Income Tax Appellate Tribunal - Mumbai
Vishesh Entertainment Ltd, Mumbai vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F", MUMBAI
BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI PRAMOD KUMAR (A.M.)
ITA No. 305/MUM/2009
Assessment Year : 2004-05
M/s Vishesh Entertainment Asstt. CIT Circle 11(1),
Ltd., 4th floor,
36, Shubh Jeevan, Aaykar Bhavan,
Gulmohar Road, Vs. Mumbai - 400 020.
JVPD Scheme,
Mumbai 400 049.
PAN : AABCV0631Q
(Appellant) (Respondent)
Appellant by : Dr. K. Shivaram
Respondent by : Smt. Ashima Gupta
ORDER
PER D.K. AGARWAL, J.M.
This appeal preferred by the assessee is directed against the order dated 21.10.2008 passed by the ld. CIT (A) for the A.Y. 2004-05.
2. Briefly stated facts of the case are that the assessee company is engaged in the business of production of feature films and T.V. serials. During the previous year relevant to the assessment year under consideration four films viz. 'Saaya', 'Footpath, 'Inthiah' and 'Murder' were released. During the course of assessment proceeding, it was inter alia observed by the A.O. that the assessee has spent ` 21,43,220/- in 2 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
foreign currency for the training of Mr. Vishesh Bhatt in U.S.A. Mr. Vishesh Bhatt is the son of Mr. Mukesh Bhatt who is the major shareholder of the assessee company. Taking into consideration various facts such as qualification of Mr. Vishesh Bhatt, relationship with the major shareholders, his age, academic qualification and purpose of expenses incurred, the assessee was requested to explain why the expenses should not be disallowed as the same was not incurred wholly and exclusively for the purpose of business. The assessee inter alia submitted as under:-
" Mr. Vishesh Bhatt went to study cinematography and film/video production.
- He is also a Director in the company.
- There was a Board resolution for such purpose upon which
an agreement was entered into with the said Director.
- Mr. Vishesh Bhatt is young in age and his training would be beneficial to the interest of the company.
- The expense is neither capital nor personal in nature.
- The training was necessary in view of the competition in market."
Such argument did not find favour with the A.O. The A.O. observed that Shri Mukesh Bhatt owns 29,206 out of 50,000 shares of the company and 20,788 shares are owned by Vishesh Films Pvt. Ltd. which is fully owned by Mr. Mukesh Bhatt and his wife Smt. Neelima. Therefore, almost 99.9% of the paid up equity shares of the company is owned and controlled by Mr. Mukesh Bhatt and his wife. Their son Mr. Vishesh 3 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
Bhatt is a non-shareholding Director of the company who studied upto class XII, his date of birth being 7.5.84. He left for training abroad at the age of 19 years. He was made a Director in the assessee's company in the last assessment year. The A.O., therefore, concluded that the education of Mr. Vishesh Bhatt abroad was in continuation of his studies in a normal course after XII standard and had nothing to do with the business of the appellant company. Further, the resolution of the company cannot override the provisions of section 37 and accordingly the A.O. after relying on certain decisions namely Siddho Mal Sons vs. ITO 122 ITR 839 (Del), Bengal Enamel Works Ltd. (1970) 77 ITR 199 (SC) and Swadeshi Cotton Mills Ltd. 63 ITR 57 (SC) held that the expenses incurred by the assessee is not exclusively for the purposes of his business but have extra commercial consideration and the resolution is not bonafide in the interest of the assessee company but was passed with an ulterior motive to benefit the son of the Director holding 99.99% share of the company and consequently he disallowed the amount of ` 21,43,220/- and added to the income of the assessee.
3. Before the ld. CIT(A), the assessee while relying on the same explanation as put forth before the A.O. further submits that Mr. Vishesh Bhatt had given an undertaking to work exclusively for the appellant company for five years and to complete at least one project every year and there is also penal clause for violating the conditions of the 4 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
agreement, therefore, the expenses claimed by the assessee are allowable as business expenditure. The ld. CIT(A) while observing that shareholding position clearly shows that the father and mother of Mr. Vishesh Bhatt are 99% shareholders of the company. The age of Mr. Vishesh Bhatt also shows that he had to continue his studies after class XII, which he did. The parents perhaps desired that their son undertake study connected with film making, they being in film making business, for which they sent him abroad. This is a personal decision and should have been a post tax matter. The arrangement made to show that this was a commercial decision is not acceptable. The ld. CIT(A) relying on the ratio of the decision in the case of Bengal Enamel Works Ltd. [177 ITR 199] while agreeing with the findings of the A.O. held that it is clearly a personal decision for education of the child which is attempted to be passed on as a commercial decision and accordingly rejected the claim of the assessee.
4. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us taking the following ground of appeal:-
"On the facts and circumstances of the case as well in law the learned C.I.T. (A) XI erred in confirming the disallowance made by learned A.O. on account of training expenses ` 21,43,220/- of a director in the USA for the course of cinematography with binding Memorandum of Undertaking entered with the director." 5 ITA No.305/MUM/2009
M/s Vishesh Entertainment Ltd.
5. At the time of hearing the ld. counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) draws our attention to the Board's resolution dtd. 1.4.2003 and Memorandum of Undertaking dated 10.4.2003 between Vishesh Entertainment Ltd. and Mr. Vishesh M. Bhatt appearing at page No. 97, 1 & 2 of the assessee's paper book to show that Mr. Vishesh Bhatt went abroad to study cinematography and film/video production vide Certificate of Eligibility for Nonimmigrant (F-1) Student appearing at page No. 12 of the assessee's paper book. The ld. counsel for the assessee while referring to the copy of ledger account of training expenses, letter dated 28.2.2004 for payment to New York University, copy of passport, VISA appearing at page No. 3 to 27 of the assessee's paper book, submits that assessee is a corporate entity and there is no personal element for a corporate entity. The Director has worked for five years as per the terms of the agreement and is still working with the company. The expenses incurred wholly and exclusively for the purpose of business and the training was necessary in view of the competition in the market. The ld. counsel for the assessee relied on the decision of Hon'ble Bombay High Court in the case of Sakal Papers Pvt. Ltd. vs. CIT [1978] 114 ITR 256 (Bom) wherein Their Lordships while holding that the expenses incurred on foreign education cannot be disallowed merely because the relationship with the Director (daughter of Director) held that the expenditure incurred on the foreign education of the daughter was 6 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
allowable as a deduction. The reliance was also placed on the decision in the case of CIT vs. Kohinoor Paper Products [1997] 226 ITR 220 (M.P.) wherein it has been held that the expenses incurred for better education and greater experience of partner are allowable as business expenditure. Reliance was also placed on the decision of Mumbai Bench of the Tribunal in the case of ITO vs. M/s Seftech India Pvt. Ltd. ITA No. 4407/M/2003 & 6119/M/2003 dated 22.7.2005 wherein the Tribunal following the decision of Hon'ble Bombay High Court in Sakal Papers Pvt. Ltd. (supra) held that in the instant case the person was working as a director before proceeding to higher studies and continued to serve the assessee even after getting the training which in turn helped the assessee company in furthering its business, allowed the expenses claimed by the assessee. Reliance was also placed in the case of Prabhudas Lilladhar Pvt. Ltd. vs. DCIT and vice-versa in ITA No. 2042/Mum/2004 and 2157/Mum/2004 dated 22.4.2008 wherein it has been held that the entire expenditure incurred by the assessee in giving tuition fees of Mr. Mihir A. Sheth in pursuing his degree in MBA in USA is an allowable deduction. The reliance was also placed on the decision in the case of J.B. Advani & Co. vs. JCIT [2005] 92 TTJ (Mumbai) 175 wherein it has been held that the expenses incurred for the education of the director abroad and after completing the studies working for the company held to be for the furthering its business is allowable expenditure. Reliance was also placed in ACIT vs. M/s Padmakshi Financial Services Pvt. Ltd. in 7 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
ITA No. 4036/Mum/2006 for A.Y. 2003-04 dated 21.10.2008 holding that Director's educational expenses on higher education are allowable. Reliance was also placed in the case of Shahzada Nand and Sons vs. CIT [1977] 108 ITR 358 (SC) wherein Their Lordships held that commercial expediency must be tested in the context of socio economic thinking. The amount was spent for the purpose of business and the training has bearing on the business of the company, hence the same may be allowed as business expenditure. The ld. counsel for the assessee further submits that the decisions relied on by the A.O. and ld. CIT (A) are not applicable to the facts of the present case. In the case of Swadeshi Cotton Mills Ltd. vs. CIT [1967] 63 ITR 57 (SC), the issue was commission paid to the Director, the assessee was not able to establish the commercial reason. Therefore, the ratio is not applicable to the facts of the assessee's case. In the case of Siddho Mal & Sons vs. ITO [1980] 122 ITR 839 (Del), there was an agreement with minor son for the purpose of commission. There was evidence to show that no services were rendered hence on facts, the Tribunal has confirmed the addition. The court observed that "Dealing with relatives in contrast with or in preference to strangers is neither prohibited by law nor can be tabooed"
