Commissioner of Income Tax and Another vs RAS Information Technologies (P) Ltd.

N. Kumar, J.—These two appeals are by the Revenue, challenging the order passed by the Tribunal, which has upheld deductions u/s 37(1) of the IT Act, 1961 (hereinafter, referred to as ''the Act''), by setting aside the order passed by the AO as well as the first appellate authority.

These two appeals arise out, of two assessment orders i.e., 1997-98 and 1998-99 wherein, deductions are on identical grounds.

One Arun Srinivasan, who is the son of the managing director of the Assessee company was sent to USA for higher studies. The Assessee spent money towards his education and the said amount was claimed under deduction u/s 37(1) of the Act and the said deduction was disallowed by the AO, which order was confirmed by the appellate authority. The Tribunal held that the case falls u/s 37(1) of the Act and the deduction was permissible. Aggrieved by the said order, the Revenue is in appeal.

This appeal was admitted on 4th Jan., 2007 to consider the following substantial questions of law:

(i) Whether the Tribunal was correct in holding that a sum of Rs. 2,87,615 paid by the Assessee company to Sri Arun Srinivasan, the son of the managing director of the Assessee company for studying abroad is an allowable expenditure in the hands of the Assessee, despite the fact that Sri Arun Srinivasan was not employed by the Assessee company nor did he come and join the Assessee company after his studies ?

(ii) Whether the Tribunal was correct in holding that the entire expenditure incurred for the studies of Sri Arun Srinivasan, the son of the managing director of the Assessee company should be allowed as an expenditure, despite the fact that agreement entered into between him and the Assessee company was a colourable device as the clause in the agreement gave an option to Sri Arun Srinivasan that if he had no interest in joining the company, he had to return the entire amount, which clearly showed that the said payment made cannot be treated as the expenditure during the current assessment year ?

We have heard the learned Counsel appearing for parties.

The material on record discloses that Arun Srinivasan is the son the managing director who entered into an agreement with the Assessee-company, under which he agreed to work for the company on completion of his course abroad. Therefore, the Assessee company undertook to sponsor him for higher studies. The sponsorship was paid during the course of business. It is on record that the Assessee is rendering consultancy service in the field of manufacturing and engineering. In fact Arun Srinivasan was an engineering graduate. It is for pursuing his post-graduation course in manufacturing and engineering, abroad that financial assistance was provided. The material on record shows that during the course of pursuing his post-graduation course at USA, he kept the company updated about the latest trends and developments in the field and was also sending key Inputs in the form of articles, research papers etc., to enable the company to keep itself updated of the technical know-how and knowledge. For the subsequent years, the Assessee company has shown higher turnover and higher profit.

In the background of this, we will look at Section 37(1) of the Act, which reads thus:

37(1) Any expenditure (not being expenditure of the nature described in Sections 30 - 36 and not being in the nature of capital expenditure or personal expenses of the Assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession''.

Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an Assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

If the expenditure incurred by the Assessee is for any purpose, which is an offence or which is prohibited by law it is not entitled to the benefit of deduction. Similarly, expenditure incurred by an Assessee on advertisement in any souvenir, brochure, tract pamphlet or the like published by a political party, also is no entitled to deduction.

Thus, once the expenses incurred is not a capital expenditure or an expenditure incurred for personal expenses of the Assessee or the said expenditure is for which is not an offence or is not prohibited by law and was not spent in advertising in any souvenir, brochure, tract, pamphlet or the like published by a political party, the Assessee is entitled to the benefit of deduction u/s 37 of the Act. In other words, the money spent by an Assessee either in sponsoring a student or towards educational expenses of a student in a discipline, In which the Assessee is carrying on its business, is a valid expenditure and is entitled to deduction.

In the instant case, the son of the managing director is an engineering graduate. Assessee is a consulting agency in manufacturing and engineering industry. They have sponsored the candidature of Sri Arun Srinivasan, to pursue his post-graduation course in engineering. In that regard, they have entered into a written contract. While pursuing the studies, the student has rendered services, which is acknowledged by the Assessee. Merely because in the agreement there was a clause that in default of his rendering services, he would return the sponsored money with interest, the genuineness of the agreement cannot be doubted. On the contrary, it only shows that the Assessee had taken precaution to see that the interest of the Assessee was protected by imposing such a condition on the student. Even otherwise, when the Assessee is running an engineering and consulting services earning profits and in pursuance of its business or profession, it laid put certain monies for education of a student in the very same field, such an expenditure cannot be held to be unlawful or prohibited by law. Having regard to the quantum of amount spent it cannot also be said that it is a devise to avoid payment of tax or to reduce the tax by such a device of sponsoring a student''s studies abroad. In the facts and circumstances of the case keeping in mind the amount extended towards the educational expenses and the nature of the education and also other attending circumstances, we are satisfied that the amount expended by the Assessee is not a devise to avoid payment of tax or reduce payment of tax and this expenditure is a bona fide one in that view of the mater, we do not find any merit in these appeal Section

The substantial questions of law are answered in favour of the Assessee and against the Revenue.

Accordingly, both the appeals are dismissed.