M/S.silicon (India) Ltd v. The Deputy Commissioner Of Income Tax, Company Circle Iv (6)

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 04.12.2006 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJATax Case (Appeal) No.2600 of 2006 M/s.Silicon (India) Ltd.,19, Marshalls Road,Raja Annamalai Building,Egmore,Chennai-600 008. ..AppellantVs The Deputy Commissioner of Income Tax,Company Circle IV (6),No.121, Nungambakkam High Road,Chennai-600 034. ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Chennai, 'B' Benchdated 13.03.2006 in I.T.A. No. 517/Mds/2002 for the assessment year1998-99 filed against order dated 26.2.2002 in ITA No.497/2001-02on the file of the Commissioner of Income Tax (Appeals)V, Chennai-34against the order dated 20.3.2001 in PAN/GIR No.2002-S on the fileof the Dy. Commissioner of Income Tax, Company Circle IV (6)Chennai-6. For Appellant : Mrs.Anitha Sumanth (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed by the Revenue under Section 260A of theIncome Tax Act, 1961 against the order of the Income-tax AppellateTribunal, Chennai, 'B' Bench dated 13.03.2006 in I.T.A.No.517/Mds/2002, raising the following substantial questions of law: 1. Whether on facts and in the circumstances ofthe case, the ITAT is right in law in rejectingtheappellant'sclaimforsponsorshipexpenditure? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on facts and in the circumstances ofthe case, the ITAT was right in law in notnoting the various distinguishing factorsbetween CIT Vs. RKKR Steels Ltd. and the instantcase. 2.The brief facts leading to the above questions of law areas under: The assessee is a Private Limited Company engaged in themanufacture of silicon and other chemicals. The relevant assessmentyear is 1998-99 and the corresponding accounting year ended on31.03.1998. The assessee filed Return of income on 30.04.1998declaring a total loss of Rs.18,05,749/-. The Return was processedunder Section 143(1)(a) on 09.09.1999. Subsequently, the case wasselected for scrutiny and notice under Section 143(2) of the Income-tax Act ("Act" in short) was issued. The Assessing Officercompleted the assessment under Section 143(3) and disallowed theclaim of entire loss and declared total income as Nil. Whilecompleting the assessment, the Assessing Officer disallowed theclaim of the assessee relating to Training Expenses ofRs.17,12,513/- on the ground that it is not related to business.Aggrieved by the order, the assessee filed an appeal to theCommissioner of Income-tax (Appeals). The C.I.T.(A) disallowed theappeal and confirmed the order of the Assessing Officer. Aggrieved,the assessee filed an appeal to the Income-tax Appellate Tribunal("Tribunal" in short). The Tribunal dismissed the appeal andconfirmed the orders of the lower authorities. 3.Learned counsel appearing for the assessee contended thatthe assessee sent the employee to higher studies to undergo trainingabroad and such training was very useful to the business of theassessee. Hence, the expenditure incurred is an allowablededuction. The mere fact that the person who was sent abroad is theson of the Director of the Group Company, should not be resulted indenial of the benefit of deduction. It was further contended thatthere was an agreement entered by the assessee company with oneShri. Vedanth Jhaver by which, the assessee company sent Shri.Vedanth Jhaver for higher studies to U.S.A. As per the agreement,the assessee company has to pay the entire cost of his studies, oncondition that the said Shri.Vedanth Jhaver should come back andserve the company for a minimum period of ten years. In pursuanceof the above, Shri Vedant Jhaver was sent abroad and hence, theamount is incurred for the purpose of the business. The learnedcounsel further submitted that the Tribunal is wrong in dismissingthe appeal by following a decision of this Court reported in 258 ITR306 in the case of Commissioner of Income-tax Vs. R.K.K.R. Steels P.Ltd., wherein the facts of the said case are totally distinguishablefrom the facts involved in the present case. 4.Heard the counsel. On a perusal of the records, it isseen that the assessee has not commenced its business till31.03.1998. The actual business of the assessee was commenced on https://hcservices.ecourts.gov.in/hcservices/ 07.12.1999. There was an agreement entered into, with one ShriVedanth Jhaver by the assessee company and the assessee company senthim for higher studies to U.S.A. As per the agreement, the assesseecompany agreed to pay the entire cost of his studies and in turn,the said Shri Vedanth Jhaver, after completion of his studies,should come back and serve the assessee company for a minimum periodof ten years. It is seen from the records, that the assesseecompany had only employed three persons and paid a total salary ofRs.22,180/-. But, after a perusal of the said agreement, theauthorities below were of the view that, it is only a self-servingdocument. One of the clauses of the agreement stipulates asfollows: "whereas the assessee company has variousmanufacturing interests and in view of largerlabour turnover in supervisory cadre, thecompany always finds itself in need ofreplacementamongitsengineeringandsupervisory staff". "whereas the assessee company has variousmanufacturing interests and in view of largerlabour turnover in supervisory cadre, thecompany always finds itself in need ofreplacementamongitsengineeringandsupervisory staff". From this fact, it is clear that though the agreement says that theassessee company is in need of tackling the need of larger labourturnover, that too in supervisory cadre, for the relevant period,the assessee company has employed only three persons and paid only atotal salary of Rs.22,180/-. Hence, it is evident that the assesseecompany was not facing any problem of labour turnover. Also, thefinding of