must be incurred wholly and exclusively for business purposes. The tribunal emphasized that the burden of proof lies with the assessee to demonstrate the business necessity of such expenses. The ITAT noted that the AO had conducted a thorough investigation, including recording statements from the spouses, which revealed they were not aware of the business activities. Judicial Precedents: The ITAT referred to several judicial decisions, including those from the Kerala, Bombay, Madras, Gujarat, Gauhati, and Madhya Pradesh High Courts, which have addressed the deductibility of foreign travel expenses of spouses. The tribunal highlighted that each case must be decided on its facts, and the assessee must prove the commercial necessity of the expenses. Conclusion: The ITAT concluded that the assessee failed to provide any evidence that the foreign tours of the spouses were for business purposes. The tribunal found the AO's and FAA's findings to be well-founded and based on thorough investigation. The ITAT distinguished the present case from the earlier years where no such investigation was conducted. The tribunal also discussed the cases cited by the AR and found them inapplicable to the present facts. Final Judgment: The ITAT upheld the disallowance of Rs. 13.38 lakhs incurred on the foreign tours of the spouses of the directors, agreeing with the Revenue authorities that the expenses were personal and not for business purposes. The appeal filed by the assessee was dismissed. Order Pronounced: The order was pronounced in the open court on November 21, 2012.
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