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TMI Blog2011 (4) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... nsal: The assessee has taken two effective grounds, bearing nos. 2 and 4, that on the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in confirming the disallowance of -(i) Rs. 12,30,799/- out of staff training, welfare and traveling expenses; and (ii) Rs. 36,000/- out of salary. Ground no. 3 is in aid of ground no. 2, in which the finding of the ld. CIT(Appeals) that the business of the assessee does not require high quality technical inputs, advance technology or globally competitive skills has been assailed. 2. The background facts are that the assessee-firm is engaged in the business of export of durries, curtains, rugs, made-ups etc. The firm consists of five partners- (i) Dr. M.R. Jain and Sons, HUF; (ii) Shri Pankaj Jain; (iii) Shri Dinesh Jain; (iv) Smt. Sangeeta Jain and (v) Smt. Niti Jain with 30%, 17.50%, 17.50%, 17.50% and 17.50% shares respectively. The return was filed on 2.12.2003 declaring total income of Rs. 43,13,920/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 (the Act) on 25.03.2004. Subsequently, statutory notices were issued under sections 143(2) and 142(1) with a view to scrutinize the return. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e abroad. On his return, the firm was reconstituted with effect from 01.04.2004 and he became a partner in the firm. No written agreement has been entered into with him before his departure from India or thereafter for pursuing the MBA course or serving the firm. However, the understanding was that he will become a partner in the firm on return after completing studies abroad. This understanding was put into practice when he joined the firm as partner on 01.04.2004. It may be mentioned here that the deed of reconstitution of the firm, by which Shri Gaurav Shyam became the partner, has not been placed on record. It has been further submitted that while pursuing education, he wrote a dissertation on the subject "U.K. Perception of Indian floor covering". 3.1 It is argued that Shri Gaurav Shyam had been the employee of the assessee-firm, who was sent abroad for gaining useful knowledge relevant to the business of the assessee-firm and such knowledge was used because he joined the firm as partner. Therefore, the expenditure had been incurred wholly and exclusively for the purpose of business, deductible under section 37(1) of the Act in computing the total income. In order to suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 2003. He went to U.K. to pursue Master's Degree in Strategic Marketing in a part of the period. He is stated to have written a dissertation but there is no evidence regarding the same on the record. Admittedly, he was taken as a partner in the firm from 01.04.2004, but the deed of reconstitution of the firm is also not on record. Thus, his share in the firm is not known. No written agreement had been drawn on the basis of which his educational expenses were borne by the assessee. The expenses inter-alia include the payment of admission fee, accommodation charges, air-ticket, visa charges, foreign currency purchased on different dates and traveling charges. The question is-whether, the expenses have been incurred in the course of business? 4.2 In the case of Sakal Papers Pvt. Ltd. vs. CIT, (1978) 114 ITR 256, the facts are that the assessee-company was a leading publisher of Marathi newspaper. It was a closely held company with only two shareholders. The company incurred expenditure in respect of education of Ms. Leela Parulekar, the daughter of both the directors and share-holders, on her education in USA. She was holding master's degree in Arts from Poona University with E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A for training in pursuance of an agreement with Kaiser of USA. These employees were not the entire work force of the assessee-company. The employees were specially selected for advance training with the purpose of running its factory efficiently and competently. The employees bound themselves to serve the assessee-company for a period of five years on their return from USA. The expenditure, in the circumstances, cannot be said to have obtained a benefit of enduring nature so as to hold it in the nature of capital expenditure. The aim and object were integrally connected with efficient running of the business. Therefore, it is revenue in nature. The expenditure had been incurred in pre-production and post-production stages and the Tribunal had given a finding that only the expenditure incurred in post-production stage was revenue in nature. The Hon'ble Court held that such distinction did not hold good on the facts of this case. Having considered the facts of the two cases, it can be very well said that they are completely distinguishable. There was no relationship of the employees with any director. 28 employees were sent abroad for training who committed to serve the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distinguishable. Shri Bhargava had worked as partner of the firm for some length of time and also obtained M.Sc. degree in this period. It has been recorded as a matter of fact by the Tribunal that his education and experience was beneficial for the business of the firm. The expenditure is neither capital in nature nor personal in nature. However, in this case, Shri Gaurav Shyam was an apprentice and had worked with the firm for a very short period from July, 2002 to September, 2002. It is yet to be seen whether his education was useful for the business of the assessee-firm for the reason that the finding of the ld. CIT(Appeals) is quite contrary; and the business of the assessee was not such which required the study of strategic-sale globally. The comparative chart of sales given above shows that there was rather decrease in the turnover. Shri Gaurav Shyam became a partner in the firm but the major source of his income was salaries from two connected concerns. Nonetheless, the ratio which comes clearly from the decision is that the material question to be seen is as to whether the expenditure was incurred wholly and exclusively for the purpose of business. While doing so, all ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in 1 SOT 30 and 7 SOT 755. 4.7 We may now discuss the cases relied upon by the ld. DR. The facts in the case of Echjay Forgings Ltd. vs. ACIT and Another, (2010) 328 ITR 286 (Bom.), are that the assessee-company was engaged in manufacturing various engineering items. During the year under consideration, Shri Dhananjay Doshi, one of the director's son, was selected and sent abroad for higher studies in the field of industrial engineering on the condition that he would serve the company for a period of at least five years after completion of the study on a reasonable remuneration to be decided by the Board of Directors. An expenditure of Rs. 11,83,697/- was incurred on the education. The finding of the ld. CIT(Appeals) was that there was no evidence that Shri Dhananjay Doshi was recruited as a trainee by open competitive examination or through any regular selection process. It is also not clear as to what he was doing as a trainee as relevant documents had not been furnished. Therefore, the only logical conclusion is that there is no nexus between the expenditure incurred on foreign education abroad and the business of the assessee company. This finding was confirmed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. counsel distinguished the facts by mentioning that Shri Gaurav Shyam was an existing employee, who later on became partner in the firm. The market competition is increasing and his education was expected to benefit the business of the assessee. In such a situation, it is not necessary to show that the sales of the assessee increased after the joining of the son as a partner. Having considered the facts of the case, there is some distinction as in the case of Dr. S.N. Naik, his son was not working with the assessee and he was not working in medical field also. 4.10 As mentioned earlier, each case has to be decided on its own facts. In this case, the grand-son of one of the partners had worked for a short period as apprentice, when he was sent abroad for higher education. No commitment was taken that he will return and work as an employee of the assessee-firm. He was not selected as apprentice on the basis of any open examination or interview. No record of discussion between partners had been placed on record to show that they considered him fit for education. After obtaining education, he became a partner in the firm but the terms and conditions of the deed are not known. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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