2014 (1) TMI 1140 - AT - Income Tax

Whether education expenses of directors is allowable business expense - Held that - Following Hansraj Mathuradas Vs ITO 2012 (10) TMI 300 - ITAT, MUMBAI - As per Board Circular No. 8/2005 dated 29-08-2005 - Fringe benefit tax is levied on the expenses incurred by the employer irrespective of whether the same are incurred for official or personal purposes - Once fringe benefit tax is levied on such expenses as has been done in the present case, it follows that the same are treated as fringe benefits provided by the assessee as employer to its employees and the same have to be appropriately allowed as expenses incurred wholly and exclusively incurred by the assessee for the purpose of its business. Following Sakal Papers Pvt. Ltd. Vs CIT 1977 (11) TMI 36 - BOMBAY High Court - The expenditure in question has been incurred by the assessee for the professional higher education of its employees (directors) for reaping the benefit of the said higher education and accordingly the said expenditure is an allowable business expenditure - Decided in favour of assessee. Ad-hoc disallowance of Vehicle Expenses & Depreciation on Vehicle - Held that - No specific averment or incident has been brought on record to indicate that the vehicle has been used other then the business purposes - Even otherwise in the case of company if it is found that the vehicle has been used for personal purpose then it can be considered as perquisites in the hands of the user employee - Decided in favour of assessee. Disallowance of bad debts - Held that - The assessee has failed to establish that the amount paid to the employee was for the purpose of the business of the assessee - Advancing loan which is not the business activity of the assessee and further having no nexus with the business of the assessee cannot be allowed as bad debts or business loss, if the assessee is not able to recover the same - Decided against assessee.

Issues Involved:
1. Disallowance of Education Expenses.
2. Ad-hoc Disallowance of Vehicle Expenses & Depreciation on Vehicle.
3. Disallowance of Claim of Bad Debts.

Issue 1: Disallowance of Education Expenses

The primary issue in these appeals concerns the disallowance of education expenses amounting to Rs. 29,05,488/- incurred for two directors of the assessee company who completed MBA courses abroad. The assessee argued that these expenses were business expenditures as the education enhanced the directors' ability to manage the company more effectively. The Assessing Officer (A.O.) denied the claim, suggesting the expenses were personal since the directors were sons of the promoter directors. The CIT(A) upheld this disallowance, agreeing that the expenses were personal.

The assessee contended that the education was specific to Marketing & Finance and technical courses, directly benefiting the company. They cited agreements where the directors committed to rejoining the company post-education. They referenced the Sakal Paper Pvt. Ltd. Vs CIT case, where similar education expenses were deemed revenue expenses. Additionally, they pointed out that Fringe Benefit Tax (FBT) was paid on these expenses for the years 2006-07 and 2007-08, which the A.O. accepted.

The Tribunal noted that the A.O. accepted the FBT paid, meaning the expenses were scrutinized and accepted. They referenced a similar case, Hansraj Mathuradas Vs ITO, where FBT payment implied acceptance of the expenses as business-related. The Tribunal concluded that the education expenses were indeed for professional enhancement and thus allowable as business expenditures. They cited the Sakal Papers Pvt. Ltd. case, emphasizing that the relationship between the directors and the company justified the expenses without a formal bond. Thus, the Tribunal deleted the disallowance and decided in favor of the assessee.

Issue 2: Ad-hoc Disallowance of Vehicle Expenses & Depreciation on Vehicle

For the assessment year 2005-06, the assessee challenged the ad-hoc disallowance of Rs. 48,138/- related to vehicle expenses and depreciation. The A.O. disallowed 20% of these expenses, citing a personal element without providing specific evidence. The CIT(A) upheld this disallowance.

The Tribunal found that the A.O. and CIT(A) failed to present specific incidents or evidence indicating personal use of the vehicles. They noted that in a company, if personal use is identified, it should be considered a perquisite for the employee. The Tribunal found no justification for the ad-hoc disallowance and deleted it.

Issue 3: Disallowance of Claim of Bad Debts

For the assessment year 2006-07, the assessee claimed Rs. 33,445/- as bad debts, which was an advance given to an ex-employee. The A.O. disallowed this claim, stating it did not qualify as bad debts. The CIT(A) upheld this decision.

The assessee argued that the amount should be allowed as a business loss since it was irrecoverable. However, the Tribunal noted that the assessee failed to establish the business purpose of the advance. They concluded that since the loan had no nexus with the business activities, it could not be allowed as bad debts or business loss. Thus, the Tribunal upheld the disallowance.

Conclusion:

The Tribunal allowed the appeals for the assessment years 2005-06 and 2007-08, deleting the disallowance of education expenses and ad-hoc vehicle expenses. However, for the assessment year 2006-07, the appeal was partly allowed, with the disallowance of bad debts being upheld. The order was pronounced on December 11, 2013.

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