Karnataka H.C : Whether the Tribunal can legally come to the conclusion on the facts of the case and particularly in view of the fact that on his return Sri T.J. Machado took over the management and responsibility of the company, that the expenditure on his higher education was motivated only by personal consideration and not for business consideration ?

High Court Of Karnataka

MAC Explotec (P) Ltd. vs. CIT

Section 37(1)

Asst. Year 1989-90

R. Gururajan & Jawad Rahim, JJ.

IT Ref. Case Nos. 420 & 421 of 1998

3rd June, 2006

Counsel Appeared

S. Parthasarathy, for the Petitioner : M.V. Seshachala, for the Respondent

ORDER

R. Gururajan, J. :

By this order, two references in ITRC 420/1998 and 421/1998 are disposed of by a common order. The assessee- company is a private limited company engaged in the business of providing technical know-how towards manufacture of industrial explosives and also in certain allied manufacturing operations. The company belongs to Mr. Machado family comprising of N.J. Machado and his wife Mrs. W.S.P. Machado. They were the directors of the company. The company sent T.J. Machado, son of the abovementioned lady director to a foreign country for getting education and bore the entire expenses of Rs. 2,04,807 relating to such foreign education in the asst. yr. 1989-90. The AO disallowed the claim of the assessee towards expenses under consideration on the ground that the expenses did not relate directly to the income earned and that the connection of the entire expenditure with the company depended on the probability of return of T.J. Machado and to continue with the company.

2. In appeal, the CIT(A) reversed the order of the AO. A second appeal was filed by the Department and the contentions of the Department were accepted. The Tribunal accepted the order of the assessment officer by reversing the order of the CIT. Subsequently, income-tax appeals were filed and the Tribunal has chosen now to refer the following two questions for reconsideration in these two references : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure on the higher education of an employee, was not a permissible deduction merely because the employee happened to be the son of directors Whether the Tribunal can legally come to the conclusion on the facts of the case and particularly in view of the fact that on his return Sri T.J. Machado took over the management and responsibility of the company, that the expenditure on his higher education was motivated only by personal consideration and not for business consideration ? These two references relate to two different assessment years. Sri Parthasarathi, learned counsel took us through the entire material on record to contend that the Tribunal is wrong in reversing the order of the CIT(A) and accepting the order of the AO. The learned counsel says that disallowance of expenditure on the facts of this case require reconsideration. He strongly relies on various judgments in support of his contentions to contend that a mere relationship does not by itself provide for no allowance as held by the Tribunal. He wants the reference to be answered in favour of the assessee. Per contra, Sri Seshachala, learned counsel for the Revenue would oppose the reference by contending that the facts of the case would show that the Tribunal is fully justified in coming to a right conclusion in the matter of disallowance in the given circumstances.

After hearing, we have carefully perused the material on record. Admitted facts would reveal that the company belongs to Machado family. Sri Machado and his wife were the directors. Their son was sent to USA and in the process, the company incurred an expenditure and that expenditure was sought to be included for the purpose of assessment by way of business expenditure. The AO by a detailed order did not accept the education (contention) of the assessee and disallowed the same. On appeal, the appellate authority reversed the findings of the Tribunal (AO) in the impugned order. Let us see as to whether the order of the Tribunal is sustainable and let us see as to whether the questions of law referred to us are required to be answered in favour of the assessee on the facts of this case. The Tribunal has noticed the facts of the case and also the arguments advanced before it. After noticing the Tribunal notices that Sri Machado happens to be the son of the two main directors of the company and he can as well be considered as the owner of the private limited company. The Tribunal further notices the training programme by the son in foreign company. His son was only an undergraduate without any special or technical qualification. He was sent on training in general line of management and proposed a special emphasis. His training was hardly for a period of 1-1/2 years. Thereafter, the Tribunal also notices that the training that was availed by the son has nothing to do with the technical aid of production or manufacturing of explosives or access thereto. The Tribunal further notices that such type of education is as well available in this country as well. Taking note of all these factual aspects of the matter, the Tribunal was of the view that such expenditure incurred by the company cannot be considered to be an expenditure for the purpose of allowing in the case on hand. The bundle of facts as referred to by the Tribunal, in our view, would justify the order of the AO. It is not as though any specialised training was given to the son and it was not as though it was absolutely necessary for the purpose of running a business. In the given circumstances and on the facts of this case, we are satisfied that the order of the Tribunal is based on facts. The Tribunal is fully justified in rejecting the contentions of the assessee.

