High Court Of Madhya Pradesh : Indore Bench
CIT vs. Flour & Food Ltd.
Asst. Year 1979-80
G.G. Sohani & R.K. Verma, JJ.
M.C.C. No. 59 of 1985
16th July, 1987
R.C. Mukati, for the Revenue : G.M. Chaphekar & Samvatsar, for the Assessee
G.G. SOHANI, J.:
By this reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”), the Tribunal, Indore Bench, has referred the following question of law to this Court for its opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred by the managing director and business executive of the assesseecompany on their tour to Mauritius amounting to Rs. 20,270 was intimately connected with the business of the assessee-company and hence was allowable as a business expenditure in respect of the asst. yr. 1979-80 ?”
2. The material facts giving rise to this reference, briefly, are as follows : The assessee is a limited company carrying on the business of manufacturing flour mill products, foodstuff, oil products, etc. For the asst. yr. 1979-80, the assessee claimed a sum of Rs. 20,270, being the amount of travelling expenses for the Mauritius trip of the managing director and the chief executive, as business expenditure. It was contended before the IAC that the trip to Mauritius was undertaken for the purpose of helping the Mauritius Government in setting up a flour mill in that country. The IAC held that the work done by the managing director was in the nature of consultancy service and that there was no clause in the memorandum of association authorising the assessee to undertake the job of consultancy. The IAC also noted that no report was submitted to the Reserve Bank of India. The IAC accordingly disallowed the claim of the assessee in that behalf. On appeal, the CIT(A) upheld the disallowance. The Commissioner held as follows : “The next objection of the appellant for the asst. yr. 1979-80 is against the disallowance of Rs. 20,270 out of travelling expenses incurred by the managing director and the chief executive on their tour to Mauritius. It was explained before the IAC (Asst.) that both the managing director and the chief executive of the company were authorised by a board resolution to undertake a tour to Mauritius to explore the possibility of setting up a flour mill in Mauritius with the appellant’s collaboration. The trip of the managing director and the chief executive was of 8 days’ duration and cost the company a sum of Rs. 20,270. I find that the managing director and the chief executive who went to Mauritius on a definite mission did not submit their report to the board of directors regarding the work which had actually been done by these persons to justify payment of travelling expenses. The IAC (Asst.) has rightly observed that the trip was undertaken for helping the Mauritius Government in erecting or setting up a flour mill in that country which was in the nature of a consultancy job. Since consultancy service was no part of the appellant’s business, it was clearly not admissible. Since the expenditure was incurred for exploring the possibility of export of technical know-how which did not pertain to the sphere of business activities of the company, the expenditure was clearly not allowable, being either of capital nature or not connected with the business of the company. The disallowance by the IAC (Asst.) was just and proper which is accordingly confirmed.”
On further appeal before the Tribunal, the Tribunal referred to cls. 1A and 1D of the memorandum of association of the assessee and held that imparting technical know-how was the business of the company. The Tribunal, therefore, took the view that the expenditure incurred by the assessee on the trip undertaken by the managing director and the chief executive to Mauritius was intimately connected with the business of the assessee-company and was, therefore, allowable as a business expenditure. The Tribunal, therefore, allowed the appeal preferred by the assessee in that behalf.Aggrieved by the order, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this Court for its opinion.
3. For holding that the expenditure in question was intimately connected with the business of the assessee, the Tribunal referred to the provisions of cls. 1A and 1D of the objects clause of the memorandum of association of the assessee. These clauses are as follows : “1A. To carry on at any place or places in India or elsewhere in the world by itself or in collaboration with any other body corporate or otherwise of any other country, the business of manufacture, and to assemble, repair, buy, sell, re-sell, exchange, import, export, distribute or deal in all kinds of plant and machineries, relating to objects of the company and tools, implements and any other materials of whatsoever kind used in or conducive to manufacture or use of such machinery. 1D. To acquire, develop and impart technical and managerial know-how in machineries, engineering, chemicals, food, animal feed, milling and other connected industries either by itself or in collaboration with others in India or elsewhere in the world.”
4. It was, however, conceded before us by learned counsel for the assessee that the aforesaid clauses were inserted in the memorandum of association on 27th April, 1981, and were not in existence during the assessment year in question. In these circumstances, on the basis of the aforesaid clauses in the memorandum of association, the Tribunal was not right in holding that the expenditure in question was intimately connected with the business of the assessee. The fact that consultancy was not the business of the assessee at the relevant time was not disputed before us. Learned counsel for the assessee, however, referred to the following resolution of the assessee-company authorising the managing director and the chief executive to incur expenditure in connection with the Mauritius trip : “Resolved unanimously that (1) Shri Jasbirsingh G. Bhandari, the managing director, and (2) Shri Jambookumar G. Bhandari, the chief executive of the company, be deputed to Mauritius to take part in the negotiations for setting up a flour milling industry on turnkey basis for and on behalf of the company with the Mauritius Government and/or any other party connected therewith and, if possible, finalise the negotiations in the interests of the company, as they deem fit. It is further resolved that all the expenditure on this travel by both these persons be and is hereby approved to be borne by the company.”
From the aforesaid resolution, it is clear that the Mauritius trip was undertaken for initiation of a new business and not for the expansion of the business carried on by the assessee. It would, therefore, be in the nature of capital expenditure as rightly held by the CIT(A). In this view of the matter also, the Tribunal was not right in holding that the amount of Rs. 20,270 was allowable as business expenditure in respect of the asst. yr. 1979-80.
5. For all these reasons, our answer to the question referred to this Court is in the negative and in favour of the Revenue. In the circumstances of the case, parties shall bear their own costs of this reference.
[Citation : 170 ITR 469]