In the High Court of Judicature at Madras Dated: 08.12.2011 Coram: The Honourable Mr.Justice ELIPE DHARMA RAO and The Honourable Mr.Justice R.SUBBIAH Tax Case (Appeal)No.136 of 2008 Commissioner of Income Tax, Chennai. ..Appellant/Respondent ..vs.. S & S Power Switchgear Ltd., 168, Mount Poonamallee High Road, Chennai-600 096. ..Respondent/Appellant Appeal filed under section 260A of the Income Tax Act, 1961 filed against the order of the Income Tax Appellate Tribunal, Madras 'C' Bench dated 02.02.2007 in I.T.A.No.1849/ Mds/2003 against the Commissioner of Income Tax (Appeals) VI, 121, Mahatma Gandhi Road, Chennai 600 034, in ITA NO.616/01-02, dated 4.8.2003 in GIR No.S-III, for the Assessment year 1996-97; against the Joint Commissioner of Income-Tax, Special Range VII, Chennai 34, in PAN/GIR NO.AABCS.0581J, dated 30.3.99 for the assessment year 1996-97. For Petitioner : Mr.T.Ravikumar For Respondents : Mr.P.S.Raman, Senior Counsel for Mr.Padmanabhan JUDGMENT R.SUBBIAH, J., This appeal is directed, at the instance of the Revenue, against the order of the Income Tax Appellate Tribunal, Chennai Bench 'C', dated 02.02.2007 made in I.T.A.No. 1849/Mds/2003. 2. The appeal was admitted on the following substantial questions of law; https://hcservices.ecourts.gov.in/hcservices/ (i) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenses incurred in the foreign travel of the Chairman's wife is to be allowed as a business expenditure ? (ii) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to depreciation on the amount paid on the sale and lease back transaction ? 3. The assessee is a company and its business is that of manufacture and sale of circuit breakers, isolators, etc. The assessee filed its return of income for the assessment year 1996-97 with the relevant previous year ending 31st March, 1996, on 26.12.1997, declaring an income of Rs.3,09,57,430/- and the same was processed on 18.08.1998 and subsequently revised on 24.09.1998. The assessee claimed deduction of a sum of Rs.1,18,219/-, which represented the foreign travel expenses incurred for the Chairman's wife, who accompanied the Chairman in his foreign trip. The Assessing Officer, while completing the assessment, disallowed the Chairman wife's foreign tour expenses, holding that the expenditure on the air travel of the Chairman's wife was not incurred for the purpose of the business of the assessee. This finding of the Assessing Officer was confirmed by the Commissioner of Income Tax (Appeals); but on appeal by the assessee, the Income Tax Appellate Tribunal has allowed the claim of the assessee in this regard. That apart, the assessee has made a claim for depreciation on assets for a sum of Rs.1,84,52,500/-. 4. With regard to the depreciation of assets, it was the case of the assessee that they have entered into a lease transaction and the assessee has incurred a loss of Rs.4,36,83,000/- from Leasing Division. This is after claiming depreciation of Rs.6,11,77,555/- and this includes a sum of Rs.1,84,52,500/- being cost of two flameless furnaces claimed to be supplied by M/s.Ashish Engineering Works, Durg, Madhya Pradesh and leased out to Prakash Industries, New Delhi by the assessee. But, this matter was referred to the Investigation Wing for verifying genuineness of the transactions and existence of the assets. The Joint Director (Investigation), Jabalpur had conducted necessary enquiries and forwarded the report, wherein it has been stated that the alleged supplier M/s.Ashish Engineering Works undertakes job works only and has no capacity to manufacture such assets; that they possessed only a small workshop with just three lathe machines; that the letter furnished by the partner of M/s.Ashish Engineering Works states that the invoice Nos.215 and 216 dated 23.09.1995 produced by the assessee in support of purchase of the asset has not been issued by them; and that their total turnover for the relevant period was only Rs.10.97 lakhs. The results of the enquiry was intimated to the assessee by a letter dated 11.03.1999; for which, the assessee sent a reply dated 22.03.1999, wherein it has https://hcservices.ecourts.gov.in/hcservices/ been contended that the payment has been effected by cheques to the account of M/s.Ashish Engineering Works at New Delhi. The source pricing and obtaining delivery of the supply of the asset was identified by the lessee and the assessee was not concerned in the matter. Further, a sum of Rs.23,38,377/- has been offered as lease rentals and Rs.1,67,275/- as lease management fee. It was also stated that the transaction was brokered by Aartik Financial Consultants Limited. Further, the lessee subsequently had threatened to terminate