Business expenditure

 Travel expenses — Foreign travel expenditure of the spouse of the Managing Director, pursuant to the board resolution, is allowable as business expenditure, as held by KolHC in JK Industries Limited v CIT — In favour of: The assessee; ITA No 649 of 2004.

No disallowance of interest expenditure is warranted if the interest-free loan was advanced by the assessee to its subsidiaries out of its internal accruals and no borrowed funds were used.


 

J. K. Industries Limited v CIT

High Court of Calcutta

I.T.A. No. 649 of 2004

Bhaskar Bhattacharya and Sambuddha Chakrabarti, JJ

Decided on: 15 July 2011

Counsel appeared:

Mr. J. P. Khaitan, Mr. Sanjay Bhowmick, Miss. D. Saha for the appellant

Mr. S. N. Dutta, Mrs. Soma Chatterjee for the respondent

Judgment

Bhaskar Bhattacharya, J.:

This appeal under section 260A of the Income-tax ("Act") is at the instance of an assessee and is

directed against order dated April 15, 2004 passed by the Income-tax Appellate Tribunal, "A" Bench,

Kolkata, in Income-tax Appeal bearing ITA No.1593(Kol.)/2003 for the Assessment Year 1996-97

and thereby dismissing the appeal preferred by the assessee. Being dissatisfied, the assessee has come up with the present appeal.

2. The facts leading to the filing of this appeal may be summed up thus:

a) The appellant is a public limited liability company within the meaning of the Companies Act, 1956

and the present appeal arises out of the assessment of the appellant for the Assessment Year 1996-97 for which the relevant previous year was the financial year ended on March 31, 1996.

b) During the previous year ending on March 31, 1996, the appellant's Managing Director travelled

overseas to Argentina, Brazil, Cuba, Columbia, Russia, Germany, U.K and other countries in Europe

to hold discussions with Foreign Collaborators with regard to manufacturing process etc. in terms of

the Collaboration Agreement and to meet and hold discussions with the material suppliers on better

material management. There were eight such overseas visits by its Managing Director.

c) According to the appellant, in order to strengthen business relations and promote better business

understanding, it was necessary for the Managing Director to be accompanied by his wife in

accordance with the practice abroad. In keeping with modern items and social customs, the Managing Director was accompanied by his wife since for the promotion of business for which the foreign visits were undertaken, such social aspects could not be overlooked. It was also necessary according to the appellant for the spouse to accompany her husband in order to reciprocate the visits to India of the foreign business associates who were accompanied by their spouses.

d) The Board of Directors of the appellant realizing the need for the spouse to accompany the

Managing Director for the purpose of such business passed a resolution on May 5, 1986 authorizing

the Managing Director, whenever necessary, to take his wife on his tour overseas for the business of

the appellant and resolved that the travel expenses of the wife should be borne by the appellant.

e) In the relevant Assessment Year on foreign travel of the wife of the appellant's Managing Director, the company spent an amount of Rs.7,44,549/-. The said amount was claimed by the appellant as expenditure for the purpose of business. The Assessing Officer, however, disallowed such claim.

f) The appellant finances its subsidiaries as part of the appellant's business activity and its

Memorandum of Association approves such activity. According to the appellant, from time to time, it

advanced loan to its subsidiaries free of interest and all such loans were given out of its own funds and no borrowed funds were utilized. The opening balance of such interest-free loans to the subsidiaries for the previous year ended on March 31, 1996 amounted to Rs.1 crore. During the previous year ended on March 31, 1996, the appellant advanced a further sum aggregating to Rs.7.30 crore to its subsidiaries and during the previous year ended on March 31, 1996, the appellant's cash profit after providing for taxation and dividend amounted to Rs.30.37 crore and the said interest-free loans of Rs.7.30 crore were given out of the said internal accruals of the appellant. The Assessing Officer, however, by order dated March 26, 1999 disallowed the interest expenditure of Rs.59,32,575/- on the assumption that the interest-free loans to the subsidiaries were made by the appellant out of the borrowed funds.

g) Being dissatisfied, the appellant preferred an appeal before the Commissioner of Income-tax

(Appeals) and in course of hearing of the appeal, the Commissioner of Income-tax (Appeals) required the appellant to work out the interest for the period from the date of clearance of the cheques given to the subsidiaries up to the date when sufficient sale proceeds were deposited in the cash credit accounts to cover the amount of the interest-free loans.

h) Although the appellant contended that the profit was far in excess of the interest-free loans given to the subsidiaries and that no part of the borrowed money was utilized for giving the loans out of the composite cash credit accounts in which all sale proceeds and income were deposited and out of

which all expenditure were met, the appellant submitted the working as desired by the Commissioner of Income-tax (Appeals) which resulted in a figure of Rs.27,220/-.

i) The Commissioner of Income-tax (Appeals), by order dated March 24, 2003 upheld the

disallowance of the foreign travel expenditure of the spouse of the Managing Director and also

restricted the addition on account of interest to Rs.27,220/-.

j) Being dissatisfied, the appellant preferred an appeal before the Income-tax Appellate Tribunal and

the Tribunal by order dated April 15, 2004 upheld the order of the Commissioner of Income-tax

(Appeals) both in respect of disallowance of foreign travel expenditure of Rs.7,44,549/- and the

interest disallowance of Rs.27,220/-.

k) Being dissatisfied, the appellant has preferred this appeal before this Court.

