Ita/794/2009 Of M/S Mallige Medical Centre Pvt Ltd v. The Joint Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 19[th]DAY OF JANUARY 2015 PRESENT THR HON’BLE MR. JUSTICK N. KUMARAN D THR HON’BLE MR. JUSTICK B.VBBRAPPA| I.T.A. NO.794/2009 BETWEEN : M/s.Mallige Medical Centre Pvt. Ltd.,No.31/32, Crescent Road, Bangalore — 560 OO1,Represented by itsManaging Director,|Dr.A.C.sreeram,Aged about 67 years,son of late Sri.A.Chowdappa. ...APPELLANT (By Sri.S.Parthasarathy &smt.Jinita Chatterjee, Adv.) AND :. The Joint Commissioner Of Income-tax, Range-o,Bangalore. ... RESPONDENT (By Sri.K.V.Aravind, Adv.) . . . . This I.T.A. is filed under Section ZJO0OA of thIncome Tax Act, 1961, arising out of order dated21.08.2009 passed in ITA No.400/BNG/2009, for theAssessment year 2005-2006, praying to : :%=formulate the substantial questions of lawstated therein,stated therein, :%%=Allow the appeal and set-aside the orderpassed by the Income Tax Appellate Tribunal,Bangalore in I.T.A. No.400/BNG/2009 dated21.08.2009, in the interest of justice andequity.passed by the Income Tax Appellate Tribunal,Bangalore in I.T.A. No.400/BNG/2009 dated21.08.2009, in the interest of justice andequity. This I.T.A. coming on_ forhearing,this day,N.Kumar J., delivered the following: JUDGMENT The assessee has preferred this appeal against the impugned order, where it has been held that the dis-allowance of expenditure of Rs.5,00,000/- spent for the education of Dr.Gauri Sriram is justified as the said amount spent on her did not accrue any benefit to theassessce Compalhly. 2. The assessee is a private limited companyrunning a hospital. The assessee filed return of incomefor the assessment year 2005-06 on 31.10.2005.declaring a total income of Rs.94,43,461/-. The|assessee claimed deduction in a sum of Rs.5,00,000/-—spent for the higher education of Dr.Gowri 8S. D/o.Dr.A.C. Sriram and Mrs.Kala Sriram, who are ManagingDirector and Executive Director of the Company. Theexemption was claimed on the ground that theirdaughter was committed to work for the assessee altersuccessful completion of her studies. It is not indispute that after successful completion of studies, shehas come back and working in the said assessee —company. She was paid a sum of Rs.20,000/- permonth as salary before she was sent for higher studies. —Aiter returning, she is being paid Rs.30,000/- permonth. The Assessing Authority dis-allowed the| assessee’s claim on the ground that the expenditureincurred by the father, of his natural love and affectionfor his children, meeting the cost of their educationcannot become a business expenditure, merely becausehe is the owner or Director of the business in which, theson or daughter subsequently takes part. 3. Aggrieved by the said order, the assesseepreferred an appeal to the Commissioner of Income Tax(Appeals), which upheld the said finding of theassessing authority. In the second appeal, for the samereasons, the Tribunal also upheld the said finding anddismissed the appeal. Aggrieved of these threeconcurrent findings, the assessee is before this Court. 4. The substantial questions of law, which arise for consideration is as under: 1.Whether in law, the Tribunal is justified in|saying that the expenditure did not enure|saying that the expenditure did not enure| any benefit to the Appellant and _ thbenefit was only to the daughter of the MDof the Appellant company and thus the|Same was not to be allowed under Section|37(1) of the Act, without considering theargumentof|the|Appellantthatthe|daughter of MD was the employee of the|Appellant and on getting higher education|had served the Appellant Company in|pursuance of the contract? 4. The substantial questions of law, which arise for consideration is as under: 1.Whether in law, the Tribunal is justified in|saying that the expenditure did not enure|saying that the expenditure did not enure| any benefit to the Appellant and _ thbenefit was only to the daughter of the MDof the Appellant company and thus the|Same was not to be allowed under Section|37(1) of the Act, without considering theargumentof|the|Appellantthatthe|daughter of MD was the employee of the|Appellant and on getting higher education|had served the Appellant Company in|pursuance of the contract? 2.Whether the law, the Tribunal was correctin holding that the expenditure incurred|towards higher education of a professionalwhose services tlmwere available to tAppellant was not in business prudence to|justify for allowance under Section 37(1) of)the Act?in holding that the expenditure incurred|towards higher education of a professionalwhose services tlmwere available to tAppellant was not in business prudence to|justify for allowance under Section 37(1) of)the Act? 3.Whether in law, the provisions of Section|40A was applicable when the expenditure|was in business prudence incurred for thebenefit of the Appellant whose value was|not proved to be excessive?40A was applicable when the expenditure|was in business prudence incurred for thebenefit of the Appellant whose value was|not proved to be excessive? -6-. 