Vildirect: IncomeTax-caselaws-1991-VIL-131-ITAT-DEL

1991-VIL-131-ITAT-DEL

Equivalent Citation: TTJ 042, 116,

Income Tax Appellate Tribunal DELHI

Date: 11.02.1991

JHALANI HOLDING P. LTD.

INCOME TAX OFFICER.

BENCH

Member(s) : A. KALYANASUNDHARAM.

JUDGMENT

The assessee, a limited company, has preferred this appeal against the order of CIT(A) dt. 5th Jan., 1989 and the issue raised in this appeal is against the non-allowance of deduction of salary and tuition fee paid of Shri Anoop Jhalani, in view of the fact, that, Shri Jhalani is the son of the Managing Director of the company and the expenditure is in the nature of personal expenditure of the Director and not related to the business.

2. The assessee company is a partner of M/s Jhalani & Co., a partnership concern carrying on the business of marketing of tools manufactured by Gedore Tools India Pvt. Ltd. and the only income of the company is the share income from the partnership concern. The Director's son Shri Anoop Jhalani after getting his Master in Commerce joined the company and was paid a salary of Rs.2,500 per month. He continued in his employment for two months. Shri Anoop Jhalani had then gone to USA for obtaining his MBA degree from the University of Pennsylvania. The tuition fee paid was Rs. 81,438. The Board of Directors in their meeting dt. 26th July, 1982, passed the resolution of sending Shri Anoop Jhalani for obtaining of MBA degree, considering his track record in studies from school through his post-graduation. The resolution also provided that, the first year's tuition fee and one way air ticket and maintenance expenses shall be borne by the company. The resolution provided that, a clear understanding between the company and Shri Jhalani has been duly recorded to the effect that, Shri Jhalani will come back after his advance studies and employ the benefit and experience of his expertise and advanced knowledge for the benefit of the company. It also added that, Shri Jhalani shall regularly send periodical reports of his programme, as well as in respect of matters that may be of interest and benefit to the company.

2.1. The assessee with the above background and also the subsequent fact of Shri Jhalani returning back after completing his advance studies, joining the company on a salary of Rs. 1,000 p.m., had claimed that, it was in keeping with the interest of the company that, the expenditure was incurred. The plea of the assessee was that, it was commercial expediency that led the company to incur the above expenditure and since the expenditure was incurred wholly and exclusively for the purposes of the business, the expenditure was allowable. The assessing (authority) dismissed the claim by observing that, there is no justification for the salary paid and there is no connection between the studies of Shri Jhalani and the earning of the share income from the firm.

2.2. The CIT(A) also dismissed the claim by observing that, there was no material to indicate that, Shri Jhalani had been sent abroad to learn the latest techniques in connection with the business of the company and in the absence of any direct nexus between the business of the company and the purpose of incurring of the expenditure the tuition fee was not allowed. The claim for deduction of salary paid was also not allowed on the basis that, no evidence for any service rendered had been planned on record.

3. The assessee had thus come on appeal before us and has placed its reliance on the decision in Hindustan Hosiery Industries vs. ITO (1984) 19 TTJ (Bom) 318: (1983) 5 ITD 349 (Bom) where a partner was sent abroad for advanced studies on Management, the claim for deduction of fees was held as allowable deduction from the business income. The plea of the assessee was that, the present day business has become too competitive and unless the management is keeps itself abreast of the latest of the management techniques, it would be difficult to maintain and improve its business. The MBA degree provides the background for management in several fields, like finance, marketing, production, employee and employer relations and other related matters. These methods are essential in profitably running of a business, because, they provide an insight into the needs of the business, the manner of finding solutions and effectively implementing them in the business activities. Therefore, the factors that would need examination are not merely that, the employee is a relation of the director, but, the subsequent development such as, Shri Jhalani's return to the company after completing his MBA course, joining the company on a merge salary of Rs. 1,000 per month, and the company venturing into other areas after his return, all need to be kept in view, without which, proper conclusion could not be arrived at. He pleaded that, the mere factor of relationship should not be criteria for disallowance but, it should be based on other factors, such as the employee not returning back despite his understanding with the company that, he shall return and work for the company, which might possibly indicate that, the expenditure was not incurred keeping the interest of the business in mind. He pleaded that, as the facts indicate in its case, the employee returning back, working for the company for Rs. 1,000 and the company widening its activities, clearly indicate that, the company had incurred the expenditure solely with its business interest in mind and, therefore, the claim was fully allowable. As regards, the salary paid, he pleaded that the price escalation has been exorbitant, that, the salary of Rs. 2,500 per month is very small for a post-graduate in commerce.

