2014 (4) TMI 344 - AT - Income Tax

Deletion of disallowance Foreign travel expenses Whether there was business necessity or business connection in undertaking the foreign travels by the directors or relative of the directors of the assessee company - Held that - The AO has disallowed 100% of claim and in some cases 50% of the case the AO has changed his view on the claim of foreign travel expenses in assessment year 2009-10 - there is business connection in undertaking foreign travels the AO has also expressed the view that the claim that the trips were undertaking solely for business purposes is not convincing - Since the tours have been undertaken with family members mostly to the places of tourist attractions and since the purpose of tour stated by the assessee was too general in nature, the AO has held that the personal element in these expenses cannot be ruled out. The AO has taken contradictory stand with regard to the quantum of disallowance - In assessment year 2008-09, the AO has disallowed 100% of expenditure relating to certain tours and 50% of the expenditure of other tours but, in assessment year 2009-10, he has disallowed 20% of the total expenditure incurred on foreign tours - Since the AO, in assessment year 2009-10, has taken the view that the business purpose involved in foreign tours cannot be altogether ruled out, the same position should be extended to the assessment year 2008-09 also - the involvement of personal purpose and incurring of personal expenses during foreign travels undertaken by the key personnel cannot be altogether ruled out - The absence of details of expenses incurred out of foreign exchange coupled with the fact that the key personnels are covered by sec. 40A(2) of the Act - the disallowance of 20% of the foreign tour expenses made by the AO in assessment year 2009-10 is quiet reasonable thus, the order of the CIT(A) set aside and the order of the AO restored also, the disallowance of foreign travel expenses should be maintained at the same level in assessment year 2008-09 also the AO is directed to restrict the disallowance to 20% of the claim Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Justification for deleting the disallowance of foreign travel expenses by the CIT(A).
2. Determination of business connection and necessity of foreign travel expenses.
3. Applicability of Section 40A(2) of the Income Tax Act to the foreign travel expenses.
4. Adequacy of documentation and evidence supporting the foreign travel expenses.
5. Consistency in the treatment of foreign travel expenses across different assessment years.

Issue-wise Detailed Analysis:

1. Justification for Deleting the Disallowance of Foreign Travel Expenses by the CIT(A):
The revenue appealed against the orders of the CIT(A) for the assessment years (AYs) 2008-09 and 2009-10, challenging the deletion of disallowance of foreign travel expenses. The CIT(A) had followed the Tribunal's decisions from AY 2005-06 to 2007-08, where similar disallowances were deleted. The Tribunal had previously concluded that the foreign travel expenses were incurred for business purposes and were necessary for the assessee's business of publishing magazines. However, the Assessing Officer (AO) had disallowed these expenses, claiming they were personal in nature and lacked business necessity.

2. Determination of Business Connection and Necessity of Foreign Travel Expenses:
The AO examined the foreign travel expenses and noted that the trips were often undertaken by employees who were related to each other and shareholders of the assessee company. The AO argued that the trips were more for pleasure than business, as evidenced by the general nature of the stated purposes and the involvement of family members. The AO disallowed the expenses, citing a lack of convincing evidence of business necessity. The Tribunal, however, had previously accepted the business necessity of such travels, emphasizing the need for the staff to stay updated with international trends relevant to their publications.

3. Applicability of Section 40A(2) of the Income Tax Act to the Foreign Travel Expenses:
The AO invoked Section 40A(2) of the Income Tax Act, which deals with expenses incurred with related parties. The AO argued that since the travelers were related to the management of another group company, Malayala Manorama, and were shareholders in the assessee company, the provisions of Section 40A(2) applied. The AO concluded that the expenses were not justified as business expenses and were primarily personal in nature.

4. Adequacy of Documentation and Evidence Supporting the Foreign Travel Expenses:
The AO highlighted the lack of detailed documentation supporting the foreign travel expenses. The expenses were recorded based on debit notes from Malayala Manorama, which provided details of air tickets and foreign exchange but lacked specifics on the actual expenses incurred abroad. The AO argued that without detailed expense reports, it was not possible to ascertain the business purpose of the expenses. The Tribunal noted that the tour reports provided by the assessee were general and lacked specific details, which cast doubt on the business necessity of the trips.

5. Consistency in the Treatment of Foreign Travel Expenses Across Different Assessment Years:
The AO had disallowed 100% of certain expenses and 50% of others in AY 2008-09, while in AY 2009-10, only 20% of the expenses were disallowed, acknowledging some business purpose. The Tribunal found this inconsistent and decided that the disallowance should be uniform across both years. The Tribunal concluded that a 20% disallowance was reasonable, considering the possibility of personal expenses being incurred during the foreign trips.

Conclusion:
The Tribunal upheld the AO's view that the foreign travel expenses lacked sufficient evidence of business necessity and were partly personal in nature. The Tribunal directed a uniform disallowance of 20% of the foreign travel expenses for both AY 2008-09 and AY 2009-10, setting aside the CIT(A)'s orders. The Tribunal emphasized the need for detailed documentation to support the business purpose of such expenses, aligning with the principles laid out in the case of Seshasayee Brothers Ltd vs. CIT.