THE COMMISSIONER OF INCOME TAX, vs. M/S.M.M.PUBLICATIONS LTD.

The question of law is re-framed as follows: Whether, in the facts and circumstances of the case, the Tribunal was right in having allowed deduction under Section 37 of the Income Tax Act, 1961 [for brevity “the Act”] on mere assumptions and conjectures without looking at whether the expenditure incurred for the foreign travels were in fact business expenditure, which alone could be allowed a deduction under Section 37 of the Act?

For both the years, the assessee had claimed business expenditure on the expenditure incurred for foreign trips by the staff of the assessee-Company, which, the assessee asserted, were for purposes of business to attend conferences, assemblies and have discussion and interaction - 3 - 164 of 2012. with the readers; all of which would enure to the benefit of the business of publication.

For the assessment year 2005-06, the assessee had claimed total amount of Rs.35,62,049/- as business expenditure under Section 37 of the Act. The break up of the amounts as also the nature of visit and disallowance is extracted in a tabular form in the order of the Assessing Officer [for brevity “AO”] at Annexure-A in I.T.A.No.285 of 2010. The AO disallowed the entire claim. Before the first appellate authority, the expenditure incurred totalling Rs.1,88,326/- stood allowed and the balance was disallowed. The Revenue was in appeal before the Tribunal, in which the assessee had filed a Cross Objection. Likewise, in the year 2006-07, the expenses claimed are seen with its break up in a tabular form in Annexure-A of I.T.A.No.335 of 2010. Here also, the AO disallowed the expenses claimed on the foreign trips. The first appellate authority interfered only with a portion of the disallowance made and sustained the balance disallowance. The assessee was in appeal before the Tribunal. The Tribunal allowed the appeal of the assessee as also the Cross Objection filed in the appeal of the Revenue and dismissed the appeal of the Revenue. 164 of 2012. 5. The learned Counsel for the assessee-respondent submits that the Tribunal had gone through the facts and considered the issue in the proper perspective and there is no cause for any interference since it is a finding on facts. We do not see any such consideration having been made by the Tribunal. The submission of the learned Counsel is on the ground that the Tribunal has asserted in paragraph 8 that the argument note as well as the paper book submitted by the assessee were perused to find the disallowance to be based on mere conjectures and surmises. We, on the other hand, find that the Tribunal had assumed that the entire foreign trips of the staff of the assessee, which was claimed as business expenses, had been undertaken for the purpose of business without any factual foundation for the said assumption. As submitted by the learned Senior Counsel, Government of India (Taxes), the considerations on which the disallowance was set aside were considerations which should not have ordinarily weighed with a Tribunal given the task of adjudicating an issue in the perspective of the Income Tax Act.

The Tribunal has made an observation that in the history of the assessment of the assessee the Department has disallowed a portion of the foreign travel expenditure for the first time. There is also an observation to the effect - 5 - 164 of 2012. that either the Department ought to have allowed the expenditure in full or they should have disallowed it in its entirety. We are surprised to see that broad statements are made by the Tribunal that there were no personal or pleasure trips undertaken and that there is no personal element involved. Merely because the persons who undertook the foreign trips are staff of the Company and not share-holders, there is no warrant for an assumption that the Company had footed the bills for the foreign trips only since they were business trips. The Tribunal has also attempted to view it from the point of a businessman, which approach is wrong especially when the Tribunal is called upon to adjudicate the issue on the basis of the facts as also the law as is evidenced from the provisions of the IT Act.