4. The plea of the Deptl. Rep. was that, when an item of expenditure is considered for allowance against the income of a year, the facts of that year alone need to be considered and consideration of events that have occurred subsequent to the year would not be proper.

5. I have given very carefully consideration to the rival; submissions. The facts as they are, when considered in isolation from subsequent developments, does no doubt gives raise to suspicion as to whether the attempt by the company is in claiming the deduction of the directors personal expenses as business expenditure, because, it is duty of the parents to provide education to their children. The plea of the assessee when considered in the light that, Shri Jhalani may not have sent his son Shri Anoop Jhalani for further studies, had it not been that, he may have to take over the business at a later date, manage and widen its sphere of activity, appears to be a reasonable argument.

5.1 In the decision of Tribunal Bombay Bench 'C' in Hindustan Hosiery Industries vs. First ITO, the firm consisted of five partners. One of the partners went to USA for training in Business Management and an amount of Rs. 60,678 was spent on his studies. The Assessing Officer and the CIT(A) disallowed the claim on the ground that, the business of the assessee being manufacture of hosiery goods and their sale, the expenses on education had nothing to do with the business carried on by the firm. The Tribunal had allowed the claim of the assessee. In the succeeding assessment year another sum of Rs. 36,786 spent on education on the partner was not allowed by the CIT(A) because, according to him, the Tribunal in the earlier year had wrongly applied the ruling of the Gujarat High Court in CIT vs. Natwarlal Tribhovandas (1973) 87 ITR 703 (Guj) which did not apply to the facts of the assessee and that the Tribunal had not considered the decision of Supreme Court in Travancore Titanium Product Ltd. vs. CIT (1966) 60 ITR 227 (SC). He also observed that, direct nexus between the education expense and the business had not been established. The Tribunal observed that, it had considered the decision of Travancore Titanium Products case and that, the Gujarat High Court ruling would resolve the controversy. The Tribunal also observed that, :training in modern Business Management is definitely beneficial to the carrying on of any business. The mere fact that the said training is beneficial to any business does not obliterate the fact that, it is beneficial to the particular business carried on by the assessee firm. The mere fact that, it has incidentally benefited the partner himself is immaterial vide the decision of the Supreme Court in the case of Sasson J. David & Co. P. Ltd. vs. CIT (1979) 118 ITR 26 (SC)". They also observed that, the decision of the Gujarat High Court was concerned with the issue of whether the income of the partner earned by him while he was studying abroad, could be his earned income or not. The Tribunal considered the fact that, in the subsequent years, the sale had increased and the finding was, that, the acquisition of knowledge by the partner inured to the firm because, the partner continued to be the firm's partner. Accordingly, the contentions of the assessee were accepted.

5.2. From the above decision of the Tribunal, it is clear that the expense if incurred on an employee, a relative of a director, and if the employee rejoins the company after completion of his education on Business Management, which knowledge has been held to be beneficial to any business, the same should be allowed to be deducted from the business income. In the instant case, the understanding as per the resolution of the Board of Directors dt. 26th July, 1982, Shri Jhalani was allowed to proceed for further education on Business Management and the company had accepted to bear the one way air passage and the first year's tuition fees, on the clear understanding that, he shall return and provide benefit of his knowledge in the business of the company. The undisputed fact is that, Shri Jhalani after obtaining his Masters in Business Management had returned to India, joined the company on a merger salary of Rs.1,000 per month, which goes to establish that Shri Jhalani had fulfilled his part of the contract of rejoining the company and allowing the benefit of his knowledge to the company. The subsequent happening or feature is already embedded in this year's facts, because, of the resolution which provides for such condition and, therefore, this year's facts alone cannot be considered for coming to a conclusion as to whether, the company had incurred the expenditure based on its commercial expediency or whether it represented the personal expenditure of the Director. I am, therefore, of the opinion that, the decision of the Tribunal in Hindustan Hosiery Industries squarely applies to the facts of the present case before me and respectfully following the said decision I hold that, the tuition fee paid of Rs. 81,438 is allowable as a business expenditure.

5.3. On the issue of salary paid of Rs. 2,500 the plea of the assessee had been that, Shri Jhalani was working in the company in connection with its business interest as a partner of the firm M/s Jhalani Holding & Co. and that, the company having earned a commission of Rs. 8,10,631, claim for deduction of Rs. 5,000 was reasonable. The claim was disallowed because that, the services rendered have not been specifically spelt out and established. Shri Jhalani's induction into the company for two months prior to his proceeding abroad for his MBA to my mind indicates when viewed in the light of his post-graduation in commerce, that, the company had only intended for using his commercial knowledge in its business and thus had employed him. I am, therefore, of the opinion that, the salary is allowable as business expenditure and hold accordingly.

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