S N KAPOOR EXPORTS,JAIPUR vs. ACIT, CIRCLE-5, JAIPUR

ORDER

PER VIJAY PAL RAO, JM

2 /JP/2020 M/s. S.N.Kapoor Exports vs ACIT, Circle - 5, Jaipur S. Name of the Person Exp. % of Exp. Amount of Exp. Dis % of Dis No Claimed Allowed Exp. Allowed Allowed by AO Allowed by AO by AO by assessee 1. Suriender Nath Kapoor 2178661 100% 2178661 NIL NIL

TOTAL 11987531 --- 10210077 1777454

2. That the ld. CIT (A), Jaipur as grossly erred in law and facts in confirming disallowances out of foreign travelling expenses which is purely and exclusively related to business. All family members has worked in the firm. Due to secrecy and confidentiality of business appellant firm can’t trust on employee outside their family members.

Refer:- CIT Vs Sundharam Clayton Ltd. And Dalmia Cement (B.) Ltd. (1999 ) 240 ITR 271.

During the course of assessment proceeding, the AO inter alia noted that the assessee has claimed Rs. 1,19,87,531/- as travelling expenses including foreign travel expenses of Rs. 1,16,46,568/-. The AO asked the assessee to furnish the breakup of such expenses and also produce vouchers for verification. From the details produced by the assessee, the AO noted that some of the expenses were incurred in respect of foreign travelling undertaken by family members of the partners of the assessee firm. Accordingly, the AO made disallowance of the entire expenditure of foreign travelling expenses in respect of Shri Rahul Kapoor and Master Vivaan Kapoor sons of the partner Shri Surender Nath Kapoor. The AO also made 20% disallowance in respect of foreign travel expenses of the employees of the partnership firm. The AO has computed the ratio of salary to the quantum of foreign travelling expenses in the case of the partners and the same is applied in the case of foreign travelling expenses action of the AO before the ld. CIT(A) but could not succeed.

2.3 The ld.AR of the assessee has submitted that the AO has made disallowances in the ratio of salary to foreign travelling expenses which are highly arbitrary and unjustified. The ld.AR has submitted that the AO computed the ratio of salary paid to partners and their foreign travelling expenses which is applied to the employees of the partnership firm without considering the fact that partners are not an employee and therefore, their salary and foreign travelling expenses cannot be compared with the employees of the partnership firm. The ld.AR further contended that he has furnished all the details regarding foreign travelling expenses which have not been disputed by the AO. Thus the ld.AR of the assessee submitted that correctness of the expenditure incurred by the assessee’s partnership firm on the foreign tour undertaken by the partners and employees of the assessee firm is not in dispute. The ld.AR of the assessee thus submitted that an identical issue has been considered by this Tribunal in assessee's own case for the Assessment Year 2011-12 vide order dated 13-06-2017 in ITA No. 290/JP/2015. Thus the ld.AR of the by the order of this Tribunal (supra).

2.4 On the other hand, the ld. DR has submitted that the AO has given the finding of facts that family members of the partners who have gone on foreign tour alonwith the partners have not incurred the expenses for business purposes of the assessee’s partnership firm. As regards the employees of the partnership firm, since these employees are also the family members and relatives of the partners, therefore, the AO by invoking the provisions of Section 40A(2) of the I.T. Act, 1961 has made proportionate disallowance which was found to be excessive. The ld. DR further contended that it is a case of family of partnership firm and entire families of the partners have undertaken foreign tour. All the expenditure is claimed as business expenditure. Therefore, only the proportionate expenditure which is found to be incurred for the purpose of business of the partnership firm can be allowed. The ld. DR has vehemently contended that the expenditure incurred for foreign tour of two children of the partner and one of them is minor cannot be allowed as expenditure incurred wholly and exclusively for the purpose of business of the lower authorities.

2.5 We have considered the rival submissions as well as relevant materials available on record. The dispute before us is regarding disallowance of foreign travelling expenses incurred by the assessee in respect of foreign visit undertaken by the employees of the assessee’s partnership firm as well as foreign visit of the children of the partner of the assessee firm. So far as the employees of the assessee’s partnership firm are concerned, once the AO has accepted that the foreign visit undertaken by the employees are for the purpose of assessee’s partnership firm then the disallowance made by the AO in proportion to the salary and travelling expenses of the partner is highly unjustified. There is no direct or proximate relation between the salary of the employees and actual expenditure incurred on foreign tour undertaken by the employees for the purpose of business of the assessee firm. It is not a perquisite given to the employees but it was a foreign tour of the employees for the purpose of business of the assessee firm and therefore, the expenditure incurred by the assessee towards foreign tour of the employees undertaken by them for the purpose of business is an allowable Year 2011-12 vide order dated 13-06-2017 has considered this issue in para 2.4 as under:-

