Kalpesh Classes

Often on a business tour of a business person, his wife accompanies him in business interest. Objections have been raised by the Assessing Officers, concerning the deductibility of the expenses relating to wives’ foreign travels in the computation of taxable incomes. There is no specific provision in the Income-tax Act, 1961, which allows or prohibits allowance of expenses on foreign tours.​​ The claims have to be scrutinized in terms of section 37(1). It shall be concluded that the claim relating to wives’ travel expenses cannot be decided with any bias or prejudice that such expenses will generally be of personal nature. Situations do arise when it becomes commercially expedient that the wife of the managing director/partner, etc., should accompany the husband in business interest. The burden to prove business interest or commercial expediency for such claims would be on the assessee.​​ The department will have to take a decision in the matter taking a pragmatic view of the fast-changing social environment, and keeping in view the guidelines laid down in the Full Bench decision of the Kerala High Court in the case of Ram Bahadur Thakur Ltd. v. CIT [2003] 261 ITR 390 / 128 Taxman 599.

There is no specific provision in the Income-tax Act, 1961 (‘the Act’), which allows or prohibits allowance of expenses on foreign tours. The claims have to be scrutinized in terms of section 37(1). This section prescribes conditions, which are to be considered by the Assessing Officer before a claim for expenditure of the nature under discussion can be allowed. These conditions are :

(i)expenditure must be revenue expenditure and not in the nature of capital expenditure;

(ii)it must be laid out or expended wholly and exclusively for the purpose of the business or profession;

(iii)it must not be of the nature described in sections 30 to 36 of the Act; and

(iv)expenditure should not be personal expenditure of the assessee.

The expenses on foreign travel are to be scrutinized, keeping in view these conditions.

Foreign Travel Expenses in General

In the context of travel expenses, generally it can be straightaway said that such expenses are not covered by sections 30 to 36. Expenditure, which is of capital nature, will, obviously, be not deductible. Thus, in situations where tours have been made in the context of purchasing assets like plant and machinery, etc., the expenditure on foreign travels has been considered as an expenditure of a capital nature and instead of allowing deduction for it in the computation of taxable income, the same has been held to be a part of the cost of the plant and machinery purchased and has been added to the price paid for the same.​​ Thus, foreign travel expenses incurred by the assessee on visit of certain officials for purpose of inspection of new machinery, which was later on purchased by the assessee, have been held to be of capital in nature - Shri Dinesh Mills Ltd. v. Asstt. CIT [2000] 72 ITD 110 (Ahd.)

Expenses on foreign tour incurred by directors or/and executives of the assessee-company for discussions and negotiations to finalize a collaboration agreement for a new project or a new line of business have been held to be of capital nature - Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466/[1986] 28 Taxman 544 (Cal.).

Expenses incurred in the context of the work relating to day-to-day functioning of a business, have been allowed as revenue expenditure.​​ Thus, where the assessee-company incurred certain expenditure on the foreign tour of its directors for obtaining technical know-how for the manufacture of its products with a different design so as to improve their quality, it has been held that the expenditure was a deductible revenue expense​​ - Sayaji Iron & Engg. Works (P.) Ltd. v. CIT [1974] 96 ITR 240 (Guj.); CIT v. Saraswati Industrial Syndicate Ltd. [1982] 136 ITR 366 (Punj. & Har.).

Similarly, the expenses of the foreign tour of the directors of the assessee-company (engaged in manufacture of various engineering equipments) for selection of foreign engineers for the purposes of starting the manufacture of aerial ropeways, with the existing machinery and financial resources, without any addition to the fixed capital were held to be of revenue character,​​ meant only to diversify the existing assets in a more effective way - CIT v. Elecon Engg. Co. Ltd. [1981] 132 ITR 752/ 5 Taxman 161 (Guj.). In Addl. CIT v. Motipur Sugar Factory (P.) Ltd. [1981] 128 ITR 84 / 6 Taxman 258 (Pat.),​​ the expenditure incurred by the assessee, a sugar manufacturing company, on foreign tour of its director for appraisal of latest techniques in sugar production was held to be a deductible business expenditure.​​ The expenditure incurred by the assessee-company on foreign tours of its chairman, managing director and technical advisor for securing technical collaboration was held to be an admissible business expenditure - Antifriction Bearings Corpn. Ltd. v. CIT [1978] 114 ITR 335 (Bom.).

