M/S Aaren Exports, Jalandhar v. Commissioner Of Income Tax-I, Jalandhar

ITA No. 312 of 2009 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 312 of 2009 (O&M) Date of Decision: 28.8.2015 M/s Aaren Exports, Jalandhar ....Appellant. Versus Commissioner of Income Tax-I, Jalandhar ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Rajiv Sharma, Advocate for the appellant. Mr. Vivek Sethi, Advocate for the respondent. Ramendra Jain, J. 1.The present appeal has been filed by the assessee under Section 260A of the Income Tax Act, 1961 (hereinafter called as 'the Act')against the order dated 28.11.2008 (Annexure A-1) passed by theIncome Tax Appellate Tribunal, Amritsar, (in short 'the Tribunal') in ITANo. 347/(ASR)/2005 for the assessment year 2001-02, reversing theorder of the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] dated 30.3.2005 (Annexure A-2) and upholding the order dated27.2.2004 (Annexure A-3), passed by the Assessing Officer, rejecting itsclaim of deduction on account of 'Foreign Travel'. The appeal was admitted by this Court vide order dated 16.11.2009 to consider thesubstantial questions of law proposed in para 12 of the appeal which areto the following effect:- A.Whether, on the facts and circumstances of thecase, the Tribunal was justified in reversing awell versed order of CIT(A) in rejecting theclaim of business expenditure on account offoreign travel of professionally qualified son anddaughter-in-law of only male partner of theappellant firm, both son and daughter-in-lawbeing legal heirs of the partner also and havingshown growth in firms business as aconsequence of their foreign travel? B. C. Whether on the facts and circumstances of thecase, the Tribunal was justified in disallowingthe entire foreign travel expense on the onlypremise that it was not incurred by a competentperson, without reversing the finding of the CIT(A) that evidence produced by assessee in theshape of e-mails etc. show actual businesstransactions of the assessee firm?Whether impugned order of ITAT is against thewell settled law and principles as laid down inthe case of Sassoon J. Davi and Co. P. Ltd.vs. CIT Bombay (1979) 118 ITR 261 (SC) andother judgments on the issue in dispute? D.Whether the order of the Tribunal is perverseand against the provisions of law? B. C. Whether on the facts and circumstances of thecase, the Tribunal was justified in disallowingthe entire foreign travel expense on the onlypremise that it was not incurred by a competentperson, without reversing the finding of the CIT(A) that evidence produced by assessee in theshape of e-mails etc. show actual businesstransactions of the assessee firm?Whether impugned order of ITAT is against thewell settled law and principles as laid down inthe case of Sassoon J. Davi and Co. P. Ltd.vs. CIT Bombay (1979) 118 ITR 261 (SC) andother judgments on the issue in dispute? D.Whether the order of the Tribunal is perverseand against the provisions of law? 2.Briefly stated, the facts necessary for adjudication of theinstant appeal as narrated therein are that the appellant-assessee, apartnership firm having two partners namely S.C. Aggarwal and Smt.Anita Aggarwal filed its return of income on 31.10.2001 for theassessment year 2001-02, declaring its income at ` 28,08,760/- byclaiming deduction of ` 90,39,678/- under Section 80HHC of the Act.The said return was processed under Section 143(1)(a) of the Act on27.9.2002 and notice under Section 143(2) of the Act was issued to theassessee. The appellant-assessee was directed to justify the expensesincurred on 'Foreign Travel' for the trips undertaken by Deepak Aggarwaland his wife Shilpa Aggarwal (son and daughter-in-law of partner ofappellant firm) as they were neither its Manager nor employees oragents. The appellant-assessee vide letter dated 14.1.2004 (AnnexureA-4) submitted that 50% of such expenses incurred by Deepak Aggarwaland his wife Shilpa Aggarwal after marriage were debited to the capitalaccount of one of the partners acknowledging that the foreign travelundertaken in May 2000 was not solely and exclusively for the purposeof business. In support of its claim, the appellant-assessee furnishedcopy of certain e-mails, Annexure A-5, showing that Deepak Aggarwaland Shilpa Aggarwal both being B.Com and MBA were looking after thetotal business of the appellant-assessee. They had visited Europeanand Scandinavian countries to introduce customers and study themarket there. Finally, Shilpa Aggarwal started communicating with thecustomers making correspondence and fully took up on herself as the Customer Relation Department since 18.4.2000. The foreign trip ofDeepak Aggarwal and Shilpa Aggarwal was purely business trips toknow about the pulse of the market, demand and supply and the futureprospect of the garden tools industries. However, the Assessing Officerdid not agree with the aforesaid assertions of the appellant-assesseeand disallowed the expenses