Ita/164/2012 Of The Commissioner Of Income Tax v. M/S.m.m.publications Limited

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON THURSDAY, THE 11TH DAY OF OCTOBER 2018 / 19TH ASWINA, 1940I.T.A.No.164 of 2012 AGAINST THE ORDER IN ITA.NO.438/COCH/2010 DATED 27-04-2012OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX,KOTTAYAM. BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, STANDING COUNSEL, GOI (TAXES) RESPONDENT/APPELLANT: M/S.M.M.PUBLICATIONS LTD.,ERAYILKADAVU, KOTTAYAM-686 001. BY ADVS. SRI.JOSON MANAVALANSRI.K.JOHN MATHAISRI.KURYAN THOMASSRI.M.GOPIKRISHNAN NAMBIARSRI.P.BENNY THOMAS SRI.P.GOPINATH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 11.10.2018, ALONG WITH ITA.285/2010 & ITA.335/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.Nos.285 & 335 of 2010 &- 2 - JUDGMENT Vinod Chandran,J. The Revenue is before us in these three appeals forthe years 2005-06, 2006-07 and 2007-08. A common order hasbeen passed by the Tribunal for the assessment years 2005-06and 2006-07 and hence those appeals [I.T.A.Nos.285 and 335 of2010] are considered first. The issue is only with respect tothe allowance of business expenditure on expenses incurredfor foreign travel by the employees of the Company, who arealso related. 2. The question of law is re-framed as follows: Whether, in the facts and circumstances of thecase, the Tribunal was right in having alloweddeduction under Section 37 of the Income Tax Act, 1961[for brevity “the Act”] on mere assumptions andconjectures without looking at whether the expenditureincurred for the foreign travels were in fact businessexpenditure, which alone could be allowed a deductionunder Section 37 of the Act? 3. For both the years, the assessee had claimed business expenditure on the expenditure incurred for foreigntrips by the staff of the assessee-Company, which, theassessee asserted, were for purposes of business to attendconferences, assemblies and have discussion and interaction ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 3 - with the readers; all of which would enure to the benefit ofthe business of publication. 4. For the assessment year 2005-06, the assessee hadclaimed total amount of Rs.35,62,049/- as businessexpenditure under Section 37 of the Act. The break up of theamounts as also the nature of visit and disallowance isextracted in a tabular form in the order of the AssessingOfficer [for brevity “AO”] at Annexure-A in I.T.A.No.285 of2010. The AO disallowed the entire claim. Before the firstappellate authority, the expenditure incurred totallingRs.1,88,326/- stood allowed and the balance was disallowed.The Revenue was in appeal before the Tribunal, in which theassessee had filed a Cross Objection. Likewise, in the year2006-07, the expenses claimed are seen with its break up in atabular form in Annexure-A of I.T.A.No.335 of 2010. Herealso, the AO disallowed the expenses claimed on the foreigntrips. The first appellate authority interfered only with aportion of the disallowance made and sustained the balancedisallowance. The assessee was in appeal before the Tribunal.The Tribunal allowed the appeal of the assessee as also theCross Objection filed in the appeal of the Revenue anddismissed the appeal of the Revenue. ITA.Nos.285 & 335 of 2010 & - 4 - 5. The learned Counsel for the assessee-respondent ITA.Nos.285 & 335 of 2010 & - 4 - 5. The learned Counsel for the assessee-respondent submits that the Tribunal had gone through the facts andconsidered the issue in the proper perspective and there isno cause for any interference since it is a finding on facts.We do not see any such consideration having been made by theTribunal. The submission of the learned Counsel is on theground that the Tribunal has asserted in paragraph 8 that theargument note as well as the paper book submitted by theassessee were perused to find the disallowance to be based onmere conjectures and surmises. We, on the other hand, findthat the Tribunal had assumed that the entire foreign tripsof the staff of the assessee, which was claimed as businessexpenses, had been undertaken for the purpose of businesswithout any factual foundation for the said assumption. Assubmitted by the learned Senior Counsel, Government of India(Taxes), the considerations on which the disallowance was setaside were considerations which should not have ordinarilyweighed with a Tribunal given the task of adjudicating anissue in the perspective of the Income Tax Act. 6. The Tribunal has made an observation that in thehistory of the assessment of the assessee the Department hasdisallowed a portion of the foreign travel expenditure forthe first time. There is also an observation to the effect ITA.Nos.285 & 335 of 2010 & 164 of 2012. that either the Department ought to have allowed theexpenditure in full or they should have disallowed it in itsentirety. We are surprised to see that broad statements aremade by the Tribunal that there were no personal or pleasuretrips undertaken and that there is no personal elementinvolved. Merely because the persons who undertook theforeign trips are staff of the Company and notshare-holders, there is no warrant for an assumption that theCompany had footed the bills for the foreign trips only sincethey were business trips. The Tribunal has also attempted toview it from the point of a businessman, which approach iswrong especially when the Tribunal is called upon toadjudicate the issue on the basis of the facts as also thelaw as is evidenced from the provisions of the IT Act. 7. In this context, we notice the first appellateauthority's order, which is fairly detailed and looks at thefacts in the proper perspective. With respect to anexpenditure incurred for a foreign trip to attend anexhibition of latest printing hardware, the AO has treatedthe same as capital expenditure. The learned Senior Counselfor Government