2007 (11) TMI 539 - AT - Income Tax

Director's training expenses disallowed as personal, not business-related. Precedents cited.

Mustang Mouldings (P.) Ltd. Versus Income-tax Officer, 2(2) (3), Mumbai

The Tribunal upheld the disallowance of director's training expenses claimed by the assessee, a private limited company, for the assessment year 2001-02. ... Business expenditure - Assessee was a private limited company promoted by a family - It appointed ‘D’, i.e., one of members of family, as a director and claimed deduction under section 37(1) in respect of director’s training expenses - Whether, on facts, there was no nexus between expenditure incurred and purpose of business, and, therefore, assessee’s claim was rightly rejected by authorities. Issues Involved:1. Disallowance of director's training expenses.2. Reopening of assessment under section 147 of the Income-tax Act, 1961.Issue 1: Disallowance of Director's Training ExpensesThe core issue in these appeals is the disallowance of director's training expenses claimed by the assessee. The assessee, a private limited company, debited Rs. 24,13,356 under director's training expenses for the assessment year 2001-02. The director, Mr. Darshan Kanshi Deora, was sent abroad for a BBA course in Finance & Management and Systems Engineering at the University of Pennsylvania, USA. The assessee claimed this expenditure as business expenditure, arguing it would benefit the company's production and marketing.The Assessing Officer (AO) found that Mr. Deora was only 18 years old with an HSC qualification when appointed as a director. The AO concluded that the appointment and subsequent training were merely to claim a deduction for personal expenses under the guise of business expenditure. The AO cited the Supreme Court's decision in Swadeshi Cotton Mills Co. Ltd. v. CIT and Delhi High Court's decision in Siddho Mal & Sons v. CIT to support the disallowance, stating the expenditure was not connected to the business.The CIT(A) upheld the AO's decision, noting that the admission process for Mr. Deora's course began before his appointment as a director, and he had not provided any services to the company before going abroad. The CIT(A) also found no evidence that Mr. Deora contributed to the company's production and marketing during his visits to India. The CIT(A) distinguished the case-law cited by the assessee and relied on similar cases where such expenses were disallowed, including CIT v. Hindustan Hosiery Industries and M. Subramaniam Bros. v. CIT.The Tribunal agreed with the lower authorities, emphasizing that the process of admission started before Mr. Deora's appointment as a director and that the expenditure was a personal obligation of his father, Mr. Kanshi Deora. The Tribunal found no nexus between the expenditure and the business of the assessee. The Tribunal also distinguished the case from Sakal Papers (P.) Ltd. v. CIT, noting that in Sakal Papers, the trainee was already an employee contributing to the business, unlike Mr. Deora. The Tribunal concluded that the expenditure was disallowable under section 37 of the Act.Issue 2: Reopening of Assessment under Section 147The assessee also challenged the reopening of assessments for the assessment years 1999-2000 and 2000-01 under section 147 of the Income-tax Act. However, no arguments were advanced on this ground during the appeal. Therefore, the Tribunal did not address this issue in detail and focused solely on the disallowance of director's training expenses.ConclusionThe Tribunal dismissed the appeals, upholding the disallowance of director's training expenses for all the years in question. The expenditure was deemed personal and not connected to the business, thus not allowable as a deduction under section 37 of the Income-tax Act.