incurred on 'Foreign Travel' done byDeepak Aggarwal and Shilpa Aggarwal treating the same as not relatedto the appellant firm as revenue expenses wholly and exclusively as theywere neither agent nor employee or partner of the appellant-assesseevide assessment order dated 27.2.2004 (Annexure A-3). Aggrieved withthe same, the appellant-assessee preferred an appeal before the CIT(A), who deleted the addition of ` 32,54,766/- made on account offoreign travelling expenses vide order dated 30.3.3005 (Annexure A-2).Against the said order of the CIT(A), the revenue preferred an appealbefore the Tribunal. The Tribunal vide its order dated 31.8.2007(Annexure A-7) remitted the matter to the Assessing Officer to decide thesame afresh. Against the order dated 31.8.2007 (Annexure A-7), theassessee moved miscellaneous application under Section 254(2) of theAct before the learned Tribunal to recall its order dated 31.8.2007(Annexure A-8), remanding the matter to the Assessing Officer. Therevenue filed its reply dated 1.2.2008 (Annexure A-9 Colly) to the saidapplication. The Tribunal vide order dated 17.7.2008 (Annexure A-10)recalled its earlier order dated 31.8.2007 and the appeal of the revenuewas ordered to be restored to its original number for hearing “afresh”.Thereafter, after hearing afresh both the sides, the Tribunal allowed theappeal of the revenue vide order dated 28.11.2008 (Annexure A-1). However, the issue regarding deduction under Section 80HHC of theAct, the same was remitted to the Assessing Officer as was done videearlier order dated 31.8.2007. Hence, the present appeal by theassessee on the question of claim of the assessee in respect of foreigntravel expenses. 3.We have heard learned counsel for the parties and gonethrough the case file carefully.through the case file carefully. 4.Learned counsel for the appellant-assessee argued that theTribunal has erred in setting aside the order of the CIT (A) withoutconsidering the fact that the same was based on the judgments in“Sassoon J. David and Co. P. Ltd. v. CIT, Bombay, (1979) 118 ITR 261 (SC); CIT v. Aspinwall and Co.Ltd. (1999) 235 ITR 106 (Kerala); CIT v.Appolo Tyres Ltd. (1999) 237 ITR 706 (Kerala)andCIT v. SundaramClayton Ltd. (1999) 240 ITR 271 (Madras). Findings of the Tribunalwere cryptic being based on surmises and conjectures. The Tribunalwas not justified in holding that Deepak Aggarwal and Shilpa Aggarwalwere not related to the appellant-firm being not its partners or theemployees, despite the fact that they had done foreign tours to enhancethe business of the appellant firm being son and daughter in law of itspartners. They were looking after the appellants business since last 5years. After marriage Shilpa Aggarwal too had joined Deepak Aggarwalbeing a qualified MBA having knowledge of business. These facts werenot disputed by the revenue. Hence, the learned Tribunal has erred innot appreciating the same and not considering the documentaryevidence relatable to the business of the appellant firm which hadenhanced in the subsequent years due to the personal efforts made by Deepak Aggarwal and Shilpa Aggarwal. The Tribunal has wronglyconcluded that they had no concern with the affairs of the appellant firmin any capacity, whatsoever. 5.On the other hand, learned counsel for the respondentpleaded the legality and validity of the impugned order. Deepak Aggarwal and Shilpa Aggarwal. The Tribunal has wronglyconcluded that they had no concern with the affairs of the appellant firmin any capacity, whatsoever. 5.On the other hand, learned counsel for the respondentpleaded the legality and validity of the impugned order. 6.After giving our thoughtful consideration to the respectivesubmissions of learned counsel for the parties, we find the presentappeal completely devoid of any merits. The Assessing Officer whiledisallowing ` 32,54,766/- on account of foreign travelling expenses ofShri Deepak Aggarwal and Smt. Shilpa Aggarwal had concluded thattheir tours were completely personal tours and not wholly and exclusivelyfor the purpose of business. It was recorded as under:- “3.During the year assessee has claimedtravelling expenses of Rs.39,93,187/-. Assessee wasasked to furnish the details along with evidence andjustification of the same for business purpose.Assessee furnished copy of account of the aforesaidexpenses. Details furnished revealed that out of totaltravel expenses a sum of Rs.39,14,814/- has beenincurred on foreign travel. Out of these foreign travelexpenses an amount of Rs.32,54,766/- has beenincurred for the foreign travel of Sh. Deepak Aggarwal& Smt. Shilpa Aggarwal. Reamining foreign travelexpenses, claimed to have been incurred for travel ofDirectors and employees of the firm for representingthe assessee in Hardware Show in Germany. 