VAAYA RENEWABLE ENERGY (PURNA) PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 3(1)`, MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 10/10/2017 of the Ld. First Appellate Authority, Mumbai, confirming the ad-hoc disallowance amounting to Rs.6,48,810/-, being 25% of the expenditure incurred on travelling.

3 Vaaya Renewable Energy (PURNA) Pvt. Ltd. other than the Directors also visited abroad. Therefore, the disallowance was rightly made.

2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is engaged in the business of development of new technology/new machinery in the field of renewable energy. The assessee company is one of the group companies of M/s Enercon India Ltd. (now known as M/s Wind World (I) Ltd.). The assessee declared total income of Rs.27,63,430/- in its return filed on 26/09/2012. Vide notice dated 13/01/2015, the assessee was asked to file the details of foreign travel expenses and its justification. In response, the assessee filed the ledger account of foreign travel expenses, copies of bills/vouchers and description of expenses. As per the Revenue, though the name of the person who travelled, period of travelling, name and designation but the purpose of tour was not provided and thus disallowance @ 25% out of the total expenditure was made, resulting into addition of Rs.6,48,810/-. The matter was carried in appeal before the Ld. Commissioner of Income Tax (Appeal), wherein, the ad-

4 Vaaya Renewable Energy (PURNA) Pvt. Ltd. hoc disallowance so made was affirmed. The assessee is in further appeal before this Tribunal.

2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that the Ld. Assessing Officer made ad-hoc disallowance of 25% of the foreign travel expenses on the plea that the assessee could not explain that the expenses were incurred for business promotion. It is a fact that even the Ld. Assessing Officer has not disputed the genuineness of the expenditure and contested that the expenses were not incurred wholly and exclusively for business purposes. It is also a fact that the Ld. Assessing Officer himself allowed 75% of the total expenditure on travelling. One of the reason for such ad- hoc disallowance is that the purpose of the trip was explained and further Shrikumar and Rajesh Khanna, employees of Wind World Group of companies were assigned the responsibility of promotion of new technology.

It is also not in dispute that both these persons are 5 Vaaya Renewable Energy (PURNA) Pvt. Ltd. employees of the assessee company and visited abroad. We find force in the argument of the Ld. counsel for the assessee that all these persons visited abroad for promotion of new technology and undertook foreign travelling. Shri Yogesh Mehra and Shri Siddharth Mehra are the main persons of the assessee group and the aforementioned employee accompanied them for the purposes of promotion of new technology. No wise businessman will waist his hard earned money on foreign trip without any basis. It is noted that right from assessment stage and till the stage of the Tribunal, the assessee had claimed that the expenses of foreign travelling were incurred for the promotion of new technology. In the assessment order, it is nowhere pointed out that the employees went abroad for pleasure trip. It is always not necessary that only the senior executives are only permitted and if some technical persons also accompanies them such expenses cannot be denied/disallowed merely on presumptive basis.

2.3. If the issue is analyzed under the relevant provisions of the Act, section 37(1) of the Act speaks

6 Vaaya Renewable Energy (PURNA) Pvt. Ltd. about ‘any expenditure’ (not being expenditure in the section 30 to 36) and not being in the nature of capital expenditure or personal expenses of the assessee but laid out or expanded wholly and exclusively for the purpose of business of the assessee. Its our bounded duty to analyze the claim of deduction u/s 57 r.w.s 37(1) of the Act.

2.4. Now, question arises, whether the payment of foreign travelling expenses is an allowable deduction? The obvious reply is “yes”. Section 57 of the Act speaks about income chargeable under the head “Income from Other Sources”, which shall be computed after making the deductions mentioned therein. The section is reproduced hereunder for ready reference:-

“57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :— (i) in the case of dividends, other than dividends referred to in section 115-O, or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee ; (ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax

7 Vaaya Renewable Energy (PURNA) Pvt. Ltd. under the head "Income from other sources", deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36 ; (ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and sub- sections (1) and (2) of section 32 and subject to the provisions of section 38 ; (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less. Explanation.—For the purposes of this clause, "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death ; (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purposeof making or earning such income; (iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section”.

2.5. If the provision of the Act, which is corresponding to the section 12(2) of 1922 Act, used in this context, the expression “incurred solely for the purposes of making or earning such income”, the use of expression “laid out or expanded wholly and exclusively” in section 57(iii) of the 1961 Act is to secure uniformity with the language of section 37(1) of the 1961 Act. At the same time, the expression, “for the purposes of business or profession” has a wider implication then the expression “for the 8 Vaaya Renewable Energy (PURNA) Pvt. Ltd. purposes of making or earning income” used in section 57(iii) of the Act. The purpose contemplated by section 57(iii) is more specific in character. So far as, reasonableness of the expenditure envisaged by section 57(iii) depends upon the facts of particular case. The Hon'ble Court in CIT vs New Savan Sugar and Good Refining Co. Ltd. (1990) 185 ITR 564, 571 (Cal.) held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income in as much as the concept “wholly” pertains to quantum of the money expended. The Hon'ble Court further observed even if a particular expenditure is un-remunerative, such expenditure is nonetheless a proper deduction, if such expenditure is made wholly and exclusively for the purposes of earning such income.

