Ita 10/2014 v. Commissioner Of Income Tax

$~3 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 24.01.2014 Pronounced on: 25.02.2014 + ITA 10/2014 M/S. KOSTUB INVESTMENT LTD...... AppellantThrough:Ms.Prem LataBansal,Sr.Advocate with Sh. Ram Avtar Bansal andSh. Naman Nayak, Advocates.versus COMMISSIONER OF INCOME TAX ..... RespondentThrough:Sh.SanjeevSabharwal,Sr.Standing Counsel with Sh. Ruchir Bhatia, Jr.Standing Counsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE RAJIV SHAKDHER MR. JUSTICE S.RAVINDRA BHAT % 1.The present appeal is directed against an order of the IncomeTax Appellate Tribunal (“ITAT”) dated 09.01.2012, and involvesdecisions on the following question of law framed at the time ofadmission: “Did the Tribunal fall into error of law in holding thatthe appellant’s claim that the amount has been spentduring the Assessment Year 2006-07, for the highereducation of Sh. Dushyant Poddar, a son of its Director,was not liable as “business expenditure” under Section37 of the Income Tax Act?” 2.For the year under consideration, the appellant company(hereinafter referred to as assessee) filed its return declaring loss at`2,08,72,440/- under the normal provisions and book profit at`1,35,42,270/- under Section 115JB of the Income Tax Act, 1961(“the Act”), on 24.11.2006. In the Profit and Loss Account annexed tothe return of income, assessee had claimed a sum of `23,16,942/- asexpenses incurred under the head “Education & Training Expenses”.These expenses had been incurred by the assessee on higher educationof Shri Dushyant Poddar, an employee of the company, who happensto be the son of the Directors Shri Lalit Poddar and Smt Saroj Poddar,for undertaking an MBA Course in the U.K. 3.During the assessment proceeding, the Assessing Officer(“AO”) required the assessee to justify its claim with respect to thesaid expenses. The assessee produced the extract from the minutes ofthe meeting of the Board of Directors dated 10.02.2005 in whichdecision was taken to send Dushyant Poddar for further study in U.K.and also the Employment Bond entered into with him. The assesseeexplained to the AO that Dushyant Poddar was a Graduate havingcompleted his B.Com (H) from Delhi University and working with it(i.e. the assessee) for a salary of `10,000/- p.m. Since he was abrilliant student and the company was in need of Manager (Marketing) who could study the mood of the investment market and the prospectstaking into consideration the economy of India and other advancedcountries and an individual who could also take decisions with respectto investment in shares and securities, the Board of Directors in themeeting held on 10.02.2005 took a conscious decision to sendDushyant Poddar for pursuing the course of MBA from U.K. and toincur the expenditure up to the extent of `30 lakhs on his study andtraining. 4.The assessee also stated in the resolution that on coming back toIndia after completion of the studies, Dushyant Poddar will serve theassessee company at least for 5 years on a remuneration as mutuallyagreed with the Board of Directors subject to minimum of `10,000/-and maximum of `25,000/- p.m. The assessee relied on a resolution ofthe Board of Directors to say that in the event of breach of bond,suitable action for recovery of the amount would be taken againstDushyant Poddar. He also furnished the bond, as required. Eventually,Dushyant Poddar was sent to U.K. for further study. The assesseeincurred an expenditure of `23,16,942/- during the year underconsideration. 5.The AO in his order refused to accept the assessee’s contentionsand rejected the argument that the sum of `23,16,942/- could beclaimed as a deduction under Section 37 of the Act. Aggrieved by thisdisallowance, the assessee carried the matter in appeal. The CIT(Appeals) upheld the disallowance in the appellate proceedings. TheCIT examined the bond furnished by Dushyant Poddar and observedthat it was on plain paper and the other query – as to what was the 5.The AO in his order refused to accept the assessee’s contentionsand rejected the argument that the sum of `23,16,942/- could beclaimed as a deduction under Section 37 of the Act. Aggrieved by thisdisallowance, the assessee carried the matter in appeal. The CIT(Appeals) upheld the disallowance in the appellate proceedings. TheCIT examined the bond furnished by Dushyant Poddar and observedthat 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 fundingfor education – remained unanswered. The CIT (Appeals) also wasinfluenced by the fact that the bond was executed on 01.04.2005 afterDushyant Poddar had been selected for completing his MBA from theU.K. University. In view of these reasons, the assessee’s appeal wasrejected. The further appeal to the ITAT was dismissed by theimpugned order. In the impugned order, the ITAT relied upon thereasoning of the previous decision of this Court in Natco Exports Pvt.Ltd. v. CIT, 2012 (345) ITR 188, particularly the observations thatwhile claiming such deductions, a distinction has to be made betweenpersonal expenditure and that which is incurred for the purpose ofbusiness. The ITAT’s view – that in the absence of any policy in thecompany to fund the higher education – the applicant’s aspirations canbe believed, except in the case of benefit accruing to DushyantPoddar, the son of a Director. In these circumstances, the disallowancewas upheld. 6.In support of the appeal, the assessee argues that therequirement spelt out in Natco Exports (supra) has to be seencontextually. 