2019 (3) TMI 139 - HC - Income Tax

Addition u/s 40A(2)(b) - remuneration paid to trustees - reasonableness of the expenditure - the entire amount paid as remuneration to the Directors was allowed by Tribunal in upholding the view of CIT (Appeals) - HELD THAT - Trust has been created for the purpose of doing business. Trust has earned income and the remuneration is paid to the trustees. The trustees have also paid taxes for the remuneration received by them. Therefore, it is not for the AO to conclude what is an appropriate payment or remuneration to be paid to the trustees. As in the case of S.A Builders Ltd. v. CIT 2006 (12) TMI 82 - SUPREME COURT held that the reasonableness of the expenditure is to be judged from the point of view of the businessman and the Revenue cannot sit in the arm chair of the businessman to decide what is reasonable and what is not. - Decided in favour of assessee. Foreign travel expenses - allowable business expenses u/s 37(1) - AO disallowed the claim based on the type of visa, which the trustee had produced for consideration - HELD THAT - It does not mean that under a tourist visa, no business can be transacted. There is no material to indicate that no business was done by the assessee in these trips. Therefore, the order of the CIT(A) as well the Tribunal is just and proper. Under the circumstances, we hold that Tribunal was right in allowing the foreign travel expenses incurred by the trustee and thereby, the ingredients under Section 37(1) - Decided in favour of assessee.

Summary

Issues:
1. Reasonableness of remuneration paid to trustees.
2. Allowability of foreign travel expenses for business purposes.

Analysis:

Issue 1: Reasonableness of remuneration paid to trustees
The assessee, a Trust engaged in the manufacture and export of garments, disclosed remuneration of &8377; 1,69,78,000/- paid to trustees in the Assessment Year 2005-06. The Assessing Officer found the remuneration exorbitant and allowed a reduced amount as reasonable remuneration. The Commissioner of Income Tax (Appeals) and the Tribunal upheld the remuneration paid to the trustees, emphasizing that the trustees paid taxes on the remuneration received. The High Court, citing the principle from the case of S.A Builders Ltd. v. CIT, held that the reasonableness of expenditure should be judged from a businessman's perspective, and the Revenue cannot determine what is reasonable. Therefore, the Court found no error in the decisions of the lower authorities and ruled in favor of the assessee, upholding the remuneration paid to the trustees.

Issue 2: Allowability of foreign travel expenses for business purposes
The Managing Trustee of the assessee Trust undertook trips to multiple countries for business purposes, but the Assessing Officer disallowed the foreign travel expenses, citing visa types as non-business visas. The Commissioner of Income Tax (Appeals) and the Tribunal partially allowed the expenses. The High Court noted that conducting business under a tourist visa is not precluded, and there was no evidence to suggest that business activities did not occur during the trips. Therefore, the Court upheld the decision of the lower authorities, allowing the foreign travel expenses incurred by the trustee as fulfilling the requirements under Section 37(1) of the Income Tax Act. Consequently, the Court ruled in favor of the assessee on this issue as well.

In conclusion, the High Court disposed of the appeal, affirming the decisions of the lower authorities regarding the reasonableness of remuneration paid to trustees and the allowability of foreign travel expenses for business purposes.