2.6. If the issue is analyzed in the light of section 37(1) of the Act, broadly speaking, where travelling expenses are incurred for purposes of business, it must be considered as revenue expenditure. This proposition is supported by Hon'ble Apex Court in Dalmia Jain & Co. Ltd.

9 Vaaya Renewable Energy (PURNA) Pvt. Ltd. vs CIT (1971) 81 ITR 754 (SC) and Meenakshi Mills Ltd. vs CIT (1967) 63 ITR 207 (SC). To be more precise, the type of expenses, object or purpose of the expenses has to be ascertained from the facts of each case. If the object or purpose is to enhance, the existing business, the expenditure would be of revenue in nature. The ratio laid down in following cases supports our view:- a) CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319, 325 (Cal); b) CIT v. Life Insurance Corporation of India, (1966) 62 ITR 827 (Cal); c) Premier Construction Co. Ltd. v. CIT, (1966) 62 ITR 176 (Bom); d) Liberty Cinema v. CIT, (1964) 52 ITR 153, 167 (Cal); Transport Co. Pr. Ltd. v. CIT, (1962) 46 ITR e) 1009, 1016 (Mad); Transport Co. Ltd. v. CIT, (1957) 31 ITR 259, 266-7 (Mad); f) G. Veerappa Pillai v. CIT, (1955) 28 ITR 636 (Mad); g) CIT v. Raman & Raman Ltd.,(1951) 19 ITR 558, 569-70 (Mad). Also see, Lachminarayan Modi v. CIT, (1955) 28 ITR 322 (Orissa); h) J. B. Advani & Co. Ltd. v. CIT, (1950) 18 ITR 557 (Bom); i) Mahabir Prasad & Sons v. CIT, (1945) 13 ITR 340 (Lah); j) Central India Spinning, Weaving & Manufacturing Co. Ltd. v. CIT, (1943) 11 ITR 266 (Nag); k) CIT v. Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC) l) Southern V. Borax consolidated Ltd. (1942) 10 ITR (Sup) 1 (KB)

10 Vaaya Renewable Energy (PURNA) Pvt. Ltd. m) Associated Portland Cement Manufacturers Ltd. v. Kerr, (1946) 27 Tax Cas 103, 118 (CA) n) Ebrahim Aboobaker v CIT (1971) 81 ITR 664 (Bom.) 2.7. It is to be seen whether the expenditure was bonafidely incurred wholly and exclusively for the purpose of the business [see, CIT v. Birla Cotton Spng. & Wvg. Mills Ltd., (1971) 82 ITR 166 (SC); CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544, 549 (SC)].

2.8. So far as, issue of quantum of the expenditure to be incurred is concerned, we are of the view, it is for the assessee to decide how best to protect his own interest. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. The ratio laid down in CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view. In that case His Lordship observed:

“It is true that in some of the cases this court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of section 1O(2)(xv)*. Those decisions were rendered on the facts of those cases. That is not the position in this case."

11 Vaaya Renewable Energy (PURNA) Pvt. Ltd. If the expenditure is incurred for business purposes having nexus with the profit and promotion of the business, then it is an allowable deduction. We find support from the decision in Saharanpur Electric Supply Co. Ltd. v. CIT, (1971) 82 ITR 405 (All). Similarly, expenditure incurred by a firm carrying on export and import business in defending one of its partners for having acquired foreign exchange and not fully utilising it for import were held not allowable although the partner was ultimately acquitted [CIT v. Chaman Lal & Bra .(1970) 77 ITR 383 (Delhi)]. This case was, however, distinguished in CIT v. Ahmedabad Controlled Iron & Steel Assn. Pr. Ltd., (1975) 99 ITR 567 (Guj), where expenses incurred by company in defending its managing director were held allowable. In order to so claim such expenditure the assessee has not only to prove that the expenditure was incidental to the business but also to show that the expenditure was laid out or expended wholly and exclusively for the purpose of the business [Indermani Jatia v. CIT, (1951) 19 ITR 342 (All) on appeal, see, (1959) 35 ITR 298 (SC)].

12 Vaaya Renewable Energy (PURNA) Pvt. Ltd. 2.9. Assessee defending an employee, etc.-When an employee is prosecuted in respect of transaction in the course of his employment, expenditure incurred in or about his defence is incurred for the protection of the good name of the business and is an allowable business expenditure [ J.B. Advani & Co. Ltd. v. CIT & EPT, (1950) 18 ITR 557 (Bom) considered in CIT v. H. Hirjee, (1953) 23 ITR 427 (SC), where the correctness of its ultimate decision was not doubted; J.N. Singh & Co. Pr. Ltd. v. CIT. (1966) 60 ITR 732 (Punj)].

