2009 (11) TMI 670 - AT - Income Tax

Enhancement u/s 251(2) - TDS u/s 195 - disallowance u/s 40(a)(i) - training expenses of the surveyors paid to Lloyds Register of Shipping London - Whether the training fee can be termed as fee for technical services ? - AO noticed that assessee had incurred training expenses, which mainly consisted of travelling, lodging and boarding abroad, made reference to reasonableness of expenditure and ultimate disallowed 50 per cent of the balance of this expenditure - CIT(A) was of the view that whole of the training expenses were in the nature of fee for technical services and since no tax has been deducted the whole of the expenditure was not allowable u/s 40(a)(i) and accordingly, he issued a notice for enhancement. HELD THAT - Hon ble Supreme Court in the case of Kanpur Coal Syndicate 1964 (4) TMI 18 - SUPREME COURT made it clear that first appellate authority has plenary powers in disposing of an appeal and the scope of his power is co-terminus with that of the Income-tax Officer. This has been interpreted by various Courts that the CIT(A) would have the same powers as the Income-tax Officer. In any case, the issue regarding training expenses was raised by the AO himself. Though the addition was made from a different angle and CIT(A) has invoked another angle by holding that why training expense should not be considered as fee for technical services. Merely because a new angle has been examined, it cannot be said that a new source of income has been created by the CIT(A). Therefore, we find no force in this issue and dismiss the same. We find that during the assessment proceedings AO noticed that assessee had claimed expenses towards training cost. He further found that as per the claim the expenses included stay and travel cost. According to him the cost of stay was much higher and thus the expenses were on higher side. After excluding the travel expenses he disallowed 50 per cent of the balance of expenses. Addition u/s 40(a)(ia) - As common sense would tell us that training expenses cannot be called as fee for technical services . In the modern days even these categories can be further sub-divided, for example - in the case of taxation, it can be direct taxes and indirect taxes and with further specialization, for example - say International taxation etc. Similarly, civil matters can be divided into various fields say property matters, family matters etc. What we mean to say is that a person is highly qualified by his law degree but still requires training for rendering practical aspects. Similarly, in the case before us surveyors were highly technically qualified but such persons, may need to learn practical aspects of examining various electrical and other equipments. Such training in our view is a continuous process because technology is changing very fast and one needs to keep touch with such technology and therefore, expenses incurred towards training cannot be termed as fee for technical services . In any case, the case before us major amount has been paid by way of reimbursement for boarding and lodging arrangements also for which no separate claims have been made. Therefore, according to us, the training fee cannot be termed as fee for technical services . CIT(A) has not dealt with the aspects whether such expenditure was excessive, or not as held by the Assessing Officer. Thus, while holding that these training expenses are not in the nature of fee for technical services, we remit the matter back to the file of the CIT(A) for examining whether the expenditure on training is excessive or not as held by Assessing Officer after providing adequate opportunity to the assessee of being heard. Deduction u/s 37(1) - Payment towards contribution to PF, superannuation fund and employee s fund - as explained that this amount was misappropriated by the brokers out of these funds while making investment. Therefore, assessee made the payment but AO did not agree with the explanation and observed that assessee had suffered huge losses and therefore, there was no justification in payment of ex gratia . CIT held that such a payment is required to be held as of revenue admissible for deduction u/s 37(1). HELD THAT - We find that various trusts created by the assessee company PF, superannuation fund, etc., lost the money because of the broker and not because of employees. It is clear that the assessee company made the payment to keep the moral of the staff high and therefore, it cannot be said that sums were paid for the purpose of business. In view of this, we find nothing wrong in the order of the learned CIT(A) and we confirm the same. In the result the appeal is dismissed.

Issues Involved:
1. Enhancement notice under section 251(2) of the Income-tax Act.
2. Classification of training expenses as fees for technical services under section 9(1)(vii) of the Income-tax Act.
3. Deductibility of payment towards PF, superannuation fund, and employee's fund under section 37(1) of the Income-tax Act.

Detailed Analysis:

1. Enhancement Notice under Section 251(2):
The assessee challenged the issuance of an enhancement notice by the CIT(A) under section 251(2), which resulted in a disallowance under section 40(a)(i). The CIT(A) viewed the training expenses as fees for technical services, leading to the disallowance. The assessee argued that the Assessing Officer (AO) had not considered this angle and that the CIT(A) should not introduce a new source of income, citing the Supreme Court decision in CIT v. Shapoorji Pallonji Mistry. The Departmental Representative countered that the first appellate authority's powers are plenary and co-terminus with the AO, citing CIT v. Kanpur Coal Syndicate. The Tribunal agreed with the Departmental Representative, stating that the CIT(A) has the same powers as the AO and can examine new angles without creating a new source of income. Therefore, the Tribunal dismissed this issue.

2. Classification of Training Expenses:
The assessee contended that training expenses paid to Lloyds Register of Shipping London should not be classified as fees for technical services. The AO had disallowed 50% of the expenses after excluding travel costs, considering them excessive. The CIT(A) reclassified these expenses as fees for technical services under section 9(1)(vii)(b) and issued an enhancement notice. The assessee argued that training does not equate to technical services, as it involves acquiring skills without transferring them. The CIT(A) disagreed, relying on various judicial decisions, and disallowed the expenses after excluding travel costs. The Tribunal, upon reviewing the submissions and relevant case law, concluded that training expenses cannot be termed as fees for technical services. It noted that the training was for practical skill enhancement and not technical service provision. The Tribunal remitted the matter back to the CIT(A) to examine if the expenses were excessive, as initially held by the AO.

3. Deductibility of Payment Towards PF, Superannuation Fund, and Employee's Fund:
The revenue appealed against the CIT(A)'s decision allowing the deduction of Rs. 61,03,672 towards PF, superannuation fund, and employee's fund under section 37(1). The AO had disallowed this amount, questioning its justification given the company's losses. The CIT(A) found that the payment was made to maintain employee morale after funds were misappropriated by brokers, and deemed it a business expense. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment was made for employee welfare and commercial expediency, thus deductible under section 37(1).

Conclusion:
The Tribunal dismissed the assessee's appeal regarding the enhancement notice, remitted the issue of training expenses back to the CIT(A) for further examination, and upheld the CIT(A)'s decision on the deductibility of payments towards employee welfare funds.

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