TMI Blog2003 (1) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred on the foreign tour of the wife of a director of a company in the computation of income under the head "Profits and gains of business" under section 37(1) of the Income-tax Act, 1961 (for short "the Act") arises in this reference. A Division Bench consisting of one of us (Sivarajan J.) and C. N. Rama chandran Nair J. has referred this case to a larger Bench stating that there is a conflict between the decision in I. T. R. No. 9 of 1998 (Ram Bahadur Thakur Ltd. v. CIT [2002] 257 ITR 289 (Ker)) on the one hand and in CIT v. Aspinwall and Co. Ltd. [1999] 235 ITR 106 (Ker) and CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 (Ker) on the other on this question. The Income-tax Appellate Tribunal, Cochin Bench, at the instance of the assessee, has referred the following question of law for the decision of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred on the foreign tour of the wife of a director of the company is not an allowable deduction under the Income-tax Act, 1961 ?" The brief facts are as follows : The assessee is a public limited company, mainly engaged in the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenses incurred by the director for the foreign tour which would clearly show that the travel was undertaken by the said director for the business of the assessee and that the assessing authority had disallowed the expenses incurred for the travel of the wife of the director accompanying him without assigning any reason at all. Counsel also submitted that the assessee-company by its resolution had permitted the director to take his wife also for the foreign tour solely for the purpose of promoting the business of the assessee and therefore the Assessing Officer or for that matter the appellate authorities were not justified in disallowing the said claim. Counsel also pointed out that neither the Assessing Officer nor the two appellate authorities had considered the factual situation and that all of them went by the decision in the case of the assessee for the earlier assessment year. Counsel also relied on the decisions of this court in Aspinwall and Co. Ltd.'s case [1999] 235 ITR 106 and Appollo Tyres Ltd.'s case [1999] 237 ITR 706 which according to counsel support the assessee's case. He also submitted that the very question in the case of the assessee for the year 1985 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for personal purposes. The two appellate authorities also went by the earlier decisions in the case of the assessee itself. Both the appellate authorities, according to us, failed to note that for taxation purposes each year is an independent unit and the issue has to be determined with reference to the factual situation obtaining in the particular year. Admittedly the claim for deduction of the expenditure incurred for the foreign travel of the director and the wife of the director of the assessee-company were made under section 37(1) of the Act which reads as follows : "General. -Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." In order that a particular item of expenditure may be deductible under this sub-section the following conditions should concur : (1) the expenditure should not be of the nature described in sections 30 to 36 ; (2) it should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision of section 10(2)(xv) of the Indian Income-tax Act, 1922, observed thus : "In our opinion the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and therefore the amount claimed is not a deductible item under section 10(2)(xv)." Meeting a contention taken by the Department that since the Davids and Tatas were indirectly benefited by the retrenchment of the services of the employees of the company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company, the Supreme Court in Sassoon J. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 observed, at page 275 of the report, as follows : "It has to be observed here that the expression 'wholly and exclusively' used in section 10(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for the purpose of trade or business of the assessee." Relying on the aforesaid principles, the Supreme Court in Sassoon J. David and Co.'s case [1979] 118 ITR 261, mentioned above considered the question. In that case it was the case of the company that many of the employees were old and superfluous and the business could be carried on with a smaller number and the only way in which they could reduce the number was to terminate the services of all the employees by paying them compensation and thereafter re-employing some of them only, that if the company felt that it was a method which would enure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency and therefore the High Court erred on the facts and in the circumstances of the case in holding that the sum of Rs. 1,27,511 was not deductible under section 10(2)(xv) of the Act. The Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 observed that apart from the conditions specified in section 37(1) of the Act there are other principles which are also fundamental. It was observed thus : "The income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The manner to apply the test is to ask the question-Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration ? It is trite that where an assessee seeks to deduct from his business profits certain items of expenditure the onus of proving that such deductions are permissible falls on the assessee. This is all the more so when the claims are based on facts which are within the exclusive knowledge of the assessee. Thus, the assessee has to place all the facts and circumstances before the revenue authorities and the latter must examine these and make up its mind as to whether the expenditure was justified by commercial expediency. The question regarding the allowability of the expenditure incurred on the foreign tour of the wife of a partner of a firm or the wife of a director of a company or the wife of an executive of the company came up for consideration before the Gujarat, Madras and Madhya Pradesh High Courts in Bombay Mineral Supply Co. (P) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hink that, in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of personal needs of those executives, In our view, these are all personal expenses as explained by the Supreme Court in State of Madras v. Coelho [1964] 53 ITR 186, at page 192." The following observation of the Supreme Court in the judgment mentioned above was also extracted : "Personal expenses would include expenses on the person of the assessee or to satisfy his personal