2005 (1) TMI 617 - AT - Income Tax

Tribunal upholds disallowance of training & capital expenses for company director.

The Tribunal dismissed both appeals of the assessee, upholding the disallowance of training expenses under section 37(1) of the Income-tax Act, 1961, for ... Business expenditure Issues Involved:1. Disallowance of expenses incurred for the training of Shri Vinay Kumar Mohota under section 37(1) of the Income-tax Act, 1961.2. Disallowance of expenses incurred for the increase in the authorized capital of the company.Issue-Wise Detailed Analysis:1. Disallowance of Training Expenses for Shri Vinay Kumar Mohota:The primary issue in both appeals was the disallowance of expenses incurred for the training of Shri Vinay Kumar Mohota, son of the Joint Managing Director of the assessee-company, under section 37(1) of the Income-tax Act, 1961. The amounts involved were Rs. 1,27,526 for the assessment year 1989-90 and Rs. 81,387 for the assessment year 1990-91.Facts of the Case:Shri Vinay Kumar Mohota was appointed as an apprentice by the assessee-company from 1-4-1986, with a monthly stipend of Rs. 300. An agreement dated 1-8-1986 stipulated that the company would send him for training abroad at Rhode Island University, USA, covering his expenses up to US$ 15,000 per year for five years. Upon his return, he was to serve the company for five years, failing which he would reimburse the company and pay Rs. 20,000 as liquidated damages.Arguments by the Assessee:The assessee argued that the expenses were revenue expenditures, incurred wholly and exclusively for the business. They contended that Mr. Mohota returned and served the company, contributing significantly to its growth. Reliance was placed on judicial pronouncements in Sakal Papers (P.) Ltd. v. CIT and CIT v. Kohinoor Paper Products.Arguments by the Revenue:The revenue contended that the expenses were not related to the business of the assessee-company, citing a Tribunal order in Intersil India Ltd. v. Addl. CIT, where similar expenses were disallowed. They argued that the connection between Mr. Mohota and the company was primarily due to his relationship with the Joint Managing Director.Tribunal's Analysis and Decision:The Tribunal noted that the mere fact that the expenses were allowed in earlier years does not confer a right to the assessee. It found the case of Intersil India Ltd. to be directly applicable, where similar expenses were disallowed. The Tribunal observed that Mr. Mohota's connection with the company was primarily as the son of the Joint Managing Director, and there was no evidence to support the claim that his academic record justified the expenses independently of his relationship with the company.The Tribunal distinguished the case from Sakal Papers (P.) Ltd., noting that in that case, the person had worked for the company for five years before being sent abroad, unlike Mr. Mohota, who was appointed as an apprentice after being selected for admission to the American University. The Tribunal also referred to Hindustan Hosiery Industries v. ITO, where the Bombay High Court held that merely benefiting from an individual's foreign education does not justify the expenses as business expenditure.The Tribunal concluded that the increase in the company's turnover and profit during Mr. Mohota's absence for studies could not be attributed to his services. Consequently, the Tribunal upheld the disallowance of the expenses for both assessment years.2. Disallowance of Expenses for Increase in Authorized Capital:Facts of the Case:For the assessment year 1990-91, the assessee incurred expenses of Rs. 1,40,200 for increasing the authorized capital of the company.Arguments and Tribunal's Decision:The assessee conceded that this issue was covered against them by the judgment of the Hon'ble Apex Court in Punjab State Industrial Development Corpn. Ltd. v. CIT. Respectfully following this precedent, the Tribunal rejected the assessee's claim for this expense.Conclusion:Both appeals of the assessee were dismissed, with the Tribunal upholding the disallowance of training expenses under section 37(1) and the expenses incurred for increasing the authorized capital.