Section 37(1) of the Income-tax Act, 1961

IN THE ITAT MUMBAI BENCH ‘J’

Air India Ltd.

v.

Deputy Commissioner of Income-tax, Spl. Range-19/IAC Range I(C), Mumbai

G.C. GUPTA, JUDICIAL MEMBER

AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NOS. 6825, 6826, 7118 TO 7120 (MUM.) OF 2002

[ASSESSMENT YEARS 1984-85 TO 1986-87]

MARCH 30, 2007

I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1984-85 - Assessee-company had made reimbursement of hotel expenses, car hire expenses and entertainment expenses on foreign tour of its advocates and solicitors - Whether aforesaid expenses incurred on advocates and solicitors were essentially legal expenses which could be allowed under section 37(1) - Held, yes

II. Section 37(1), read with section 37(3A) and 37(3B), of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1984-85 - Assessee was engaged in business of carrying passengers on its international flights - It had incurred expenses on providing certain services to its customers like cabin service materials; overnight bags; compensation for damaged bags, etc. - It had also incurred expenses on making stay arrangements for its passengers in hotels on account of delay in flight due to bad weather, defect in aircraft, etc. - Whether since expenses-in-question were in conformity with international conventions which required all international air operators to provide for certain facilities to its international passengers, said expenses could not be regarded as sales promotion expenses within meaning of section 37(3B)(i) - Held, yes - Whether, therefore, expenses in question were to be allowed under section 37(1) as they had been incurred in ordinary course of assessee’s business and as a part of contractual obligation towards passengers - Held, yes

III. Section 40A(5) of the Income-tax Act, 1961 - Business disallowance - Remuneration, etc., paid in excess of prescribed limit in case of company, etc. - Assessment year 1985-86 - During course of assessment proceedings, Assessing Officer had noticed that assessee had not offered any disallowance in respect of payment of salary to employees posted outside India in terms of section 40A(5) - He, thus, made certain disallowance on account of period of employment of employees outside India - Assessee’s plea that its case was covered by section 40A(5)(b)(i) and, hence, provisions of section 40A(5)(a) were inapplicable, was not accepted - On appeal, it was seen that assessee had a global presence and its employees were subject to posting abroad or at places within India in terms of their contracts of employment and in exigencies of business - Whether, in aforesaid circumstances, mere fact that assessee’s employees were deputed abroad for a short period would not take case away from purview of section 40A(5)(b)(i) - Held, yes - Whether, therefore, impugned disallowance was to be deleted - Held, yes

IV. Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment - Assessment year 1985-86 - Whether where assessee had collected foreign travel tax and did not pay it to Government till end of relevant previous year, it was to be disallowed under section 43B - Held, yes

FACTS-I

The assessee-company reimbursed the car hire expenses, hotel expenses and entertainment expenses incurred by its advocates and solicitors on foreign tour. The Assessing Officer disallowed same on the ground that the assessee could have made the payments directly to the advocates and solicitors instead of bearing or reimbursing the impugned expenditure. The Commissioner (Appeals) upheld the disallowance.

On second appeal :

HELD-I

It is true that the payments made to hotels are hit by section 37(3A)/37(3B). The question, however, was as to what was the true character of the impugned payments,  i.e., whether they were in the nature of payments made to hotels or as a part of legal charges. Apparently the payments had been made to the hotels. However, it is not the form but the substance of the transaction that helps to determine the true character of payment. In order to examine the true character of the payment, it was necessary to keep in mind that the assessee had engaged the advocates and solicitors for handling its legal matters. The impugned expenses met by it on the tour of its advocates and solicitors were in the nature of legal expenses. It was stated in the orders of the departmental authorities that if the advocates and solicitors had themselves met that expenditure, it would not have been hit by section 37(3A)/37(3B). It would not alter the true character of the expenditure only because of the fact that the payments had been made by the assessee for and on behalf of the advocates and solicitors instead of being made by the advocates and solicitors themselves. The expenses incurred on advocates and solicitors were essentially legal expenses which were allowable under section 37(1) and were not hit by section 37(3A)/(3B). [Para 4]

FACTS-II

The assessee-airways was engaged in the business of carrying passengers on its international flights. It had incurred expenses on providing certain services to its customers like cabin service materials; overnight bags; compensation for damaged bags, etc. It had also incurred expenses to provide for hotel facilities to its passengers in accordance with international conventions followed by all international air carriers. It had to make stay arrangements for its passengers in the hotels on account of delay in flight due to defect in the aircraft; bad weather, etc. The Assessing Officer disallowed all the aforesaid expenses on the ground that they were hit by section 37(3A)/37(3B). The Commissioner (Appeals) upheld the disallowance.

