2015 (4) TMI 547 - HC - Income Tax

Disallowance of expenditure spent for the education of Dr.Gauri Sriram - daughter of the Managing Director - whether disallowance is justified as the said amount spent on her did not accrue any benefit to the assessee company? - Held that - In the instant case, before expenditure was incurred, the daughter had acquired a degree in medicine. She was employed. Apart from the fact that she is the daughter of the Managing Director and the Chief Executive, she was an employee of the assessee. She was sent outside the country for acquiring higher educational qualification, which would improve the services, which the assessee is giving to its patients. It is in this context, the sum of ₹ 5,00,000/- is spent. That is not in dispute. After acquiring the degree, she has come back and she is working with the assessee. She was paid ₹ 20,000/- per month as salary, before she was sent to higher education and after returning she is being paid ₹ 30,000/- per month. Merely because she happens to be the daughter of the Managing Director and the Chief Executive, it cannot be said that the money is spent by her parents out of love and affection for higher education of their daughter. She was an employee of the assessee, in the field, in which, she has acquired degree. They wanted her to specialize in Radiological Investigations and therefore, she was sent abroad for acquiring the knowledge. After acquiring the additional knowledge, she has come back and she is working with the assessee. Therefore, there is a direct nexus between the expenses incurred towards her education, with the business, which the assessee is carrying on. See CIT Versus Ras Information Technologies (P.) Ltd. 2010 (7) TMI 670 - KARNATAKA HIGH COURT - Decided in favour of the assessee

Summary

Issues:
Disallowance of expenditure for education of a family member under Section 37(1) of the Act.

Analysis:
The appellant, a private limited company running a hospital, claimed a deduction of Rs. 5,00,000 spent on the higher education of the daughter of its Managing Director and Executive Director. The daughter was committed to work for the company after completing her studies. The assessing authority disallowed the claim stating that the expenditure on education for the daughter did not accrue any benefit to the company. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision. The main issue was whether the expenditure should be allowed under Section 37(1) of the Act.

The Tribunal held that the expenditure did not benefit the appellant but only the daughter of the Managing Director, and thus, it was not allowable under Section 37(1) of the Act. The Tribunal also found that the expenditure on the education of a professional whose services were available to the appellant was not in business prudence to justify for allowance under Section 37(1) of the Act. Additionally, the applicability of Section 40A was questioned concerning the expenditure incurred for the benefit of the appellant.

The High Court referred to a previous case where it was established that money spent by an assessee on sponsoring a student or educational expenses in a discipline related to the business is a valid expenditure under Section 37 of the Act. In the present case, the daughter of the Managing Director was an employee of the appellant and was sent for higher education to improve services provided by the company. The court found a direct nexus between the educational expenses and the business activities of the appellant. Therefore, the court set aside the decisions of all three authorities and directed the assessing authority to allow the deduction of Rs. 5,00,000 as claimed by the assessee. The substantial questions of law were answered in favor of the assessee.

In conclusion, the judgment highlighted the importance of establishing a direct connection between the expenditure incurred for education and the business activities of the appellant to determine the allowability of deductions under Section 37(1) of the Act.