Karnataka High Court
Mac Explotec (P) Ltd. vs Commissioner Of Income-Tax on 3 June, 2006
Equivalent citations: (2006)203CTR(KAR)409, [2006]286ITR378(KAR), [2006]286ITR378(KARN), 2006 (4) AIR KANT HCR 623, 2006 TAX. L. R. 626, (2006) 286 ITR 378, (2006) 195 TAXATION 579, (2006) 155 TAXMAN 247, (2006) 203 CURTAXREP 409
Bench: R. Gururajan, Jawad Rahim
ORDER
Page 0492
1. By this order, two references in ITRC 420/1998 and 421/1998 are disposed of by a common order. The assessee-Company is a Private Limited Company engaged in the business of providing technical know-how towards manufacture of industrial explosives and also in certain allied manufacturing operations. The Company belongs to Mr. Machado family comprising of N.J. Page 0493 Machado and his wife Mrs. W.S.P. Machado. They were the Directors of the Company. The Company sent T.J. Machado, son of the above mentioned lady Director to a foreign country for getting education and bore the entire expenses of Rs. 2,04,807/- relating to such foreign education in the assessment year 1989-90, The assessing officer disallowed the claim of the assessee towards expenses under consideration on the ground that the expenses did not relate directly to the income earned and that the connection of the entire expenditure with the company depended on the probability of return of T.J. Machado and to continue with the company.
2. In appeal, the Commissioner (Appeals) reversed the order of the assessing officer. A second appeal was filed by the department and the contentions of the department were accepted. The Tribunal accepted the order of the assessment officer by reversing the order of the Commissioner. Subsequently, ITAs were filed and the Tribunal has chosen now to refer the following two questions for re-consideration in these two references:
1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure on the higher education of an employee, was not a permissible deduction merely because the employee happened to be the sone of directors?
2. Whether the Tribunal can legally come to the conclusion on the facts of the case and particularly in view of the fact that on his return Sri. T.J. Machado took over the management and responsibility of the company, that the expenditure on his higher education was motivated only by personal consideration and not for business consideration?
These two references relate to two different assessment years.
3. Sri. Parthasarathi, learned Counsel took us through the entire material on record to contend that the Tribunal is wrong in reversing the order of the Commissioner and accepting the order of the assessing officer. The learned Counsel says that disallowance of expenditure on the facts of this case require re-consideration. He strongly relies on various Judgments in support of his contentions to contend that a mere relationship does not by itself provide for no allowance as held by the Tribunal. He wants the reference to be answered in favour of the assesses.
4. Per contra, Sri. Seshachala, learned Counsel for the Revenue would oppose the reference by contending that the facts of the case would show that the Tribunal is fully justified in coming to a right conclusion in the matter of disallowance in the given circumstances.
5. After hearing, we have carefully perused the material on record. Admitted facts would reveal that the Company belongs to Machado family. Sri. Machado and his wife were the Directors. Their son was sent to U.S.A and in the process, the Company incurred an expenditure and that expenditure was sought to be included for the purpose of assessment by way of business expenditure. The Assessing officer by a detailed order did not accept the education of the assesses and disallowed the same. On appeal, the appellate authority reversed the findings of the Tribunal in the impugned order.
Page 0494
6. Let us see as to whether the order of the Tribunal is sustainable and let us see as to whether the questions of law referred to us is required to be answered in favour of the assessee on the facts of this case. The Tribunal has noticed the facts of the case and also the arguments advanced before it. After noticing the Tribunal notices that Sri. Machado happens to be the son of the two main Directors of the Company and he can as well be considered as the owner of the Private Limited Company. The Tribunal further notices the training programme by the son in foreign company. His son was only an under graduate without any special or technical qualification. He was sent on training in general line of management and proposed a special emphasis. His training was hardly for a period of 1 1/2 years. Thereafter, the Tribunal also notices that the training that was availed by the son has nothing to do with the technical aid of production or manufacturing of explosives or access thereto. The Tribunal further notices that such type of education is as well available in this country as well. Taking note of all these factual aspects of the matter, the Tribunal was of the view that such expenditure incurred by the Company cannot be considered to be an expenditure for the purpose of allowing in the case on hand. The bundle of facts as referred to by the Tribunal, in (sic) view, would justify the order of the assessing officer. It is not as though any specialised training was given to the son and it was not as though it was absolutely necessary for the purpose of running a business. In the given circumstances and on the facts of this case, we are satisfied that the order of the Tribunal is based on facts. The Tribunal is fully justified in rejecting the contentions of the assesses.
