Expenses on Business Management Course abroad for director’s son held as not incurred for business purpose

Expenses on Business Management Course abroad for directors son held as not incurred wholly and exclusively for the purpose of business of assessee

ABCAUS Case Law Citation:
ABCAUS 2417 (2018) 07 HC

The instant appeal was filed by the appellant company against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT), in disallowing expenditure incurred on director’s son for Business Administration course in USA by not treating it a business expenditure under the Income Tax Act, 1961 (the Act).

The appellant was a closely held company. During the relevant previous year it had incurred an expenditure which was debited under the head ‘Management Training and Development expenditure’ which was incurred for higher education and training of director’s son sent to USA for pursuing course in “Business Administration.

During the course of the assessment, it was explained that expenditure was incurred for the purpose of company business, to ensure better administration in long run as the company had decided to train suitable employee. The company had executed an agreement whereby the director’s son had committed to serve the company for ten years. It was also submitted that after completing the education and training, the said person was serving in the company since three years. Thus it was claimed that the expenditure incurred was wholly and exclusively for the purpose of business of the assessee company.

However, the Assessing Officer (AO) rejected the Explanation given by the company and disallowed the same u/s 37(1) of the Act.

Aggrieved by the disallowance, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which was allowed.

The Income Tax Department (Revenue) preferred an appeal before the Tribunal which was allowed and the disallowance made by the AO was restored.

Hence the assessee company had filed the instant appeal.

It was submitted by the assessee that the ITAT had ignored the evidence i.e. appointment letter of concerned employee, copy of resolution passed by the Board of Directors, agreement with the concerned employee and the fact that concerned employee was serving assessee after completing his education and training abroad.

It was submitted that the expenditure incurred for education and training of it’s employee was for securing better administration of the assessee company and the fact that the concerned employee was serving the company after completing education and training had established a clear ‘nexus’ between the expenditure incurred by the company and it’s business.

The Hon’ble High Court opined that the facts of the case law relied upon by the company were entirely different where daughter of the director was post-graduate and was serving with the company in editorial department nearly for five years before she was sent for the training and further education abroad and after securing degree from reputed university in USA, she again started working with the company. There was dependable evidence to hold that expenditure incurred was for securing better services and for promoting its business.

The Hon’ble High Court observed that in the instant case, the course in Business Administration was ‘general’ in nature and had no direct nexus with the business activities of the assessee. The company failed to place particulars like, basic qualification of the son, subjects in which he did his administration course; how such subjects has-had nexus to business activities of the company and so on. The contract whereby he had agreed to render his services after completing his education and training itself was not sufficient to hold that the company had proved nexus between the expenditure and its business activities.

The Hon’ble High Court held that amount claimed was not incurred wholly and exclusively for the purpose of business of the appellant company.

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