2010 (5) TMI 63 - HC - Income Tax

During the year in question, the assessee incurred expenses, amounting to Rs 20.42 lakhs for participating in the exhibition IMTEX-1998. The vouchers in respect of the aforesaid expenditure were produced before the Assessing Officer, who noticed that the expenditure incurred on the exhibition during the Assessment Year 1997-98 being only Rs 2,67,162/- there was an eight fold increase in the expenditure, though the commission income earned from the sale had decreased to Rs 2.15 crore in the Assessment Year 1998-99, as against Rs 2.43 crores earned in the Assessment Year 1997-98. The Assessing Officer, therefore, added back Rs. 18 lakhs out of the aforesaid expenditure, to the income of the assessee-company. CIT(A) confirmed the disallowance only to the extent of Rs 9 lakhs in first round in the second round (remand back from ITAT) CIT(A) deleted the addition made by AO and allowed the full expenditure. Held that Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head Profit and Gains of the Business or Profession. - It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration. Order of ITAT confirming the order of CIT(A) upheld decided in favor of assessee

Summary

Issues:
- Disallowance of expenses incurred for participating in an exhibition for the Assessment Year 1998-99.
- Interpretation of Section 37(1) of the Income Tax Act regarding business expenditure.
- Contractual obligations and their impact on business expenditure deductions.

Analysis:
1. The appeal challenged the ITAT's order dismissing the Revenue's appeal against the CIT(A)'s decision allowing part of the assessee's appeal regarding the disallowed expenses for participating in an exhibition for the Assessment Year 1998-99.
2. The assessee incurred increased expenses for the exhibition, leading to a dispute over the deduction. The CIT(A) confirmed a partial disallowance, prompting cross-appeals by both parties.
3. The Tribunal referred the matter back to the CIT(A) to determine if the expenses were wholly for business purposes. The Tribunal emphasized that the key issue was the exclusive business nature of the expenditures.
4. The assessee argued that the exhibition expenses were part of a contractual obligation with Principals, contributing to increased product sales. The past pattern of increased expenses during exhibition years was highlighted.
5. The CIT(A) noted the contractual obligation between the assessee and Principals regarding the exhibition expenses, emphasizing the direct correlation between sales and promotional activities.
6. The Tribunal, while dismissing the Revenue's appeal, stressed the necessity of proving that the expenses were not incurred for business purposes, irrespective of benefits to others.
7. Section 37(1) of the Income Tax Act allows deductions for expenses laid out exclusively for business purposes, not personal or capital expenses.
8. The judgment emphasized the contractual obligation between the assessee and Principals, stating that such obligations constitute business expenditures unless proven otherwise.
9. The genuineness of the contractual agreement for sharing expenses was acknowledged, and the benefit to the assessee from the exhibition was deemed relevant for deduction purposes.
10. Precedents like CIT vs. Chandulal Keshavlal & Co. were cited to support the deduction of expenses benefiting the trade, even if third parties benefited indirectly.
11. The judgment referenced Sassoon J. David and Co. Pvt. Ltd., vs. CIT, Bombay to highlight that voluntary business expenses for profit generation are deductible, even if not compelled by necessity.
12. The Court found no reason to interfere with the ITAT's decision, concluding that no substantial legal question arose for consideration, and the appeal was dismissed accordingly.