The learned counsel for the assessee invites our attention to the judgment of the Bombay High Court in Sakal Papers (P) Ltd. vs. CIT 1978 CTR (Bom) 318 : (1978) 114 ITR 256 (Bom). A close reading of the said judgment would show that in that case in pursuance of resolution of the directors dt. 24th March, 1960, the daughter was sent to USA in September, 1960 for specialised education in journalism and business administration. It was in that view of the matter, the Bombay High Court accepted the contention of the assessee. In Hindustan Aluminium Corpn. Ltd. vs. CIT (1986) 55 CTR (Cal) 237 : (1986) 159 ITR 673 (Cal), the Calcutta High Court has chosen to notice the facts of the case with regard to practical training and experience in running an aluminium factory. On facts, the Calcutta High Court notices that the employees were specially selected for advance training in order to enable the assesseecompany to run its factory efficiently and competently. The Calcutta High Court also ruled that the training was given to achieve efficient running of the factory with a view to gain optimum production. It was on these facts, the Calcutta High Court accepted the case of the assessee. The Madhya Pradesh High Court in CIT vs. Kohinoor Paper Products (1997) 226 ITR 220 (MP) has considered the allowance of education expenses. From a reading of the judgment, we do not find any reasoning as such in the said judgment. None of the judgments are applicable to the given circumstances. The bundle of facts would point out that the assessee is not entitled for any benefits in terms of the IT laws particularly in terms of s. 37 of the IT Act. Any expenses on the facts of this case would result in providing the benefit for the purpose of personal gain and not for the purpose for which the section is meant for in the case on hand. We would be failing if we do not refer to the three judgments cited by the Revenue.

In fact, the Madras High Court in two judgments namely, CIT vs. R.K.K.R. Steels (P) Ltd. (2002) 178 CTR (Mad) 172 : (2002) 258 ITR 306 (Mad) and M. Subramaniam Bros. vs. CIT (2001) 170 CTR (Mad) 527 : (2001) 250 ITR 769 (Mad) has chosen to consider a similar issue. The Madras High Court in the case of CIT vs. R.K.K.R. Steels (P) Ltd. (supra) has chosen to refer to its earlier decision in (2001) 170 CTR (Mad) 527 : (2001) 250 ITR 769 (Mad) (supra). After referring the Madras High Court has chosen to hold as under : “It was canvassed for the assessee before the Tribunal that the fact that Rajiv Rai was the son of the director of the company should not be held against him and the expenditure incurred on his training was in fact, an expenditure which was to the benefit of the company as he subsequently became a director. If this logic were to be accepted, in every family owned business, all the expenditure incurred in bringing up the children who may later on be given a role in the business as partners or directors could be claimed as business expenditure incurred in training the prospective employees and directors of the business. The expenditure permissible for deduction is expenditure that is wholly and exclusively laid out for the purposes of the business. The expenditure which a father incurs out of his natural love and affection for his children in meeting the cost of their education cannot become a business expenditure merely because he is also the owner or a director of a business in which the son or daughter subsequently takes part.” We are in agreement with the views expressed by the Madras High Court. The Revenue is also supported by the judgment of the Bombay High Court in the case of CIT vs. Hindustan Hosiery Industries (1994) 209 ITR 383 (Bom). The Bombay High Court in similar circumstances has ruled that there exists no nexus between expenditure and business of assessee and the expenditure incurred. In the light of the case laws available on record and in the light of the given circumstances, we are of the view that the assessee has failed to make out a case for the purpose of deduction in terms of s. 37 of the Act. The questions of law as referred to us are answered against the assessee and in favour of the Revenue. Ordered accordingly. No costs.

[Citation : 286 ITR 378]

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