Full Judgment
The issue in revenue 's appeal lies within a narrow compass of facts.
The assessee-company made a reimbursement of medical expenses amounting to Rs. 1,07,215 to Shri S.C. Samal, its managing director, on account of his cardiac operation and post-operative check up at Apollo Hospital, Madras This expenditure was disallowed by the assessing officer with the observations that "the assessee has claimed Rs. 1,07,250 on account of treatment of M.D. The same is to be disallowed as the same was (not) for the purpose of business. Secondly, it is more an application of income than an expenditure for earning the same." Assessee being aggrieved inter alia by this disallowance, the matter was carried in appeal before the learned Commissioner (Appeals) Orissa.
The learned Commissioner (Appeals) held that in the circumstances of this case, particularly Shri S.C. Samal being whole-time director and having no other source of income, the resolution passed by the Board of Directors should be considered bona fide and the expenditure approved by the resolutions cannot but be treated as business expenditure.
Accordingly, this disallowance was deleted in appeal. Aggrieved by this order of the learned Commissioner (Appeals), the revenue is in appeal before us.
We have heard Shri B.B. Panigarhi, the learned senior Departmental Representative though none appeared for the assessee. We have received an adjournment petition dated 7-2-2001, from the company on the ground of illness of Shri R.K. Das, FCA, learned counsel of the assessee.
However, since hearing of this appeal has already been adjourned on quite a few occasions, we reject the adjournment petition and proceed to dispose of the appeal on merits.
Shri Panigrahi's submissions, in support of the appeal, are broadly to the effect that the reimbursement of medical expenses to the managing director cannot be construed as an expenses 'wholly and exclusively' for the purpose of business of the company. It was submitted that such a payment was application of income rather than an expenditure for earning the same'. Learned senior Departmental Representative further submitted that it was not even a part of the original terms of appointment of the managing director that he will be reimbursed medical expenses and the Board resolution was an afterthought to regularise meeting personal expenditure of the managing director. It was also pointed out that since Board resolution was not filed at the time of assessment, and in fact on details whatsoever of medical reimbursement were filed at the time of assessment proceedings, the learned Commissioner (Appeals) was unjustified in deleting the disallowance based on such material. In support of this stand, the learned senior Departmental Representative produced original assessment records for our perusal. On the strength of these submissions, learned senior Departmental Representative urged us to set aside the order of the Commissioner (Appeals) and restore that of the assessing officer. In response to Bench's observation that the Commissioner (Appeals) action seems to be supported by the judicial precedents, learned senior Departmental Representative was fair enough to leave the matter to the Bench but he prayed that his arguments may also be considered while disposing of this appeal.
We have considered the contentions of the revenue , carefully perused the orders of the authorities below as well as assessment records, examined facts of the case and deliberated upon judicial precedents on the issues in this appeal.
We find that it is not in dispute that the reimbursement of medical expenses to the managing director was duly authorised by the resolution of Board of Directors of the company. We have noticed that in 42nd meeting of the Board of Directors, which took place on 27-12-1989, a decision was taken 'after careful consideration of the position held by Shri S.C. Samal in the company and a detailed scrutiny of expenses to the effect that expenses for cardiac operation at Apollo Hospital Madras, for cardiac treatment and other incidental expenses will be reimbursed to him. In the background of these facts, we find that that deductiblity of such medical reimbursements is squarely covered by at least two judicial precedents on the subject. In the case of Mehboob Productions (P) Ltd. v. CIT (1977) 106 ITR 758 (Bom) their Lordships of Honble Bombay High Court observed that, "In view of facts and conclusions arrived at by the Tribunal regarding the basis on which the Board resolution was passed by the company, entire amount of medical expenses occasioned by Mehboob Khan's illness which were borne by the assessee-company pursuant to Board's resolution, should be allowed as a deduction on the footing that decision to reimburse was taken on the principles of commercial expediency and that no part of such expense was held to be not proved or arbitrary, excessive or unreasonable." In the case of CIT v. Steel Ingots (P) Ltd. (1996) 220 ITR 552 (MP), their Lordships of Hon'ble Madhya Pradesh High Court, respectfully following judgment of Hon'ble Bombay High Court in Mehboob Productions's case, (supra) held as follows : "Section 37 of the Income Tax Act provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenses or personal expenses of the assessee), laid out or expended wholly or exclusively for the purposes of business or profession shall be allowed in computing the income chargeable under the head "Profits or gains of business or profession".
