2011 (4) TMI 454 - AT - Income Tax

Staff training, welfare and traveling expenses - Foreign traveling - the grand-son of one of the partners had worked for a short period as apprentice - Joining the firm as partner is only incidental. The major portion of his income was by way of salaries. The facts of the case do not show that the business of the assessee-firm increased. In fact, there was a reduction in turnover - It is clearly that the foreign education was not undertaken in the course of business of the assessee - The same was obtained for pursuing successful career thereafter - The absence of any prior agreement and bond may also not be conclusive in the matter but they point towards the same - Further, the agreement of partnership is terminable at will and it is not known whether any restrictions were placed on him in the agreement for continuing as partner for any noticeable length of time - Decided against the assessee.

Issues Involved:
1. Disallowance of Rs. 12,30,799/- out of staff training, welfare, and traveling expenses.
2. Disallowance of Rs. 36,000/- out of salary.
3. Assessee's business requirement for high-quality technical inputs, advanced technology, or globally competitive skills.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 12,30,799/- out of Staff Training, Welfare, and Traveling Expenses:
The assessee-firm, engaged in the export business, incurred expenses for the education of Shri Gaurav Shyam, who is the grandson of a partner, amounting to Rs. 12,30,799/-. The Assessing Officer (AO) added this amount to the total income, finding it was not incurred for business purposes but for personal education. The CIT(Appeals) confirmed this finding, leading to the appeal.

The assessee argued that Shri Gaurav Shyam, after completing his BBA, joined the firm as an apprentice and was sent abroad for a Master's Degree in Strategic Marketing, which was beneficial for the business. He later became a partner. The assessee cited several cases to support that such expenses could be considered business expenses under section 37(1) of the Income-tax Act, 1961.

The Tribunal analyzed various precedents:
- Sakal Papers Pvt. Ltd. vs. CIT: The expenditure was allowed as the education was beneficial for the business and the individual served the company post-education.
- Hindustan Aluminium Corporation Ltd. vs. CIT: The expenditure was considered revenue in nature as it was for training employees who committed to serving the company for a specified period.
- CIT vs. Kohinoor Paper Products: The expenditure was allowed as the partner's education and experience were beneficial for the firm.

However, the Tribunal distinguished these cases from the present one, noting the lack of a written agreement, the short duration of Shri Gaurav Shyam's apprenticeship, and the absence of evidence showing the benefit to the business. The Tribunal found that the primary purpose was personal education rather than business advancement. The overall conclusion was that the expenditure was not incurred in the course of business.

2. Disallowance of Rs. 36,000/- out of Salary:
The disallowance of Rs. 36,000/- was due to Shri Gaurav Shyam not serving the assessee during his foreign education. The Tribunal upheld this disallowance, noting that he did not render any service to the firm while studying abroad. The dictionary definition of "apprentice" was cited to emphasize the requirement of a legal agreement to serve, which was not present in this case. The Tribunal concluded that the expenditure was not incurred in the course of business.

3. Assessee's Business Requirement for High-Quality Technical Inputs, Advanced Technology, or Globally Competitive Skills:
The CIT(Appeals) found that the assessee's business did not require high-quality technical inputs or globally competitive skills, which was contested by the assessee. The Tribunal noted that the business's turnover did not increase after Shri Gaurav Shyam became a partner, indicating that his education did not benefit the business. The Tribunal agreed with the CIT(Appeals) that the expenditure was not justified as necessary for the business.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of Rs. 12,30,799/- and Rs. 36,000/-. The Tribunal concluded that the expenses were not incurred wholly and exclusively for business purposes and were primarily for personal education. The decision emphasized the necessity of a clear nexus between the expenditure and business benefit, which was not established in this case.

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