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 theassessee company and had chosen to apply for higher educationalstudies directly from the University. It was in the context of such factsthat the decision in Natco Exports (supra) was rendered. Learnedcounsel relied upon a judgment of the Bombay High Court in SakalPapers Private Limited v. Commissioner of Income Tax, 1978 (114) ITR 256 for the proposition that even in the absence of commitment orcontract or bond, an expenditure which is otherwise proper cannot bedisallowed to the company, especially when it can result in the traineesecuring a degree that would be of assistance to the assessee.Likewise, the expenditure incurred for pursuit for higher studies by apartner which can yield beneficial results to the company was held tobe business expenditure under Section 37 in Commissioner of IncomeTax v. Kohinoor Paper Products, 1997 (226) ITR 220 (MP). Learnedcounsel also relied upon the decision of the Karnataka High Court inCIT v. Ras Information Technologies (Pvt) Ltd., 2011 (12) Taxman 158 (Kar). 7.Learned counsel for the revenue relied upon Natco Exports(supra) and submitted that the onus to show that the expenditurewould accrue to the advantage of the assessee’s business has to bedischarged first and that while doing so, expenditure which isotherwise personal cannot be generally allowed to be deducted. It wassubmitted that in Natco Exports (supra), the decision of the BombayHigh Court in Sakal (supra) was noticed and the Court further heldthat Sakal (supra) stood distinguished by Mustang Mouldings P. Ltd.v. ITO, 2008 (306) ITR 361. It was submitted that given thesedecisions and the fact which emerged from a cumulative reading ofthe AO and the CIT (Appeals), the impugned order cannot be termedas erroneous and does not call for interference. 8.This Court has considered the materials on record. There can beno doubt that the burden of showing that expenditure would be whollyand exclusively for the purpose of business under Section 37(1) is 8.This Court has considered the materials on record. There can beno doubt that the burden of showing that expenditure would be whollyand exclusively for the purpose of business under Section 37(1) is upon the assessee and that personal expenditure cannot be claimed asbusiness expenditure. The question is whether these twin requirementsare said to have been satisfied in the circumstances of this case. Thefirst is what are the materials on record? The assessee furnished itsresolution authorizing disbursement of the expenses to fund DushyantPoddar’s MBA. It secured a bond from him, by which he undertook towork for five years after return within a salary band and he had in factworked after graduating from the University for about a year beforestarting his MBA course. In Natco Exports (supra), the student hadapplied directly when she was pursuing her graduation. There was aseamless transition as it were between the chosen subject of herundergraduate course and that which she chose to pursue abroad. Inthe present case, the facts are different. Dushyant Poddar was acommerce graduate. The assessee’s business is in investments andsecurities. He wished to pursue an MBA after serving for an year withthe company and committed himself to work for a further five yearsafter finishing his MBA. There is nothing on record to suggest thatsuch a transaction is not honest. Furthermore, the observation in NatcoExports (supra) with respect to a policy appears to have been made inthe given context of the facts. The Court was considerably swayed bythe fact that the Director’s daughter pursued higher studies in respectof a course completely unconnected with the business of the assessee.Such is not the case here. Dushyant Poddar not only worked but – asstated earlier – his chosen subject of study would aid and assist thecompany and is aimed at adding value to its business. 9.Whilst there may be some grain of truth that there might be atendency in business concerns to claim deductions under Section 37,and foist personal expenditure, such a tendency itself cannot result inan unspoken bias against claims for funding higher education abroadof the employees of the concern. As to whether the assessee wouldhave similarly assisted another employee unrelated to its managementis not a question which this Court has to consider. But that it haschosen to fund the higher education of one of its Director’s sons in afield intimately connected with its business is a crucial factor that theCourt cannot ignore. It would be unwise for the Court to require allassessees and business concerns to frame a policy with respect to howeducational funding of its employees generally and a class thereof, i.e.children of its management or Directors would be done. Nor would itbe wise to universalize or rationalize that in the absence of such apolicy, funding of employees of one class – unrelated to themanagement – would qualify for deduction under Section 37(1). Wedo not see any such intent in the statute which prescribes that onlyexpenditure strictly for business can be considered for deduction.Necessarily, the decision to deduct is to be case-dependent. 10.In view of the above discussion, having regard to thecircumstances of the case, this Court is of the opinion that theexpenditure claimed by the assessee to fund the higher education of itsemployee to the tune of `23,16,942/- had an intimate and directconnection with its business, i.e. dealing in security and investments.It was, therefore, appropriately deductible under Section 37(1). 11.The AO is thus directed to grant the deduction claimed. Theimpugned order and that of the lower authorities are hereby set aside.The appeal is allowed in the above terms. No costs. S. RAVINDRA BHAT(JUDGE) RAJIV SHAKDHER(JUDGE)FEBRUARY 25, 2014