THE issues before the Bench are - Whether the expenditure incurred by
the assessee company on foreign studies of its Director's son working as an
employee and furnishing bond to work for longer period after studies are over,
is allowable as per provisions of Sec 37; Whether such expenditure is allowable
even if higher studies are pursued in a different subject from that of the
business of the assessee and Whether the burden of showing that expenditure is
incurred wholly and exclusively for the purpose of business u/s 37(1) is on the
assessee. And the verdict goes in favour of the assessee.
The assessee is an investment company.
It had filed its return declaring loss at Rs. 2,08,72,440/- under the normal
provisions and book profit at Rs. 1,35,42,270/- u/s 115JB. In the Profit and
Loss Account annexed to the return of income, assessee had claimed a sum of Rs.
23,16,942/- as expenses incurred under the head “Education & Training
Expenses”. These expenses had been incurred by the assessee on higher education
of Shri Dushyant Poddar, an employee of the company, who happens to be the son
of the Directors Shri Lalit Poddar and Smt Saroj Poddar, for undertaking an MBA
Course in the U.K. During assessment, AO required the assessee to justify its
claim with respect to the said expenses. The assessee produced the extract from
the minutes of the meeting of the BOD in which decision was taken to send
Dushyant Poddar for further study in U.K. and also the Employment Bond entered
into with him. The assessee explained that Dushyant Poddar was a Graduate having
completed his B.Com (H) from Delhi University and working with it for a salary
of Rs. 10,000/- p.m. Since he was a brilliant student and the company was in
need of Manager (Marketing) who could study the mood of the investment market
and the prospects taking into consideration the economy of India and other
advanced countries and an individual who could also take decisions with respect
to investment in shares and securities, the BOD in the meeting held on
10.02.2005 took a conscious decision to send Dushyant Poddar for pursuing the
course of MBA from U.K. and to incur the expenditure up to the extent of Rs. 30
lakhs on his study and training. AO in his order refused to accept the
assessee’s contentions and rejected the argument that the sum of Rs. 23,16,942/-
could be claimed as a deduction u/s 37.
On appeal, CIT(A) upheld the
disallowance in the appellate proceedings. The CIT examined the bond furnished
by Dushyant Poddar and observed that it was on plain paper and the other query –
as to what was the employee’s response to the University’s query with respect to
funding for education – remained unanswered. The CIT(A) also was influenced by
the fact that the bond was executed on 01.04.2005 after Dushyant Poddar had been
selected for completing his MBA from the U.K. University. In view of these
reasons, the assessee’s appeal was rejected. The further appeal to the ITAT was
dismissed. Tribunal had relied upon the reasoning of the previous decision of HC
in Natco Exports Pvt. Ltd. v. CIT, particularly the observations that
while claiming such deductions, a distinction had to be made between personal
expenditure and that which was incurred for the purpose of business. The ITAT’s
view – that in the absence of any policy in the company to fund the higher
education – the applicant’s aspirations can be believed, except in the case of
benefit accruing to Dushyant Poddar, the son of a Director. Thus, the disallowance was upheld.
Before HC, the assessee’s counsel
had argued that the requirement spelt out in Natco Exports had to be seen
contextually. In that case, the course opted for by the employee – daughter of a
Director – had no relation with the assessee’s business. She, unlike Dushyant
Poddar, had not taken-up employment with the assessee company and had chosen to
apply for higher educational studies directly from the University. It was in the
context of such facts that the decision in Natco Exports was rendered. Counsel
relied upon a judgment of the Bombay HC in Sakal Papers Private Limited v.
CIT, 1978 (114) ITR 256 for the proposition that even in the absence of
commitment or contract or bond, an expenditure which was otherwise proper cannot
be disallowed to the company, especially when it can result in the trainee
securing a degree that would be of assistance to the assessee. Likewise, the
expenditure incurred for pursuit for higher studies by a partner which can yield
beneficial results to the company was held to be business expenditure u/s 37 in
CIT v. Kohinoor Paper Products, 1997 (226) ITR 220 (MP). Counsel also
relied upon the decision of the Karnataka HC in CIT v. Ras Information
Technologies (Pvt) Ltd., 2011 (12) Taxman 158 (Kar). On the other hand, the
Revenue’s counsel had submitted that the onus to show that the expenditure would
accrue to the advantage of the assessee’s business had to be discharged first
and that while doing so, expenditure which was otherwise personal cannot be
generally allowed to be deducted. It was submitted that in Natco Exports, the
decision of the Bombay HC in Sakal was noticed and the Court further held that
Sakal stood distinguished by Mustang Mouldings P. Ltd. v. ITO - (2007-TIOL-507-ITAT-MUM).
Held that,
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there can be no doubt that the burden of showing that expenditure would be
wholly and exclusively for the purpose of business u/s 37(1) is upon the
assessee and that personal expenditure cannot be claimed as business
expenditure. The assessee furnished its resolution authorizing disbursement of
the expenses to fund Dushyant Poddar’s MBA. It secured a bond from him, by which
he undertook to work for five years after return within a salary band and he had
in fact worked after graduating from the University for about a year before
starting his MBA course. In Natco Exports, the student had applied directly when
she was pursuing her graduation. There was a seamless transition as it were
between the chosen subject of her undergraduate course and that which she chose
to pursue abroad. In the present case, the facts are different. Dushyant Poddar
was a commerce graduate. The assessee’s business is in investments and
securities. He wished to pursue an MBA after serving for an year with the
company and committed himself to work for a further five years after finishing
his MBA. There is nothing on record to suggest that such a transaction is not
honest. Furthermore, the observation in Natco Exports with respect to a policy
appears to have been made in the given context of the facts. The Court was
considerably swayed by the fact that the Director’s daughter pursued higher
studies in respect of a course completely unconnected with the business of the
assessee. Such is not the case here. Dushyant Poddar not only worked but – as
stated earlier – his chosen subject of study would aid and assist the company
and is aimed at adding value to its business;
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whilst there may be some grain of truth that there might be a tendency in
business concerns to claim deductions under Section 37, and foist personal
expenditure, such a tendency itself cannot result in an unspoken bias against
claims for funding higher education abroad of the employees of the concern. As
to whether the assessee would have similarly assisted another employee unrelated
to its management is not a question which this Court has to consider. But that
it has chosen to fund the higher education of one of its Director’s sons in a
field intimately connected with its business is a crucial factor that the Court
cannot ignore. It would be unwise for the Court to require all assessees and
business concerns to frame a policy with respect to how educational funding of
its employees generally and a class thereof, i.e. children of its management or
Directors would be done. Nor would it be wise to universalize or rationalize
that in the absence of such a policy, funding of employees of one class –
unrelated to the management – would qualify for deduction under Section 37(1).
We do not see any such intent in the statute which prescribes that only
expenditure strictly for business can be considered for deduction. Necessarily,
the decision to deduct is to be case-dependent. In view of the above discussion,
having regard to the circumstances of the case, this Court is of the opinion
that the expenditure claimed by the assessee to fund the higher education of its
employee to the tune of Rs. 23,16,942/- had an intimate and direct connection
with its business, i.e. dealing in security and investments. It was, therefore,
appropriately deductible under Section 37(1). The AO is thus directed to grant
the deduction claimed. The impugned order and that of the lower authorities are
hereby set aside. The appeal is allowed in the above terms. No costs
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