2005 (7) TMI 48 - HC - Income Tax

Section 37 - 1. Whether Tribunal was right in law in holding that the disallowance under rule 6D of the Income-tax Rules 1962 should be computed on the basis of total expenditure on each employee for the whole year and not on the basis of expenditure incurred on each trip? 2. Whether Tribunal was right in law in holding that the expenditure of Rs. 44, 966 incurred by the assessee on the foreign trips of the wife of the company s president was wholly and exclusively incurred for the business of the assessee and was allowable as a deduction in computing the profits and gains of the business?

Summary

Issues:
1. Disallowance under rule 6D of the Income-tax Rules, 1962 - computation basis.
2. Allowability of expenditure incurred on foreign trips for business purposes.

Analysis:

Issue 1: Disallowance under rule 6D - computation basis
The first issue pertains to the computation basis for disallowance under rule 6D of the Income-tax Rules, 1962. The Tribunal had to determine whether the disallowance should be based on total expenditure on each employee for the whole year or on the basis of expenditure incurred on each trip. The High Court referred to a previous decision in the case of CIT v. Aorow India Ltd. [1998] 229 ITR 325, where it was held that the disallowance should be computed based on total expenditure for the whole year. Consequently, the first question was answered in favor of the Revenue and against the assessee.

Issue 2: Allowability of expenditure on foreign trips
The second issue revolved around the allowability of an expenditure of Rs. 44,966 incurred by the assessee on a foreign trip of the wife of the company's president for business purposes. The Commissioner of Income-tax (Appeals) and the Tribunal both found that the expenses were incurred for the business of the assessee. The High Court emphasized that the test of commercial expediency requires that the expenditure should not be in the nature of capital or personal expenditure and should be wholly and exclusively laid out for business purposes. The Court applied the standard of a normal, prudent businessman to assess the expenditure's business purpose. Given the factual findings and the nature of the expense, the High Court concluded that the expenditure on the foreign trip was allowable as a deduction in computing the profits and gains of the business. The judgment highlighted that each case must be decided based on its own facts, primarily considering business expediency, and that not all expenses on foreign trips would be allowable unless connected with the business.

In conclusion, the High Court answered the second question in favor of the assessee and against the Revenue, disposing of the reference with no order as to costs.