The deductibility of expenditure incurred by the Indian company on providinghospitality to employees of their joint venture partners or collaborators orof the parent company has been disputed and sought to be disallowed. Thecourts, however, are inclined to take a pragmatic view and adopt abusinesslike approach in respect of such expenses which undoubtedly promotebusiness interests of Indian and foreign partners. In fact, courts have eventaken the view that travelling expenses incurred pertaining to the spouse ofsenior executives of foreign collaborators are deductible. This was held inCIT vs Sundaram Clayton Ltd ((1999) 105 Taxman 545).

The facts in this case were that the chairman and managing director referredto in the order of reference were the chairman and managing director ofClayton Dewandre Holding Ltd, collaborator of the assessee-company, SundaramClayton Ltd They had been invited to India by the assessee-company inconnection with its business for the purpose of discussing with theassessee-company their manufacturing and marketing programmes, future plansand other activities and also to visit the assessee's factory to getacquainted with the day to day working. They had been invited to India withtheir wives as it was useful, besides being graceful, to invite them thatway, as that would further strengthen the cordial relations between theassessee-company and the English company and maintain highs level ofgoodwill between the two companies.

The assessing officer having disallowed the travelling expenditure inrespect of the wives of the chairman and the managing director of theforeign company, the assessee carried the matter to the appellate assistantcommissioner who allowed the appeal on the ground that it was commerciallyexpedient on the part of the assessee to have borne this expenditure tofacilitate the visit of the officials of the English company to the factorywhich was in fact indirectly controlled by them and that in the interest ofthe collaboration, it was necessary for the assessee to hear theexpenditure.

The revenue appealed against the order of the appellate assistantcommissioner to the tribunal. The tribunal rejected the revenue's appealholding that it was not only expenditure which directly resulted in abenefit or advantage to the assessee's business that was entitled todeduction, but also any expenditure which was incurred with a view tofacilitate the carrying on of the business, as held by the Supreme Court inthe case of CIT vs Malayalam Plantation (53 ITR 140). The tribunal alsoobserved that inviting the chairman and the managing director to visit Indiawith their wives served the purpose of strengthening the cordial relationsbetween the foreign company and the assessee and had the beneficial effectof helping to promote the business interest of the assessee.

The counsel for the revenue submitted that the tribunal was in error intaking that view. He referred to the decisions of the Madras high court inthe case of CIT vs TS Hajee Moosa & Co (153 ITR 422), of the Gujarat highcourt in the case of Bombay Mineral Supply Co (P) Ltd vs CIT (153 ITR 437)and of the Allahabad high court in the case of Modi Industries Ltd vs CIT(110 ITR 855).

In all these cases, the matter in issue was the expenditure incurred on thewives of the directors of the assesee-company during their travel abroadalong with their husbands. It was held in these decisions that theexpenditure incurred on the wife who accompanied her husband on the foreigntour could not be regarded as expenditure laid out wholly and exclusivelyfor business purposes as the wife could not be said to have contributeddirectly to the business of the assessee concerned therein.

The facts of the instant case, however, were different. The expenditureincurred in this case by the assessee was not on the spouse of its directoron business tour abroad, but expenditure incurred on the persons whom theassessee had invited having regard to the beneficial effect of their visiton the business interests of the assessee, those invitees being none otherthan the chairman and the managing director of the company with whom theassessee had collaboration, and which foreign company apparently exercisedsome control over the assessee-company. The foreign company being a holdingcompany, it was in the interest of the assessee to maintain good relationswith the foreign company as its business interests could not possiblyprosper to a significant extent without the aid and support of that foreigncompany.

The invitation given to the chairman as also to the managing director andtheir spouses was for the purpose of furthering the business interests ofthe assessee and was, therefore, commercially expedient. Their visit was forthe purpose of facilitating the carrying on of, and improving, the businessof the assessee. Expenditure which persons engaged in business may incur andwhich expenditure would qualify for being considered as a deduction from itsgross income, is to be determined having regard to commercial expediency andno rigid standard can be laid down, nor can the opinion of the assessingofficer be substituted for that of the assessee concerned, if there arematerials or if the surrounding circumstances indicate that the expenditureincurred was commercially expedient.

It was not in dispute in the present case that the visit of the chairman andthe managing director of the foreign company was in the interest of theIndian company and was deductible as business expenditure. Having regard tothe position they occupied in the foreign company and the importance of thatcompany in furthering the business interests of the assessee-company, theexpenditure incurred by the assessee on the spouses of the chairman and themanaging director was expenditure which was commercially expedient for theassessee to incur for enhancing the goodwill between the two companies.Therefore, the court held that the tribunal had rightly allowed theexpenditure.

As to whether the expenditure incurred on the spouse of a director could beregarded as a legitimate business expenditure, would depend upon thecircumstances in which such expenditure was incurred. An assessee cannotclaim the expenses, if any, incurred on the travel of a spouse of itsdirector on his/her business travel abroad, unless the spouse contributes tothe business of the assessee, as the income of an assessee is not meant tobe frittered away for promoting the pleasure of those who manage it, andsuch expenditure cannot be regarded as commercially expedient.

However, in matters of business too, a narrow view cannot be adopted. It isthe reality of the commercial world that should determine the kind ofexpenditure reasonably required to be incurred, and it is necessary toconstantly update the interpretation of the Act with a view to accommodateall such expenditure. The language employed in the relevant section isflexible enough to permit such wider interpretation whenever circumstanceswarrant.

In CIT vs Aluminium Corporation of India Ltd (92 ITR 563), theassessee-company claimed deduction of Rs 20,065 spent on account oftravelling and other expenses of three technicians who came from abroad forthe purpose of examining the assessee's manufacturing plants. Thetechnicians went through various aspects of the manufacturing process andrecommended improved methods of operation. As a result, the output of thecompany increased by 41 per cent.

On the question whether the expenditure was allowable, the Calcutta highcourt held, on the facts, that as a result of the expenditure an improvedmethod was introduced in the running of the existing plant of the assesseeand there had been a substantial increase in production. However, in theface of swift changing methods in technology, the methods recommended by thetechnicians would in course of time become out of date. The court concludedthat the expenditure had not resulted in an advantage of a permanent natureand was not, therefore, capital expenditure. Hence, the court rightlyallowed such expenses as having been incurred on grounds of commercialexpediency.

Thus, expenses incurred on employees of joint venture partners,collaborators and parent companies should be deductible in computing thebusiness income of the Indian company. Such expenses would undoubtedly befor a business purpose as they not only enhance business relationships butcould also save expenses for the Indian company when its executives travelabroad because the collaborators would reciprocate and bear such expenseswhich otherwise would have to be borne by the Indian company.

The author is a Supreme Court advocate