7. The learned Counsel for the assessee invites our attention to the Judgment of the Bombay High Court in 114 ITR 256. A close reading of the said Judgment would show that in that case in pursuance of resolution of the Directors dated March 24, 1960, the daughter was sent to U.S.A. in September, 1960 for specialised education in journalism and business administration. It was in that view of the matter, the Bombay High Court accepted the contention of the assessee.
8. In 159 ITR 673, the Calcutta High Court has chosen to notice the facts of the case with regard to practical training and experience in running an aluminium factory. On facts, the Calcutta High Court notices that the employees were specially selected for advance training in order to enable the assessee-company to run its factory efficiently and competently. The Calcutta High Court also ruled that the training was given to achieve efficient running of the factory with a view to gain optimum production. It was on these facts, the Calcutta High Court accepted the case of the assessee.
9. The Madhya Pradesh High Court in 226 ITR 220 (Commissioner of Income-Tax v. Kohinoor Paper Products) has considered the allowance of education expenses. From a reading of the Judgment, we do not find any reasoning as such in the said Judgment.
10. None of the Judgments are applicable to the given circumstances. The Bundle of facts would point out that the assessee is not entitled for any Page 0495 benefits in terms of the Income Tax Laws particularly in terms of Section 37 of the I.T. Act. Any expenses on the facts of this case would result in (sic)-providing the benefit for the purpose of personal gain and not for the purpose for which the Section is meant for in the case on hand. We would be failing if we do not refer to the (sic) Judgments cited by the Revenue.
11. In fact, the Madras High Court in two Judgments namely, 258 ITR 306 (Commissioner of Income-Tax v. R.K.K.R. Steels P. Ltd.) and 250 ITR 769 has chosen to consider a similar issue. The Madras High Court in the case of Commissioner of Income-Tax v. R.K.K.R. Steels P. Ltd. has chosen to refer to its earlier decision in 250 ITR 769. After referring the Madras High Court has chosen to hold as under:
It was canvassed for the assessee before the Tribunal that the fact that Rajiv Rai was the son of the director of the company should not be held against him and the expenditure incurred on his training was in fact, an expenditure which was to the benefit of the company as he subsequently became a director.
If this logic were to be accepted, in every family owned business, all the expenditure incurred in bringing up the children who may later on be given a role in the business as partners or directors could be claimed as business expenditure incurred in training the prospective employees and directors of the business. The expenditure permissible for deduction is expenditure that is wholly and exclusively laid out for the purposes of the business. The expenditure which a father incurs out of his natural love and affection for his children in meeting the cost of their education cannot become a business expenditure merely because he is also the owner or a director of a business in which the son or daughter subsequently takes part.
12. We are in agreement with the views expressed by the Madras High Court. The Revenue is also supported by the Judgment of the Bombay High Court in the case of 209 ITR 383 (Commissioner of Income-Tax v. Hindustan Hosiery Industries). The Bombay High Court in similar circumstances has ruled that there (sic) no nexus between expenditure and business of assessee and the expenditure incurred.
13. In the light of the case laws available on record and in the light of the given circumstances, we are of the view that the assessee has failed to make out a case for the purpose of deduction in terms of Section 37 of the Act, The questions of law as referred to us are answered against the assesses and in favour of the revenue.
14. Ordered accordingly. No costs.