3. A Division Bench of this Court has formulated the following substantial questions of law for

decision:

"i) Whether the Tribunal was justified in law in disallowing the foreign travel expenditure of the

spouse of the appellant's Managing Director who accompanied her husband on business visits and its purported findings disallowing the expenditure of Rs.7,44,549/- for the assessment year 1996-97 are arbitrary, unreasonable and perverse.

"ii) Whether in view of the admitted position that interest-free loans were given by the appellant to its subsidiaries out of its internal accruals and that no borrowed funds were used, the Tribunal was

justified in law in upholding the disallowance of interest expenditure of Rs.27,220/- and its purported findings in that behalf are arbitrary, unreasonable and perverse."

4. So far the first point formulated by the Division Bench is concerned, we find that this Bench in the

case of the assessee for another Assessment Year, has answered the point in the affirmative and

against the Revenue, (Vide our order dated March 17, 2011 in I. T. A. no.624 of 2004) and we

propose to adopt the same view. So far the second question is concerned, Mr. Khaitan, the learned

Counsel appearing on behalf of the appellant, strongly relied upon the following decisions in support

of his contention that interest paid on the overdraft account maintained with the bank for the purpose of business where all receipts are deposited and all payments are made should be deducted even if it appears that the assessee used to give loan to its sister concerns without charging any interest provided it is proved that the assessee had sufficient profit exceeding the amount advanced on loan:

1) S. A. Builders Ltd v. C.I.T and another reported in (2007) 288 ITR 1 (SC);

2) British Paints (India) Ltd. v C.I. T reported in (1991) 190 I.T.R. 196 (CAL);

3) Woolcombers of India Ltd. v CIT (central), Calcutta reported in (1982) 134 I.T.R 219(CAL);

4) Alkali and Chemical Corporation of India Ltd. v. C.I.T reported in (1986) 161 I.T. R 820 (CAL).

5. Mr. Dutt, the learned Counsel appearing on behalf of the Revenue, has, on the other hand,

supported the order passed by the Tribunal and at the same time taken a preliminary objection as to

the maintainability of this appeal on the ground that the CIT (Appeals) passed the order on the basis

of suggestion given by the assessee and as such, the said order was a consent order and no appeal lay against such order before the Tribunal. According to Mr. Dutt, we should dismiss this appeal on that ground alone. Therefore, the first question that arises for consideration in this appeal is whether the order passed by the CIT (Appeals) reducing the addition to Rs. 27,200/- was based on consent. The letter dated February 21, 2003 written by the assessee to the CIT (Appeals) which is annexed at pages 108-109 of the Paper Book itself will indicate that the statement showing interest-free loan given to the subsidiaries during the Financial Year 1995-96 vis-à-vis deposits of sale collection in the cash credit account were furnished as desired by the said officer during appellate proceedings and such statement was made without prejudice to the submissions of the appellant. The said letter is quoted below:

"The Commissioner of Income-tax (Appeals), 21st February, 2003 Central-I, Poddar Court,

KOLKATA

Ref: Appeal No.15/CC-V1/CIT(A),C-1/1999-2000

Assessment Year 1996-97

Re. : Disallowance of interest of Rs.59,32,575/- on interest free Loans given to subsidiaries - Ground

No.'E'

Hon'ble Madam,

Without prejudice to the submissions made during the appellate proceedings for Asst. Year 1995-96

held on 20th February, 2002 and as desired by you. We enclose herewith a statement showing the

interest free loans given to subsidiaries during the Financial Year 1995-96 relevant to assessment year under appeal vis-à-vis deposit of sales collections in the mixed cash credit account. Further, as desired by you, in the extended columns, we have calculated the interest on the said loans from the date of clearance of cheques up to the date when sufficient deposit of sales collections were made in the cash credit accounts. Where, there was credit balance available in the cash credit current accounts, on the date when the cheque is cleared the interest is taken at nil since no interest is applicable thereon.

Based on above, the interest, if at all disallowable, works out to Rs.27,220/-.

We hope you will find the above in order.

Thanking you,

Yours faithfully,

For J.K. INDUSTRIES LTD.

