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M/s Jet Speed Audio Pvt. Ltd., 48, Pravasi Indl. Estate, 2nd Floor, Opp. Aarey Road, Goregaon East, Mumbai Vs. The Assistant Commissioner of Income Tax, Circle-11(1),
December, 18th 2013
                      ,   ``  

                 IN THE INCOME TAX APPELLATE TRIBUNAL
                           "J" BENCH, MUMBAI
                   , .       
                                                 RAJENDRA, AM
            BEFORE SHRI VIJAY PAL RAO, JM & SHRI RAJENDRA,

                     ./I.T.A. No.1706/Mu
                                  1706/Mu m/2009
                              No. 1706/Mum/2009
                   (   / Assessment Year :2005-06)
                     ./I.T.A. No.161/Mum/2011
                              No. 161/Mum/2011
                   (   / Assessment Year :2006-07)
                     ./I.T.A. No.4760/Mum/2010
                              No. 4760/Mum/2010
                   (   / Assessment Year :2007-08)

M/s Jet Speed Audio Pvt.        /               The Assistant Co mmissioner
Ltd., 48, Pravasi Indl.                         of Income Tax, Circle-11(1),
                                Vs.
Estate, 2 n d Floor, Opp. Aarey                 4 t h Floor, Aayaka r Bhavan,
Road, Goregaon East,                            Churchgate,
Mumbai                                          Mumbai-20
     . /   . / PAN/GIR No.                     :AAACJ0260A
       ( /Appellant
                 Appellant)
                   pellant      ..                      (    / Respondent)
                                                               Respondent

     /Assessee by :                          Shri Satish R. Mody
     / Revenue by           :                Shri B. P. K. Panda
     / D a te o f H e ar i n g     :         2nd December 2013
    /D at e O f P ro n o u n c e m e n t :   11th December 2013


                                   / O R D E R

 PER :  , .. / VIJAY PAL RAO, JM

        These three appeals by the assessee are directed against the

 respective orders of the CIT(A) for the assessment years 2005-06 to

 2007-08.


 2.     First common ground raised by the assessee in all these three

 appeals except the amount involved is as under:
                                    2
                                        ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                              Jet Speed Audio Pvt. Ltd.

     "The Commissioner of Income Tax (Appeals) erred in
     upholding the Assessing Officer order of disallowing Education
     Expenses of ` 29,05,488/- on the facts."

3.    Two Directors of the assessee company completed MBA course

abroad. Their expenses have been charged to the profit and loss

account. The assessee claimed that the MBA degree has helped the

Directors in improving the business profile of the assessee and

therefore, the expenditure incurred for acquiring higher professional

degree is an allowable business expenditure. The A.O denied the claim

of the assessee on the ground that these two Directors are sons of the

promoter directors of the assessee company and have been admitted

as directors for the sole purpose of debiting their education expenditure

to the profit and loss account of the company. On appeal, the CIT(A) has

confirmed the disallowance made by the A.O by holding that the

expenses are purely personal and under no circumstances can be

stated to be commercial in nature or business purposes of the assessee

company.


4.    Before us the Ld. A.R of the assessee has submitted that Mr.

Keyur Shah and Mr. Varun Makhija were employee as Directors of the

assessee company in the prior years and not in the year when the

expenditure on education was incurred and claimed of the assessee. He

has further contended that these two Directors had already completed

their basic education prior to employed in the assessee company. The

education of MBA course was not in general but was very specific

course of Marketing & Finance in case of Mr. Keyur Shah and similarly
                                    3
                                        ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                              Jet Speed Audio Pvt. Ltd.