3.1.On perusal of details furnished by assessee, itwas found that travelling has been undertaken by Sh.Deepak Aggarwal along with his wife Smt. ShilpaAggarwal in the capacity of the son and daughter-in-law of the partners. During the course of assessmentproceedings it was submitted that they are neither anemployee nor Manager nor Agent of the firm.Assessee was asked to establish that the travellingexpenses have been incurred and the incurrence iswholly and exclusively for the purposes of business.Audit report did not indicate incurrence of travellingexpenses by Sh. Deepak Aggarwal and Smt. ShilpaAggarwal on behalf of the firm though majority of theforeign travel expenses payment has been made toSh. Deepak Aggarwal [a person covered by section40A (2)(b)]. Assessee was asked to justify the samewith the evidence in support of work done by Sh.Deepak Aggarwal and Smt. Shilpa Aggarwal (w/o Sh.Deepak Aggarwal) none of them is either anemployee or manager of the firm. Thus the firm andSh. Deepak Aggarwal, Smt. Shilpa Aggarwal do nothave any relationship otherwise than being son anddaughter-in-law of the two of the partners. In view ofabove facts, the assessee was asked to justify theforeign travel expenses claimed by the firm in respectof their travel. 3.2.Assessee submitted vide letter dated14.01.2004 that 50% expenses pertaining to tour inMay 2000, which was the tour undertakenimmediately after the marriage of Sh. DeepakAggarwal to Smt. Shilpa Aggarwal have already beendebited to the capital a/c of one of the partners of thefirm. Acknowledging that the foreign travelundertaken in May 2000 was not wholly andexclusively for the purpose of business. 3.3.Assessee also furnished certain e-mailphotocopies in support of its claim regarding workdone by Sh. Deepak Aggarwal & Smt. ShilpaAggarwal. These papers filed by the assessee do nothave any evidentiary value. It is also noted that allcorrespondence is in the individual name of Mr. &Mrs. Deepak Aggarwal and they are not in the nameof assessee firm. According to the assessee thetravelling expenses were incurred to train Sh. DeepakAggarwal and Smt. Shilpa Aggarwal, who were notassociated with firm during the year underconsideration, but later on associated themselves withthe business. Thus even if, it is presumed andexpenses have been incurred to train partner's sonand daughter-in-law, these are not the expenses ofthe firm since these two persons are neither anemployee nor partner, agent, Manager of the firm. Moreover, expenses incurred on training of themanpower with the prospective use in the business isin the nature of capital expenses and not revenue.While examining books of account it was found thatforeign currency has been purchased in respect ofvisit of Sh. Deepak Aggarwal, however there are nobills etc. accompanying those vouchers indicating thatamounts have actually been spent, if at all spent,there is no evidence that it is an expense for thebusiness purposes spent by newly married couple.Assessee was also confronted with theseobservations while examining books of accounts videexamination notes dated 21/01/04. The reply given bythe assessee has already been discussed above. 3.4.Thereby it is clear and beyond doubt that theforeign tours undertaken by Sh. Deepak Aggarwal andSmt. Shilpa Aggarwal, being the son and daughter inlaw of the partners were completely personal toursand not wholly and exclusively for the purpose ofbusiness. Therefore the expenses debited under thehead travelling a/c expended on foreign travel of Sh.Deepak Aggarwal and Smt. Shilpa Aggarwal are heldnot to be revenue expenses wholly and exclusively forthe purpose of business of the assessee firm. Thus asum of Rs.32,43,766/- under the head TravellingExpenses is disallowed u/s 37(1) of the IT Act.” 7.The Tribunal while reversing the findings of the CIT(A) onthis issue had elaborately analyzed the material on record and concurredwith the conclusion of the Assessing Officer with the followingobservations:- “10.We have heard the parties and have perusedthe material on record. Out of total expenses chargedof Rs.39.93 lacs, the assessee had suo moto debitedthe amount of Rs.3.78 lacs to the capital account ofthe partner, as personal in nature, incurred on theforeign travelling of Shri Deepak Aggarwal and hiswife, Smt. Shilpa. It was observed by the learned CIT(A) that all the correspondence in support of theexpenditure was with the parties with whom businesstransactions were effected by the assessee. It wasalso observed that the entire business of assesseewas looked after by Shri Deepak and Smt. Shilpa.The correspondence being in the individual name ofShri Deepak, was taken as not detrimental to theclaim of the assessee. Shri Deepak, though he wasneither the employee nor a manager/agent of theassessee firm, was found involved with the businessof the firm. Foreign tours undertaken during theperiod from 1998 to 2000 were found to have beeundertaken by Shri Deepak in connection with thebusiness of the assessee. Apropos the tour expensesof Rs.39.43 lacs during the year, Rs.32.54 lacs was