WHEHTER THE EXPENSES INCURRED FOR THE EDUCATION ABROAD FOR THE SON/DAUGHTER OF A DIRECTOR OF A COMPANY CAN BE TREATED AS BUSINESS EXPENSES

[Mr. M. GOVINDARAJAN]

Section 37 of the Income Tax Act, 1961 (‘Act’ for short) provides that expenditure which is wholly and exclusively incurred for the purpose of business can be allowed as a deduction in computing the taxable business income. The twin conditions are to be satisfied. The onus is on the assessee to show and establish that the twin conditions are satisfied. 

Personal expenditures cannot be claimed under Sec. 37 of the Act. The issue to be discussed in this article whether the expenses incurred for the education abroad for the son/daughter of a Director of a company can be treated as business expenditure with reference to decided case laws.

In ‘Mustang Mouldings Private Limited V. Income Tax Officer’ – 2007 (11) TMI 539 - ITAT, MUMBAI it was held that where the assessee company was controlled by the family members the expenditure on higher education of a child was personal expenditure of father/parents.

In ‘Mac Explotec Private Limited V. Commissioner of Income Tax’ – 2006 (6) TMI 86 - KARNATAKA HIGH COURT the High Court held that the expenses incurred by the assessee company in sending the director’s son abroad for training in general management were not allowable since the training did not pertain to the assessee’s business. 

In ‘Krishna Fabrications Limited V. Joint Commissioner of Income Tax’ – 2009 (12) TMI 655 - KARNATAKA HIGH COURT the Karnataka High Court is of the view that just because the two directors were children of the Managing Director of the company, cannot be a ground for the Assessing Officer to reject the claim of the assessee, until and unless it is established that these two children of the Managing Director, sponsored to acquire higher education are not connected with the business of the company, even though they are directors. Since vital issue has not been considered by the Assessing Officer and such a mistake is committed by the Commissioner of Income Tax (Appeals) as well as the Tribunal, the Court set aside all the orders and remand the matter to the Assessing Officer for fresh consideration without answering questions of law framed herein, keeping open all the contentions since the order of dismissal is in the nature of best judgement assessment.

In ‘Natco Exports P. Limited V. Commissioner of Income Tax’ –2012 (3) TMI 331 - DELHI HIGH COURT there were four directors in the appellant company, namely, Ajay Grover, Manju Grover, Ms. Ruchika Grover and Naresh Inderpal Singh.  In the history of the company, the company has not set any of its employees/directors for studying abroad.  Ms. Ruchika Grover is the daughter of Ajay Grover The company claimed deduction of the expenses incurred towards her studies abroad as business expenditure which was rejected by the Assessing Officer and the first appellate authority as well as the Tribunal. taxmanagementindia.com

The Appellate Authorities observed that Ms. Ruchika Grover completed her graduation from Delhi University in the year 2005. The graduation result was declared on 12.07.2005. Ms. Ruchika Grover applied to the University of Nottingham, UK much earlier than the declaration of the graduation result by the Delhi University.  It is clearly suggestive of the fact that the expenditure is in the nature of personal expenditure and has no relevance with the business activities of the appellant company. Mr. Ruchika Groverdid commerce from one of the very reputed institutions of the Delhi University is concerned and if the argument of the appellant company that higher studies shall benefit the appellant company then the same reasoning is applicable as far as doing graduation from the Delhi University and the appellant or for that matter all other assesses doing business shall start taking the plea that the studies are in connection with the business and hence, to be allowed as ‘business expenditure’. 

It was further held that as there is no business connection between the expenditure incurred on higher education of Ruchika Grover who went abroad for dong M.Sc., in Entrepreneurship immediately after her completing her graduation and there being no history of the appellant company as far as sending its workforce abroad for training which can be said to have relation with the business activities.

The appellant approached the High Court for remedy. The High Court noted that Ruchika Grover had not executed any bond that she would work for the appellant company after she completes and the course and on failure shall return the money spent. The findings of the Tribunal clearly show that Ruchika Grover, who has completed her graduation in the year 2005 and immediately thereafter applied for further study in the University of Nottingham in the United Kingdom.  It is a case where she continued with her studies. The said application for undertaking the studies abroad was made even prior to her completing the course.  The alleged board resolution has rightly not been relied upon as it was not relied and filed before the Assessing Officer. Considering the facts and circumstances of the case the aforesaid expenditure cannot be regarded as wholly and exclusively incurred for the purpose of business.