However, controversies cropped up when wives’ expenses on foreign travels, when they accompanied their husbands, were claimed. The question regarding the allowability of the expenditure incurred on the foreign tour of the wife of a partner of a firm or the wife of a director of a company or the wife of an executive of a company came up for consideration before the Gujarat, Madras and Madhya Pradesh High Courts in Bombay Mineral Supply Co. (P.) Ltd. v. CIT [1985] 153 ITR 437 / 23 Taxman 549 (Guj.) followed by CIT v. Shahibag Entrepreneurs (P.) Ltd. [1995] 215 ITR 810 (Guj.), CIT v. T.S. Hajee Moosa & Co. [1985] 153 ITR 422/122 Taxman 250 (Mad.) and CIT v. Steel Ingots (P.) Ltd. [1996] 220 ITR 552/ 88 Taxman 28 (MP). The said question has also come up for consideration in CIT v. Aspinwall & Co. Ltd. [1999] 235 ITR 106 (Ker.), CIT v. Apollo Tyres Ltd. [1999] 237 ITR 706 /[1998] 101 Taxman 167 (Ker.) and in Ram Bahadur Thakur Ltd. v. CIT [2002] 257 ITR 289 /[2003] 130 Taxman 275 (Ker.). In Bombay Mineral Supply Co. (P.) Ltd.’s case (supra ), the Gujarat High Court considered the question regarding the allowability of the foreign tour expenses of the wife of the managing director of the assessee-company. In that case, the managing director had undertaken a tour to Japan for business purposes but since he was keeping indifferent health, he needed someone to look after him and, therefore, the wife of the director accompanied him on the foreign tour. It was stated that the assessee-company had agreed to bear the expenses of the wife of the director, for otherwise the company would have had to engage a nurse to accompany the director to look after him. The company claimed deduction of this expenditure as business expenditure. It was disallowed by the ITO. It was contended before the High Court that where it was found that the managing director was maintaining indifferent health and that he was a vegetarian, it should follow as a necessary corollary that the service of his wife to attend on her husband should also be treated on par with that of a nurse and the expenses incurred in respect of the tour of the wife should be allowed as business expenses since there is no distinction in principle in the real nature of the expenses.​​ 

The Gujarat High Court, accordingly, held that the need of the managing director of the assessee-company to have the services of his wife, who was not a qualified or a trained nurse, either to attend on him in the state of his indifferent health or to prepare food for him since he happened to be a strict vegetarian, would not entitle the assessee-company to claim​​ the proportionate expenses as business expenses. Expense was held to be not allowable as deduction on grounds that it being personal.

Full Bench decision of Kerala High Court on the issue

The Kerala High Court, in its Full Bench’s decision in the case of Ram Bahadur Thakur Ltd. v. CIT [2003] 261 ITR 390/ 128 Taxman 599, has considered the issue after taking into account the decisions given by the Kerala High Court itself in the past and also the decisions given by other High Courts. It has laid down the principles that have to be considered in allowing such claims. According to the Full Bench, the issue needs to be decided in the background of the provisions of section 37(1) and has summarized the broad principles that have to be considered in deciding the issue, inter alia, regarding the travel expenses of the wives of businessmen. These are :

• In order to constitute an expenditure falling under section 37(1) the six conditions, viz., ( i) the expenditure should not be of the nature described in sections 30 to 36, (ii) it should have been incurred in the accounting year, (iii) it should be in respect of a business, which was carried on by the assessee and the profits of which are to be computed and assessed, (iv) it should not be in the nature of personal expenses of the assessee, (v) it should have been laid out or expended wholly and exclusively for the purpose of such business, and (vi) it should not be in the nature of capital expenditure.

