Income Tax Appellate Tribunal - Mumbai
Mustang Mouldings Pvt. Ltd. vs Ito on 16 November, 2007
ORDER
K.C. Singhal, Judicial Member
1. Since common issues involved in all these appeals, the same are being disposed off by the common order for the sake of convenience. The only issue arising from these appeals for our consideration relates to the disallowance of director's training expenses pertaining to the years under consideration. At this stage, it may be stated that in appeals pertaining to assessment years 1999-2000 and 2000-01, the assessee has also raised ground challenging the reopening of the assessment Under Section 147 of the Income-tax Act, 1961 (the Act), but no arguments have been advanced in respect of such ground. Therefore, we shall deal with the sole ground relating to disallowance of director's training expenses.
2. The assessee is a private limited company promoted by the family members headed by Shri Kanshi Sitaram Deora. In the assessment year 2001-02 the assessee had debited an amount of Rs. 24,13,356/- under the head director's training expenses. In the course of assessment proceedings, the assessee was asked to furnish the details in respect of the same and also to explain as to why such expenses could be allowed as business expenditure. In response to the same, the details were filed and it was stated that the director Shri Darshan Kanshi Deora was sent abroad to a course of BBA in Finance 8s Management and Systems Engineering for a period of 5 years at the University of Pennsylvania of USA. According to the assessee the director was sent abroad since such study would help the assessee company in the production and marketing of its products. Reliance was placed on the judgements of High Courts viz., Kohinoor Paper Products 226 ITR 220 and Delhi Cloth 8s General Mills Co. Ltd. 158 ITR 64.
3. The perusal of the details furnished by the assessee showed that Mr. Darshan K. Deora was only of 18 years old when he was appointed as a director of the assessee's company on 3rd August, 1998 and his educational qualification at the time of appointment as a director was only HSC. Further the so called training was from September 1998 for a duration of 5 years. In view of these details, the Assessing Officer was of the view that Mr. Deora was appointed as a director only with a view that the expenses on his higher education could be debited to the accounts of the assessee company for claiming deduction in computing the business income. It was also observed by him that the decision to send the director on training was not based on any service record. Further he was also not looking into the affairs of the company. Accordingly it was held by him that the expenditure was in no way connected with the business of the assessee. He distinguished the judgements of High Courts relied upon by the assessee. On the contrary, he relied on the judgements of the apex court in the case of Swadeshi Cotton Mills Co. Ltd. 63 ITR 57 for the proposition that despite the fact that there is an agreement between the employee and employer and the fact that actual payment was made, the Assessing Officer can make enquiry to determine whether the expenditure was incurred for the purpose of business or not before allowing any deduction Under Section 10(2)(xv) of 1922 Act. Further reliance was placed on the decision of Delhi High Court in the case of Siddhomal & Sons 122 ITR 839, for the proposition that the courts and authorities are not to wear blinkers to overlook or condone the passing off of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of the apparent legality and get to the truth. In view of the facts stated above and the legal position relied upon by him, the Assessing Officer finally held that it was only an attempt to legalise the claim of a personal expense and consequently could not be allowed as deduction Under Section 37(1) of the Act. For the similar reason, the Assessing Officer made disallowance of Rs. 20,52,342/- for the assessment year 2002-03.
4. At this stage, it may be mentioned that on the basis of the order of assessment for assessment year 2001-02, the Assessing Officer reopened the assessments for assessment year 1999-2000 and 2000-01 and following the order for the assessment year 2001-02 the Assessing Officer disallowed the sum of Rs. 22,18,834/- each for the assessment years 1999-2000 and 2000-01.
5. The matter was carried in appeal before the CIT(A), before whom it was submitted that the director was sent for further study so that after completion of the training he could handle production and marketing of the products of assessee company. It was further submitted that the said director has executed an indemnity bond to the effect that he shall remain in service of the company for a period of 5 years from the date of his arrival in India and that if he fails to serve the company, he shall be liable to repay the company the amount of training expenses. In support of this claim, the assessee relied upon the resolution passed by the Board of Directors and also the correspondence between the assessee and the Reserve Bank of India as well as Bank of India. It was also submitted that Mr. Darehon Deora handled the production and marketing of the company whenever he came to India. The assessee relied on the decisions which were cited before the Assessing Officer as well as the decision of Madras High Court in the case of Southern Leather Industries 164 ITR 194, of Calcutta High Court in the case of Hindustan Aluminium Corporation Ltd. 159 ITR 673 and of Bombay High Court in the case of Sakal Papers Pvt. Ltd. 114 ITR 256.
