2017 (3) TMI 570 - AT - Income Tax

Study expenses incurred for the daughter of brother of the Director - allowable business expenditure u/s 37 - Held that - There is merit in the submissions of the assessee, as the propositions canvassed by the ld AR for the assessee are supported by the facts narrated by him. As ld AR pointed out that Miss Megha Goyal was working with the company prior to her higher study. Miss Megha Goyal had executed a bond stating that after her higher study she would work in the company. In fact she worked in company for 32 Months after her higher study. The company had reaped the benefits and expertise to promote its business operations and maintain labour harmony. The ld CIT(A) relied on certain judgments which are not applicable to the facts under consideration. Therefore, we are of the view that the addition made by the Assessing Officer and confirmed by the ld CIT(A) needs to be deleted. Accordingly, we delete the addition. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of staff welfare expenses.
2. Disallowance of traveling expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Staff Welfare Expenses:

The assessee company, engaged in manufacturing fabricated metal and structural products, filed its e-return showing a total income of ?9,99,292/-. The case was selected for scrutiny, and the Assessing Officer (AO) disallowed ?13,79,177/- of staff welfare expenses incurred for the higher studies of Ms. Megha Goyal, a relative of one of the directors. The AO concluded that the expenditure was not allowable under Section 37 of the Income Tax Act, 1961, as it was not incurred wholly and exclusively for the business purpose.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that Ms. Goyal was the niece of a director and the sponsorship was granted due to her familial relationship. The CIT(A) observed that the arrangement appeared to be a planned effort to claim the expenditure as a business expense, which was cleverly debited under 'Staff Welfare Expenses' and 'Travelling Expenses' instead of 'Education Sponsorship Expenses'. The CIT(A) emphasized that the company did not benefit from her higher education as no substantial evidence was provided to support the claim.

The CIT(A) referenced the case of CIT vs. R.K.K.R. Steels (P) Ltd., where the High Court held that expenses incurred for the education of a director’s relative cannot be claimed as business expenditure. The CIT(A) concluded that the expenditure was not for the business purpose and confirmed the disallowance.

2. Disallowance of Traveling Expenses:

The AO also disallowed ?5,59,225/- of traveling expenses related to Ms. Goyal's higher studies. The CIT(A) upheld this disallowance for similar reasons as the staff welfare expenses, stating that the expenses were not incurred wholly and exclusively for the business purpose.

The assessee appealed to the Appellate Tribunal, arguing that Ms. Goyal was employed by the company before her higher studies and had executed a bond to work for the company for three years after completing her studies. The assessee claimed that the company benefited from her expertise and that the expenses should be allowed as business expenditure.

The Tribunal considered the submissions and found merit in the assessee's arguments. It noted that Ms. Goyal worked with the company for 32 months after her studies and that the company reaped benefits from her expertise. The Tribunal concluded that the CIT(A) relied on judgments not applicable to the current facts and decided to delete the additions made by the AO.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the disallowances of ?13,79,177/- for staff welfare expenses and ?5,59,225/- for traveling expenses, concluding that the expenses were incurred for the business purpose and should be allowed as business expenditure.

Order Pronounced:
The appeal filed by the assessee is allowed, and the order was pronounced in the open court on 04/01/2017.