2014 (9) TMI 509 - AT - Income Tax

Imposition of penalty u/s 271(1)(c) Expenses on foreign education and foreign travelling expenses - Held that - Assessee company is engaged in the business of food and catering services - assessee company has claimed expenditure on foreign education and foreign travelling in respect of Tushar Khanna, who is son of one of the Directors of the assessee company - assessee company decided to send Mr. Tushar Khanna, son of the director for specialization in food industries and selected Cornell University to impart the required training and education - in the opinion of the Board of directors of assessee company would benefit the Company substantially in broadening its business horizon - the entire training and education was in Hotel Management, being the specific line of business the Company is engaged in - the employer-employee relationship is in place prior to the assessee Company sponsoring such training - it is clear that to implement International Hotel Business practices and systems, the assessee Company has spent monies on employing foreign nationals - During the previous year 2000-01, the Company had employed an internationally acclaimed foreign cook, Mr Somdet Kesoraprom from Bangkok - it sponsored one of its employees to acquire hotel management education and training at Cornell University, USA. Assessment proceedings and penalty proceedings are separate and distinct and assessee has all the liberty to put his case in the penalty proceedings to prove that there was no concealment of particulars of income or no intention to furnish any inaccurate particulars - in quantum proceedings, assessee s claim of expenses was declined by Tribunal on the plea that before passing Board resolution, there was all intention to send Mr. Tushar Khanna abroad for higher education - the expenses so incurred were not for the purpose of the business - it was demonstrated that after coming from training Mr. Tushar Khanna is continuously rendering his services to the assessee company with the help of his specialized education in hotel management - the agreement entered with Tushar Khanna, before leaving India for higher education was being acted upon and there is nothing adverse found by the departmental authority to show that after returning back to India, Tushar Khanna has not rendered the services as per terms of agreement dated 1-8-2000 as agreed by him with the assessee company. The entire expenditure was intended to be incurred wholly and exclusively for the purpose of assessee s hotel business - it is not a fit case for levy of penalty for the disallowance of expenses so made - the penalty imposed for disallowing claim of expenditure on foreign education and foreign travelling cannot be upheld mere admission of appeal by the High Court is sufficient to debar the penalty levied u/s.271(1)(c) of the Act penalty u/s 271(1)(c) cannot be levied Decided in favour of assessee.

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.
2. Disallowance of foreign education and foreign traveling expenses claimed by the assessee company.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The primary issue revolves around the penalty imposed by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act for the disallowance of foreign education and traveling expenses claimed by the assessee company. The AO's contention was that the expenses were personal in nature, benefiting the son of one of the directors, and not for the business purposes of the company. The CIT(A) confirmed the AO's order, leading to the assessee's appeal before the Tribunal.

The Tribunal noted that the assessee company had claimed these expenses as business expenditures, arguing that they were incurred for training an employee, Mr. Tushar Khanna, in hotel management, which is directly related to the company's line of business. The Tribunal emphasized that the relationship between the company and Mr. Tushar Khanna was that of an employer and employee, and the training was intended to benefit the company by enhancing its business operations.

The Tribunal referred to several judicial precedents, including the decisions of the Hon'ble Bombay High Court in the cases of Nayan Builders & Developers Pvt. Ltd. and Liquid Investment & Trading Co., which held that the mere admission of a substantial question of law by the High Court makes the issue debatable, thereby negating the grounds for imposing a penalty under Section 271(1)(c).

2. Disallowance of Foreign Education and Foreign Traveling Expenses:
The assessee company had claimed expenses for the foreign education and traveling of Mr. Tushar Khanna, who was sent to Cornell University for a hotel management course. The AO disallowed these expenses, arguing that they were personal expenses of the director's son and not incurred for the business purposes of the company. The CIT(A) initially deleted the addition, recognizing the specialized nature of the company's business and the necessity of training employees to maintain high service standards.

However, after a search and seizure operation, the AO reaffirmed the disallowance, and the CIT(A) upheld this decision. The Tribunal, in its earlier order, restored the matter to the CIT(A) for a fresh decision, which again resulted in the disallowance of the expenses.

The Tribunal, in the present appeal, considered the detailed submissions of the assessee, which highlighted the business necessity of the expenses. The company argued that the training was essential for maintaining high service standards and reducing employee turnover, which is a significant issue in the hospitality industry. The Tribunal acknowledged the employer-employee relationship and the binding agreement that required Mr. Tushar Khanna to work for the company for a minimum period after completing his education.

The Tribunal also noted that the Hon'ble High Court had admitted substantial questions of law regarding the disallowance of these expenses, indicating that the issue was debatable. The Tribunal referenced the decision in the case of Aditya Birla Centre, where it was held that no penalty can be imposed when the issue is debatable and a substantial question of law has been accepted by the High Court.

Conclusion:
The Tribunal concluded that the penalty under Section 271(1)(c) was not justified, as the issue of disallowance of foreign education and traveling expenses was debatable and had been admitted as a substantial question of law by the High Court. The Tribunal directed the deletion of the penalty for all the assessment years under consideration, emphasizing that the expenses were incurred for the business purposes of the company and were not personal expenses of the director's son. The appeals filed by the assessee were allowed, and the penalty imposed by the AO was deleted.