6. The CIT(A) examined the material placed before him as well as the case-law cited. It was found by him that after completing the HSC and attaining the majority, Mr. Darshan Deora was appointed as director of the company on 3rd August, 1998 but the correspondence for the admission with University of Pennsylvania started much earlier as was apparent from the letter dated 12.12.1997 issued by the University of Pennsylvania inviting Mr. Darshan Deora to join the University. There were other correspondences dated 23rd February, 1998, 12th June, 1998, etc., which were all before the date of appointment of Mr. Darshan Deora as director on 3rd August, 1998. In view of these facts it was held by him that the process of admission was started much earlier before the date of appointment as director. It was also found by him that till the date of going abroad for education, Mr. Darshan Deora had not provided any services to the company. The CIT(A) also did not find any truth in the statement of the assessee that Mr. Darshan Deora looked after the production and marketing of the assessee company whenever he visited India. It was also observed by him that the assessee is a family controlled company and the resolution of the Board of Directors allowing the company to meet the cost of training (which is only a misnomer as the correct expression should be education expenses) is not based on bona-fide consideration. Hence, he was of the view that expenditure incurred was not for the purpose of business. Accordingly, the deduction was not allowable Under Section 37 of the Act. The CIT(A) distinguished the case-law relied upon by the assessee. On the contrary, it was held by him that facts of the present case were similar to the facts in the case of CIT v. Hindustan Hosiery Industries 209 ITR 383 (Bom) wherein similar expenses were disallowed. It was also pointed out by him that similar view had been taken by the Madras High Court in the case of M. Subramanyam Bros. v. CIT 250 ITR 769 as well as in the case of CIT v. R.K.K.R. Steels Pvt. Ltd. 258 ITR 306. Accordingly the orders of the Assessing Officer disallowing the expenses were upheld for all the years.
Aggrieved by the above orders of the CIT(A), the assessee has preferred these appeals before the Tribunal for all the years.
7. The learned Counsel for the assessee has reiterated the stand of the assessee taken before the lower authorities. It was also submitted by him that the expenditure was incurred for the benefit of assessee's business i.e., promoting the production and marketing of the products manufactured by the assessee. He also drew our attention to the agreement wherein it was provided that Mr. Darshan Deora was required to join the company after the training and in case of his failure to join the company he was required to reimburse the money spent on his training. It was also submitted by him that after the training, Mr. Darshan Deora has joined the company. Thus, the expenditure was allowable Under Section 37 of the Act. Reliance has been placed on the decision of Bombay High Court in the case of Sakal Papers Pvt. Ltd. 114 ITR 256 and the decision of Madhya Pradesh High Court in the case of Kohinoor Paper Products 226 ITR 220 as well as the decision of the Tribunal in the case of J.B. Advani & Co. Ltd. 92 TTJ 175.
8. On the other the hand, the learned DR has heavily relied on the order of the CIT(A) by submitting - (i) that the expenditure cannot be said to be on training since it was an expenditure on education of the son of the director which is pious obligation of the father; (ii) the process of admission to Pennsylvania University had started much earlier i.e., prior to induction of Mr. Darshan Deora as a director in the company; (iii) the modus operandi adopted by the assessee was nothing but a device to reduce the income of the company; and (iv) there was no nexus between the expenditure and the purpose of the business. Heavy reliance has been placed on the decision of Bombay High Court in the case of Hindustan Hosiery Industries, 209 ITR 383 wherein on similar facts the claim of the assessee was disallowed. He has also relied on the Madras High Court judgement referred to in the order of the CIT(A).
