COMMISSIONR OF INCOME TAX vs. M/S WILLIAMSON TEA ASSAM LTD.

Still dissatisfied by the order, dated 01.09.2006, passed by the Commiss ioner of Income Tax (Appeals), the respondent company preferred two appeals befo re the Income Tax Appellate Tribunal, Gauhati Bench (hereinafter referred to as ’the Tribunal’), at Guwahati. The said two appeals came to be registered as ITA No. 109/2006 and ITA No. 129/2007. 4. By order, dated 31.08.2007, the learned Tribunal has partly allowed the two appeals. While considering the respondent company’s grievance against reject ion of their claim of Rs. 32,75,872/- as Foreign Travel Expenses, the learned Tr ibunal disagreed with the findings of the Commissioner of Income Tax (Appeals), whereby the entire Foreign Travel Expenses of Directors were disallowed, and hel d that, out of the said claimed amount of Rs. 32,75,872/, only an amount of Rs. 3,85,217/- was not incurred for business purpose and, consequently, allowed the remaining amount of Rs. 28,90,655/- incurred by respondent company as their For eign Travel Expenses. While dealing with this ground of appeal, the learned Tri bunal observed as under: During the relevant year the assesse’s export turnover was over Rs. 100 crores. If for promoting export senior executives of the company undertook Foreign trav el then the expenditure could not be considered for non-business purposes. It wa s not correct on the part of CIT(A) to expect that the assessee should depend so lely on the directors and executives were not involved in export promotion. The visits to UK and Kenya were undertaken by garden managers who were actively asso ciated with growing and manufacture of tea and were competent to study the metho ds of competitors and effectively interact with foreign customers for export pro motion. Having regard to the facts therefore we do not find any merit in the CIT (A)’s action of fully disallowing the foreign travel expenditure of garden manag ers. We also do not find merit in CIT(A)’s order in disallowing the entire expen diture on visits to India by the representatives of the London office because ha ving regard to assessee’s substantial exposure to overseas trade and large holdi ng of the assessee being with foreign promoters; visits to India for monitoring business operations was business necessity. Such expenditure was incurred by th e assessee in the earlier year also which was allowed in the past assessments. W e therefore see no reason for CIT(A) to disallow entire expenditure on visits of representatives of the London office. 

The learned Tribunal dismissed the respondent company’s grievance agains t the initiation of penalty proceeding under Section 271(1)(c) of the Act on the ground that no right of appeal was provided in the Act against initiation of pe nalty.

As against the respondent company’s claim of Rs. 11,65,000/- on account of publicity expenses vis-à-vis the Commissioner’s order allowing an amount of Rs. 2,65,000/- to the respondent company and disallowing the claim to the extent of Rs. 9,00,000/-, the learned Tribunal disagreed with the view of the Commiss ioner and held that the expenditure of Rs. 11,65,000/-, as claimed by the respon sessee had paid Rs. 5,00,000/- towards renovation of a building of the club of w hich the employees of the assessee were members and the Calcutta High Court held

While dealing with the respondent company’s grievance against the Assess ing Officer as well as the Commissioner of Income Tax (Appeals) rejecting the re spondent company’s claim of Rs. 3,01,94,000/-, as cess on green leaf, the learne ned Tribunal’s deletion of the disallowance of Rs. 28,90,655/-, on account of Fo reign Travel Expenses, as had been disallowed by the Assessing Officer and uphel d by the Commissioner, Income Tax (Appeals), and the order of the learned Tribun al deleting the disallowance of Rs. 9,00,000/-, as had been disallowed by the A ssessing Officer, under head publicity expenses, and as confirmed by the Commiss ioner, Income Tax (Appeals), the Commissioner of Income Tax has preferred the pr esent appeal, as indicated above, under Section 260A of the Act.

We have heard Mr. G. K. Joshi, learned Senior Counsel, appearing on beha lf of the appellant, and Ms. Nitu Hawelia, learned counsel, appearing for the re spondent company.