In this context, we notice the first appellate authority's order, which is fairly detailed and looks at the facts in the proper perspective. With respect to an expenditure incurred for a foreign trip to attend an exhibition of latest printing hardware, the AO has treated the same as capital expenditure. The learned Senior Counsel for Government of India (Taxes), to sustain the same and causing interference even to the order of the first appellate authority granting allowance, has placed before us a decision - 6 - 164 of 2012. of the Gujarat High Court in Ambica Mills Ltd. v. Commissioner of Income Tax [(1964) LIV ITR 167]. The first appellate authority has found that the foreign visit was to attend the exhibition to learn about new products in the industry and update the knowledge in the field, which would eventually benefit the assessee-Company. The exhibition was found to be intrinsically connected with the business carried on by the assessee-respondent and the trip undertaken by the Production Manager of the assessee-Company was to learn about the new products. This expense was directed by the first appellate authority to be treated as revenue in nature. The decision of the Gujarat High Court is with respect to a business expenditure incurred in a foreign trip so as to study new methods of manufacture with a view to install new machinery. We are of the opinion that the facts are distinct insofar as there is no attempt to purchase machinery and the trip was only to update the technical know-how of the Production Manager. As to the other disallowances for the year 2005-06, the first appellate authority has clearly found that there were no sufficient materials/details or papers submitted to ascertain the purpose and nature of the trips undertaken. The first appellate authority has listed out the conditions for the allowance of deduction under Section - 7 - 164 of 2012. 37(1), which, in the case of the various foreign trips, were found to be not satisfied. The expenditure was found to have been not laid out wholly and exclusively for the purpose of the business. The assessee also failed to establish the nexus between the expenditure and the business carried out by the assessee in connection with which the expenditure was incurred. A disallowance of Rs.23,72,290/- was made in the year 2005-06. 8. Similarly, in the year 2006-07 also the first appellate authority has looked at each of the expenses claimed; and allowed some, but confirmed the disallowance with respect to the others. The learned Counsel for the assessee specifically has a contention with respect to the disallowance of the expenses of the spouse of the Managing Director. Reliance is also placed on a Full Bench decision of this Court in Ram Bahadur Thakur Ltd. v. C.I.T. [(2003) 261 ITR 390 (FB)(Ker.)]. In the cited decision, the AO had allowed the foreign travel of the Director, but rejected that of the wife who accompanied the Director. The Full Bench held that the same was done in a mechanical manner merely assuming that the foreign travel of the Director of the assessee-Company was for business and not that of the wife. It was held that the AO was bound to conduct an enquiry and - 8 - 164 of 2012. to afford an opportunity to the assessee to establish his claim by adducing evidence, the matter was remanded.

In this context, we notice the extract in the tabular form in the order of the AO. With respect to items 1 to 4 when documents were directed to be submitted, the assessee had produced a write-up on Consolidated Press Holdings without any substantiation that the meeting of the Consolidated Press Holdings having been carried out for the purpose of business. In fact, the reply specifically indicated that the travel was undertaken for personal discussions and was not supported by any communications and that it is a reciprocal measure and not a business activity. With respect to each of the items, the AO had hence sought for substantiation and dealt with it effectively in the assessment order. The same has also been considered by the first appellate authority item by item and certain allowances were made and other disallowances confirmed. We do not see any infirmity in the factual findings of the first appellate authority. These were set aside by the Tribunal without looking at the documents or the materials said to have been produced by the assessee. The Tribunal went on broad principles and abstract assumptions to find that the foreign trip undertaken by the staff were all for business purposes. 164 of 2012. We, hence, answer the question of law in favour of the Revenue and against the assessee and allow the appeals, confirming the order of the first appellate authority. The Tribunal had not dealt with the facts and had merely found the foreign trips to be for the purpose of business on broad statements and unwarranted assumptions not supported by sufficient materials.

In I.T.A.No.164 of 2012, we find that the Tribunal and the first appellate authority had not considered the issue at all. Following the Tribunal's decision of the earlier years, which we have now set aside, the first appellate authority allowed the appeal of the assessee, which was confirmed by the Tribunal, again without looking at the facts. In such circumstances, we refuse to answer the question of law and remand the issue to the first appellate authority for the year 2007-08 for fresh consideration. Ordered accordingly. Parties are left to suffer their respective costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE - 10 - 164 of 2012.