ITAT on Eligibility of Education expenses by company for its Director

DCIT Vs Toshvin Analytical Private Limited (ITAT Mumbai)

Conclusion: Expenditure incurred by assessee on education of director was incurred in furtherance of assessee’s business interest and hence, allowable.

Held: Education expenses had been incurred in relation to knowledge enhancement of the key personnel of assessee-company and the director was liable to refund the said expenditure in case of breach of various terms of agreement. The expenditure was duly authorized by Board of Directors of the assessee company. The offer letters of the concerned universities offering the aforesaid course to the director had also been placed on record. Thus, it was concluded that the expenditure as incurred by assessee on education of director fulfilled the conditions of Section 37(1) and was incurred in furtherance of assessee’s business interest and hence, allowable.

FULL TEXT OF THE ITAT JUDGMENT

1. These are cross appeals for Assessment Year [AY] 2011-12 which contest the order of Ld. Commissioner of Income Tax (Appeals)-3, Mumbai, [CIT(A)], Appeal No.CIT(A)-3/IT-98/DCIT-1(3)/14-15 dated 29/3/2017. The assessee is aggrieved by confirmation of estimated disallowance on account of alleged bogus purchases & disallowance of certain foreign education expenses whereas the revenue is aggrieved by grant of relief on account of alleged bogus purchases. The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax-1(3), Mumbai [AO] u/s 143(3) on 20/03/2104 wherein the income of the assessee was assessed at Rs.12.59 Crores after certain additions as against returned income of Rs.11.81 Crores e-filed by the assessee on 30/09/2011. During impugned AY, the assessee being resident corporate entity was engaged as commission agent & in the business of marketing, installation & servicing of analytical hi-tech equipments. The following quantum additions are the subject matter of present appeal before us:-

2.1 During assessment proceedings, pursuant to receipt of certain information from DG Investigation, Mumbai / Sales Tax Department, Maharashtra regarding hawala dealers, it transpired that the assessee stood beneficiary of such bogus purchase bills aggregating to Rs.53.26 Lacs from 10 such entities, the details of which have been extracted at para-4.7 of the quantum assessment order. Accordingly, the assessee was asked to produce the parties for verification and confirmation of the transactions. The assessee, while expressing inability to do the same, defended the purchases vide submission dated 10/02/2014, inter-alia, by submitting that the purchases were duly supported by the purchase invoices / purchase orders etc. It was submitted that the assessee was required to participate in various exhibitions, seminars, conferences, in house meetings etc. and there was continuous requirement of stationery items, brochures, dairies, key-chains etc. on regular basis which was purchased from the above parties and therefore, the purchases were genuine and the expenditure was meant for business purposes only. However, for want of production of the suppliers and for want of proper documentary evidences viz. delivery challans, transport receipt, octroi receipts etc. evidencing delivery of material, the said purchases were disallowed by Ld. AO and added to the income of the assessee.

2.2 The second addition stems from the fact that the assessee claimed foreign education expenses of Chairman and Managing Director, Shri Nakul Toshniwal, of the assessee company amounting to USD 28930.82 [equivalent INR 15,00,947/-]. The same were incurred during the period from Jan, 2011 to March, 2011 and the details of the same has been extracted at para 6.1 of the quantum assessment order. In support of the expenditure, the assessee placed on record Board Resolution authorizing the expenses. The stated expenditure was claimed to be incurred towards attending the Policy and Business programs of John Hopkins University, Washington DC and of Stanford University, California. The other terms of the said arrangement have been extracted at para 6.2 of the quantum assessment order. Upon perusal of the same, it, inter-alia, emanates that immediately after completion of the said program, the aforesaid executive was to return back to India and serve the company for a minimum period of 5 years after that and no remuneration was payable to him during the tenure of the program. However, finding no nexus of the said program with the business of the assessee and for want of necessary documentary evidences, Ld. AO disallowed the same.