the technical course for Mr. Varun Makhija is also for getting direct

benefit by the assessee company. After acquiring higher education in

the specific field and profession the directors would be able to manage

the affairs of the assessee more competitively and technically better in

the fast changing and stiff competitive scenario in the business of the

assessee company. He has further submitted that there are agreements

between the assessee company and these directors whereby the

directors gave prior undertaking to join back the assessee after

completing the courses and therefore the higher education would

benefit the companies business. He has relied upon the decision of

Hon'ble Jurisdiction High Court in case of Sakal Paper Pvt. Ltd. Vs CIT

114 ITR 256 and submitted that the Hon'ble Jurisdiction High Court has

held that the husband and wife as shareholders and directors of the

company running Marathi Paper incurred expenditure for obtaining

practical training of their daughter who was working in the editorial

department of the company was held to be revenue expenses. He has

also relied upon the following decision:


      CIT Vs Dr. M. S. Shroff 80 ITR 687 (Del)
      M/s J. B. Advani & Company Pvt. Ltd. 92 TTJ 175
      Apurva Patel 7 SOT 755

5.    The Ld. A.R has further pointed out that for the assessment year

2006-07 and 2007-08 the assessee has paid Fringe Benefit Tax (FBT) on

these expenses which have been accepted by the A.O after verification.

Therefore, in view of CBDT Circular No. 8/2005 dated 29.8.2005 the
                                    4
                                        ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                              Jet Speed Audio Pvt. Ltd.

expenditure on education of the employee is an allowable business

expenses. In support of his contention he has relied the decision of this

Tribunal dated 16.9.2011 in case of Hansraj Mathuradas Vs ITO in ITA

No. 2397/M/2010.


6.    On the other hand, the Ld. D.R has relied upon the orders of the

authorities below and submitted that when both the directors are sons

of the promoter-director of the assessee company then it is apparent

that they were inducted in the company with the sole purpose of

claiming the education expenses in the account of the company. He has

further submitted that the expenses incurred on education of the sons

of the promoter-directors are a personal expense cannot be allowed as

business expenses.


7.    We have considered the rival submissions as well as relevant

material on record there is no dispute that these two directors after

completing their basic education were employed in the assessee

company in the earlier year and subsequently they were sent for higher

education of MBA and technical courses to foreign countries. It is not

disputed by the A.O that the assessee took the undertaking/bond from

these two directors for joining back to the assessee company after

completing their respective higher education. At the outset we note

that for the assessment years 2006-07 and 2007-08 the assessee paid

the Fringe Benefit Tax on these education expenses. The Assessing

Officer has categorically dealt with the payment of value and

chargeability of Fringe Benefit Tax as mentioned in the assessment
                                     5
                                         ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                               Jet Speed Audio Pvt. Ltd.

order u/s 115 WE: "After verification, the value of Fringe Benefit

chargeable to tax is accepted at ` 12,91,235/-." Thus, it is clear that the

Fringe Benefit Tax paid by the assessee has been duly examined by the

A.O and then accepted. Once the A.O has accepted the FBT paid by the

assessee then such expenditure cannot be disallowed. The Co-ordinate

Bench of this Tribunal in case of Hansraj Mathuradas Vs ITO (supra) has

considered an identical issue in para 17 as under:


    "17. We have heard the arguments of both the sides and also
    perused the relevant material on record. The learned counsel
    for the assessee has taken us through the CBDT Circular No.
    8/2005 dated 29-08-2005 giving explanatory notes on the
    provisions relating to fringe benefit tax as introduced by the
    Finance Act, 2005 and invited our attention to the relevant
    portion thereof to explain the object behind levying fringe
    benefit tax. As indicated in the said circular, the fringe benefit
    tax has been introduced as a surrogate tax on employer with
    the objects of resolving the problems in taxing some
    perquisites/fringe benefits in the hands of the employees in
    terms of section 17. Further, as explained in para No. 3.2 of
    the Circular, the scope of the term "fringe benefits provided" is
    defined in section 11 5WB (1) to mean any consideration for
    employment provided by way of any privilege, service facility
    or amenity, directly or indirectly, provided by an employer,
    whether by way of reimbursement or otherwise, to his
    employees. Moreover, as clarified in the said circular while
    answering frequently asked question No. 15, fringe benefit is
    deemed to have been provided if the employer has incurred
    expenses for any of the purposes referred to in the relevant
    provisions and there is no requirement to segragate such
    expenses between those incurred for official purposes and
    personal purposes. It was further clarified while answering
    question No. 81 that when expenditure on running and
    maintenance of motor cars is liable to fringe benefit tax, the
    employees will not be liable to income tax on the perquisite
    value of motor car provided by the employer. As rightly
    contended by the learned counsel for the assessee, circular
    No. 8/2005 dated 29-08-2005 issued by the Board explaining
    the provisions relating to fringe benefit tax thus makes it clear
    that fringe benefit tax is levied on the expenses incurred by
    the employer irrespective of whether the same are incurred for
    official or personal purposes. In our opinion, once fringe
                                      6
                                          ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                                Jet Speed Audio Pvt. Ltd.