(page 852). Thus, the ratio is in favour of the assessee. In the case of Bengal Enamel Works Ltd. [1970] 77 ITR199 (SC), extra remuneration paid to Directors was held to be unreasonable. It is also not applicable to the facts of the case of appellant-assessee. The ld. counsel for the 8 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
assessee further submits the ratio of decision in the case of CIT vs. Hindustan Hosiery Industries [1994] 209 ITR 383 (Bom) has been distinguished by the Mumbai Bench of the Tribunal in the case of J.B. Advani & Co. Ltd. (supra) wherein it has been held that there was no agreement entered upon by the partner with the firm in the earlier case whereas there is an agreement entered upon by the Director with the assessee company to work wholly and exclusively for the company for five years, therefore, the same is distinguishable and hence not applicable. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of CIT vs. Sun Engineering [1992] 198 ITR 297 (SC) at page 320 for the proposition that the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court and while applying the decision to the later case, courts must carefully try to ascertain the true principle laid down by the decision. The ld. counsel for the assessee also distinguished the recent decisions of Hon'ble Bombay High Court in the case of Echjay Forgings Ltd. vs. ACIT & Another [2010] 328 ITR 286 (Bom) and Ocean City Trading (India) P. Ltd. vs. CIT [2010] 328 ITR 290 (Bom) for the reasons that the facts of those cases are distinguishable to the facts of the assessee's case. In the light of the above, he submits that the expenses of ` 21,43,220/- incurred by the assessee for training of the Director abroad was for the benefit of the assessee, therefore, the same 9 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
be allowed as business expenditure and the A.O. and the ld. CIT(A) have erred in not allowing the same.
6. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) further submits that for the reasons as mentioned in the order of the A.O. and ld. CIT(A), the ld. CIT(A) was fully justified in upholding the disallowance of training expenses of ` 21,43,220/- not allowable as business expenditure and accordingly the order passed by the A.O. be upheld.
7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that according to the assessee, the assessee company has passed Board Resolution dated Ist April, 2003 as under:-
"THAT Mr. Vishesh Bhatt be sent for training in New York University for a maximum period of Three Years. And that Company should bear his all expenses to and fro fare on all his visits, his tuition fees, Lodging Boarding expenses during his stay together with other incidental expenses. And that Mr. Vishesh Bhatt be bound by an agreement for exclusive engagement for five years."
8. We further find that pursuant to the above, Memorandum of Understanding between the assessee company M/s Vishesh Entertainment Ltd. and Mr. Vishesh M. Bhatt has been entered into on 10.4.2003 wherein it has been agreed upon:-
10 ITA No.305/MUM/2009
M/s Vishesh Entertainment Ltd.
(1) That the Company will bear all the expense pertaining to the full period of training i.e. (i) occasional to and fro fare from Mumbai to the Venue of the training (ii) the fees and other expenses of the University (iii) boarding and lodging expense during his stay.
(2) That the Director shall diligently work to acquire the knowledge and will keep the Company reported and informed of all the progress in the training at the end of each semester.
(3) The Director shall devote time to the activities of the Company during his vacations and visits to India.
(4) The Director shall share all his knowledge gained at the University with other employees of the company with a view to updating them regularly.
(5) The Director shall not work in film or projects outside the Company except with the permission of the company.