of India (Taxes), to sustain the same andcausing interference even to the order of the first appellateauthority granting allowance, has placed before us a decision ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 6 - ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 6 - of the Gujarat High Court inAmbica Mills Ltd.v.Commissioner of Income Tax [(1964) LIV ITR 167]. The firstappellate authority has found that the foreign visit was toattend the exhibition to learn about new products in theindustry and update the knowledge in the field, which wouldeventually benefit the assessee-Company. The exhibition wasfound to be intrinsically connected with the business carriedon by the assessee-respondent and the trip undertaken by theProduction Manager of the assessee-Company was to learn aboutthe new products. This expense was directed by the firstappellate authority to be treated as revenue in nature. Thedecision of the Gujarat High Court is with respect to abusiness expenditure incurred in a foreign trip so as tostudy new methods of manufacture with a view to install newmachinery. We are of the opinion that the facts are distinctinsofar as there is no attempt to purchase machinery and thetrip was only to update the technical know-how of theProduction Manager. As to the other disallowances for theyear 2005-06, the first appellate authority has clearly foundthat there were no sufficient materials/details or paperssubmitted to ascertain the purpose and nature of the tripsundertaken. The first appellate authority has listed out theconditions for the allowance of deduction under Section ITA.Nos.285 & 335 of 2010 & - 7 - 37(1), which, in the case of the various foreign trips, werefound to be not satisfied. The expenditure was found to havebeen not laid out wholly and exclusively for the purpose ofthe business. The assessee also failed to establish the nexusbetween the expenditure and the business carried out by theassessee in connection with which the expenditure wasincurred. A disallowance of Rs.23,72,290/- was made in theyear 2005-06.8. Similarly, in the year 2006-07 also the firstappellate authority has looked at each of the expensesclaimed; and allowed some, but confirmed the disallowancewith respect to the others. The learned Counsel for theassessee specifically has a contention with respect to thedisallowance of the expenses of the spouse of the ManagingDirector. Reliance is also placed on a Full Bench decision ofthis Court in Ram Bahadur Thakur Ltd.v. C.I.T.[(2003) 261ITR 390 (FB)(Ker.)]. In the cited decision, the AO hadallowed the foreign travel of the Director, but rejected thatof the wife who accompanied the Director. The Full Bench heldthat the same was done in a mechanical manner merely assumingthat the foreign travel of the Director of theassessee-Company was for business and not that of the wife.It was held that the AO was bound to conduct an enquiry and ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 8 - to afford an opportunity to the assessee to establish hisclaim by adducing evidence, the matter was remanded. ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 8 - to afford an opportunity to the assessee to establish hisclaim by adducing evidence, the matter was remanded. 9. In this context, we notice the extract in thetabular form in the order of the AO. With respect to items 1to 4 when documents were directed to be submitted, theassessee had produced a write-up on Consolidated PressHoldings without any substantiation that the meeting of theConsolidated Press Holdings having been carried out for thepurpose of business. In fact, the reply specificallyindicated that the travel was undertaken for personaldiscussions and was not supported by any communications andthat it is a reciprocal measure and not a business activity.With respect to each of the items, the AO had hence soughtfor substantiation and dealt with it effectively in theassessment order. The same has also been considered by thefirst appellate authority item by item and certain allowanceswere made and other disallowances confirmed. We do not seeany infirmity in the factual findings of the first appellateauthority. These were set aside by the Tribunal withoutlooking at the documents or the materials said to have beenproduced by the assessee. The Tribunal went on broadprinciples and abstract assumptions to find that the foreigntrip undertaken by the staff were all for business purposes. ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 9 - We, hence, answer the question of law in favour of theRevenue and against the assessee and allow the appeals,confirming the order of the first appellate authority. TheTribunal had not dealt with the facts and had merely foundthe foreign trips to be for the purpose of business on broadstatements and unwarranted assumptions not supported bysufficient materials. 10. In I.T.A.No.164 of 2012, we find that theTribunal and the first appellate authority had not consideredthe issue at all. Following the Tribunal's decision of theearlier years, which we have now set aside, the firstappellate authority allowed the appeal of the assessee, whichwas confirmed by the Tribunal, again without looking at thefacts. In such circumstances, we refuse to answer thequestion of law and remand the issue to the first appellateauthority for the year 2007-08 for fresh consideration. Ordered accordingly. Parties are left to suffertheir respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENONJUDGE ITA.Nos.285 & 335 of 2010 & 164 of 2012. - 10 - APPENDIX [in I.T.A.No.164 of 2012] PETITIONER'S ANNEXURES: ANNEXURE AASSESSMENT ORDER U/S 143(3) INCOME TAX ACT 1961 DATED 25.11.2009 ANNEXURE BCIT (A)'S IN ITA NO.18/KTM/CIT (A) -IV DATED30.04.2010 ANNEXURE C ITAT'S ORDER IN ITA NO.438/COCH/2010 DATED 27.04.2012 WITH A COPY '-RESPONDENTS ANNEXURES: Vku/- NIL [ true copy ]