found related to Shri Deepak and his wife, Smt.Shilpa. Documentary evidence in support of theexpenditure had been filed before the A.O. Thisdocumentary evidence comprises correspondencewith foreign customers, dealers and agents. Asummary of each and every place visited, the purposeof the visit, the business fetched etc., were producedbefore him. The address, the e-mal, code, fax andtelephone numbers and other particulars were of thefirm. The written submission filed by the assesseebefore the learned CIT(A), were sent by him to theA.O., seeking a remand report. The A.O., in responsehad nothing more to say, other than relying on theassessment order. The learned CIT(A) thus deletedthe addition made by the A.O. 11.The learned CIT(A), however, erred in deletingthe addition made by the A.O. It was erroneouslyoverlooked by the learned CIT(A) that none of theevidence filed on behalf of the assessee before theA.O. proved that the expenditure in question wasincurred wholly and exclusively for the businesspurpose of the assessee firm. The learned CIT(A)has accepted that the correspondence in respect ofthe expenses was not in the name of the assesseefirm but was in the name of the individuals. However,this was not considered material holding that the 11.The learned CIT(A), however, erred in deletingthe addition made by the A.O. It was erroneouslyoverlooked by the learned CIT(A) that none of theevidence filed on behalf of the assessee before theA.O. proved that the expenditure in question wasincurred wholly and exclusively for the businesspurpose of the assessee firm. The learned CIT(A)has accepted that the correspondence in respect ofthe expenses was not in the name of the assesseefirm but was in the name of the individuals. However,this was not considered material holding that the correspondence related to the business of theassessee firm and was with the parties with whom thebusiness was transacted by the assessee firm. This,in our considered opinion, is not in accordance withlaw. The legal requirement is that the expenditureought to have been incurred by a competent person,i.e., the employee or the Manager, etc. of theassessee firm, which neither Shri Deepak, nor his wifeSmt. Shilpa was. Rather, it has been admitted by theassessee firm that neither of these persons weretaken in any capacity in the assessee firm; that it wasthe firm of the parents of Shri Deepak; and that ShriDeepak and Smt. Shilpa did not have any relationshipwith the firm other than being son and daughter-in-lawof the two partners of the assessee firm. Theassessee had, rather, contended before the learnedCIT(A) that taking Shri Deepak and Smt. Shilpa on therolls of the assessee firm as a employee would havedowngraded the status of would be owners of thefamily firm. Moreover, before the A.O., the stand hadbeen that Shri Deepak Aggarwal had been under-training. Anyhow, the fact remains that neither ShriDeepak nor Smt. Shilpa had any capacity vis-a-vis theaffairs of the assessee firm. As such the learned CIT(A) clearly erred in overlooking this material fact whiledeleting the addition.” 8.The findings have been recorded by the Assessing Officerand the Tribunal that the foreign travel expenses of Shri DeepakAggarwal and Smt. Shilpa Aggarwal (son and daughter-in-law of thepartners of the assessee firm) was on account of personal tours and notexpended wholly and exclusively for business purposes and was, thus,inadmissible under Section 37(1) of the Act. It would primarily be aquestion of fact whether in a given facts and circumstances, the expenseis wholly and exclusively for business purposes or not. The view takenby the Assessing Officer and the Tribunal is a plausible view and,therefore, does not call for any interference by this Court. 9.Adverting to the judgment relied upon by learned counselfor the assessee, inSassoon J. David and Co. P. Ltd's case (supra),the appellant company was the investment company having shareseither directly or through their nominees by Sir Percival David, LadyDavid and Mr. V.P. David (hereinafter collectively called as “Davids”)Certain meetings of the Board of Directors were held on different dates.Finally, an agreement was entered into between the Davids and TataSons Limited on 23.3.1956 agreeing to sell 1000 shares held by Davidsor their nominees in the company in favour of Tatas or their nominees fora sum of ` 155 lakhs. The said agreement, inter alia, provided that thesum voted by the company for payment of gratuities and/or ascompensation for loss of employment to existing directors andemployees of the company with respect to their service upto andinclusive of 31.3.1956 and a further amount of ` 16188/- payable to theManaging Director Mr. Mathalone, should be paid with respect to hisservices in accordance with the resolution by the company and the amount so paid should be deducted towards price paid of ` 155 lakhs.During the Assessment year 1957-58, the relevant