2020 (4) TMI 736 - AT - Income Tax

ITAT allows training expenses as valid business deduction under Section 37(1)

Soujanya Color Pvt. Ltd. Versus DCIT Circle-3, Thane

The ITAT allowed the appeal, directing the disallowed training expenses of Rs. 22,33,843/- to be treated as a valid business expense under Section 37(1) ... Allowable revenue expenditure u/s 37 - training charges incurred on non-executive director - HELD THAT:- Shri Jashan Bhumkar completed the higher education with the financial assistance of the assessee company and assessee company had incurred the education expenditure for the last year of graduation and Shri Jashan Bhumkar was working in the company as non-executive director at the time of availing the above benefit. The company has decided to approve the above expenditure by passing a resolution in this regard and entered into an education sponsorship agreement. As per the above agreement Shri Jashan Bhumkar has to work with the assessee company for a period of 3 years in return for the above said sponsorship. Assessee has sponsored the education of son of the M.D. What is relevance, whether the person who was sponsored, is relevant for the existing business and whether the business benefitted. If it is yes, then it is valid business expenditure and respectfully following the aforesaid decisions which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, we allow the grounds raised by the assessee. Issues Involved:1. Disallowance of training expenses under Section 37(1) of the Income Tax Act.2. Validity of the 'Education Sponsorship Agreement' and its relevance to the business.Detailed Analysis:Issue 1: Disallowance of Training Expenses under Section 37(1) of the Income Tax ActThe assessee company, engaged in the manufacturing of colorants, claimed training expenses of Rs. 49,39,185/-, which included Rs. 22,33,843/- for the education fees of Mr. Jashan Bhumkar, a Non-Executive Director. The Assessing Officer (AO) disallowed this expenditure, treating it as not expended wholly and exclusively for business purposes under Section 37(1) of the Income Tax Act. The AO's decision was based on the view that the expenditure was personal in nature, benefiting the director's son rather than the business.The CIT(A) upheld the AO's decision, citing various case laws including Echjay Forgings Ltd. v. ACIT, Mac Explotec Pvt. Ltd. v. CIT, CIT v. R.K.K.R. Steels Pvt. Ltd., and M. Subramaniam Bros. v. CIT. The CIT(A) concluded that the resolution approving the expenditure was passed at the instance of the Managing Director, who was the mother of Mr. Jashan Bhumkar, and that the expenditure was a personal liability camouflaged as a business expense.Issue 2: Validity of the 'Education Sponsorship Agreement' and Its Relevance to the BusinessThe assessee argued that the education fees were incurred to retain talent within the organization and were directly relevant to the business. The company had entered into an 'Education Sponsorship Agreement' with Mr. Jashan Bhumkar, requiring him to work for the company for a minimum of three years after completing his graduation. The company provided evidence of increased profits and expanded business operations attributed to Mr. Jashan Bhumkar's expertise gained through his education.The ITAT considered the rival submissions and material on record. The tribunal noted that Mr. Jashan Bhumkar completed his higher education with the financial assistance of the company and joined the company immediately after graduation, continuing to serve in a significant role. The tribunal found that the facts of the case were similar to the decision of the Hon’ble Madras High Court in Aswathanarayana & Eswara v. DCIT, where the court allowed the deduction of educational expenses incurred for a partner who continued to work for the firm after completing his education.The tribunal also referred to the decision of the Hon’ble Bombay High Court in Sakal Papers (P.) Ltd. v. CIT, which allowed the deduction of educational expenses for the director's daughter, who worked with the company after completing her education.Conclusion:The ITAT concluded that the expenditure on Mr. Jashan Bhumkar's education was relevant to the business and beneficial to the company. The tribunal held that if the sponsored education is relevant to the existing business and benefits the business, it qualifies as a valid business expenditure. Therefore, the tribunal allowed the appeal, directing that the disallowed expenditure of Rs. 22,33,843/- be allowed as a business expense under Section 37(1) of the Income Tax Act.Order:The appeal filed by the assessee was allowed. The order was pronounced in the open court on 10th February 2020.