Foreign travel expenses directly related to securing capital investments in the business are capital in nature: ITAT

The Bangalore Bench of the Income Tax Appeal Tribunal (ITAT) has ruled that expenses related to performing overseas trips directly relate to securing capital investment in the business of the assessed cannot be of a fiscal nature. On the other hand, it is capitalist in nature.

The two member bench of Beena Pillai (Judicial member) and Chandra Poojari (Accounting member) observed that the assessee only provided the supplemental agreement with the above party and did not provide the main agreement also. It can be inferred that the assessee wanted to hide the true intention of going abroad to go to foreign countries and incur expenses.

The Appellant/Assessed is a limited liability company, engaged in the hatchery business and dealing with spawning operations during the year. The assessee had filed his tax return for the 2017-2018 tax year, reporting a net taxable loss. The case was selected for review, and during the hearing, the person being assessed was served with a show cause notice, offering, among other things, to deny overseas travel expenses. The company was looking to expand or explore opportunities outside of the Middle East, as its operations in India are limited by its franchise agreement. Travel costs were mainly incurred for trips to the Middle East and some poultry seminars held outside the country.

The assessee has claimed initial travel expenses for exploring new markets and out-of-country business opportunities as a legitimate business expense spent entirely and exclusively for business purposes, which is allowable under under Section 37(1) Income Tax. Act, 1961. One of the leads resulted in a business opportunity in the form of a joint venture in Oman, namely Dar Al Tomouh Projects, LLC (DATP). The joint venture initially crystallized in September 2016 and the actual investment was made on February 28, 2017. However, travel expenses incurred after September 2016 were not claimed by the assessee as an expense and were recovered with the beneficiary company.

The company had claimed an expenditure of Rs. 13,51,168 as an eligible expenditure under Section 37(1) and did not claim the expenditure of Rs. 13,86,377/- incurred under the joint venture. The Assessing Officer disagreed with the assertions of the assessee and proceeded to dismiss a sum of Rs. 13,51,168 claimed under Section 37 treating travel expenses as natural capital.

The assessee argued that expenses were incurred to secure the expanded market for their product in foreign countries. For this purpose, the assessee traveled to foreign countries in order to get more overseas sales of the product he is dealing with. The assessee conducted various market studies and met with various dignitaries in foreign countries, namely Oman, United Arab Emirates, Bangkok, Doha, Bucharest and Thailand. The assessee also paid a visit to the slaughterhouse to establish a similar slaughterhouse in India to maintain hygiene.

The department argued that the assessee incurred expenses unrelated to the performance of the assessee’s day-to-day activities. On the other hand, he was hired to secure investment from foreign countries for his business to create the capital asset and was not directly related to the day-to-day running of the assessee’s business. The expenditure cannot be authorized under sections 30 to 38 of the Income Tax Act.

The ITA found that the expenses cannot be authorized under Sections 30 to 38 because the expenses were not entirely and exclusively devoted to the day-to-day activities of the assessee. The expense cannot be treated as an income expense when calculating the assessee’s income.

Case title: M/s. Balkrishna Live Stock Breeders Pvt. ltd. Versus ACIT

Reference: ITA n° 619/Bang/2021

Dated: 04.08.2022

Counsel for the Appellant: AR Pratibha R.

Counsel for the Respondent: DR Sankar Ganesh K.

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