• Though the expression ‘for the purposes of the business’ is wider in scope than the expression ‘for the purpose of earning profits’, and may comprehend many acts incidental to the carrying on of a business, its limits are implicit in it and the purpose shall be for business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.

• The expenditure incurred is on the ground of commercial expediency and in order, indirectly, to facilitate the carrying on of the business.

• The fact that there was no compelling necessity to incur the expenditure on which deduction is claimed is irrelevant to constitute expenditure under section 37(1).

• Even an expenditure incurred by an assessee in the course of his business or its business voluntarily and without necessity can be allowed as a deduction under section 37(1), if it is incurred for promoting the business and to earn profits even though there was no compelling necessity to incur such expenditure.

• If the payment of expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may enure to the benefit of a third party also.

• In every case, it is a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee.

• Where an assessee seeks to deduct from his or its business profits, certain items of expenditure, the onus of proving that such deductions are permissible, is on the assessee.​​ This is particularly so when the claims are based on facts, which are exclusively within the knowledge of the assessee. Thus, it is for the assessee to plead and prove before the authorities that the expenses are incurred wholly and exclusively for the purpose of the business of the assessee.

• When a claim for deduction of an expenditure under section 37(1) is made by an assessee, the Assessing Officer is bound to conduct an enquiry as to whether the assessee satisfies all the requirements of the section before either allowing or rejecting the claim.

The Court has clarified that the Assessing Officer cannot mechanically allow or disallow the claim relating to any expenditure (including on wife’s travel); the tests laid down by the Court are not exhaustive and can vary from case-to-case and the decision will depend on the facts and circumstances in different cases.

The Court has further observed that in all cases where an assessee makes a claim for deduction of an expenditure under section 37(1), the Assessing Officer is bound to consider the said claim, be it in respect of expenses for the foreign tour of the director of a company or in respect of the expenses for the foreign tour of the wife of the director accompanying him, meticulously keeping in mind the legal principles governing the question and to arrive at a decision either way after affording a reasonable opportunity to the assessee. The appellate authorities are also bound to consider the matter in accordance with law and in the light of the broad legal principles summarized above. Of course, the burden is on the assessee to furnish all relevant materials to establish its claim that the expenditure on which deduction is claimed falls under section 37(1).

Latest decision of Delhi High Court on the issue of wives’ foreign travel expenses

The latest decision on the issue is from the Delhi High Court in the case of CIT v. Autometer Ltd. [2004] 136 Taxman 562 . In this case, the claim related to the foreign travel expenses of the wife of the managing director of the company. In this case, the travel of the wife was approved by the board of directors of the company in the meeting held on July 1, 1980, where the following resolution was passed :

"It was also suggested that the Managing Director should be accompanied by Mrs. K.K. Thirani so that social functions could be attended during this tour and cordial relations could be developed." (p. 564)

The High Court after referring to the decision of the Kerala High Court in the case of Ram Bahadur Thakur (supra), has opined that whether the expenditure is incurred wholly and exclusively for the purpose of trade and business of the assessee, is required to be determined and where the assessee seeks to deduct from his or its business profits certain items of expenditure, the onus of proving that such deductions are permissible is on the assessee. This is particularly so, when the claims are based on facts which are exclusively within the knowledge of the assessee. Thus, it is for the assessee to plead and prove before the authorities that the expenses are incurred wholly and exclusively for the purpose of the business of the assessee.

Concluding comments

The claim relating to wives’ travel expenses cannot be decided with any bias or prejudice that such expenses will generally be of personal nature. Situations do arise when it becomes commercially expedient that the wife of the managing director/partner, etc., should accompany the husband in business interest. The burden to prove business interest or commercial expediency for such claims would be on the assessee.​​ The department will have to take a decision in the matter taking a pragmatic view of the fast-changing social environment, and keeping in view the guidelines laid down in the Full Bench decision of the Kerala High Court discussed earlier.