2016 (12) TMI 1545 - AT - Income Tax

Disallowance of hotel expenses as being not incurred for purpose of business - wholly and exclusively - company has incurred hotel expenses for stay of Shri Samyak Veera,NRI, who stayed in India as a strategic investor for monitoring project in India - Held that - The expenditure incurred being wholly and exclusively does not mean that it has to be incurred necessarily. The expression wholly and exclusively used in section 37 of the IT. Act does not mean necessarily and the payments made voluntarily are not to be disallowed only on account of their voluntary character. So long as there is a reasonable nexus between the expenses incurred and the business of the assessee, the expenses will be regarded as having been incurred for the purposes of business. Thus, the test to find out whether a particular expenditure is wholly or partly justified or exclusively incurred for the purpose of business is not to see whether it is necessary, but to be considered as commercial expediency and has to be judged from a prudent businessman s point of view. The true test is to find out whether the business man, when he expends the money is acting reasonably in the interest of his own business. Every businessman knows his interest best and it is for assessee to decide how to promote his business interest. Therefore, the disallowance made by the AO on the ground that the hotel expenses was not incurred exclusively for the business purpose is not justified. In view of above discussion, we do not find any merit in the action of lower authorities disallowing the expenditure incurred by assessee for the purpose of its business. - Decided in favour of assessee

Summary

Issues:
Disallowance of hotel expenses as non-business purpose
Admission of evidence in the form of Board resolution

Analysis:
1. The appeal was against the CIT(A)'s order confirming the disallowance of hotel expenses amounting to ?54,72,091 as not incurred for the purpose of business.
2. The assessing officer questioned the hotel expenses incurred by the assessee for a non-resident strategic investor, stating that monitoring by an individual client was unnecessary given the company's reputation and resources.
3. The CIT(A) upheld the disallowance, considering the payment for boarding and lodging as personal expenses of the investor, not business expenses of the assessee.
4. The tribunal reviewed the facts, noting the investor's substantial investment in the company and the challenges faced in the real estate project. The investor, a non-resident, was crucial for the project's financial potential, prompting the company to provide lodging and boarding to utilize his resources.
5. The tribunal found that the expenses were commercially justified and mutually agreed upon, supported by a board resolution for reimbursement of expenses incurred by the investor during his stay in Mumbai.
6. Citing judicial pronouncements, the tribunal emphasized that expenses incurred wholly and exclusively for business purposes should be allowed, irrespective of the necessity, as long as there is a reasonable nexus to the business and commercial expediency.
7. Considering the facts and legal principles, the tribunal concluded that the disallowance of hotel expenses was unjustified, as the expenses were incurred in the interest of the business and for commercial expediency.
8. Consequently, the tribunal allowed the appeal of the assessee, overturning the lower authorities' decision to disallow the expenses incurred for the business purpose.