previous year being1956, the company claimed deduction of ` 1,64,899/- before the IncomeTax Officer, under Section 10(2)(xv) of the Income Tax Act, 1922. Duringeach of the three succeeding assessment years, the company claimeddeduction of ` 16,885/-,being annuity paid to the former Director inpursuance to the above resolution. During the assessment year 1957-58, the claim in respect of entire sum of ` 1,64,899/-was disallowed bythe ITO on the ground that services of the Directors and employees hadbeen terminated not because of the business expediency, but becauseof Tatas, purchaser of the shares, made it a condition precedent underthe agreement. Aggrieved with the decision of the Income Tax Officer,the company filed an appeal, which was dismissed. Further appealsbefore the AAC, the Tribunal and before the High Court, filed by thecompany, were dismissed, upholding the decision of the Income TaxOfficer. In the further appeal to the High Court, a Division Bench of theBombay High Court found that out of ` 1,64,899/-, only a sum of` 21,000/- paid towards liability for payment of pension to some retiredemployees and/or widows of such employees, besides a sum of` 16,188/- paid to Managing Director in lieu of 6 months' notice that hadgiven prior to the termination of services was not liable to claimdeduction. The High Court was of the view that a sum of ` 1,27,511/-paid to the employees and Director of the company by way ofretrenchment of compensation had been incurred by the company forpersonal expediency and/or consideration, accordingly, disallowed theclaim of the company to that extent. Still dissatisfied, the company approached the Apex Court, who held that as per the case of thecompany that many of its employees were old and superfluous andbusiness could be carried out with a smaller number and the only way inwhich they could reduce the number was to terminate the services of allthe employees by paying them compensation and, thereafter, re-employing some of them only. If the company felt that it was a methodinure to its benefit, it cannot be said that payment of compensationwould be referred as compensation or expediency. In thesecircumstances, the Apex Court allowed the appeal and ruled thatremaining sum of ` 1,27,511/- was deductible under Section 10(2)(xv) ofthe Act during the assessment year 1957-58 and a sum of ` 16,885/-wasallowable as deduction during the three succeeding assessment years,whereas, there are no circumstances, as discussed above, in thepresent case. The appellant has miserably failed to show anyconnection of the “foreign tours” of Mrs. and Mr. Deepak Aggarwal withthe firm in connection with its business. 10.In Aspinwall and Co.Ltd's case (supra), 'Foreign Travel'undertaken by the Senior Executive only for the purpose of businesswas held to be allowable deduction, whereas, there are nocircumstances as such, because as discussed above, the appellant hasfailed to prove any nexus of the foreign tours of Smt. and Sh. DeepakAggarwal with the business of the appellant firm. 11.In Appolo Tyres Ltd's case (supra), the Hon'ble HighCourt allowed the deduction of expenditure on foreign travel of wife ofManaging Director accompanying him on the foreign tour duly approvedby the Directors on the ground that it was for assisting Managing Director to discharge his social -cum-business obligations, whereas,Smt. and Sh. Deepak Aggarwal have no nexus or connection with theappellant firm in any capacity, whatsoever. 12.In Sundaram Clayton Ltd's case (supra), visits of theChairman and the Managing Director of the foreign company was held tobe in the interest of the Indian company. In these circumstances, thesame was allowed to be deducted as business expenditure, whereas,there are no such circumstances in the present case. 11.In Appolo Tyres Ltd's case (supra), the Hon'ble HighCourt allowed the deduction of expenditure on foreign travel of wife ofManaging Director accompanying him on the foreign tour duly approvedby the Directors on the ground that it was for assisting Managing Director to discharge his social -cum-business obligations, whereas,Smt. and Sh. Deepak Aggarwal have no nexus or connection with theappellant firm in any capacity, whatsoever. 12.In Sundaram Clayton Ltd's case (supra), visits of theChairman and the Managing Director of the foreign company was held tobe in the interest of the Indian company. In these circumstances, thesame was allowed to be deducted as business expenditure, whereas,there are no such circumstances in the present case. 13.The principle of law enunciated in these pronouncements iswell recognized. However, no benefit can be derived by the appellantfrom any of the said authorities referred to above being distinguishableon facts. 14.In view of the above, the substantial questions of law areanswered accordingly any the instant appeal is dismissed. (RAMENDRA JAIN) JUDGE 28.8.2015Ashwani/gbs (AJAY KUMAR MITTAL)JUDGE