(6) The Director shall exclusively work for the company for a period of five years after his training and will complete atleast one project every year. The Director will accept a monthly remuneration of ` 30,000/-.
(7) In the event of any default by the Director of the terms and breach of commitment of work the Director agrees and undertakes to replenish & pay back 20% every year to the company of all the expenses incurred by the company on his training.
9. Based upon the above documents, the assessee company has sent Mr. Vishesh Bhatt to USA for study in New York University in cinematography and film/video production. It is the claim of the assessee that the assessee company is a corporate entity and there is no personal element for a corporate entity. The Director has worked for five years as per the terms of the agreement and still working for the company. The expenses were incurred wholly and exclusively for the purpose of business as the training was necessary in view of competition in the market.
11 ITA No.305/MUM/2009
M/s Vishesh Entertainment Ltd.
10. Per contra, the case of the Revenue is that almost 99.9% of paid up equity shares of the company is owned and controlled by Mr. Mukesh Bhatt and his wife. Their son, Mr. Vishesh Bhatt is a non-shareholding Director of the company who had studied up to Class XII. His date of birth is 7.5.84. He left for training abroad at the age of 19 years. He was made a Director in the immediately preceding asstt. year. It was held by the A.O. that education of Mr. Vishesh Bhatt abroad was in continuation of his studies in normal course after XII standard and had nothing to do with the business of the assessee company. Further, the Resolution of the company cannot override the provisions of section 37 and hence the expenses incurred by the assessee on the education of his son/Director are not allowable as business expenditure and the ld. CIT(A) while upholding the view of the A.O. confirmed the disallowance made by the A.O.
11. At the time of hearing, the ld. counsel for the assessee has also drawn our attention to the date-wise details of foreign visits by Mr. Vishesh Bhatt for study in New York University appearing at page no. 91 of the assessee's paper book which is reproduced as under:-
Date Particulars Page No
of
assessee's
paper
book
25.8.2003 Departure from Mumbai 18
12 ITA No.305/MUM/2009
M/s Vishesh Entertainment Ltd.
25.8.2003 Arrived in Italy
26.11.2003 Departure from Italy 18
26.11.2003 Arrived in UK 18
30.11.2003 Arrived in Italy 26
13.12.2003 Departure from Italy 18
14.12.2003 Arrived in Mumbai 23
18.1.2004 Departure from Mumbai 24
18.1.2004 Arrived in Italy 21
14.3.2004 Departure from Mumbai 19
14.3.2004 Arrival in Italy 26
29.3.2004 Departure from Mumbai 22
29.3.2004 Arrived in Italy 26
19.5.2004 Departure from Italy 19
19.5.2004 Arrival in Mumbai 19
29.8.2004 Departure from Mumbai 20
30.8.2004 Arrival in New York 20
19.12.2004 Departure from New York 20
19.12.2004 Arrival in Mumbai 20
5.6.2005 Departure from Mumbai 20
5.6.2005 Arrival in Los Angeles 25
13 ITA No.305/MUM/2009
M/s Vishesh Entertainment Ltd.
