Sunidhi Consultancy Services Ltd. v. Dy. CIT

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The Tax Publishers2012 TaxPub(DT) 1212 (Mum-Trib) : (2012) 045 (II) ITCL 0096 : (2012) 050 SOT 0223 INCOME TAX ACT, 1961 --Business expenditure--AllowabilityHigher education expenditure of director's son-- The assessing officer noted that during the year education and scholarship payment was made for education and training of Mr R. Parekh, son of Mr. J. Parekh, one of the directors of the assessee-company. The assessee-company has made a total payment of Rs. 28,92,198 in this respect. The assessing officer asked the assessee as to how this is allowable expenditure. The assessee contended before the assessing officer that the expenditure has been incurred in order to augment the future business as the assessee-company has entered into an agreement with Mr R. Parekh regarding higher studies, i.e., Bachelor in General Studies in Economics, USA and bearing the expenses on account of all the educational, travelling and incidental cost and in turn, Mr. R. Parekh will join the assessee-company for a minimum period of five years after completion of the education in USA. Thus, the assessee's main contention before the assessing officer was that the expenditure is legitimate for the purpose of business of the assessee-company. The assessing officer did not agree with the contention of the assessee and was of the view that all these expenses are personal in nature. Accordingly, the assessing officer disallowed the said expenditure of Rs. 28,91,198. On appeal, the Commissioner (Appeals) concurred with the action of the assessing officer while passing the impugned order. Held: Justified. It is an undisputed fact that Mr R. Parekh was not an employee of the assessee-company when he went for higher studies in USA. There is no dispute that any expenditure incurred by the assessee-company for the training and higher education of its employees for reaping the benefit of the said training and higher education, then the said expenditure would be a business expenditure and allowable. It is clear that the decision for sending Mr R. Parekh to USA for higher education was taken because he is the son of one of the directors of the assessee- company and not being the employee of the assessee-company. Even otherwise, there is no such policy of the assessee-company to send its employees for training and higher education. This is only incident and it appears that the decision to bear the expenses for the education of Mr R. Parekh, was taken with a view to claim the said expenditure by the assessee-company. Further, the assessee-company is a fully family owned company and therefore, the decision for bearing the expenses for higher education is deliberate exercise on the part of the assessee company to claim the said expenditure as business expenditure. [Para 11] In the present case, the decision for sending the son of one of the directors of the assessee was taken without being taken into employment of the assessee-company. The education of the children is sole and exclusive responsibility of the parent and cannot be mixed up with the business of the family owned company. Therefore, having entered into alleged agreement for incurring the expenses on the higher education and thereafter putting a condition of employment with the assessee-company subsequent to the completion of the education is a motivated act of shifting the education expenditure to the accounts of the assessee-company as there is no policy or past practice of sending employees for studies or training for reaping the benefit. [Para 13] The decision of the Hon'ble. Madras High Court is applicable in the facts and circumstances of the present case, where the director of the assessee company interested to send his son for education and giving the colour as the education was for the interest of the assessee-company and thus claimed as an expenditure. Therefore, the agreement between the assessee and the son of the director cannot change the real intent behind the entire exercise of the arrangement made. [Para 15] The expenditure for education of the son of the director of the assessee-company for a degree course, who was not employed by the assessee-company at that point of time, cannot be allowed as business expenditure. [Para 17] The expenditure on higher education of the son of the director, in the facts and circumstances of the case cannot be said to be wholly and exclusively for the purpose of the business of the assessee and without any extra commercial circumstance. Accordingly, there is no error or illegality in the orders of the lower authorities on this issue. [Para 18] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1212 (Mum-Trib) : (2012) 045 (II) ITCL 0096 : (2012) 050 SOT 0223

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityHigher education expenditure of director's son-- The assessing officer noted that during the year education and scholarship payment was made for education and training of Mr R. Parekh, son of Mr. J. Parekh, one of the directors of the assessee-company. The assessee-company has made a total payment of Rs. 28,92,198 in this respect. The assessing officer asked the assessee as to how this is allowable expenditure. The assessee contended before the assessing officer that the expenditure has been incurred in order to augment the future business as the assessee-company has entered into an agreement with Mr R. Parekh regarding higher studies, i.e., Bachelor in General Studies in Economics, USA and bearing the expenses on account of all the educational, travelling and incidental cost and in turn, Mr. R. Parekh will join the assessee-company for a minimum period of five years after completion of the education in USA. Thus, the assessee's main contention before the assessing officer was that the expenditure is legitimate for the purpose of business of the assessee-company. The assessing officer did not agree with the contention of the assessee and was of the view that all these expenses are personal in nature. Accordingly, the assessing officer disallowed the said expenditure of Rs. 28,91,198. On appeal, the Commissioner (Appeals) concurred with the action of the assessing officer while passing the impugned order. Held: Justified.

It is an undisputed fact that Mr R. Parekh was not an employee of the assessee-company when he went for higher studies in USA. There is no dispute that any expenditure incurred by the assessee-company for the training and higher education of its employees for reaping the benefit of the said training and higher education, then the said expenditure would be a business expenditure and allowable. It is clear that the decision for sending Mr R. Parekh to USA for higher education was taken because he is the son of one of the directors of the assessee- company and not being the employee of the assessee-company. Even otherwise, there is no such policy of the assessee-company to send its employees for training and higher education. This is only incident and it appears that the decision to bear the expenses for the education of Mr R. Parekh, was taken with a view to claim the said expenditure by the assessee-company. Further, the assessee-company is a fully family owned company and therefore, the decision for bearing the expenses for higher education is deliberate exercise on the part of the assessee company to claim the said expenditure as business expenditure. [Para 11] In the present case, the decision for sending the son of one of the directors of the assessee was taken without being taken into employment of the assessee-company. The education of the children is sole and exclusive responsibility of the parent and cannot be mixed up with the business of the family owned company. Therefore, having entered into alleged agreement for incurring the expenses on the higher education and thereafter putting a condition of employment with the assessee-company subsequent to the completion of the education is a motivated act of shifting the education expenditure to the accounts of the assessee-company as there is no policy or past practice of sending employees for studies or training for reaping the benefit. [Para 13] The decision of the Hon'ble. Madras High Court is applicable in the facts and circumstances of the present case, where the director of the assessee company interested to send his son for education and giving the colour as the education was for the interest of the assessee-company and thus claimed as an expenditure. Therefore, the agreement between the assessee and the son of the director cannot change the real intent behind the entire exercise of the arrangement made. [Para 15] The expenditure for education of the son of the director of the assessee-company for a degree course, who was not employed by the assessee-company at that point of time, cannot be allowed as business expenditure. [Para 17] The expenditure on higher education of the son of the director, in the facts and circumstances of the case cannot be said to be wholly and exclusively for the purpose of the business of the assessee and without any extra commercial circumstance. Accordingly, there is no error or illegality in the orders of the lower authorities on this issue. [Para 18]