VVF Ltd. vs. DCIT-39; [ITA. No. 9030/Mum/2010; Date of order: 31st August, 2016; A.Y.: 2007-08; Bench: F; Mum. ITAT] Section 37 – Business expenditure – Salary paid to director – The expenditure may be incurred voluntarily and without any necessity – So long as it is incurred for the purposes of business, the same is allowable as deduction

The Pr. CIT-3 vs. VVF Ltd. [Income tax Appeal No. 1671 of 2017]

Date of order: 4^th March, 2020

(Bombay High Court)

VVF Ltd. vs. DCIT-39; [ITA. No. 9030/Mum/2010; Date of order: 31^st August, 2016; A.Y.: 2007-08; Bench: F; Mum. ITAT]

Section 37 – Business expenditure – Salary paid to director – The expenditure may be incurred voluntarily and without any necessity – So long as it is incurred for the purposes of business, the same is allowable as deduction

A search and seizure action u/s 132(1) of the Act was carried out by the Department in the case of the assessee and its group associates, including its directors, on 3^rd January, 2008. In A.Y. 2002-03, the A.O. made an addition of Rs. 13,00,000 which represented the salary paid to Shri Faraz G. Joshi, its Director.

The A.O. disallowed the salary paid to Shri Joshi primarily relying on a statement recorded during the course of the search u/s 132(4) of the Act. The A.O. noted that in the course of the search it was gathered that Shri Joshi was not attending office on a day-to-day basis and no specific duties were assigned to him except some consultation.

The assessee had pointed out before the A.O. that Shri Joshi was a whole-time Director and was performing his duties as Director of the assessee-company and was being paid remuneration in accordance with the limits prescribed under the Companies Act, 1956.

The A.O. disagreed with the assessee and concluded that the payment made to Shri Joshi in the form of salary was an expenditure not expended wholly and exclusively for the purposes of business and, therefore, disallowed the same u/s 37(1) of the Act.

The CIT(A) also sustained the action of the A.O. by noting that Shri Joshi had specifically admitted in the statement recorded at the time of the search that he was not attending office for the last six years and no specific duties were assigned to him.

The Tribunal held that the assessee has appropriately explained the statement rendered by Shri Joshi. His answer has to be understood in the context of the question raised. In this context, attention has been drawn to the relevant portion of the statement, which reads as under:

‘Q.9: What is the nature of business conducted by the company, i.e., M/s VVF Ltd.?

A.9:  The company deals in Oleo-Chemicals. We also work on contract basis for Jhonson & Jhonson (sic) & Racket – Colman (sic). (Johnson & Johnson; Reckitt-Coleman.)

Q.10: Who looks after the day to day activity of that company and what are the duties assigned to you?

A.10: I am not aware about the person who looks after the day to day business activity. Since last 6 years I am not attending the office nor any duty is assigned to me except consultation.’

It has been explained that the answer by Shri Joshi was in response to the question put to him which was as to whether he was involved in the day-to-day management of the company. It was in this context that the answer was given. However, it is sought to be pointed out that the said Director was rendering consultation and advisory services which, in fact, is the role of a Director. Therefore, it has to be understood that services were indeed being rendered by the said Director to the assessee company. The Tribunal observed that the overemphasis by the Revenue on the wordings of the reply of Shri Joshi has led to a wrong conclusion.

Further, Shri Joshi was one of the two main Directors of the assessee company and that historically such salary payments had been allowed as a deduction. In fact, there is no negation to the plea of the assessee that for A.Ys. 2009-10 to 2012-13, such salary payments stood allowed and such assessments have been completed even after the search carried out on 3^rd January, 2008. It is judicially well settled that it is for the assessee to decide whether any expenditure should be incurred in the course of carrying on of its business. It is also a well-settled proposition that expenditure may be incurred voluntarily and without any necessity and so long as it is incurred for the purposes of business, the same is allowable as deduction even though the assessee may not be in a position to show compelling necessity of incurring such expenditure. In support of the aforesaid proposition, reliance can be placed on the judgment of the Hon’ble Supreme Court in the case of Sasoon J. David & Co. P. Ltd., 118 ITR 261 (SC).

Being aggrieved, the Revenue filed an appeal to the High Court. The Court held that in response to the specific query the answer given by Shri Joshi was quite reasonable and no adverse inference could be drawn therefrom. Besides, the Tribunal also found that in all the assessments made up to the date of the search, the salary payment to Shri Joshi was allowed. Even post-search, from A.Y. 2009-10 onwards where assessments have been made u/s 143(3) of the Act, salary paid to Shri Joshi was not disallowed.

The Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. vs. CIT (Supra), examined the expression ‘wholly and exclusively’ appearing in section 10(2)(xv) of the Income tax Act, 1922 which corresponds to section 37 of the Act. Sub-section (1) of section 37 says that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.

It was observed that the expression ‘wholly and exclusively’ appearing in the said section does not mean ‘necessarily’. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his business. Such expenditure may be incurred voluntarily and without any necessity. If it is incurred for promoting the business and to earn profits, the assessee can claim deduction u/s 10(2)(xv) even though there was no compelling need for incurring such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction u/s 10(2)(xv) of the Act. In the light of the above, the Revenue appeal was dismissed.