the lease citing defect in the asset and sent notice through their advocates. Further, the assessee had also produced a copy of part of policy from New India Assurance Company Limited regarding insurance of the asset. Thus, the assessee had produced documents to establish the transaction of the lease with Prakash Industries as genuine. But, the Assessing Officer has disallowed the claim made by the assessee for depreciation of Rs.1,84,52,500/- on a finding that the facts gathered from the supplier made it clear that the transaction is only a paper transaction and asset does not exist. The said finding of the Assessing Officer was also confirmed by the Commissioner of Income Tax (Appeals) by order dated 04.08.2003. 5. Aggrieved over the same, the assessee filed an appeal before the Income Tax Appellate Tribunal and the Revenue filed an appeal challenging the confirmation of disallowance of expenditure incurred on the foreign travel of the Chairman's wife and by a common order dated 02.02.2007, the Appellate Tribunal has dismissed the claim of the Revenue and allowed the claim of the assessee by assigning the following reasons; "10. In view of these facts, we find that neither the C.I.T.(Appeals) nor the Assessing Officer has appreciated the facts regarding the existence of the assets. Even the Assessing Officer has not brought out that who has denied the invoices on account of M/s.Ashish Engineering works. It seems that the assessee has produced complete details before the Assessing Officer at the time of assessment and the same was not confronted neither to the Ashish Engineering Works nor to the Prakash Industries. The Assessing Officer without examining these details has decided the issue against the Assessee and the same was confirmed by the C.I.T.(Appeals). We find that the lease transaction was entered into by the assessee with M/s.Prakash Industries Limited in January and hence, the transaction of lease and the existence of assets cannot be doubted on conjectures or surmises. In view of this, we find that the leased assets existed and there is no reason to disallow the claim of the Assessee in respect of depreciation. Accordingly, we allow the same and the orders of the lower authorities are reversed and the Assesee succeeds on this issue". https://hcservices.ecourts.gov.in/hcservices/ Challenging the said finding, this appeal has been filed by the assessee. 6. Heard the learned counsel for the parties and perused the materials available on record. Substantial question of law No.1: 7. With regard to the first question of law, it is the submission of the learned counsel for the Revenue that the expenditure of a sum of Rs.1,18,219/- incurred on foreign travel expenses of Chairman's wife was not deductible since the expenditure incurred by the Chairman's wife was not for the purpose of business of the assessee. Per contra, it is the submission of the learned Senior counsel appearing on behalf of the respondent that the expenditure incurred in the foreign travel by the wife of the Chairman accompanying him has to be allowed as business expenditure and hence, no infirmity could be found in the order passed by the Income Tax Appellate Tribunal. 8. But we are unable to appreciate the submission made by the learned Senior Counsel for the respondent because the facts on the case on hand would show that the wife of the Chairman has nothing to do with the business of the company. At least if she is one of the Directors of the Company, then the arguments put forth by the respondent could have some force. In this regard, it would be useful to refer the judgments relied on by the learned counsel for the appellant/revenue. In COMMISSIONER OF INCOME TAX .vs. T.S.HAJEE MOOSA AND CO., ((1986) 51 CTR (MAD) 200, it has been held as follows: "The attention given by the wife of the partner of the assessee while on tour would enure to his benefit and advantage, not only when he was engaged in his business activities, but even, otherwise as a human being, so that at least in part the expenditure incurred had been laid out for the advantage and benefit of the partner. The expenditure incurred thus served not only purposes of business but also a personal or a private purpose and if the expenditure does not exclusively serve the purposes of business, then, it does not qualify for allowance under S.37(1). Viewed thus, the expenditure in this case had a twin purpose and did not qualify for allowance". 