2016 (6) TMI 26 - AT - Income Tax

Addition u/s 40A(2) - excessive of expenditure - Held that - So far as the expenditure on foreign travel is concerned, the payment is not made to the specified persons. Section 40A(2) specifically deals with the situation in which the payment is made to the specified persons. That is not the case here. The payment is made in respect of foreign travel of the specified persons but that does not bring the expense within the scope of disallowance under section 40A(2). The very foundation of impugned disallowance is thus wholly unsustainable in law. As for the element of personal expenses being present is concerned, the assessee before us is a legal entity. Even if an expenses incurred by the assessee results in a personal advantage to its directors, such a fact of personal advantage to the directors does not affect the deductibility of expenses as long as the expenses are incurred wholly and exclusively for the purposes of business of the company. A personal advantage to the directors, even if that be so, cannot be a reason enough for resorting to the disallowance. Hon ble jurisdictional High Court s decision in the case of Sayaji (2001 (7) TMI 70 - GUJARAT High Court ) supports this proposition. The decision that the assessee s senior directors, who are on their way out, personally meet the vendors and introduce the newer directors is essentially a business decision and it cannot be open to the Assessing Officer to question same. The element of business needs in such circumstances is clearly present. The assessee company may or may not have direct tangible benefit as a result of the expense but then just because the assessee does not get immediate tangible benefit, the expense does not cease to be deductible in nature. The disallowance has been made under section 40A(2) and, in any event, it cannot be open to the Assessing Officer to improve upon his case at this stage and add the reasons which were not even taken up at the assessment stage. Keeping in view these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the entire disallowance - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of foreign travelling expenses.
2. Applicability of Section 40A(2) of the Income Tax Act, 1961.
3. Determination of whether the expenses were incurred wholly and exclusively for business purposes.

Issue-wise Detailed Analysis:

1. Disallowance of Foreign Travelling Expenses:
The primary issue revolves around the disallowance of Rs. 16,56,367/- incurred on foreign travel by the directors of the assessee company. The Assessing Officer (AO) disallowed the entire amount, questioning the business necessity and suggesting that the expenses were personal in nature. The CIT(A) partially upheld the AO's decision, confirming the disallowance of 50% of the expenses on the grounds that some expenses might have been personal. The CIT(A) noted that the directors' visit to the USA was for business purposes, including negotiations and exploring new material sources, but acknowledged the possibility of personal expenses being included. The Tribunal, however, found that the disallowance was not justified as the expenses were incurred for business purposes and deleted the entire disallowance.

2. Applicability of Section 40A(2):
The AO invoked Section 40A(2) to disallow the expenses, claiming they were "unreasonable and excessive" and that the company did not benefit from the expenses. The CIT(A) and the Tribunal both found this application incorrect. Section 40A(2) pertains to payments made to specified persons, and in this case, the expenses were for foreign travel, not payments to specified persons. The Tribunal emphasized that the foundation of the disallowance under Section 40A(2) was unsustainable as the section did not apply to the nature of these expenses.

3. Determination of Business Purpose:
The Tribunal scrutinized whether the expenses were incurred wholly and exclusively for business purposes. It acknowledged that even if the expenses resulted in personal advantages to the directors, this did not affect their deductibility as long as they were incurred for business purposes. The Tribunal noted the business rationale behind the directors' travel, such as introducing new directors to business associates and negotiating raw material prices. It concluded that the business needs were evident and that the expenses should be allowed in full. The Tribunal also pointed out that the AO could not question the business decisions of the company, especially when the expenses were justified as necessary for business operations.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the entire disallowance of foreign travelling expenses, and dismissed the appeal of the Revenue. The judgment underscored that the expenses were incurred for business purposes, the application of Section 40A(2) was incorrect, and personal advantages to directors did not negate the business nature of the expenses. The decision reaffirmed that business decisions and expenses, even if benefiting directors personally, are deductible if incurred for the company's business.