3. Aggrieved, the assessee agitated the same with partial success before first Appellate Authority vide impugned order dated 29/03/2017 wherein the addition on account of alleged bogus purchases was restricted to 12.5% whereas the addition of foreign travel expenses was confirmed. Aggrieved as aforesaid, the assessee as well as revenue is in further appeal before us.

4. The submissions of Ld. Auhtorized Representative for assessee [AR], draws strength from the fact that the assessee purchased stationery items and sales promotion material from the aforesaid suppliers as per the business requirements and the purchases were genuine. Our attention is also drawn to the fact that these expenditure were regularly being incurred by the assessee over past several years which has been accepted by the revenue. The addition on account of foreign education expenses has been assailed on the ground that the said expenditure fulfilled the conditions of Section 37(1) and further, the similar disallowance in immediately succeeding AY has been deleted by the first appellate authority itself, finding strength in assessee’s claim. Per Contra, Departmental Representative [DR], Shri D.G.Pansari submitted that the assessee failed to discharge the primary onus casted upon him to prove the purchases and therefore, the additions were justified.

5. We have carefully heard the rival contentions and perused relevant material on record including documents placed in the paper book and various judicial pronouncements as cited before us. So far as the addition on account of alleged bogus purchases is concerned, the assessee has placed on record documentary evidences in the shape of purchase summary, copies of challans, purchase orders the perusal of which reveals that the assessee has purchased various stationery and sales promotion items from the aforesaid suppliers. However, as rightly noted by Ld. AO, the assessee has failed to provide transport details / any other documentary evidences to substantiate the delivery thereof. It is also undisputed fact that the all suppliers were listed as hawala dealers by Sales Tax Department, Maharashtra and the assessee failed to produce even the single supplier to confirm the transactions. The complete onus to prove the genuineness of the purchases was upon assessee and the same, in our opinion, has remained unfulfilled. Therefore, the stand of first appellate authority, under the circumstances, in making estimated additions, was quite fair and justified. However, keeping in view the overall factual matrix including VAT rates, we find that estimation to be slightly on higher side and therefore, we reduce the same to 8%. Secondly, upon perusal of details, it is noted that the net amount of expenditure [excluding VAT] as debited by the assessee in the profit & loss account aggregates to Rs.47,92,345/-. Therefore, by modifying the impugned order, we restrict the impugned additions to 8% of net alleged bogus purchases of Rs.47,92,345/- which comes to Rs.3,83,388/-. The revenue’s appeal stand dismissed whereas this ground of assessee’s appeal stand partly allowed.

6. So far as the disallowance of foreign education expenses is concerned, we find that the same has been incurred in relation to knowledge enhancement of the key personnel of Assessee Company namely Nakul Toshnival aged around 36 years. The undisputed facts as advanced before us is that the director was first promoter director of the assessee company and was qualified as B.S. in economics from Wharton School of the University of Pennsylvania and was in the business for over 10 years during which the assessee company grew considerably. The expenses were incurred in relation to attending of Policy and Business programs of John Hopkins University, Washington DC and of Stanford University, California covering the period from January, 2011 to December, 2011. The program was designed as an executive program for experienced professionals having relevant work experience who wished to develop analytical and leadership skills necessary to formulate and advocate policy on key international issues. Further, the said arrangement was duly supported by an agreement dated 13/01/2011 having onerous stipulations for the director to return back to India after completion of the program and serve the assessee for a minimum period of 5 years. Also, the director was liable to refund the said expenditure in case of breach of various terms of the agreement. The expenditure was duly authorized by the Board of Directors of the assessee company. The offer letters of the concerned universities offering the aforesaid course to the director has also been placed on record. The above factual matrix lead us to conclude that the aforesaid expenditure as incurred by the assessee fulfilled the conditions of Section 37(1) and was incurred in furtherance of assessee’s business interest and hence, allowable. Therefore, by deleting the same, we allow this ground of assessee’s appeal.

Conclusion

7. The revenue’s appeal stands dismissed whereas the assessee’s appeal stands partly allowed in terms of our order.

Order pronounced in the open court on 16th November, 2018.