2021 (5) TMI 516 - AT - Income Tax

Tribunal allows deduction for management trainee fees as business expenditure

J.D. Jones & Company Private Limited Versus Deputy Commissioner of Income Tax, Circle-6

The Tribunal allowed the appeal of the assessee, overturning the disallowance of Rs. 23,69,443 incurred towards fees paid to Babson College, USA, for a ... Disallowance of the claim incurred towards fees paid to Babson College, USA, for a management trainee - Assessing Officer disallowed this amount on the ground that the expenditure cannot be treated as research & development expenses, there is no nexus between the expenditure of higher education for a management trainee and propagation of business of the assessee and the expenditure cannot be treated is business expenditure as it is incurred for future services to be obtained by the company.HELD THAT:- The genuineness of this agreement cannot be doubted in the absence of any adverse material. The fact is that, Mr. Karan Kanodia, is not related to any of the Directors of the assessee company. Mr. Karan Kanodia, is working for this company till date for more than a period of five (5) years after completion of his education and training on a small pay of ₹ 50,000/- p.m. only. As relying on M/S. GOURNITYE TEA & INDUSTRIES LTD. VERSUS COMMISSIONER OF INCOME TAX CIRCLE I [2010 (6) TMI 764 - CALCUTTA HIGH COURT] Expenditure in question has to be allowed. Booking expenditure under a wrong head of expenditure cannot be a ground for disallowance. The expenditure was incurred for the purpose of business and hence the same is allowed. Appeal of the assessee is allowed. Issues Involved:1. Disallowance of the claim of Rs. 23,69,443/- incurred towards fees paid to Babson College, USA, for a management trainee.2. Whether the expenditure can be treated as research & development expenses.3. Nexus between the expenditure of higher education for a management trainee and the propagation of the business.4. Classification of the expenditure as business expenditure for future services.Issue-Wise Detailed Analysis:1. Disallowance of the Claim of Rs. 23,69,443/-:The primary issue in this case is the disallowance of Rs. 23,69,443/- incurred by the assessee towards fees paid to Babson College, USA, for a management trainee under an agreement. The Assessing Officer disallowed this amount on the grounds that it cannot be treated as research & development expenses, there is no nexus between the expenditure and the business propagation, and the expenditure is for future services.2. Expenditure as Research & Development Expenses:The Assessing Officer and the Ld. CIT(A) held that the expenditure incurred on the education of a management trainee cannot be classified as research & development expenses. The Ld. CIT(A) stated that the trainee, being only 10th passed, did not possess any special qualifications that would justify the selection and sponsoring of his studies abroad by the company. The Ld. CIT(A) also noted that if the company was focused on improving its functioning, it would have hired a qualified professional from a business college.3. Nexus Between Expenditure and Business Propagation:The Ld. CIT(A) found no nexus between the expenditure on the higher education of the trainee and the business propagation of the assessee. The Ld. CIT(A) argued that hiring a management trainee immediately after completing 10th grade does not ensure the requisite skills suited to the company's needs. The Ld. CIT(A) also pointed out that the trainee appeared to be related to the director of the company, suggesting that the expenditure was not justified from a business point of view.4. Classification of the Expenditure as Business Expenditure:The assessee's counsel argued that the expenses were claimed erroneously under a wrong head of expenditure and that sponsorship expenses can be treated as business expenditure. The counsel highlighted that the trainee is not related to any of the directors of the company and has been serving the company for more than five years with a minimum salary of Rs. 50,000/- per month. The counsel relied on certain case laws to support the proposition that the expenditure should be allowed.Tribunal's Findings:The Tribunal examined the service agreement between the company and the trainee, which included clauses about the company's commitment to bear all educational expenses and the trainee's obligation to serve the company for a minimum period of 60 months after completing his education. The Tribunal found no adverse material to doubt the genuineness of the agreement. The Tribunal noted that the trainee is not related to any of the directors and has been working for the company for more than five years on a small pay.Legal Precedent:The Tribunal referred to the Hon'ble Jurisdictional High Court's decision in the case of M/s. Gournitye Tea & Industries Ltd. v. Commissioner of Income Tax Circle-I, which held that any expenditure incurred on account of training and imparting higher education is treated as business expenditure if the trainee contributes to the business activities of the assessee company after completion of their study.Conclusion:Applying the propositions of law laid down in the above case law, the Tribunal concluded that the expenditure in question has to be allowed. The Tribunal emphasized that booking expenditure under a wrong head cannot be a ground for disallowance and that the expenditure was incurred for the purpose of business. Consequently, the appeal of the assessee was allowed.Result:The appeal of the assessee is allowed, and the disallowance of Rs. 23,69,443/- is overturned.