9. In D.B.MADAN .vs. COMMISSIONER OF INCOME TAX ((2003) 179 CTR (MAD) 487, a Division Bench of this Court has held as follows: "8. We have carefully considered the submissions of the learned counsel for the assessee and the learned counsel for the Revenue. This Court in T.S.Hajee Moosa's case (153 ITR 422) has upheld the disallowance of expenditure on two grounds; (i) it was purely a personal expenditure; and (ii) there was a dual object https://hcservices.ecourts.gov.in/hcservices/ in incurring the expenditure on the foreign tour of the assessee's wife. In so far as the disallowance of expenditure on the ground that it was the personal expenditure of the assessee is concerned, the following observation of the Court is relevant:- "....The state of health of a person is not in any way related to the business activities carried on by him. A good businessman may be bad in health and a good and healthy person may be no good at all in business. Therefore, the state of health has no relevance or bearing at all to the business activities carried on by a person. If a businessman, not in good health, desires to secure the help and assistance of an attendant, then, it is purely to satisfy his personal need. Such a need is not very different from say, his need for food and clothing, except that this need is directed towards the maintenance of his health. The expenses incurred for availing of the services of an attendant would, in our view, be only to satisfy or meet the personal need and in that context, it is really immaterial whether the person concerned avails himself of the services of his wife or that of a stranger. In this case, if the partner of the assessee had not been accompanied by his wife on the tour, having regard to his state of health, he would have been obliged to engage the services of probably a professionally trained nurse and, even in such a case, the expenses would have been purely personal. While we agree that a businessman in indifferent health ought not to be discouraged from undertaking a foreign tour accompanied either by his wife or nurse or other attendant, we cannot at the same time hold that expenses incurred either for availing himself of the company of his wife or the services of a nurse or attendant are any the less personal, however much the expenses are either necessary or even otherwise productive of good health or other enjoyable results from the point of view of the personal need and requirement of such a businessman". 9. This Court also examined the question whether the expenditure would be allowable under section 37 of the Income- tax Act and held that the expenditure was not laid out wholly and exclusively for business purposes. It was held that the expenditure was laid out for a dual purpose, viz., (i) to satisfy the personal needs of the assessee and (ii) for the purpose of business, and therefore the expenditure was not incurred wholly and exclusively for the purpose of business and it would not qualify for allowance. In other words, the Court held that the expenditure was for a dual purpose and it would not qualify for allowance. This Court after noticing some of earlier cases on this aspect held as under:- https://hcservices.ecourts.gov.in/hcservices/ " ... the object of the partner of the assessee at the time when he took his wife along with him on his foreign tour was only to serve or assist him and not for any business purposes, albeit there was also another object, namely, the furtherance or the promotion of the business of the assessee by the partner taking his wife along with him. Even in such a case, it would only be a dual purpose in respect of which the expenditure had been incurred. On a consideration of the principles laid down in the aforesaid decisions, it is difficult to support the conclusion that the expenditure in question was wholly and exclusively laid out for business purposes". In our view, the decision of this Court in T.S.Hajee Moosa's case (153 ITR 422) would squarely apply to the facts of the case. 10. A reading of the aforesaid judgments would show that if the expenditure incurred for the foreign travel of the Chairman's wife is not only for the purpose of business but also the private purpose, then the expenditure does not exclusively serve the purpose of the business, it does not qualify for allowance under S.37(1) of the Income Tax Act. Therefore, unless it is established by the assessee that the travelling of the Chairman's wife was only for the business purpose by producing tangible evidence, the assessee is not entitled for the allowance towards the expenditure incurred for foreign travel by the wife of the Chairman, particularly in the circumstances when the wife is not occupying any official position in the company. When that being the position, the order passed by the Appellate Tribunal in allowing the claim of the respondent towards the expenditure incurred on the foreign travel