2020 (10) TMI 99 - HC - Income Tax

Disallowance towards foreign travel - expenditure as wholly and exclusively for the business of the appellant and thus not allowable u/s 37 - travel to own subsidiary companies - HELD THAT - Subsidiaries in the foreign country were exclusive companies which dealt only with the products of the assessee. The products which were manufactured by the assessee were shipped to the subsidiaries in the foreign country in the knock down condition and they were to reassemble the same and the products were marketed under the Trade mark Elgi . - There was no reason as to why the CIT- A had disallowed a portion of the expenditure without noting the fact that the expenditure was incurred by the assessee to safeguard the interest of the assessee the holding company and its normal business expenditure of the holding company. CIT-A failed to note that all those expenditure incurred by the assessee the holding company was to keep the subsidiary companies in the foreign country to continue to do their business. Tribunal which tested the finding of the CIT-A did not assign any reasons as to why the expenditure was not for the benefit of the assessee the holding company. The order passed by the Tribunal is devoid of reasons. Though the assessee was able to produce their annual report along with accounts prepared in accordance with AS-18 that there was a gradual increase in sales compare to the early years by the subsidiary companies in the foreign country the Tribunal in a single stroke held that it is not convinced with the stand taken by the assessee. Bonafides and genuineness of the expenses incurred by the assessee towards foreign travel was never in doubt before the assessing officer or before the CIT-A or before the Tribunal thus we have no hesitation to hold that the disallowance done by the CIT-A as affirmed by the Tribunal is erroneous. Allowable revenue expenses - Expenses paid to M/s Stehlin and Associates Paris France in connection with acquisition of M/s Belair France - AO opined that the expenditure was incurred towards acquisition of a French company and it is not related to the assessee s business earnings and income and the expenditure was incurred in connection with the new unit feasibility and acquisition of a capital asset and not allowable u/s 37(1) - HELD THAT - As relying on Bombay Dyeing Manufacturing Company Limited 1996 (2) TMI 8 - SUPREME COURT assessee had incurred expenditure by way of professional fees to M/s Stehlin and Associates Paris France. The said question was answered in favour of the assessee and it was held that expenditure incurred towards professional charges of the solicitor s firm was deductable as revenue expenditure. Nature of expenses - Repairs and Maintenance towards machinery - revenue or capital expenditure - HELD THAT - As beneficial to refer to the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. Neyveli Lignite Corporation Ltd. 2016 (4) TMI 675 - MADRAS HIGH COURT wherein it is held that each machine should be treated independently as such and not as mere part of an entire composite machinery of the spinning mill. The said question was answered in favour of the assessee As gone into the working of the various parts of the Holyroid machine and examining the photos it was held that the CNC control can only be termed as part of the machine and cannot be itself a machine. Further the CIT-A noted that the manufacturer had recommended to the assessee to go for electronic systems modification without modifying the machine technology and machine specifications. The CITA perused the literature the design of the CNC system which was furnished in the form of a floppy disk and held in favour of the assessee - one more important fact which needs to be noted is the cost of the full machine was Rs. 534 Lakhs in the year 1985 and the cost of the same machine full machine at the time when CITA decided the appeal i.e. in the year 2014 was Rs. 1250 Lakhs. This is also a very relevant factor which needs to be borne in mind while approving the finding rendered by the CITA. Tribunal had erroneously stated as if the assessee for the first time had placed photographs and materials and held that the matter has to be remanded to the assessing officer when the fact remains that the entire material along with the detailed write-up was placed before the assessing officer and also before the CIT-A who had done a thorough factual examination and granted relief to the assessee. Therefore the order of the Tribunal in remanding the matter to the assessing officer was wholly unjustified.

Summary

Issues Involved:
1. Foreign Travel Expenditure
2. Legal and Professional Charges for Acquisition
3. Disallowance of Expenditure under Repairs and Maintenance

Issue-Wise Detailed Analysis:

1. Foreign Travel Expenditure:
The primary issue was whether the foreign travel expenditure of Rs. 17,42,595/- incurred by the assessee was wholly and exclusively for the business purposes and allowable under Section 37 of the Income Tax Act, 1961. The assessing officer disallowed the expenditure, stating it was related to the subsidiary companies and not the assessee's business earnings. The Commissioner of Income Tax Appeals (CITA) allowed part of the expenditure but disallowed Rs. 17,42,595/- on the grounds that it was to promote the business of the subsidiary company. The Tribunal upheld the CITA’s decision without assigning specific reasons. The High Court found the CITA’s disallowance cryptic and unsupported by factual analysis, noting that the subsidiaries dealt exclusively with the assessee’s products, and the expenditure was to safeguard the interest of the holding company. Thus, the High Court held that the disallowance was erroneous and allowed the expenditure in its entirety.

2. Legal and Professional Charges for Acquisition:
The second issue concerned the expenditure of Rs. 19,55,555/- paid to M/s Stehlin & Associates, Paris, for services related to the acquisition of M/s Belair, France. The assessing officer treated this as a capital expenditure, not allowable under Section 37(1) of the Act. The CITA upheld this view, stating the expenditure was for acquiring shares and not related to regular business. The Tribunal also dismissed the appeal, considering the expenditure as capital in nature. The High Court, however, referred to various judicial precedents, including the Supreme Court's decision in S.A. Builders Limited v. CIT, which emphasized commercial expediency. The Court concluded that the expenditure was for expanding global operations and should be treated as revenue expenditure, thus answering the substantial questions of law in favor of the assessee.

3. Disallowance of Expenditure under Repairs and Maintenance:
The third issue was whether the expenditure incurred for importing and erecting the Holroyd Dual Type PC Technology was a capital expenditure. The assessing officer treated it as capital expenditure, allowing depreciation instead. The CITA, after detailed examination, found that the expenditure was for replacing an obsolete operating system and not the entire machine, thus treating it as revenue expenditure. The Tribunal remanded the matter to the assessing officer for fresh consideration, which the High Court found unjustified. The High Court noted that the CITA had thoroughly examined the facts and the Tribunal failed to provide reasons for setting aside the CITA’s findings. The High Court held that the expenditure was rightly treated as revenue expenditure by the CITA and disallowed the Tribunal’s remand.

Conclusion:
The High Court allowed both Tax Case Appeals, answering the substantial questions of law in favor of the assessee. The foreign travel expenditure and legal and professional charges for acquisition were deemed allowable as revenue expenditures. The disallowance of expenditure under repairs and maintenance was also overturned, affirming it as revenue expenditure.