needs such as clothes, food, etc., or purposes not related to the business for which the deduction is claimed." The Gujarat High Court accordingly held that the need of the managing director of the assessee-company to have the services of his wife who was not a qualified or a trained nurse either to attend on him for his indifferent heal or to prepare food for him since he happened to be a strict vegetarian would not entitle the assessee-company to claim the proportionate expenses as business expenses. In CIT v. T. S. Hajee Moosa and Co. [1985] 153 ITR 422, the Madras High Court considered a claim made by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilment of the personal need of the partner to have his wife with him to attend on him and no more and by no stretch of imagination, the expenditure incurred in that connection can be said to relate to business. The court also dealt with a contention taken by the Revenue that even assuming that the expenditure incurred related to business purposes, such expenditure was not laid out or expended wholly and exclusively for the purpose of the business. The gist of the said contention was that the expenditure was laid out for a dual purpose, namely, to satisfy the personal needs as well as for purposes of business and not solely and exclusively for business purposes and that would take it out of section 37(1) of the Act. The Madras High Court interpreting the expressions "wholly" and "exclusively" and relying on the decisions of the English courts held that the object of the partner in taking his wife with him on the foreign tour, on the facts of this case, was not exclusively for the purpose of the promotion of the business, but also with the object of securing the company of the wife in order that she may be in a position to attend on him during the course of his tour and even if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99] 235 ITR 106, this court considered the claim for deduction of the expenditure incurred for the foreign travel of the wife of the chief executive of the assessee-company under section 37(1) of the Act. The Assessing Officer rejected the said claim holding that the expenditure was incurred for non-business purposes. This was confirmed in appeal by the Commissioner of Income-tax (Appeals). In further appeal the Tribunal limited the disallowance to 50% of the claim. At the instance of the Revenue, the Tribunal referred the question as to whether the Tribunal is right in law and fact in allowing the foreign travel expenditure of the wife of the executive of the company. This court observed that the Tribunal has found as a fact that the travel was undertaken by the wife of the senior executive only for the purpose of the business. The court also observed that it is a case where the assessee had incurred expenses for the travel of the employee and the wife of the employee and not the wife of its own partner or director. On the basis of the factual finding of the Tribunal this court did not find any merit in the contention of the Revenue based on the decisions of the Madras and Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses but wholly and exclusively for the purpose of the business. We, however, do not endorse the view that whenever the wife of the director of the company undertakes a foreign tour along with that director, it should be presumed that such foreign travel is wholly and exclusively for business purposes. Applying this principle to the facts of this case we do not think that any interference is called for, with the concurrent findings of fact arrived at by the assessing authority, the appellate authority and the Tribunal that no materials are available to establish that the expenditure incurred on the foreign tour of the wife of the director of the assessee-company was for its business purposes. We answer the question referred, against the assessee and in favour of the Department." We have already noted that another Division Bench considered the same question in the case of the assessee itself in respect of the assessment year 1985-86 in the judgment dated September 26, 2002 in I. T. R. No. 197 of 1996 (CIT v. Ram Bahadur Thakur Ltd. [2003] 261 ITR 388). The Division Bench observed that the Tribunal has not given reasons with regard to the travelling expenses of the wives of the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 37(1) of the Act if it is incurred for promoting the business and to earn profits even though there was no compelling necessity to incur such expenditure. (6) If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure to the benefit of a third party also. (7) In every case it is a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee. (8) Where an assessee seeks to deduct from his or its business profits certain items of expenditure the onus of proving that such deductions are permissible is on the assessee. This is particularly so when the claims are based on facts which are exclusively within the knowledge of the assessee. Thus, it is for the assessee to plead and prove before the authorities that the expenses are incurred wholly and exclusively for the purpose of the business of the assessee. (9) When a claim for deduction of an expenditure under section 37(1) of the Act is made by an assessee the Assessing Officer is bound to conduct an enquiry as to whether the assessee satisfies all the requirements of the section be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the claim for deduction of the expenses incurred for the foreign travel of the wife of the director accompanying him and the case of the Assessing Officer is that it does not constitute business expenditure. Since there is no categoric finding by the Tribunal on the facts as to the requisite condition, viz., the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee, we decline to answer the referred question. We, instead, set aside the appellate order of the Tribunal and direct the Tribunal to dispose of the appeal afresh in accordance with law and in the light of the broad legal principles stated in this judgment. Since this case has come up before the Full Bench only because of the reference made by the Division Bench stating that there is a conflict between the decisions of this court in I. T. R. No. 9 of 1998 (the assessee's own case for the assessment year 1987-88-[2002] 257 ITR 289) in Aspinwall and Co.'s case [1999] 235 ITR 106 and in Appollo Tyres's case [1999] 237 ITR 706 we are bound to express our view in that regard. According to us, there is no conflict of opinions as such. These decisions are to the effect that in every ..... 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