1970 (12) TMI 28 - HC - Income Tax

Assessee claimed allowance for a sum of on account of travelling expenses of its managing director, incurred in respect of two foreign tours undertaken by him in connection with the business of the assessee-company - merely because the Managing Director had gone abroad to study the conditions of manufacturing in factories similar to the one of the assessee does not necessarily mean that the expenditure was of revenue nature

Summary

Issues Involved:
1. Deductibility of travelling expenses incurred by the managing director.
2. Classification of expenses as capital or revenue expenditure.
3. Deductibility of entertainment expenses incurred during the foreign tours.

Issue-wise Analysis:

1. Deductibility of Travelling Expenses Incurred by the Managing Director:

The assessee, a public limited company engaged in manufacturing sugar machinery, claimed deductions for travelling expenses incurred by its managing director during foreign tours. The tours were undertaken for business purposes, including negotiations with foreign collaborators and placing orders for machine tools. The Income-tax Officer (ITO) split the expenses into two categories: those related to the existing business and those related to new ventures (boiler and boiler components manufacturing). The ITO allowed only 50% of the expenses as deductible, considering the rest as preliminary expenses for new ventures. This decision was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal.

2. Classification of Expenses as Capital or Revenue Expenditure:

The ITO and appellate authorities classified a significant portion of the travelling expenses as capital expenditure. They reasoned that the expenses were primarily for acquiring capital assets or securing collaborations for new ventures, which would provide enduring benefits to the company. The court referenced the case of Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income-tax, where similar expenses were deemed capital in nature because they were related to the purchase of new plant and machinery for business expansion. The court concluded that the foreign tours were mostly concerned with acquiring capital assets or collaborations, thus justifying the classification of the expenses as capital expenditure.

3. Deductibility of Entertainment Expenses Incurred During the Foreign Tours:

The managing director also claimed Rs. 761 for entertaining company guests during the foreign tours. The ITO disallowed this amount, categorizing it as capital expenditure. However, the court found that this expenditure should be allowed as it was an ordinary business courtesy and did not result in acquiring any capital asset. The court held that the entertainment expenses were incurred for business purposes and should be treated as revenue expenditure.

Conclusion:

- The court affirmed the decision of the ITO and appellate authorities regarding the travelling expenses, agreeing that they were primarily capital in nature and thus not fully deductible as revenue expenditure.
- The court disagreed with the disallowance of the entertainment expenses, ruling that they should be allowed as revenue expenditure.
- The final judgment was in favor of the revenue regarding the travelling expenses and in favor of the assessee regarding the entertainment expenses, with costs assessed at Rs. 300 for both references.