V.K. SHARMA

General Manager (Taxation)"

6. From the aforesaid letter, it is clear that the calculation of interest was shown, as desired by the

appellate authority, and without prejudice to the submissions of the appellant in the appeal. It appears that the CIT (Appeals) has in her judgement made following observations:

"The A/R argued that from the cash flow statement it is apparent that the appellant company had

always comfortable cash position in the form of profit for making advances to its subsidiaries and

sister concerns. He stated that all the cash credit overdraft accounts of the banks and its sale proceed contain element of profits after providing for taxation, interest and other over heads. However, the A/R argued that at best an amount of Rs. 27,220/- can be disallowed in view of the fact that for certain periods debit balances were there in the account." From the aforesaid recording of submission, it is clear that there was no admission of the appellant of the liability but an alternative submission was made that at the most, the amount of Rs.27, 220/- could be disallowed. Thus, an alternative submission that at the most, the said amount might be disallowed if the main contention that entire amount should be deducted was not accepted cannot be said to be an admission on a question of fact.

It is now settled law that if two alternative reliefs are claimed and the Court grants the alternative one by rejecting the first prayer, a litigant has a right to prefer an appeal for grant of the main relief. For instance, in a suit for specific performance of contract with alternative prayer of return of earnest money if the Court grants the relief of return of earnest money by refusing the main prayer of specific performance of contract, it will be preposterous to suggest that no appeal claiming the relief of specific performance is maintainable as the alternative relief has been granted.

7. We, therefore, find no substance in the first contention of Mr. Dutt that the appeal before the

Tribunal was not maintainable as the order was passed on consent before the CIT (Appeals).

8. The next question is whether the learned Tribunal below erred in law in maintaining the deduction

to Rs.27,220/- in the facts of the present case. It appears that the Tribunal really proceeded as if such order was passed by the CIT (Appeals) on the basis of suggestion of the assessee. We have already pointed out that there was no admission on the part of the assessee that the deduction should be limited to that amount. Thus, the reason assigned by the Tribunal for affirming the order of the CIT (Appeals) was patently erroneous It is now a settled law that it is permissible for an assessee to borrow the fund from the bank and lend some of it to its sister concern (a subsidiary) on interest-free loan. The test in such a case is really whether this was done as a measure of commercial expediency.

The expression "commercial expediency" is an expression of wide import and includes such

expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not

have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Thus, the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act.

Also, the expression "for the purpose of business" is wider in scope than the expression "for the

purpose of earning profits". What is relevant is whether the assessee advanced such amount to its

sister concern as a measure of commercial expediency. (S.A. Builders Ltd v CIT (Appeals) and

another reported in AIR 2007 SC 482). The CIT (Appeals) has not disbelieved the transaction but has

restricted the deletion to Rs.27, 200/- when the claim of the assessee is that all payments made should be deducted even if it appears that the assessee used to give loan to its sister concerns without charging any interest because it is proved that the assessee had sufficient profit exceeding the amount advanced on loan. As pointed out by a Division Bench decision of this court in the case of Woolcombers of India Ltd v CIT (Appeals), Central Calcutta (supra), in a case where the assessee has overdraft account in the bank and the entire profits in the relevant year were deposited in the said account which was far exceeding the amount of advance tax liability and the money was withdrawn both for business purpose and payment of advance tax, there is a presumption that advance tax was paid out of profits and not out of overdraft account and disallowance of interest on overdraft account as being relatable to payment of advance tax was not justified. The same view has been taken in the case of British Paints (India) Ltd (supra) by another Division Bench of this Court. In the case before us, we find that the opening balance of such interest- free loans to the subsidiaries for the previous year ending on March 31, 1996 amounted to Rs.1 crore. During the previous year ended on March 31, 1996, the appellant advanced a further sum aggregating to Rs.7.30 crore to its subsidiaries and during the previous year ended on March 31, 1996, the appellant's cash profit after providing for taxation and dividend amounted to Rs.30.37 crore and the said interest-free loans of Rs.7.30 crore were given out of the said internal accruals of the appellant. Thus, it should be presumed that the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount of subsidiaries and there was

no justification of adding a sum of Rs.27,200/- as approved by the Tribunal.

9. We, therefore, set aside the order of the Tribunal and direct the Assessing Officer not to deduct any amount from expenditure on the ground that interest-free loan was given to its sister concerns from the borrowed fund when the profit was far in excess and entire deposits were made in the said account and at the same time disallowance of foreign travel expenditure of the spouse of the appellant's Managing Director who accompanied her husband on business visits amounting to Rs.7,44,549/- is also set aside.

10. The appeal is, thus, allowed by answering both the points formulated in this appeal in the negative and against the Revenue. In the facts and circumstances, there will be, however, no order as to costs.