9. Rival submissions of the parties have been considered in the light of the material produced before us as well as the case-law referred to. The perusal of the orders of the lower authorities reveals - (i) that the process of admission of Mr. Darshan Deora to Pennsylvania University of USA had started much before the appointment of Mr. Darshan Deora as a director in the company as is apparent from the fact that he became director on 3rd August, 1998 while the university invited Mr. Darshan Deora for admission vide letter dated 12.12.1997; (ii) that Mr. Darshan Deora was not even a major when he passed his basic education of matriculation (HSC) and he was made director only when he attained the age of 18 years; (iii) Mr. Darshan Deora was sent to USA to a course of Bachelor of Business Administration in Finance & Management and System Engineering for a period of 5 years; and (iv) the cost of education was in the vicinity of Rs. 1.20 to 1.30 crores while the turnover of the assessee was just around Rs. 1 crore per annum. These facts are not disputed before us. Considering the above facts, we are of the view that there is no nexus between the expenditure incurred and the purpose of business, for the reasons given hereinafter. Firstly Mr. Darshan Deora had passed merely HSC when he was not even 18 years of age. It is the pious obligation as well as duty of a Hindu father to provide education to his children and therefore, it was a mere personal expenditure of the father, Mr. Kanshi Deora. The process of admission started in 1997 when he was not even a director and therefore, it is clear that such process was started by the father of Mr. Darshan Deora in discharging of his personal obligation. He was made director only for the purpose of availing deduction in order to reduce the business profits. There is also no evidence to prove the contention of the assessee that Mr. Darshan Deora assisted in the business of the assessee whenever he came to India. He was also not an employee of the assessee company. The expenditure related to the education of Mr. Darshan Deora and it was a misnomer for the assessee to describe the same as expenditure on training. It is also to be noted that the assessee company is a family concern comprising of husband, wife and children and, therefore, it was very easy for the assessee company to induct Mr. Darshan Deora as a director so as to claim deduction in respect of the expenditure which was supposed to be incurred by the father of Mr. Darshan Deora. In our opinion, the entire process was merely a paper work just for claiming the deduction. In our opinion, there is no nexus between the expenditure incurred and the purpose of the business. The issue before us is squarely covered by the decision of hon'ble Bombay High Court in the case of Hindustan Hosiery Industries (supra) wherein on similar facts the issue was decided against the assessee. In that case the assessee was a firm of a family concern of a mother and her four sons. One of the sons of 21 years of age was sent to USA for higher studies and had obtained a degree in business management from an American university. In that case also the person who was sent for higher education was taken as a partner before sending him to higher studies. The expenditure incurred by the firm on his education was claimed as business expenditure. The Assessing Officer as well as the CIT(A) disallowed the expenditure as there was no nexus between the business of the assessee and the expenditure incurred. However, the Tribunal allowed the claim of the assessee. On Reference, the decision of the Tribunal was reversed and the expenditure was held to be disallowable as the expenditure incurred by the assessee had no nexus with the business of the assessee. Following the said decision which is binding on us, the issue is decided against the assessee. Consequently, the expenditure incurred by it is held to be disallowable.
10. It is not necessary for us to deal with each and every case cited by the learned Counsel for the assessee in view of the binding decision of the jurisdictional High Court. However, we would refer to the decision of the hon'ble Bombay High Court in the case of Sakal Papers Pvt. Ltd. (supra), relied on by the learned Counsel for the assessee, which is distinguishable on facts. In that case the facts were entirely different from the case before us. The perusal of the said judgement shows that assessee was a closely held company with two shareholders i.e., husband and wife. The assessee was a publisher of a leading Marathi newspaper 'Sakal'. Their daughter, who was a Master of Arts with English and French as special subjects, was working in the editorial department of the paper from September, 1955. After a period of 5 years, the company passed a resolution on 24th March, 1960 to send the daughter to USA for specialised education in journalism and business administration which in the directors' belief would be good for the progress of the newspaper. After getting the specialised education she came back to India and rejoined the editorial department of the company and continued to work. During the years 1960, 1961 and 1962 an expenditure of Rs. 29,654/- was incurred in connection with her trip to USA which included passage money and certain expenditure prior to her departure. This amount was disallowed by the Assessing Officer. However, the Tribunal held that such expenditure could not be attributed to any extra commercial consideration but the disallowance was confirmed on the ground that the assessee not behaved in a sensible or business like manner as the daughter was not bound to join the assessee company after training. On reference, the High Court held that merely because there was no commitment or contract or bond taken from the trainee, the expenditure which was otherwise proper could not be disallowed. The facts as stated before reveal that the daughter of the directors was already in service with the assessee company for the last 5 years. She was a Master of Arts with English and French as special subjects and was working in the editorial department of the newspaper. Therefore, the specialised education in journalism and business administration was for the benefit of the assessee company and there was a complete nexus between the business of the assessee company and the expenditure incurred. Further, the expenditure was not on education but was incurred by way of travelling expenses and exposes prior to departure. Therefore, that decision is quite distinguishable on facts. Similarly in the case of J.B. Advani & Co. Ltd. (supra), the expenditure was incurred on higher studies of the daughter of the director who was already an existing employee of the assessee company which shows that the facts were entirely different from the present case.
11. In view of the above discussion, it is held that there was no nexus between the business of the assessee and the expenditure incurred. Consequently, the deduction was not allowable. The orders of the CIT(A) are therefore, upheld.
In the result, appeals are dismissed.
Order pronounced on 16th November, 2007.