2012 (9) TMI 1021 - HC - Income Tax

Expenditure incurred by the Assessee company on foreign education and travel of son of the Managing Director of the Company - Allowable business expenditure - Held that - The purpose of Section 40A is to prevent the abuse of fund by the company for personal interest. There should be dividing line between personal interest and the interest of the company. A personal interest means the expenditure incurred not for the purpose of company but for own interest of the office bearers of the company or their sons and relatives but in case an expenditure is incurred by the company to send someone for training or higher education and after returning back in pursuance to contractual obligation, such person joins the company itself, then in such circumstances, it may not be treated as expenditure for personal reason because of relationship with an office bearer. The expenses incurred should be for the purpose of the company which has been benefitted because of training and higher education imparted to the person concerned. - Decided in favour of assessee

Summary

Issues:
Appeals against assessment years 2001-02 and 2004-05 involving the question of whether expenditure on foreign education and travel of the Managing Director's son qualifies as business expenditure.

Analysis:
The appeals were consolidated due to a common question of law regarding the nature of expenditure incurred by the company on the education and travel of the Managing Director's son. The company, engaged in manufacturing and sale of asbestos sheet products, was selected for scrutiny, leading to a dispute over the expenses related to the son's education abroad. The assessing authority initially disallowed the expenses, citing provisions of the Income Tax Act. The appellate authority upheld this decision in the first round of litigation. However, the tribunal remitted the matter back for fresh consideration, resulting in reaffirmation of the initial decision by the assessing authority and the tribunal.

In the subsequent appeal, the appellant argued that the expenses did not qualify as business expenditure under Sections 37 and 40A(2)(b) of the Act. The appellant contended that the expenditure was of a personal nature and not exclusively for business purposes, emphasizing the relationship between the Managing Director and the beneficiary. Section 40A(2)(b) was invoked to highlight restrictions on benefits to certain individuals related to the assessee company. The appellant's counsel argued that the expenses were not justifiable under these provisions, given the personal nature of the expenditure.

The court analyzed the provisions of the Act and emphasized the distinction between personal interest and company benefit. It noted that a company, as a legal entity, has the right to make decisions in its interest, including sending individuals for education and training abroad. The court highlighted that the purpose of Section 40A is to prevent misuse of funds for personal interests, stressing the importance of ensuring that expenses benefit the company. In this case, since the son's education and training directly benefited the company and the individual joined the company post-education, the court found no grounds to deem the expenses as personal in nature.

Consequently, the court upheld the tribunal's decision, dismissing the appeals as lacking merit. The question of law was answered in favor of the assessee and against the revenue.