of Chairman's wife is liable to be set aside and accordingly, the order passed by the Tribunal allowing the expenditure of Rs.1,18,219/- in this regard is hereby set aside. The question is answered in favour of the revenue. Substantial question of law No:2 11. With regard to the next question, it is the submission of the learned counsel for the appellant Revenue that the enquiry conducted by the Joint Director (Investigation) Jabalpur would show that the alleged supplier M/s.Ashish Engineering Works of assets, namely, flameless furnaces, has no capacity to manufacture such assets and they are having only a small workshop with three lathe machines. During investigation, the letter furnished by a partner of M/s.Ashish Engineering Works would state that the invoice Nos.215 and 216 dated 23.09.1995 produced by the assessee in support of purchase of the asset have not been issued by the alleged manufacturer. Therefore, the claim of the assessee for a sum of Rs.4,36,83,000/- on the ground of depreciation by leasing the machinery to M/s.Prakash Industries, New Delhi, is not genuine. But the Appellate Tribunal, by relying upon the lease agreement entered into between the assessee and Prakash Industries has allowed the claim. In this regard, the https://hcservices.ecourts.gov.in/hcservices/ appellant has further submitted when there is ample evidence to show that the alleged manufacturer has not supplied the asset to M/s.Prakash Industries, by placing reliance on the lease agreement entered into between the assessee and the lessee, the Appellate Tribunal ought not to have allowed the claim on the ground of depreciation. At this stage, it would be appropriate to refer the judgments relied on by the learned counsel for the appellant. In LACHMINARAYAN MADAN LAL .vs. COMMISSIONER OF INCOME TAX ((1972) 086 ITR 0439, the Hon'ble Supreme Court has held as follows: "... The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act". 12. The learned counsel for the appellant further relied on the decision of the Hon'ble Apex Court in COMMISSIONER OF INCOME TAX .vs. JAIN (S.P.) ((1973) 087 ITR 0370 in support of his contention that the Tribunal has failed to take into account relevant material and acting on inadmissible material and basing conclusion on conjectures and surmises, it has arrived at a finding, which is bad. Countering the said submission, the learned senior counsel for the respondent submitted that the assessee has effected payments by way of cheques to the account of the manufacturer M/s.Ashish Engineering Works, New Delhi for the supply of assets, namely, flameless furnaces to the lessee. The source pricing and obtaining delivery of the supply of the asset was identified by the lessee. Under such circumstances, the assessee was not concerned in the matter, It is the further submission of the learned senior counsel for the respondent that so far as the factum about the payment effected by the assessee to the supplier was not denied by the revenue and even if the assessee is not entitled for the claim under the head 'depreciation' they are entitled to 'business loss' under section 28 of the Income Tax Act since it is the contention of the revenue that the manufacturer has not supplied the assets to the lessee; for which, it is the reply of the learned counsel appearing for the revenue that once the assessee has made a claim of depreciation on assets, which claim was disputed by the revenue, the assessee cannot alternatively make a claim under the head of 'business loss'. https://hcservices.ecourts.gov.in/hcservices/ 13. In the above circumstances, we are of the opinion that it would be appropriate to set aside the finding of the Appellate Tribunal that the assessee is entitled to depreciation of Rs.1,84,52,500/-. When the fact finding authorities, viz., Assessing Officer and the Commissioner of Income Tax (Appeals) have consistently held, after ordering an investigation, that the claim of the assessee in this regard is shown, the contra view taken by the Tribunal, placing reliance on legally unsustainable grounds is untenable. Hence, the order of the Tribunal in this regard is set aside and the question is answered in favour of the revenue. The Appeal is, thus, allowed in favour of the Revenue. No costs. Sd/ Asst. Registrar /true copy/ Sub Asst.Registrar gl 1. The Assistant Registrar, I.T. Appellate Tribunal, 'C' Bench, Madras. 2. The Commissioner of I.T. (Appeals)VI, 121, Mahatma Gandhi Road, Chennai-34. 3. The Joint Commissioner of I.T.Special Range VII, Chennai 34. 4. The Section Officer, VR Section, High Court, Madras. Tax Case (Appeal)No.136 of 2008 VSV(CO) Eu 2.01.2012 https://hcservices.ecourts.gov.in/hcservices/