TMI Blog2020 (10) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... untry to continue to do their business. Tribunal, which tested the finding of the CIT-A did not assign any reasons as to why the expenditure was not for the benefit of the assessee, the holding company. The order passed by the Tribunal is devoid of reasons. Though the assessee was able to produce their annual report along with accounts prepared in accordance with AS-18 that there was a gradual increase in sales compare to the early years by the subsidiary companies in the foreign country, the Tribunal in a single stroke held that it is not convinced with the stand taken by the assessee. Bonafides and genuineness of the expenses incurred by the assessee towards foreign travel was never in doubt before the assessing officer or before the CIT-A or before the Tribunal, thus, we have no hesitation to hold that the disallowance done by the CIT-A, as affirmed by the Tribunal, is erroneous. Allowable revenue expenses - Expenses paid to M/s Stehlin and Associates, Paris, France in connection with acquisition of M/s Belair, France - AO opined that the expenditure was incurred towards acquisition of a French company and it is not related to the assessee's business earnings and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. Therefore, the order of the Tribunal in remanding the matter to the assessing officer was wholly unjustified. - T.C.A.Nos.10 and 11 of 2019 - - - Dated:- 25-9-2020 - Honourable Mr. Justice T.S. Sivagnanam And Honourable Mrs. Justice V. Bhavani Subbaroyan For the Appellant : Mr.R.Sivaraman For the Respondents : Mr.T.R.Senthilkumar Senior Standing Counsel and Mrs.K.G.Usha Rani COMMON JUDGMENT T.S.SIVAGNANAM, J. These appeals have been filed by the assessee under Section 260-A of the Income Tax Act, 1961 [the 'Act' for brevity] challenging the common order dated 28.06.2016 in I.T.A.No.2769/Mds/2014 and I.T.A.No.2943/Mds/2014 passed by the Income Tax Appellate Tribunal, Chennai 'C' Bench, [hereinafter referred to as 'Tribunal'] for the assessment year [for brevity 'AY'] 2010-2011. 2. The appeals were admitted on 08.01.2019 to decide the following substantial questions of law:- T.C.A.No.10 of 2019: (1) Whether on facts and circumstances of the case the Appellate Tribunal was right in law in holding that the Foreign Travel expenditure incurred by the appellant amounting to ₹ 17,42,595/- cannot be stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer upon perusal of the profit and loss account, disallowed foreign travel expenditure of subsidiary companies. With regard to the legal and professional charges paid by the assessee in connection with the acquisition of the French Company, M/s. Belair, France was disallowed holding that the expenditure incurred towards acquisition of the French Company is not related to the assessee's business earnings and income. The assessing officer concluded that such expenditure was incurred in connection with a new unit's feasibility and acquisition of a capital asset and hence not allowable as deduction under Section 37(1) of the Act. With the above finding, the assessment was completed under Section 143(3) of the Act by order dated 13.03.2013. 7. The assessee filed appeal before the Commissioner of Income Tax Appeals - I, Coimbatore [for brevity 'CITA']. The CITA by order dated 04.09.2014 partly allowed the appeal. With regard to the foreign travel expenses, the expenses for vendor development related travel and expenses for production and gear sourcing for Elgi India was allowed. With regard to the balance amount of ₹ 17,42,595/-, the same were d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to explain as to why the expenditure incurred / related to subsidiary companies should not be disallowed, as the same are not related for earning of the income by the assessee company. Though the assessee had given a elaborate reply, the assessing officer opined that the reply was not satisfactory and the assessee has not proved as to how the expenses are related to earning the assessee's income?. 12. Before the CITA, the assessee, once again explained as to how the foreign travel expenditure was necessitated to develop the business of the assessee and it did not pertain to the subsidiary company at China. Upon considering the materials placed before the CITA by the assessee, it was held that the vendor development related travel is definitely in the interest of the holding company, since procurement of components for the holding company was also done from China. Accordingly, the expenditure incurred under the said head to the tune of ₹ 1,11,80,255/- was allowed. 13. With regard to the expenditure for import purchase, production and gear sourcing for Elgi India, the CITA held that it is in interest of the assessee company and it has to be treated as expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rketed under the Trade mark 'Elgi'. Therefore, there was no reason as to why the CITA had disallowed a portion of the expenditure without noting the fact that the expenditure was incurred by the assessee to safeguard the interest of the assessee, the holding company and its normal business expenditure of the holding company. 16. Furthermore, the CITA failed to note that all those expenditure incurred by the assessee, the holding company was to keep the subsidiary companies in the foreign country to continue to do their business. The Tribunal, which tested the finding of the CITA did not assign any reasons as to why the expenditure was not for the benefit of the assessee, the holding company. The order passed by the Tribunal is devoid of reasons. 17. Though the assessee was able to produce their annual report along with accounts prepared in accordance with AS-18 that there was a gradual increase in sales compare to the early years by the subsidiary companies in the foreign country, the Tribunal in a single stroke held that it is not convinced with the stand taken by the assessee. 18. As pointed out earlier, the bonafides and genuineness of the expenses incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was in connection with acquisition and it is in the capital field and cannot be permitted as a deduction. 