While considering the present appeal, we note that the following two que stions have, primarily, arisen for determination: (i) Whether, in the facts and circumstances of the present case, the learned Tribunal was justified and correct in deleting the disallowance of Rs. 28,90,65 5/-, under the head of Foreign Travel Expenses, as had been made by the Assessin g Officer and upheld by the first appellate authority and whether the said decis ion is perverse ? (ii) Whether, in the facts and circumstances of the present case, the learned Tribunal was justified and correct in law in deleting the disallowance of Rs. 9 ,00,000/-, as had been made by the Assessing Officer, under head publicity expen ses, and as confirmed by the first appellate authority and whether the said deci sion is perverse ? 11. e authority does not substitute its own view of how an assesse’s business affair s should be maintained and proceed to disallow the expenditure if the condition of its admissibility is absent.

Ms. Nitu Hawelia, learned counsel, appearing for the respondent company, contends that the respondent company, having furnished all the details of expen ses incurred by the respondent company, cannot be accused of not submitting the necessary documents and evidence in support of the expenditure incurred by it. M s. Hawelia also contends that it is for an assessee, such as, the respondent com pany, to decide, in the interest of promoting its business, whether any expendit ure is to be incurred, in the course of business, and whether such expenses are to be incurred voluntarily. The learned counsel for the respondent company submi ts that the respondent company can incur certain expenditure and claim deduction s of the same under Section 37 even though there was no necessity to incur such expenditure. Ms. Hawelia further contends that in order to make an expenditure d eductible under Section 37 of the Act, it is not necessary that the primary moti ve to incur the expenditure has to be directly earn income thereby. According t o the learned counsel for the respondent company, the expenditure incurred, thou gh may not be with a view to obtain direct and immediate benefit, but for the pu rpose of commercial expediency as well as to indirectly facilitate carrying on o f business, yet such an expenditure would be regarded as having been incurred, w holly and exclusively, for the purpose of business. The learned counsel for the respondent company further submits that while considering whether a given case f alls within the scope of Section 37 or not, one of the tests to be applied is wh ether the expenditure is incurred by the assessee as a trader or in some other c apacity. If the expenditure is incurred by an assessee (respondent company in th e present case) in his/her capacity as a trader, then, it would come within the to be expenses for assessee’s business and allowable under the Act. The High Cou assessee as a trader and not in any other capacity. The word wholly  refers to the quantum of expenditure and the word exclusively  refers to the motive, obj ective and purpose of the expenditure. The expression wholly and exclusively , appearing in Section 37, does not mean necessarily. It is important to note, i n this regard, that the word, necessarily , found place in the Income Tax Bill, 1961, but it was dropped at the Legislative anvil. It may be noted here that Vi scount Cave L. C., in Atherton vs. British Insulated & Helsby Cables Ltd., (1925 ) 10 TC 155, 191(HL), observed  & a sum of money expended, not of necessity an d with a view to direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purpose of trade . The same test was applied in Cooke vs. Quick Shoe Repair Ser vice, (1949) 30 Tax Case 460. 17. What necessarily follows from the above discussion is that when an expen diture is claimed to have been incurred by an assessee for promotion of his busi ness, there is no legal obligation imposed on the assessee to prove that the exp enditure was necessary for promotion of his business. So long as the expenditur e is incurred by an assessee for promotion of sale of product, the assessee is e ntitled, under Section 37(1) of the Act, to claim exemption from tax on such amo unt of expenditure.

The tests, referred to above, were quoted in Eastern Investments Ltd. vs . CIT, (1951) 20 ITR 1, 4 (SC), wherein the following principles were laid down: (a) Though the question must be decided on the facts of each case, the final

Keeping in view the aforesaid legal principles, when we examine the fact s of the present case, we find that the learned Tribunal has given a specific fi nding that the respondent company (assessee) has submitted bills and vouchers in support of the Foreign Travel Expenditure. It is also an admitted fact that the respondent company is engaged in the business of export of tea and, in fact, du ring the relevant year, the export turnover of the respondent company was more t han Rs.100 crores. It is also an admitted fact that 70% of the company’s shares were held by the foreign residents and the respondent company regularly exporte d tea to European countries. The Foreign Directors of the respondent company vis ited India in order to attend Board meetings and monitoring business operations. Besides representatives and consultants of the respondent company, representati ves of holding company from U.K. also visited India for coordinating exports and monitoring functioning of the tea gardens. The garden managers visited U. K. an d Kenya for business purposes. Visits to U. K. were necessary as the respondent company exported its tea to London for sale in the European market. The garden m anagers visited UK also to meet foreign customers and selling agents to promote the respondent company’s exports. Visits to Kenya by the Directors/ Executives/M anagers were necessary, because the said country is the largest exporter of tea in the world. The respondent company had sent its senior garden Manager for cond ucting study on Kenyan tea manufacturers so that the respondent company survives in the international competition in tea export. Under such circumstances, the finding of the learned Income Tax Appellate Tribunal that the expenditure, on th e visits by the garden managers, was wholly and exclusively for business purpose s cannot be said to be suffering from any illegality and infirmity.

