2018 (7) TMI 491 - HC - Income Tax

Court disallows business expenditure for director's son's education lacking direct business nexus.

Indian Galvanics Cyrium Foils Ltd. Versus Deputy Commissioner of Income-tax CIR 4 (4), Mumbai and Others

The Court disallowed the business expenditure claimed by the Appellant for the higher education and training of a director's son, finding that the ... Allowable busniss expense - son of one of the directors was sent abroad for acquiring degree in 'Business Administration' and expenditure incurred for higher education was claimed as deduction which was sought to be supported by contract/agreement - direct nexus with the business activities of the Appellant-Assessee - Held that:- Amount which is claimed by the Appellants-Assessee as deductible allowance was not incurred wholly and exclusively for the purpose of business of the Appellants-Assessee. - Decided against assessee. Issues:Disallowance of business expenditure under the Income Tax Act, 1961.Analysis:The Appellant, a closely held industrial company engaged in manufacturing copper foils, incurred expenditure under the head of 'Management Training and Development expenditure' for the higher education and training of a director's son. The Appellant claimed that the expenditure was incurred for the business's benefit to ensure better administration in the long run. An agreement was executed with the employee committing to serve the company for ten years after completing the education and training. However, the explanation provided by the Appellant was rejected by the Income-tax Officer, leading to an appeal before the Commissioner of Income-tax (Appeals), where the disallowance was initially overturned but later restored by the Tribunal. The Appellant contended that the expenditure was for securing better administration and establishing a nexus between the expenditure and the business. On the other hand, the Revenue argued that the expenditure had no nexus with the business activities and was a personal expenditure of the director's son.In the case of Sakal Papers Pvt. Ltd., a similar issue involving expenditure on education abroad was considered, where the Tribunal disallowed the expenditure due to the lack of commitment or bond from the trainee. However, the Court found the reasons given by the Tribunal unsustainable and allowed the deduction, as there was evidence to support that the expenditure was for the business's benefit. In the present case, the Court noted that the son of the director was sent to the USA for a general Business Administration course, lacking a direct nexus with the business activities of the company. Despite a contract with the employee, the Court found insufficient evidence to establish a nexus between the expenditure and the business activities, leading to the disallowance of the claimed deduction.Additionally, the Court referred to the case of Shreenath Motors, where a similar deduction claim for a director's course fees was disallowed, and the appeal was dismissed. Similarly, in the case of Divyakant C. Mehta, a deduction claim for higher education expenses was rejected as the expenditure was not deemed to be incurred wholly and exclusively for the purpose of business. The Court concluded that the amount claimed by the Appellant as a deductible allowance was not solely for the business's benefit, resulting in the questions being answered in favor of the Revenue and against the Appellant.