COMMISSIONER OF INCOME TAX Vs. SUNDARAM INDUSTRIES LIMITED

JUDGEMENT

(1.) THE following questions of law at the instance of the Revenue have been referred to us for our consideration relating to the income of the assessee for the assessment year 1974-75 :

(2.) WHETHER, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure incurred on the maintenance of the vehicles owned by the company including the wear and tear thereon, which were provided by the company to its directors should not be treated as a 'perquisite' for the purpose of disallowance under Section 40A(5) of the Income-tax Act, 1961, and, therefore, the disallowance of the sum of Rs. 10,317 should be deleted ?

(3.) SECTION 37 of the Act postulates that any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income of the assessee. The essential requirement for claiming the deduction of the expenditure is that the expenditure should have been incurred wholly and exclusively for the purpose of business of the assessee. The assessee is a company and it was found by the Appellate Tribunal that the expenditure by way of subscription to the clubs was incurred for the purpose of promoting the business of the company and in view of the finding of the Appellate Tribunal, we hold that the expenditure incurred is an allowable business expenditure. In the case of subscription to clubs, in so far as the assessee is concerned, the expenditure was incurred to promote and foster its business relationship. The object of the assessee was that its directors by remaining as members in some of the city clubs would give them certain social status, and it is obvious that by being members of the club, they would be able to meet various kinds of people in a calm and cool atmosphere of the club and because of the meeting they would develop business relationship, benefiting the assessee. Therefore, it cannot be said that the possible advantage to the assessee is remote and far fetched. No doubt, there may be a personal benefit enjoyed by the director by the various types of amenities afforded at the club. But the personal benefit that goes to the director is incidental to the membership of the club. The question whether a particular expenditure is allowable or not has to be tested from the point of view of the person expending the same and the object with which he incurred the expenditure. The assessee has not spent the money with the object of providing a personal relaxation to the director, but it was incurred to promote its business. In the commercial world, the contact with the right person is vital for an efficient business organisation. The expenditure incurred cannot be regarded as having been incurred for the personal benefit of the director. In our opinion, in each case, it has to be seen whether the object of the expenditure was to promote the business of the assessee. In view of the finding by the Tribunal, the assessee-company, in our view, had incurred the expenditure wholly and exclusively for the purpose of its business and therefore the expenditure incurred by way of subscription to the club is an allowable expenditure.