6.8.2005 Departure from L.A. 22
6.8.2005 Arrival in Mumbai 22
5.9.2005 Departure from Mumbai 19
5.9.2005 Arrival in New York 19
18.12.2005 Departure from New York to Mumbai
18.12.2005 Arrival in Mumbai 22
(Emphasis supplied)
12. From the above details, it is observed that during the F/Y 2003-04 relevant to A.Y. 2004-05 under consideration, Mr. Vishesh Bhatt went to Italy and U.K. and has not gone to New York. From the copy of the Passport appearing at page No. 15 to 27 of the assessee's paper book, it is also observed that at page No. 20 Mr. Vishesh Bhatt got VISA of USA on 23rd July, 2004 which falls in the financial year 2004-05 relevant to the asstt. year 2005-06 and not in the year under consideration i.e. A.Y. 2004-05. Therefore, it cannot be said that during the year under consideration the Mr. Vishesh Bhatt has gone on tour to New York, U.S.A. for study in New York University, passed in the Board Resolution (supra). We further find that the assessee in his letter dated 28.2.04 addressed to Manager, Thomas Cook (India) Ltd., Mumbai has stated that our Director Mr. Vishesh Bhatt is presently studying at New York University and has till date availed $21171/- towards his fees and living expenses whereas there is no supporting material to show as to how Mr. Vishesh Bhatt is studying in New York University in the absence of any 14 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
VISA and permission of admission in the New York University. There is also no any material on record to show as on what basis the assessee has sent the drafts to New York University. From the letter/Certificate of eligibility for Non-immigrant (F-1) student of the New York University appearing at page No. 12 of the assessee's paper book, it is observed that Mr. Vishesh Bhatt has signed the said letter on 3rd September2005 whereas he was asked by the University to report to the School 'No later than 06.09.2005 and complete studies not later than 21.12.07'. Since the dates in the letter/certificate do not fall in the year under consideration hence the same is not relevant for the year under consideration. The identity card of Mr. Vishesh Bhatt of New York University is dated August, 2007 not relevant for the year under consideration and similarly the other identity card issued to Mr. Vishesh Bhatt by University of Southern California does not help to the assessee as it is not the case of the assessee that Mr. Vishesh Bhatt was allowed to study other than New York University. There is no material on record as to when Mr. Vishesh Bhatt has completed his studies and got Certificate/Degree/Diploma from New York University. In this view of the matter, we are of the view that since Mr. Vishesh Bhatt has not gone to USA in the year under consideration as per VISA issued on 23rd July, 2004 and keeping in view that the assessee was not able to substantiate that sending of Mr. Vishesh Bhatt for training abroad during the year 15 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
was for the benefit of the business of the assessee, the expenses incurred for foreign training are devoid of any merit and are not deductible.
13. There is no quarrel on the ratio of decisions relied on by the ld. counsel for the assessee. However, the facts of the present case are entirely different inasmuch as the assessee has failed to establish that Mr. Vishesh Bhatt, Director of the company has gone to U.S.A. for training in New York University during the year under consideration. As a matter of fact, the factual matrix in the present case reveals that the issue involved revolve around the facts based on pure appreciation of evidence which is against the assessee in view of our finding recorded in para 12 of this order. Therefore, the decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case.
14. In Echjay Forgings Ltd., (supra) it has been held (Head note):-
"Held, dismissing the appeal, that there was no evidence or record to show that any other person at any point of time, either prior to 1996 or subsequent thereto till date was appointed as trainee or sent abroad for higher education. No documentary evidence with respect to appointment of was produced before the Tribunal or before the assessing authority. The expenditure was not deductible."
15. Ocean City Trading (India) P. Ltd. Vs. CIT (supra) it has been held (Head note):-
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M/s Vishesh Entertainment Ltd.
"That the assessee was not able to substantiate that sending a person for training abroad was for the benefit of the business of the assessee. The expenses incurred in training were not deductible."
16. For the aforesaid reasons, we are of the view that the assessee is not entitled to deduction of ` 21,43,220/- claimed as training expenses of a Director sent to U.S.A. for the course of Cinematography and film/video production and accordingly we are inclined to uphold the findings of the ld. CIT(A) in sustaining the disallowance made by the A.O. but with different reasons. The ground taken by the assessee is therefore rejected.
17. In the result, assessee's appeal stands dismissed.
Order pronounced on this 25th day of February, 2011.
Sd/- Sd/-
(PRAMOD KUMAR) (D.K. AGARWAL)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated 25th February, 2011.
RK
Copy to:
1. The Appellant
2. The Respondent
3. Commissioner of Income Tax (Appeals)-XI Mumbai
4. Commissioner of Income Tax, - XI- , Mumbai
5. Departmental Representative, Bench 'F', Mumbai //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI 17 ITA No.305/MUM/2009 M/s Vishesh Entertainment Ltd.
1 Draft dictated on 18.2.11,22.2.11 Sr PS 2 Draft placed before Author on 21.2.11, Sr PS 23.2.11 3 Draft proposed & Place before the JM/AM 2 member nd 4 Draft discussed/approved by 2nd JM/AM Member 5 Approved draft comes to the Sr Sr.PS PS 6 Kept for pronouncement on Sr PS 7 File sent to the Bench Clerk Sr PS 8 Date on which file goes to the Head Clerk 9 Date on which file goes to the AR 10 Date of despatch Sr PS