2014 (2) TMI 1072 - HC - Income Tax

Scope of Business expenditure u/s 37 of the Act - Whether the Tribunal fall into error of law in holding that the appellant s claim that the amount has been spent for the higher education of son of the Director, was not liable as business expenditure u/s 37 of the Income Tax Act Held that - The burden of showing that expenditure would be wholly and exclusively for the purpose of business under Section 37(1) is upon the assessee and that personal expenditure cannot be claimed as business expenditure - there is nothing on record to suggest that such a transaction is not honest - Dushyant Poddar not only worked but his chosen subject of study would aid and assist the company and is aimed at adding value to its business. It would be unwise for the Court to require all assessees and business concerns to frame a policy with respect to how educational funding of its employees generally and a class thereof, i.e. children of its management or Directors would be done - Nor would it be wise to universalize or rationalize that in the absence of such a policy, funding of employees of one class unrelated to the management would qualify for deduction under Section 37(1) that was not such an intent in the statute which prescribes that only expenditure strictly for business can be considered for deduction thus, the expenditure claimed by the assessee to fund the higher education of its employee had an intimate and direct connection with its business, i.e. dealing in security and investments thus, it was appropriately deductible under Section 37(1) the AO is directed to grant the deduction claimed Decided in favour of Assessee.

Summary

Issues:
1. Interpretation of Section 37 of the Income Tax Act regarding business expenditure on higher education.

Analysis:
1. The case involved a dispute over the deductibility of expenses incurred by an appellant company for the higher education of its director's son under Section 37 of the Income Tax Act. The appellant claimed that the expenses were related to the business as the son was an employee and the education would benefit the company's operations.

2. The appellant filed its return declaring a loss and claimed expenses for education and training. The Assessing Officer questioned the justification for the expenses, and the appellant provided evidence of a board resolution authorizing the expenditure for the son's MBA in the U.K. with a commitment for future service.

3. The Assessing Officer disallowed the deduction, which was upheld by the CIT (Appeals) and the ITAT. The ITAT relied on a previous court decision emphasizing the need to differentiate between personal and business expenses when claiming deductions under Section 37.

4. The appellant argued that the case was distinguishable from the precedent cited by the ITAT, highlighting other court judgments where similar expenses were allowed as business deductions, especially when the education could benefit the company.

5. The High Court analyzed the facts and held that the expenses for the director's son's education had a direct connection to the company's business activities in investments and securities. Therefore, the expenses were deemed deductible under Section 37(1) as they served the business purpose.

6. The High Court directed the Assessing Officer to grant the deduction claimed by the appellant, setting aside the decisions of the lower authorities. The appeal was allowed in favor of the appellant, with no costs imposed.