21. The Tribunal, in our considered view lost sight of a very important issue, namely, that the expenditure was incurred for the expansion of the global operations of the assessee and the assessee was in the process of acquiring shares in a foreign company, namely, M/s Belair, France and had to incur expenditure in the nature of legal and professional fee for various services rendered by M/s Stehlin Associates and this expenditure ought to have been treated as wholly and exclusively for business purposes. In this regard, it is relevant to refer to the decision of Hon'ble Supreme Court in the case of S.A.Builders Limited V. CIT reported in [2007] 288 ITR Page 1, in the said decision while interpreting the words for the purpose of business used in Section 37(1) of the Act, while computing the income chargeable under the head Profits and Gains of business or Profession , it was held that such expenditure is to be tested in the light of the commercial expediency, which is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly and exclusively for the purposes of the business or profession to assail that the expression wholly and exclusively used in Section 10(2)(xv) of the old Act (now Section 37(1) of the Act), does not mean necessarily , the Apex Court has held that ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business and such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the old Act, even though there was no compelling necessity to incur such expenditure. It was further held that the fact that somebody other than the assessee (like in the instant case, the sister concerns) is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the old Act (now Section 37(1) of the Act), if it satisfies otherwise the tests laid down by law, referred to above. 6.5. Recently, the Apex Court, in S.A.Builders Ltd. v. Commissioner of Income-tax (Appeals), [2007] 288 I.T.R. Page 1, interpreting the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductable as revenue expenditure. The relevant portion of the Judgment reads as follows:- ' ..The Tribunal was of the opinion that as both the companies were carrying on complementary business and their amalgamation was necessary for the smooth and efficient conduct of the business , it is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. In view of the said finding and also in view of the decision of this Court in Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT 1965 56 ITR 52, we are of the opinion that the Tribunal was right in its conclusion. The decision in Bombay Steam Navigation also pertains to amalgamation of two shipping companies. The assessee-Company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note and hypothecation of all moveable properties of the assessee-Company. The loan was to carry simple interest at 6 per cent. The question that arose in the said case was whether the interest paid upon the said loan was deductible as revenue expenditure. It was held by this Court that it was an expenditure deductible under Section 10(2)(xv) of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trol Area Network] by replacing the existing CNC [Computer Numerical Control] drive system. 25. The assessee was called upon to explain as to why the expenditure should not be treated as a capital expenditure? We find that the assessee had given a detailed submission along with catalogues and photographs. However, the assessing officer disallowed the expenditure and held it to be capital expenditure on the ground that the replacement of the CAN System instead of the existing CNC system is a major replacement of the existing machine with a new machine, consequence thereof, the efficiency of the machine will improve resulting in increased production. Furthermore, the old machinery had become obselete and the installation of the equipment in the machine resulting in increase production will give an enduring benefit to the assessee. 26. On appeal before the CITA, an elaborate examination of the facts was done and it was held that CNC system was part of the machine and this technology has become obsolete was replaced by 'modified electronic system' and it did not amount to replacement of an existing machine with new machine and the expenditure was treated as 'revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the decision in CIT V. Saravana Spinning Mills (P.) Ltd., reported in [2007] 293 ITR 201, the case was decided against the assessee. We find that the expenditure incurred by the assessee in the said case was towards replacement of the machinery with new machinery, which is not the case of the assessee on hand. 29. Also, reliance was placed on the decision of this Court in Commissioner of Income Tax III, Coimbatore Vs. M/s Vijayeswari Textiles Limited, Coimbatore in T.C.(Appeal) Nos.1316 to 1322 of 2008 dated 30.10.2018. The said case also pertain to replacement of old machinery by purchasing and installing new machinery and following the decision in CIT Vs. Saravana Spinning Mills Pvt. Ltd., reported in MANU/SC/3308/2007; Commissioner of Income Tax, Madurai Vs. Mangayarkarasi Mills (P) Ltd., reported in 2009 (315) ITR 114 (SC) and Super Spinning Mills Ltd., Vs. Assistant Commissioner of Income Tax reported in 2013 (357) ITR 0720 (Mad.), the case was remanded to the CITA for fresh consideration. As noted in the said Judgment, the expenditure incurred was for replacement of old machinery with that of new machinery and the said decision would not assist the revenue. 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tating that the amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure. 23. Though the Act defines the expression income , it does not define either the expression expenditure or the expression repairs or current repairs . However, several heads of expenditure are separately dealt with under Sections 35 and 35A to 35E. 24. Section 37(1) states that any expenditure laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . But, Section 37 (1) excludes three items of expenditure. They are (i) expenditure of the nature described in Sections 30 to 36, (ii) expenditure in the nature of capital expenditure, and (iii) expenditure in the nature of personal expenses of the assessee. 25. Therefore, if an item of expenditure falls within any of the categories indicated in Sections 30 to 36, the same is entitled to deduction as per the provisions of those Sections. But, any expenditure which does not fall within the scope of Sections 30 to 36, but which may still qualify whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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