‘’2.4 We have heard the rival contentions and perused the materials available on record. Brief facts of the case are that the assessee has claimed expenses of Rs. 91,69,981/- as foreign travelling expenses. The AO during the course of assessment proceedings made the disallowances of Rs. 26,02,282/- on the basis of percentage of salary of employee and partner besides children of the partner. In first appeal the ld. CIT(A) has confirmed the disallowances of expenses incurred during foreign trip on the children and sustained 20% disallowance of expenses incurred during foreign trip of the employee. It is pertinent to mention that the assessee has taken his employees on foreign trip for official purposes for which the employees incurred the expenses. It is also not understood as to how the expenses are sustained by the ld. CIT(A) relating to disallowance of expenses as in foreign trip the expenses like air tickets, hotels etc. are commonly spent and incurred which the partner of the firm spends. It is also noted that the ld. CIT(A) has flatly sustained the addition @ 20% without giving any cogent reasons which is not justified. In this situation, we direct to allow the addition of Rs. 5,39,671/- ( 2,29,948 + Rs. 2,53,982 + Rs. 55,801). As regards the disallowance of expenses of Rs. 2,04,215/- incurred on minor children of the assessee , it is noted that the assessee vide his written submission before the ld. CIT(A) at page 7 of his order submitted as under:- ‘’ Further Vivan is minor children and they cannot live alone at him at home and under compulsion they had to take with them and it was necessary to keep with him for better business activities otherwise they could not have paid attention on business and their mind could be diverted. The AO nowhere stated that this is not the business tour rather admitted. If so, then how the AO can make partly disallowance treating part of personal.’’ The ld. CIT(A) has not taken into consideration the submissions of the assessee . It is also pertinent to mention that when the partner alongwith his family is going on official foreign trip then it will be difficult for him to leave his minor children alone and under such circumstances, it will also be difficult to put attention for growth of the business during foreign trip as his minor children is away from the parents and the object to ponder on the development of business is 8 /JP/2020 M/s. S.N.Kapoor Exports vs ACIT, Circle - 5, Jaipur defeated. Hence, it is not justified on the part of the lower authorities to sustain the addition. In this situation, we direct to delete the addition of Rs. 2,04,215/-. Further the ld. CIT(A) has also confirmed the addition of Rs. 7,80,734/- in the case of Shri Rahul Kapoor in first appeal. The ld. AR of the assessee at page 7 of the ld. CIT(A) order on this issue prayed for deletion of addition as under:- ‘’The Rahul Kapoor although not getting the salary of the firm but he was closely associated with the business of the assessee and indirectly supporting the business activities. He is master mind in designing. In the case of ITO vs. Delhi Press Samachar Patra (P) Ltd. (1990) 32 ITD 650, held that business expenditure- allowability- foreign travel expenses – visit to England by a person who was not a director or employee of the company but a relation of the directors- the personal was an expert in publishing- visit for the purpose was solving of certain problems encountered by the assessee with a press imported from England allowable. And a person can take help or assistance other person for a short period to boost his business. For that in law there is no denial.’’ It is noted from the records that the major son of the assessee Shri Rahul Kapoor also went to the foreign trip alongwith the parents i.e. partner of the company. It is also noted that Shri Rahul Kapoor is associated with the business of assessee without any salary. He is supporting the business activities as he had expertise in designing. It is also relevant to mention that every family member of partner of firm associates with the business growth of the firm by utilizing his/ her talent without receiving any salary. Therefore, the assessee has taken his son on foreign trip to promote the business of firm by utilizing his expertise in designing. Therefore, it is not justified to sustain the disallowance of expenses of Rs. 7,80,734/- on his foreign trip. In such situation, we direct to delete the expense of Rs. 7,80,734/-. Conclusively, the appeal of the assessee is allowed.’’ Therefore, the disallowance made by the AO on account of foreign travelling expenses in respect of employees of the assessee firm is deleted.

2.5.1 As regards the expenditure incurred in respect of foreign travelling of children namely Shri Rahul Kapoor and Master Vivaan Kapoor of the firm and even one of them i.e. Master Vivaan Kapoor is still a minor who cannot be considered as the employee of the partnership firm of the assessee. As regards, the expenditure incurred in respect of foreign tour of Shri Rahool Kapoor who was found to be assisting in the business of the assessee's partnership firm, being a qualified and expert in designing, the same was allowed by this Tribunal for the A.Y. 2011-12. There is no dispute if the son is associated with the business of the assessee partnership firm and actively participating in the business activities by providing his expertise and services of designing in the business of assessee then the expenditure incurred in foreign tour of the son of the partner is an allowable business expenditure. However, this fact has not been examined by any of the authorities below and therefore, we direct the AO to verify this fact and if Shri Rahool Kapoor is found to be assisting in the business activity of the assessee firm and also providing the services of designing then the claim of the assessee shall be allowed by following our earlier order of this Tribunal for the Assessment Year 2011-12.

Vivaan Kapoor, a minor son of the partner, though the Tribunal has allowed this expenditure for the Assessment Year 2011-12, however, we are of the considered view that said expenditure cannot be considered as incurred wholly and exclusively for the business purposes of the assessee firm. There may be an exceptional circumstances for the Assessment Year 2011-12 but it cannot be a routine matter of taking the son on foreign visit. Even otherwise the business affairs of the partners of the assessee firm cannot be mixed with the personal or family affairs. The issue of taking the minor on foreign visit is purely a personal/ family affair of the partner and therefore, the expenditure incurred on the foreign visit of the minor son cannot be allowed as regular business expenditure.

Therefore, irrespective of the fact that said expenditure was allowed in the Assessment Year 2011-12 by the Tribunal, it cannot be a perpetual routine expenditure. Therefore, the disallowance of foreign tour expenditure in respect of Master Vivaan Kapoor is confirmed.

3.0 During the course of hearing, the ld.AR of the assessee has not pressed the Ground No. 4 due to smallness of the amount. Therefore, the same is dismissed being not pressed.

Order pronounced in the open court on 20 /03/2020.