2.10. To sum of the issue we find that Hon'ble Justice P.D. Desai, in Smt. Virmati Ramkrishna vs CIT (1981) 131 ITR 659, 672-73(Guj.), has analyzed the statutory language and laid down various principles, in various decided cases and made following propositions.

(i) in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined; (ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee;

13 Vaaya Renewable Energy (PURNA) Pvt. Ltd. (iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning "Income from other sources"; (iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose or for a mixed purpose; v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure; (vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction; (vii) it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order

14 Vaaya Renewable Energy (PURNA) Pvt. Ltd. indirectly to facilitate the making or earning of the income; (viii) if, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction; (ix) it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on of the activity which is the source of the income; the nexus must necessarily be between the expenditure incurred and the income earned; (x) it is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (xi) the test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income; (xii) the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law'. In the aforesaid propositions (vi) it has been clearly held/observed that incurring of expenses for preserving and maintaining of source of income would be allowable deduction.

15 Vaaya Renewable Energy (PURNA) Pvt. Ltd. 2.11. Likewise, Hon'ble Apex Court in Sree Meenakshi Mills Ltd. v. CIT, (1967) 63 ITR 207 (SC), where expenses were incurred in filing a suit for obtaining an order restraining seizure of goods delivered in contravention of the control order were held allowable deduction. It follows from this decision that:

(i) litigation expenses to secure an order from the court for enabling an assessee to carry on its business without interference is an allowable deduction;

(ii) expenditure incurred to resist, in a civil proceeding, the enforcement of a measure, legislative or executive, which imposes restrictions on the carriage of a business or to obtain a declaration that the measure was invalid, would, if other conditions are satisfied, be admissible as deduction; and (iii) the deductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the civil proceeding in relation to assessee's business and cannot be affected by the final outcome of that business.

16 Vaaya Renewable Energy (PURNA) Pvt. Ltd. 2.12. In the case of CIT vs Gannon Dunkarlay and Co.

Pvt. Ltd. (2000) 243 ITR 646 (Mad.), CIT vs Administrator General Of Madras (1998) 234 ITR 351 (Mad.), CIT vs Patiala Flour Mills Co. Ltd. (1989) 180 ITR 75 (P & H), Hindustan Milk Food Manufacturing Ltd. 179 ITR 302 (P & H), Palani Sir Murgun Textiles Ltd. vs ACIT (2002) 254 ITR 333 (Mad.) decided the issue in favour of the assessee. In the case of Gannon Dunkarlay and Co. Pvt. Ltd., the Hon'ble Madras High Court, where the expenditure was incurred by the official liquidator to maintain the infrastructure of the company held that the expenditure was deductible u/s 57(iii), as it would not have been possible to earn the interest income without incurring such expenditure. In the light of the foregoing discussion, ratio laid down by various Hon'ble High Courts/Hon'ble Apex Court and the facts available on record, it can be concluded that the word ‘wholly’ refers the quantum of expenditure and the word ‘exclusively’ refers to the motive, objective and the purpose of the expenditure and gives jurisdiction to the tax authorities to examine the matter. The test laid down by their lordship of the Hon'ble Apex Court in State

17 Vaaya Renewable Energy (PURNA) Pvt. Ltd. of Madras vs G.J. Coelho (1964) 53 ITR 186 is that the expenditure made under a transaction, which is so closely related to business that it could be viewed as an integral part of conduct of business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of business. Identical ratio was laid down in Bombay Steam Navigation Company vs CIT (1965) 56 ITR 52, 61 (Supreme Court), CIT vs Delhi Safe Deposit company Ltd.(133 ITR 756)(Supreme Court), CIT vs Rajaram Bandekar (208 ITR 503)(Bom.) and B.K. Khanna & Company Pvt. Ltd. (247 ITR 705)(Del.). There are certain decision, where the Hon'ble Court even went to the extent, where the expenditure, in the course of trade, which is un- remunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. Our view find support from the decision in Maysore Spinning and Mfg. Company Ltd. vs CIT (1966) 61 ITR 572 (Bom.), Velimalai Rubber Company Ltd. vs Income Tax Officer 188 ITR 262 (Mad.), Calvary Mount Estate Pvt. Ltd. 41 ITR 755 (Supreme Court). Considering the totality of facts, the expenses incurred by the assessee on foreign travelling for 18 Vaaya Renewable Energy (PURNA) Pvt. Ltd. promotion of business is an allowable deduction, thus, the appeal of the assessee is allowed.

Finally, the appeal of the assessee is allowed.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 03/05/2018.