2019 (10) TMI 447 - HC - Income Tax

Disallowance of expenditure incurred towards the educational expenses in respect of daughter of one of the Directors of the assessee company - allowable revenue expenditure - HELD THAT - In the present case daughter of one of the Directors was barely 18 years of age without any relevant education, qualification or experience when she was inducted as a whole time Director of the Company. The agreement with the company wherein she undertook to remain in the employment of the assessee company for a period of not less than one year from the date of completion of higher education/training was executed on 20.03.2000, the date when she was inducted as the Director of the Company. The terms of the said agreement also defy logic. It is highly improbable that a Company which would incur expenditure to the tune of ₹ 70 lacs approximate on overseas education, agreed to have Ms. Esha Arya make a commitment to work for the Company only for a period of one year and, in the event she were to leave the Company before the expiry of the said period, she was required to pay only ₹ 50,000/- as default money, which too could also be waived off at the discretion of the Director of the assessee. When these contradictions were pointed out, the Assessee produced the supplemental agreement dated 01.11.2000 wherein she agreed to serve the Company for not less than two years and in the event of default, reimburse 50% of the expenditure incurred on higher education. These facts cannot be ignored and one can easily infer that the expenses were not incurred wholly and exclusively for the business of the Company. In the first round of a challenge, the assessee, despite opportunity failed to produce the evidence that would justify the expenditure, as noted in the impugned order. The assessee could not produce any evidence to show that the assessee company had sponsored the application of Ms. Esha Arya from the beginning. AO thus correctly concluded that there was no nexus between the higher education expense of Ms. Esha Arya and the business of the assessee and accordingly disallowed the entire sum holding that it was not an expenditure incurred wholly and exclusively for the purpose of business. - Decided against assessee.

Issues Involved:
1. Disallowance of educational expenses under Section 37 of the Income Tax Act.
2. Determination of whether expenses were incurred wholly and exclusively for business purposes.
3. Evaluation of the evidence provided by the assessee to justify the expenses.
4. Examination of the relationship between the expenses and the business activities of the assessee.

Detailed Analysis:

1. Disallowance of Educational Expenses under Section 37 of the Income Tax Act:
The appeals were directed against the composite order dated 20.12.2018 passed by the Income Tax Appellate Tribunal (ITAT) in respect of assessment years 2001-02 to 2004-05, involving disallowance of educational expenses claimed by the appellant for Ms. Esha Arya, the daughter of one of the Directors of the assessee company. The Tribunal dismissed the appeals and upheld the disallowance of these expenses, which were deemed personal in nature and not incurred wholly and exclusively for business purposes.

2. Determination of Whether Expenses Were Incurred Wholly and Exclusively for Business Purposes:
The assessee claimed that the expenses incurred for Ms. Esha Arya's education at Boston University were for business purposes. However, the Assessing Officer (AO) and the CIT (A) found that the expenses were personal, as the assessee failed to provide sufficient evidence to establish a business nexus. The key findings included the lack of an original application form for admission, no scheme for employee training, and the relationship between Ms. Esha Arya and the Director being the primary reason for the expenditure.

3. Evaluation of the Evidence Provided by the Assessee to Justify the Expenses:
The Tribunal noted that the assessee failed to produce critical documents, such as the original application form for admission to Boston University and evidence of sponsorship by the company. The AO and CIT (A) emphasized that the assessee did not comply with the Tribunal's directions to furnish all relevant facts and documents. The Tribunal highlighted that the expenses on education were not justified as business expenses and were personal in nature.

4. Examination of the Relationship Between the Expenses and the Business Activities of the Assessee:
The Tribunal examined whether the expenses had a direct and exclusive connection to the business activities of the assessee. It found that the expenditure on Ms. Esha Arya's education did not meet the criteria under Section 37(1) of the Act, as it was not incurred wholly and exclusively for business purposes. The Tribunal also noted that the assessee company was running into losses when it resolved to send Ms. Esha Arya for higher education, further questioning the commercial expediency of the expenditure.

Conclusion:
The High Court upheld the concurrent findings of the AO, CIT (A), and the Tribunal, concluding that the educational expenses incurred for Ms. Esha Arya were personal and not allowable under Section 37(1) of the Income Tax Act. The Court emphasized that the assessee failed to establish a business nexus for the expenses and that the findings were based on factual analysis, not raising any question of law. Consequently, the appeals were dismissed.

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