Income-tax------

‑‑‑‑Business expenditure‑‑‑Expenditure incurred on spouse of a Director‑‑ General principles‑‑‑Travelling expenses of wives of Chairman and Managing Director of foreign company who were collaborators of assessee company‑On facts, allowable expenditure.

The question whether the expenditure incurred on the spouse of a director can be regarded as a legitimate business expenditure of the assessee company, will depend upon the circumstances in which such expenditure was incurred. An assessee cannot claim the expenses if any incurred on the travel of a spouse of its director on his/her business travel abroad, unless the spouse contributes to the business of the assessee. However, in matters of business, too narrow a view cannot be adopted. It is the realities of the commercial world that should determine the kind of expenditure reasonably required to be incurred, and it is necessary to constantly update the interpretation of the Act with a view to accommodate all such expenditure. The language employed in the relevant section is flexible enough to permit such wider interpretation whenever circumstances warrant:

Held, that it was not in dispute that the visit of the Chairman and the Managing Director of the foreign company was in the interest of the Indian company and was deductible as business expenditure. Having regard to the position they occupied in the foreign company and the importance of that company in furthering the business interest of the assessee‑company, the expenditure incurred by the assessee on the spouses of the Chairman and the Managing Director was an expenditure which was commercially expedient for the assessee to incur for enhancing the goodwill between the two companies. The Tribunal had rightly allowed that expenditure.

CIT v. T.S. Hajee Moosa & Co. (1985) 153 ITR 422 (Mad.); Bombay Mineral Supply Co. (P.) Ltd. v. CIT (1985) 153 ITR 437 (Guj.) (Appex.) and Modi Industries Ltd. v. CIT (1977) 110 ITR 855 (All.) distinguished.

CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) ref.

C.V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for Subbaraya Aiyar, Padmanabhan and Ramamani for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.‑‑‑The question referred to us at the instance of the Revenue arising out of the assessment of the respondent's income for the assessment year 1976‑77, is as to whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the travelling expenses of the wives of the Chairman and the Managing Director of the foreign company should be allowed as a deduction in computing the income of the assessee.

The Chairman and the Managing Director referred to in the order of reference are the Chairman and the Managing Director of Clayton Dewandre Holding Limited, collaborators of the assessee‑company, Sundaram Clayton Limited. They had been invited to India by the assessee‑company in connection with its business for the purpose of discussing with the assessee company their manufacturing and marketing programmes, future plans and other activities and also to visit the assessee's factory to get acquainted with the day‑to‑day working. They had been invited to come to India with their wives as it was useful besides being graceful to invite them in that way as that would further strengthen the cordial relations between the assessee company and the English company and maintain a high level of goodwill between the two companies.

The Income‑tax Officer having disallowed the travelling expenditure of the wives of the Chairman and the Managing Director of the foreign company, the assessee carried the matter to the Appellate Assistant Commissioner who allowed the appeal on the ground that it was commercially expedient on the part of the assessee to have borne this expenditure to facilitate the visit of the officials of the English company to the factory which was in fact indirectly controlled by them and that in the interest of the collaboration it was necessary for the assessee to bear the expenditure. The Revenue having carried an appeal against the order of the Appellate Assistant Commissioner to the Appellate Tribunal. The Appellate Tribunal rejected the Revenue's appeal holding that it is not only expenditure which directly results in a benefit or advantage to the assessee's business that is entitled to deduction, but also any expenditure which is incurred with a view to facilitate the carrying on of the business, as held by the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140. The Tribunal also observed that inviting the Chairman and the Managing Director to visit India with then wives would serve the purpose of strengthening the cordial relations between the foreign company and the assessee and had the beneficial effect of helping to promote the business interest of the assessee.

Learned counsel for the Revenue submitted that the Tribunal was in error in taking that view. Learned counsel referred to the decision of this Court in the case of CIT v. T.S. Hajee Moosa & Co. (1985) 153 ITR 422, to the decision of the Gujarat High Court in the case of Bombay Mineral Supply Co. (Pvt.) Ltd. v. CIT (1985) 153 ITR 437 (Appex.) and to the decision of the Allahabad High Court in the case of Modi Industries Ltd. v. CIT (1977) 110 ITR 855. In all these cases, the matter in issue was the expenditure incurred on the wives of the directors of the assessee‑company during their travel abroad alongwith their husband. It was held in these decisions that the expenditure incurred on the wife who accompanies her husband on the foreign tour cannot be regarded as expenditure laid out wholly and exclusively for business purposes as the wife could not be said to have contributed directly to the business of the assessees concerned therein.

The facts of this case, however, are different. The expenditure incurred here by the assessee was not on the spouse of its director on his business tour abroad, but the expenditure was incurred on the persons whom the assessee had invited having regard to the beneficial effect of their visit, on the business interest of the assessee those invitees being none other than the Chairman and the Managing Director of the company with whom the assessee had collaboration, and which foreign company apparently exercised some control over the assessee‑company, the foreign company being a holding company, it was in the interest of the assessee to maintain good relations with the foreign company, as its business interest could not possibly prosper to a significant extent without the aid and support of that foreign company. The invitation given to the Chairman as also to the Managing Director and their spouses was in the context one given for the purpose of furthering the business interest of the assessee and so commercially expedient. Their visit was for the purpose of facilitating the carrying on and improving the business of the assessee. The expenditure which persons engaged in business may incur and which expenditure would qualify for being considered as a deduction from its gross income is to be determined having regard to the commercial expediency and no rigid standard can be laid down, nor can the opinion of the Income‑tax Officer be substituted for that of the assessee concerned, if there are materials or if the surrounding circumstances indicate that the expenditure incurred was commercially expedient.

It is not in dispute that the visit of the Chairman and the Managing Director of the foreign company was in the interest of the Indian company and was deductible as business expenditure. Having regard to the position they occupied in the foreign company and the importance of that company in furthering the business interest of the assessee‑company, the expenditure incurred by the assessee on the spouse of the Chairman and the Managing Director is an expenditure which was commercially expedient for the assessee to incur for enhancing the goodwill between the two companies. The Tribunal in our view has rightly allowed that expenditure.

As to whether the expenditure incurred on the spouse of a director can be regarded as a legitimate business expenditure, will depend upon the circumstances in which such expenditure was incurred. An assessee cannot claim the expenses if any incurred on the travel of a spouse of its director on his/her business travel abroad, unless the spouse contributes to the business of the assessee, as the income of an assessee is not meant to be frittered away for promoting the pleasure of those who manage it, and such expenditure cannot be regarded as commercially expedient. However, in the matters of business, too narrow a view cannot be adopted. It is the realities of the commercial world that should determine the kind of expenditure reasonably required to be incurred, and it is necessary to constantly update the interpretation of the Act with a view to accommodate all such expenditure.

The language employed in the relevant section is flexible enough to permit such wider interpretation whenever circumstances warrant.

Our answer to the question referred to us is, therefore, in the affirmative, in favour of the assessee and against the Revenue. In the circumstances of the case, we direct the parties to bear their respective costs.

M.B.A./323/FC Reference answered.