2018 (9) TMI 967 - HC - Income Tax

Disallowance of foreign education and training expenses of partner as being not related to the business of the firm - allowable busniss expenses - Held that - After completion of the post graduate degree, the partner continued to work for the firm and materials were placed to show that several important contracts have been secured by the firm, which they attribute to the educational qualification and expertise acquired by the partner of the firm abroad. There was no material place by the Revenue to demonstrate that any part or whole of the stand taken by the assessee was either false or untrue. Viewed from this angle, this Court is fully satisfied that this is not a case where there is a misuse of the provision of Section 37 of the Act to foist a personal expenditure as a business expenditure. Therefore, we are of the considered view that the expenditure was allowable and the authorities concurrently erred in not taking into consideration the factual position placed, in spite of specific grounds raised before the Tribunal, which would render the decision perverse. Perusal of the grounds of appeal filed before the CIT(A) shows that the assessee has specifically raised the point regarding non-consideration of the materials placed before the assessing authority. Yet the CIT(A) did not make an endeavour to examine the stand taken by the assessee, resulted in non-consideration of the materials placed - Decided in favour of assessee

Issues Involved:
1. Whether the expenditure incurred towards foreign education and training expenses of a partner is personal in nature and hence not an allowable deduction under Section 37 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Nature of Expenditure Incurred for Foreign Education and Training:
The primary issue in this case was whether the expenses incurred by the assessee firm for the foreign education and training of one of its partners could be considered a deductible business expenditure. The assessee, a professional firm of Consulting Engineers & Architects, had sent one of its partners, who was also the son of another partner, to Australia for higher education in construction management. The firm argued that this expenditure was directly related to its professional activities and would benefit the firm.

2. Assessment and Disallowance by Assessing Officer:
The Assessing Officer disallowed the expenditure of ?2,65,588/- related to the partner's foreign education, citing it as personal and not related to the business. This decision was based on precedents set in the cases of M. Subramaniam Bros. vs. Commissioner of Income Tax and Commissioner of Income Tax vs. R.K.K.R Steels. The officer concluded that there was no evidence of a direct nexus between the expenditure and the firm's business activities.

3. Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]:
The assessee's appeal to the CIT(A) was rejected, with the CIT(A) upholding the Assessing Officer's decision. The CIT(A) did not consider the factual submissions by the assessee regarding the partner's contribution to the firm after completing his education.

4. Tribunal's Decision:
The Income Tax Appellate Tribunal (ITAT) also dismissed the assessee's appeal, agreeing with the lower authorities that the expenditure was personal in nature.

5. Substantial Question of Law:
The High Court admitted the appeal on the substantial question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding the expenditure incurred towards foreign education and training expenses of a partner as personal in nature and hence not an allowable deduction?"

6. High Court's Analysis and Decision:
The High Court scrutinized the material facts and found that the lower authorities had ignored substantial factual evidence provided by the assessee. The Court noted that the partner had joined the firm before being sent abroad and had significantly contributed to the firm's business upon his return, including securing multinational contracts. The Court emphasized that the expenditure was incurred for the firm's benefit and was not merely a personal expense.

The Court referred to relevant case laws, including Sakal Papers Pvt. Ltd. vs. Commissioner of Income Tax and Commissioner of Income Tax vs. Kohinoor Paper Products, which supported the deductibility of educational expenses if they benefit the business. The Court found that the lower authorities had erred in not considering the factual evidence and had applied precedents that were distinguishable on facts.

7. Conclusion:
The High Court concluded that the expenditure was indeed allowable as a business deduction under Section 37 of the Income Tax Act. The Court set aside the Tribunal's order, answering the substantial question of law in favor of the assessee and against the Revenue. The appeal was allowed with no costs.

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