2023 (9) TMI 614 - HC - Income Tax

Allowable revenue expenditure - treatment to the travelling expenses of the Director's wives as well as fees paid for professional service - HELD THAT - The agreement dated 10.11.1995 would fall under Section 37 of the Act, thus, the service rendered relate to the re-arrangment of manufacturing and sale activities. Further Section 35B provides that where the assessee has paid any lump sum consideration for acquiring any know how for use for the purpose of his business, deduction is allowable to the assessee at rate of 1/6 in six consecutive years. This expenditure is to be treated as revenue expenditure. The judgment of Delhi High Court in a case of Indo Rama Synthetics India Ltd 2009 (9) TMI 635 - DELHI HIGH COURT is directly applicable to the facts of the present case. Also relying on Honda Siel Cars India Ltd 2017 (6) TMI 524 - SUPREME COURT the appeals are allowed and impugned orders are set aside. The appellant (s) company shall be entitled to treat the travelling expenses of the Director's wives as well as fees paid to M/s Kinsey and Co Ltd for professional service for the relevant assessment year as revenue expenditure.

Summary

Issues Involved:
1. Deduction on account of traveling expenditure incurred on the director's wife accompanying their husbands on business tours.
2. Deduction on account of expenditure paid to M/s McKinsey and Company Ltd for professional services rendered.

Issue-wise Detailed Analysis:

1. Deduction on Account of Traveling Expenditure:

The primary question was whether the appellant-company is entitled to a deduction for the traveling expenses of the director's wife accompanying their husbands on business tours. The appellant-company referenced the judgment in "M/s Avon Cycles Pvt. Ltd vs. ACIT" and the Kerala High Court decision in "CIT vs. Apollo Tyres Ltd" to support their claim. The judgment of the Calcutta High Court in "J.K. Industries vs. Commissioner of Income Tax" was also cited, where it was held that the expenditure incurred for the foreign travel of the spouses of the company's directors could be considered business expenditure if it was decided by the company for promoting better business understanding and reciprocity in international business. The court emphasized that the reasonableness of such expenditure should be judged from the point of view of the businessman and not the revenue authorities.

2. Deduction on Account of Expenditure Paid to M/s McKinsey and Company Ltd:

The second issue was whether the expenditure paid to M/s McKinsey and Company Ltd for professional services could be deducted. The appellant-company provided an agreement dated 10.11.1995, which outlined that McKinsey was to assist in developing a growth strategy and profit improvement program. The court referred to Section 35AB of the Income Tax Act, 1961, which allows for the deduction of lump sum consideration for acquiring any know-how for business purposes. However, it was determined that the agreement with McKinsey did not involve the provision of industrial information or techniques for manufacturing or processing goods, but rather consultancy services. Therefore, the expenditure did not fall under Section 35AB but under Section 37 of the Act, which allows for the deduction of business expenses not covered under Sections 30 to 36, provided they are not capital or personal expenses.

The court also referenced the Delhi High Court judgment in "Indo Rama Synthetics India Ltd vs. Commissioner of Income Tax," where expenses paid to McKinsey for improving operational efficiencies were considered business expenditure. Additionally, the Supreme Court judgment in "Honda Siel Cars India Ltd vs. Commissioner of Income Tax" was considered, which distinguished between capital and revenue expenditure, emphasizing that expenses incurred for setting up a new business or plant are capital in nature, while those for improving existing business operations are revenue expenditures.

Conclusion:

The court concluded that the agreement dated 10.11.1995 falls under Section 37 of the Act, and the services rendered by McKinsey relate to the rearrangement of manufacturing and sales activities. The expenditure is to be treated as revenue expenditure. The appeals were allowed, and the impugned orders were set aside. The appellant-company was entitled to treat the traveling expenses of the director's wives and the fees paid to McKinsey for professional services as revenue expenditure for the relevant assessment year.