5. We have heard the learned counsel for theparties. This Court had an occasion to consider thesaid question in the case of)Commissioner of Income Tax and another V/s. RAS Information Technologies (P) Ltd.,reported in.(2011) 238 CTR (Kar) 76_ After|noticing Section 37(1) of the Act, it was held as under atparas 8 and 9: 8.Thus, once the expenses incurred is nota capital expenditure or an expenditureincurredforpersonalEXPEMSsesof|theassessee or the said expenditure is for which|is not an offence or is not prohibited by law|and was not spent in advertising in any|souvenir, brochure, tract, pamphlet or the likepublished by a political party, the assessee isentitled to the benefit of deduction under|section 37 of the Act. In other words, the|money spent by an assessee either in|sponsoring a student or towards educational|expenses of a Student in a discipline, in which| the assessee 1s carrying on its business, 1S @|valid expenditure and is entitled to deduction. 9 |In the instant case, the son of themanaging director is an engineering graduate.ASSeCSSEC1S (OconsultingAGeETlcin.manufacturingand.engineeringindustry.They have sponsored the candidature of Sri|Arun:Srinivasan,toDUrsuehispost-graduation course in engineering. In thatregard, they have entered into a _ wyrittcontract. While pursuing the studies, the|Student has rendered services, which 1s.acknowledgedbytheasSCSSCC.Merelybecause in the agreement there was a clause|that in default of his rendering services, he|would return the sponsored money with|interest, the genuineness of the agreementcannot be doubted. On the contrary, it only|Showsthatthe|asSSCSSCEhadtakenprecaution to see that the interest of theassessee was protected by imposing such a\condition on the student. Even otherwise,when the assessee is running an engineering| and consulting services earning profits and in|pursuance of its business or profession, it laid|out certain monies for education of a studentin the very same field, such an expenditure|cannot be held to be unlawful or prohibited bylaw. Having regard to the quantum of amount|spent it cannot also be said that it is a deviseto avoid payment of tax or to reduce the tax|by such a device of sponsoring a student’s|Studies|abroad.In|thefactsand.circumstances of the case keeping in mind the|amount extended towards the educationalexpenses and the nature of the education and|also other attending circumstances, we are|satisfied that the amount expended by the.assessee is not a devise to avoid payment oftax or reduce payment of tax and this|expenditure is a bona fide in that view of the|mater, we do not find any merit in these|appeals.” | 6. In the instant case, before expenditure wasincurred, the daughter had acquired a degree in medicine. She was employed. Apart from the fact thatshe is the daughter of the Managing Director and theChief Executive, she was an employee of the assessee. —ohe was sent outside the country for acquiring highereducational qualification, which would improve theservices, which the assessee is giving to its patients. Itis in this context, the sum of Rs.5,00,000/- is spent. |That is not in dispute. After acquiring the degree, shehas come back and she is working with the assessee. —ohe was paid Rs.20,000/- per month as salary, beforeshe was sent to higher education and aiter returningShe is being paid Rs.30,000/- per month. Merelybecause she happens to be the daughter of theManaging Director and the Chief Executive, it cannot besaid that the money is spent by her parents out of loveand affection for higher education of their daughter. —ohe was an employee of the assessee, in the field, inwhich, she has acquired degree. They wanted her to specialize in Radiological Investigations and therefore,she was sent abroad for acquiring the knowledge. Afteracquiring the additional knowledge, she has come backand she is working with the assessee. Therefore, thereis a direct nexus between the expenses incurredtowards her education, with the business, which the)assessee iS carrying on. In that view of the matter,following the aforesaid judgment, we hereby set-asidethe impugned orders passed by all the three authoritiesand direct the assessing authority to allow deduction ofthe said expenses. The substantial questions of law isanswered in favour of the assessee and against therevenue. Accordingly, we pass the following order: :#=Appeal is.allowed :3=The impugned orders are set-aside. "%"� >����>� :)=��'��""'""%*&�#6��.+%�4�%"�(%+')�'(��.�#$$.9���'� ('(6)�%.*�.8��"��-��-���!>�#"�)$#%5'(�34���'�#""'""''�� "#�$� ������ "#�$�������