Keeping in mind the rival submissions made before us, let us, now, rever t to the fact that the Commissioner of Income Tax (Appeals) enhanced the disallo wance on the ground that the visits of the tea estate managers to foreign countr ies cannot be said to be for the purpose of business as the tea estate managers cannot be said to be responsible for exports. Moreover, the expenses, incurred in connection with the foreign travels of the spouses of tea estate managers, we re also held to be not for the purposes of business. The Commissioner of Income Tax (Appeals) held that the respondent company failed to prove the necessity of the wives of the tea estate managers travelling with their spouses and the expen diture incurred in connection therewith. Our attention is drawn, at this stage, to the contention of the learned counsel for the respondent company that the nec essity of the expenditure is not a subject matter of examination by the Assessin g Officer. As regards the question on the expenditure incurred in connection wit h the travels of the wives of the tea estate managers, we find force in the subm ission of Ms. Hawelia, learned Counsel for the respondent company, that since it is customary in the European countries for the wives to accompany their husband s, the travelling of the wives along with their husbands cannot be said to be pe rsonal visits of the wives, but such a visit has to be regarded as having been u ndertaken for the purpose of business of the respondent company. The Tribunal, as a fact finding authority, having come to the finding that the expenditure, on the visits by the representative of the company abroad and expenditure as well as the visits to India by the London based officials of the respondent company, in view of the respondent company’s substantial exposure to overseas trade and large holdings of the respondent company with foreign promoters, were business e xpenditures, is a finding of fact and the same cannot be interfered with in an a ppeal under Section 260A of the Act.

In view of the above, we do not find any infirmity in the order of the I ncome Tax Appellate Tribunal in deleting the disallowance of Rs. 28,90,655/- on account of Foreign Travel Expenses.

In so far as the deletion of disallowance of Rs. 9,00,000/- on account o f publicity expenses is concerned, the learned Tribunal, in its order, noted tha t the respondent company had paid Rs. 5,00,000/- to Bengal Club Ltd. for sponsor ing programmes and to fund infrastructural additions to celebrate the 175th year of the club. The respondent company further paid Rs. 3,00,000/- to Anand Bazar Patrika Ltd. for sponsoring the Centenary Celebrations of Cotton College at Guw ahati. The respondent company paid Rs. 2,00,000/- for sponsoring the State Level National Children Science Congress in Assam. The disallowance of Rs. 9,00,000/- was on the ground that the above mentioned expenditures were for non-business p urposes and it was, rather, in the nature of donation.

While considering the above aspect of the appeal, it needs to be borne i n mind that it was submitted, before the learned Tribunal, that the Managing Dir ector of the respondent company was a member of the Bengal Club and he had spent Rs. 5,00,000/- for sponsoring the programmes of the club. Sponsoring of a progr amme of the nature aforesaid, obviously, leads to advertisement and wider acknow ledgement of the respondent company and its products. Such an expenditure canno t but be regarded as having been incurred for the purpose of augmentation of inc ome of the respondent company. In short, the said sum of Rs. 5,00,000/- ought t o have been allowed as an expenditure incurred in the interest of the business o f the respondent company. The expenditure, incurred in connection with sponsori ng of the Centenary celebrations of Cotton College, at Guwahati, by Anand Bazar Patrika Ltd. and the sponsoring the State Level National Children Congress in As sam, were also allowable, because the respondent company’s banners, as sponsors of the events, were displayed at the said functions. Therefore, the said expendi tures were held by the Tribunal to be wholly and exclusively incurred in connect ion with business. While allowing the respondent company’s claim, the learned Tr ibunal relied on a decision of the Calcutta High Court, in Assam Brooke Ltd. (su pra), wherein a sum of Rs. 5,00,000/- was paid by the assessee to a club. The re