CIT vs U.P. Asbestos Ltd.

These two appeals filed by the appellant against the assessment years 2001-02 and 2004-05 involve common question of law and facts, hence with the consent of the parties counsel are being decided by the present common judgment. While admitting the appeal, a Division Bench of this Court has framed following substantial question of law:

Whether, in the facts and circumstances of the case, the Tribunal erred in law in holding that the expenditure incurred by the assessee company on foreign education and travel of son of the managing director of the company was business expenditure?

The assessee company is engaged in the manufacture and sale of asbestos sheet and allied products. The company was selected for scrutiny as per Boards circular. The assessee furnished the substantial audit report in pursuance to recommendation for the purpose u/s 142(2A) of the Act. A notice u/s 142(1) along with a questionnaire u/s 143(2) was issued, in response to which the assessee filed details and particulars. During the course of proceeding before the assessing authority, question cropped up with regard to expenditure incurred on education abroad of Mr. Priyank Tayal, son of the managing director in July, 2001. Mr. Priyank Tayal had gone for higher education and training in 2000 in USA in pursuance to an agreement dated 17-7-2000. After coming back from USA, Mr. Tayal joined the company as director on 23-6-2004. The assessing authority noted that an amount of Rs. 15,66,498 was spent by the company on education and Rs. 1,37,737 as travelling expenses. The assessing authority relying upon the provisions contained in sections 47 (sic) and 40A(g) (sic) of the IT Act held that the expenditure incurred on the studies and training of Mr. Priyank Tayal was not a business expenditure, hence added in the overall income of the assessee. Feeling aggrieved, the appeal was preferred and the appellate authority in the first round of litigation, by its order dismissed the appeal of the assessee. However, on appeal to the Tribunal, the matter was remitted back for decision afresh to the assessing authority to adjudicate the controversy, by order dt. 21-11-2005 after examining the issue on certain points.

In the second round, the assessing authority has reiterated its earlier order. Hence, the appeal was preferred before the Tribunal and the Tribunal has affirmed the same by the impugned order dated 13-10-2008. Hence, the Revenue has approached this Court whereby the appeal was admitted on the aforesaid substantial question of law.

While assailing the impugned order, Mr. D.D. Chopra, learned counsel for the appellant invited attention of this Court to sections 37 and 40A(2)(b) of the Act and submits that the expenditure incurred for the training of Mr. Priyank Tayal cannot be a business expenditure. Being the son of the managing director, he has been given the benefit of the company. No son of other employee ever has been sent to abroad for education and training. The instant case is the only case where a person has been sent to abroad for training. It is further submitted by Mr. Chopra that the expense is of personal nature and not exclusively spent for the purpose of business. Accordingly, it may not be held to be business expenditure u/s 37 of the Act.

While inviting attention to section 40A(2)(b), it is submitted by Mr. Chopra that where the assessee is a company, firm, AOP or HUF, any Director of the company, partner of the firm or member of the association or family, or any relative of such director, partner or member, he/she shall not be entitled for any benefit except the expenditure incurred for legitimate needs of the company. Such expenditure should not be excessive and unreasonable. For convenience, section 40A(2)(b) of the Act is reproduced as under:

Section 40A(2)(b) in the IT Act, 1961

(b) The persons referred to in clause (a) are the following, namely:

(i) where the assessee is an any relative of the assessee; individual

(ii) where the assessee is a any director of the company, company, firm, AOP or HUF partner of the firm, or member of the association or family, or any relative of such director, partner or member;

(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;

(iv) a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;

(v) a company, firm, AOP or HUF of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;

(vi) any person who carries on a business or profession,--

(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or

(b) where the assessee being a company, firm, AOP or HUF, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation.--For- the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,--

(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and

(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.

A plain reading of the aforesaid provisions of the Act does not reveal that there is complete prohibition because of relationship. Merely because there is relationship with office-bearers of a company, a person cannot be deprived to be engaged during the usual course of business in terms of agreement with due education and training.

In the present case, admittedly, Mr. Priyank Tayal was a trainee of the management itself and was sent to USA for higher education and training and after coming back, he has joined the company itself. It is the company which was benefited by the training and higher education acquired by Mr. Priyank Tayal while joining university in USA. Things would have been different in case there might be no agreement and the incumbent after availing higher education and knowledge could have joined other company or establishment.

It is well-settled proposition of law that a public limited company is a legal entity or legal person and has got right to manage its affairs in accordance with its memorandum of association or related rules. Being a legal entity, the company can take a decision to secure its interest by sending anyone on contract basis for higher education and training to abroad and after completion of training return back to the country and the person may join the company itself. Of course, the purpose of section 40A is to prevent the abuse of fund by the company for personal interest. There should be dividing line between personal interest and the interest of the company. A personal interest means the expenditure incurred not for the purpose of company but for own, interest of the office-bearers of the company or their sons and relatives but in case an expenditure is incurred by the company to send someone for training or higher education and after returning back in pursuance to contractual obligation, such person joins the company itself, then in such circumstances, it may not be treated as expenditure for personal reason because of relationship with an office-bearer. The expenses incurred should be for the purpose of the company which has been benefited because of training and higher education imparted to the person concerned.

In view of above, we do not find any impropriety or illegality in the impugned order passed by the Tribunal. The appeals are devoid of merit, hence liable to be dismissed. Both the appeals are dismissed. The question framed is answered in favour of assessee and against the Revenue.