The expenditure is linked with the business of the assessee. The revenue placed no material on record to destroy the worth of the resolution passed by the assessee............... In the instant case, there is enough material on record to show the commercial expediency if the assessee thought it fit to provide the best medical treatment to its financial director so that he remains fit to manage affairs of the company. It cannot be said that expenses so incurred remained inconnectible with the purpose of the business. That being so, the Tribunal does not seem to have made any error (in allowing the deduction on account of these expenses)." Turning to revenue 's stand that these expenses are not wholly and exclusively for the purpose of business of the assessee-company but, on the contrary, these expenses are voluntarily incurred by the company for the benefit of its managing director who also happens to be a beneficial owner of the company and as such the incurring of such expenditure must be construed as application of income rather than expenditure to earn income, we may quote a passage from the judgment of House of Lords in the case of Atherton v. British Insulated & HeIsbey Cables Ltd. 1925 (10) Tax Cases 155 (HL), referred to with approval by the Hon'ble Supreme Court in the case of CIT v. Chandulal KeshavIal & Co. (1960) 38 ITR 601 (SC), which reads as follows : "It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce (supra) and Smith v. Incorporated Council of Law (1914) 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the Commissioners in the present case bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus in effect, though not in terms, negativing the Crown's contentions. I think that there was ample material to support the findings of the Commissioners, and accordingly hold that this prohibition does not apply." It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. On the facts of this case, we are satisfied that the reimbursement of medical expenses to the managing director can be said to be 'wholly and exclusively' for the purposes of business; in coming to this conclusion, we are supported by two judgments of Hon'ble Bombay High Court and Honble Madhya Pradesh High Court referred to earlier in this order. We are also unable to accept the Departmental Representative suggestion that such a medical reimbursement is application of income and not incurring the expenditure for earning the income. The assessee-company is a legal entity, independent from it shareholders or directors, and the expenditure is incurred, duly authorised by a bona fide Board resolution, for commercial expediency and in furtherance of legitimate objects of the company. Merely because an expenditure may end up benefiting a shareholder, though it is incurred for bona fide reasons and in the interest of the company, in our considered view, it cannot be treated as an application of income. In the revenue 's ground of appeal a mention is also made about 'closely-held company of family members' but it is not even necessary to examine this aspect of the matter as this issue is not discussed in the assessment order or even in the order of the Commissioner (Appeals). As discussed above, this aspect is also not relevant in adjudicating upon the issue in appeal before us.
We may now come to revenue 's objections that conclusions arrived at by the Commissioner (Appeals) on the basis of resolution passed by the Board of Directors on 27-12-1989, which has been reproduced by the Commissioner (Appeals) in his impugned order, was vitiated in law as this resolution was produced for the first time before the Commissioner (Appeals). It is thus suggested that admission of evidence being in violation of rule 46A, any conclusions based on such evidence are only fit to be set aside. We had an occasion to peruse the assessment records and we have noticed that at no stage there was any query by the assessing officer on the expenditure in dispute in this appeal. On these undisputed facts, we cannot but conclude that the disallowance was made by the assessing officer without affording any opportunity to the assessee to explain the related facts. Such as action anyway violates one of the very fundamental principles of natural justice that no person shall be condemned unheard'(audi alteram partem) and for this reason also disallowance is vitiated in law. It is difficult to comprehend as to how the assessee can be expected to have clairvoyance to see the necessity of filing Board resolution in support of deduction for reimbursement of medical expenses to its managing director, unless the assessing officer, during the assessment proceedings, has any questions about the claim of related deduction. In any event, as held by Hon'ble Bombay High Court in the case of Smt. Prabhavati S. Shah v.CIT (1998) 4 DTC 389 (Bom-HC) : (1998) 231 ITR 1 (Bom), it is incumbent on the Commissioner (Appeals) to exercise its powers under section 250(4) where the facts and circumstances so justify and such powers cannot be fettered by rule 46A of the Income Tax Rules. On the facts of the case before us, and particularly when disallowance was made without giving any opportunity of hearing to the assessee on that aspect of the matter, we are of the considered view that action of the learned Commissioner (Appeals), in examining the circumstances in which this medical reimbursement was made, was fully justified. We. accordingly, are not persuaded to uphold this technical objection of the revenue.
In view of the above discussions, we are not inclined to interfere in the matter and we support the conclusions arrived at by the learned Commissioner (Appeals). The revenue 's appeal, therefore, fails.