the lower authorities was that, the assessee had sentShri. Vedanth Jhaver for short time course to augment his technicalcompetence, but the said Shri Vedanth Jhaver has joined a fullfledged Master's Course of Engineering Degree Programme in ComputerScience which could not be termed as training course. The lowerauthorities also taken note of the fact that the said Shri VedanthJhaver was introduced by his father Shri. J.K.Jhaver who was theDirector of one of the Group Companies, namely, M/s.ZIP IndustriesLtd. and from June 2000 Shri J.K.Jhaver has become Director inM/s.Southern Group Industries P. Ltd., which is another GroupCompany. Further it is seen that the assessee company had receivedunsecured loan from M/s.Southern Group of Industries P. Ltd., atRs.20,18,338/- and has also utilised the same to meet the studyexpenses of Shri Vedant Jhaver. The Tribunal rightly rejected thecontention of the assessee, by relying on this Court judgmentreported in 258 ITR 306 in the case of Commissioner of Income-taxVs. R.K.K.R. Steels P. Ltd. The only argument of the counsel isthat, there was an agreement entered between the assessee companyand the said Shri.Vedanth Jhaver, but there is no such agreement inthe judgment relied on by the Tribunal, cited supra and hence, theratio of that judgment is not applicable to the facts of thepresent case. The presence or absence of an agreement does not makeany difference. The relevant fact is that the expenditure should beincurred for the purpose of the business. In the case ofM.Subramaniam Bros. Vs. Commissioner of Income-tax, reported in 250ITR 769, this Court had an occasion to consider a similarexpenditure incurred in connection with the training of one of the sons of the partner. In that case, the person who was sent abroad isthe son of a partner and also there was an agreement entered into,between the partners, in which this Court held as follows: "The terms of the agreement cannot be decisiveas to the true intent and purpose of thearrangement. The firm is one founded by thefather T.V. Subramaniam. He had admitted hischildren even when they were minors to thebenefit of the partnership. The childrencontinued their studies even after attainingthe age of majority. The fact that one of thesons Viswanathan was sent abroad for furtherstudy, cannot be regarded as a deputation madeby the firm of one of its partners inconnection with the business of the firm. Itwas in substance, only a step taken by thefather who is naturally interested in givingthe best possible education to his son, and hadsent him abroad to get a higher degree after hecompleted his B.Com. and M.Com. in India. Theagreement that was drawn up was merely onewhich was intended to give a colour ofcommercial expediency and was rightly notrelied upon by the Tribunal.Counsel for the assessee invited ourattention to the decision of the Madhya PradeshHigh Court in the case of CIT v. Kohinoor PaperProducts [1997] 226 ITR 220 wherein the courtupheld the deduction claimed by the firm, ofthe expenses incurred in educating one of thepartners of the firm abroad for three years.Having perused that judgment, we are unable,with great respect, to agree with what has beenheld therein. We find ourselves in agreement with theapproach of the Bombay High Court in the caseof CIT v. Hindustan Hosiery Industries [1994]209 ITR 383 wherein the facts were somewhatsimilar. There also, the son of a partner aged21 was sent abroad to obtain a degree inbusiness management and the expenditure on hiseducation claimed as deduction was negatived bythe High Court holding that the expenditure wasof personal nature and not businessexpenditure." The principles enunciated in the above cases, have been rightlyfollowed by the Tribunal in the present case. The important factorsemerging from the present case are as follows:a) The expenses incurred for training of a person abroad, who is theson of the Director of the Group Company. b) The assessee company had received unsecured loan from https://hcservices.ecourts.gov.in/hcservices/ M/s.Southern Group of Industries P. Ltd., at Rs.20,18,338/- and usedthe same for education purpose.c) Business not commenced till 31.03.1998. d) It is not the case sending a person to acquire technicalcompetency, but the said person has joined a full fledged Master'sCourse of Engineering Degree Programme in Computer Science whichcould not be termed as training course. e) No materials or evidence or any compelling reason given as to howthe higher studies is indispensable for the company. The above factors were considered by the lower authorities and theyhave arrived at a correct conclusion that the expenditure incurredfor training is not a business expenditure. Also, there is nomaterial to show that there is a commercial expediency or businessnecessity for sending Shri. Vedanth Jhaver abroad. The reasons givenby the lower authorities were based on materials and evidence andthe Tribunal has correctly followed the principles enunciated bythis Court judgments cited supra. 5.In view of the foregoing reasons, we find no error orlegal infirmity in the order of the Tribunal and the same does notrequire interference. Under these circumstances, no substantialquestions of law arise for consideration of this Court andaccordingly, the tax case is dismissed. No costs. /true copy/ Sd/-Asst. Registrar. kmTo Sub Asst. Registrar. 1. The Deputy Commissioner of Income Tax,Company Circle IV (6),No.121, Nungambakkam High Road,Chennai-600 034. 2. The Assistant RegistrarIncome tax appellate Tribunal,Rajaji Bhavan, Besant Nagar, Chennai. 3. The Income Tax Appellate Tribunal B Bench, Chennai.4. The Commissioner of Income Tax (Appeals)V, Chennai-34. 1 cc to M/s. Dr. anita Sumanth, Advocate, sr. 59852 SSV (CO)kk 12/1 Tax Case (Appeal) No.2600 of 2006 https://hcservices.ecourts.gov.in/hcservices/