On second appeal :

HELD-II

The assessee was engaged in the business of carrying passengers on its international flights. It was required to provide for certain facilities to its customers as all other international airlines provided those facilities. However, the departmental authorities had taken the view that the impugned expenses were sales promotion expenses and, thus, were hit by section 37(3B). Perusal of section 37(3B)(i), as it existed at the relevant point of time, showed that the expenses covered by the said provisions were those, which were incurred by the assessee by way of ‘advertisement, publicity and sales promotion’. The expression ‘sales promotion’ used in section 37(3B)(i) has not been defined anywhere in the Act. Section 37(3B) was enacted with a view to curb certain categories of avoidable or ostentatious expenditures by the assessee carrying on business or profession. The expression ‘sales promotion’ is preceded by the words ‘advertisement’ and ‘publicity’ in section 37(3B)(i), which means that the meaning of the term ‘sales promotion’ has to take its colour from the preceding words, namely, ‘advertisement’ and ‘publicity’. The principle of ejusdem generis restricts the meaning of general words to things or matters of the same genus as the preceding particular words. If so interpreted, the phrase ‘sales promotion’ cannot be interpreted to include the selling expenses or the expenses incurred in providing services to the customers in the ordinary course of business. The phrase ‘sales promotion’ would mean and cover only those expenses which are incurred with a view to promote sales in the same way as an advertisement and publicity. If the customers have paid for certain services, the assessee would be required to provide for those services to the customers and the expenses so incurred on providing such services to the customers as part of business dealings and contractual obligations would not be hit by section 37(3B)(i). The assessee had incurred the impugned expenses after it had booked the passengers and after it effected the sales. The expenses had been incurred not to promote the sales but to provide certain facilities to the customers in lieu of the airfare paid by them. They had been incurred in the ordinary course of business and as a part of contractual obligations towards its passengers. They were also in conformity with the international conventions, which required all international air operators to provide certain facilities to the international passengers. The impugned expenses could not, therefore, be called as sales promotion expenses within the meaning of section 37(3B)(i). [Para 9]

Section 37(3C), as it existed at the relevant point of time, provided that the provisions of section 37(3A) would not apply in respect of expenditure incurred by an assessee, being a domestic company as defined in section 80B(2) as it existed then, on advertisement, publicity and sales promotion outside India in respect of the goods, services or facilities ‘which the assessee deals in or provides in the course of his business’. There was no doubt that the assessee was a domestic company. Even if the impugned expenses were held to be in the nature of sales promotion expenses, the provisions of section 37(3A) would be inapplicable in view of the bar created by section 37(3C). It was not in dispute that the assessee was an international carrier and had incurred the impugned expenses outside India to provide for certain services to its passengers in the course of its ordinary business. [Para 10]

Accordingly, order of the Commissioner (Appeals) confirming disallowance was to be vacated. [Para 11]

FACTS-III

During the course of the assessment proceedings, the Assessing Officer had noticed that the assessee had not offered any disallowance in respect of payment of salary to the employees posted outside India in terms of section 40A(5). He, therefore, estimated a sum of Rs. 6 lakhs for disallowance on account of period of employment of the employees outside India. The plea of the assessee that its case was covered by section 40A(5)(b)(i) and, hence, the provisions of section 40A(5)(a) were inapplicable, was not accepted by the Assessing Officer. The Commissioner (Appeals) upheld the disallowance.

On second appeal :

HELD-III

The impugned disallowance had been made on an  ad hoc basis under section 40A(5)(a) after rejecting the submission of the assessee that its case was covered by section 40A(5)(b)(i). The assessee had a global presence. Its employees were subject to posting abroad or at places within India in terms of their contracts of employment and in the exigencies of business. The mere fact that they were deputed for a short period would not take the case away from the purview of section 40A(5)(b)(i). Even shorter period of deputation of an employee outside India would constitute ‘any period of his employment outside India’ within the meaning of section 40A(5)(b)(i). Therefore, the impugned disallowance was to be deleted. [Para 18]

FACTS-IV

The Assessing Officer had disallowed a sum, being collection of foreign travel tax and a sum, being turnover tax in Ceylon under section 43B as they had not been paid till the end of the previous year, relevant to the assessment year under appeal. On appeal, the assessee contended before the Commissioner (Appeals) that the aforesaid sums were not in the nature of taxes or levies as held by the Assessing Officer and that the impugned sums had been collected on behalf of the Government for providing for facilities at the airport to the passengers undertaking foreign travels, hence, same were not disallowable. The Commissioner (Appeals) did not agree with the aforesaid submission of the assessee and held that the provisions of section 43B were  applicable in respect of foreign travel taxes collected by the assessee.

On second appeal :

HELD-IV

The Commissioner (Appeals) had correctly appreciated the legal aspects of the case. Foreign travel tax is covered by section 43B. The impugned order, therefore, was to be affirmed. [Para 21]

CASES REFERRED TO

CIT v. Hindustan Motors Ltd. [1991] 192 ITR 619/[1992] 63 Taxman 110 (Cal.) (para 7), CIT v. Statesman Ltd. [1992] 198 ITR 582/[1993] 70 Taxman 267 (Cal.) (para 7), CIT v. Print System Products [2000] 243 ITR 8/[2003] 128 Taxman 275 (Mad.) (para 7), Ramnath Exports (P.) Ltd. v. ISE [1992] 42 TTJ (Delhi) 441 (para 7) and Nelco India (P.) Ltd. v. ITO [1991] 36 ITD 224 (Delhi) (para 7).

D.J. Shukla for the Appellant.

Anil Mehta for the Respondent.