     benefit tax is levied on such expenses as has been done in the
     present case, it follows that the same are treated as fringe
     benefits provided by the assessee as employer to its
     employees and the same have to be appropriately allowed as
     expenses incurred wholly and exclusively incurred by the
     assessee for the purpose of its business. In that view of the
     matter, we delete the disallowance made by the A.O and
     confirmed by the learned CIT(A) out of conveyance and
     telephone expenses and allow ground no. 4 and 5 of the
     assessee's appeal."

8.    Apart from the payment of Fringe Benefit Tax and acceptance of

the same by the revenue we further note that the expenditure in

question has been incurred by the assessee for the professional higher

education of its employees (directors) for reaping the benefit of the said

higher education and accordingly the said expenditure is an allowable

business expenditure. The Hon'ble Jurisdiction High Court in case of

Sakal Papers Pvt. Ltd. Vs CIT (supra) has held as under:


     "On these facts, it appears to us impossible to accept the
     Tribunal's contention that merely because there was no
     commitment or contract or bond taken from the trainee, the
     expenditure, which was otherwise proper, should be
     disallowed to the company, particularly when as a result of
     that expenditure the trainee has secured both a degree and
     training which will be of assistance to the assessee-company
     and she has in fact served the assessee-company after her
     return to India. The relationship between the directors and the
     trainee is also to be borne in mind. With that relationship the
     question is whether any formal contract or bond is required.
     We are of the opinion, that the factum of relationship itself will
     confer assurance on any scrutinising mind that as far as
     possible the result of the training will be utilised for the benefit
     of the company.
       On the facts as found by the Tribunal, which have been
     indicated and summarized above, is appears to us that the
     reason given by the Tribunal for the disallowance in the facts
     and circumstances of this case and particularly bearing in
     mind the close relationship of the two directors and the trainee
     is clearly unsustainable; and if that be the only reason which
     has weighed with the Tribunal, we must answer the question
                                     7
                                         ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                               Jet Speed Audio Pvt. Ltd.

      referred to us in favour of the assessee since the view we have
      taken is that the reason given by the Tribunal is not a good
      reason."
9.     The above decision of the Hon'ble Jurisdiction High Court is

applicable in the facts of the case in hand. Accordingly, in the facts and

circumstances of the case and in view of the above discussion we

delete the addition made by the A.O on this account and decide this

issue in favour of the assessee. The decision relied upon by the A.O are

clearly distinguishable on the facts and therefore would not help the

case of the revenue.


                        2005-06
For the assessment year 2005-


10.    The assessee has raised another ground as under:


      "The Commissioner of Income Tax(Appeals) erred in upholding
      the Assessing Officer order of ad-hoc disallowance of Vehicle
      Expenses & Depreciation on Vehicle totalling to ` 48,138/- on
      the facts."

11.    We have heard the Ld. A.R as well as Ld. D.R and considered the

relevant material on record. The A.O has disallowed 20% of the Vehicle

Expenses on the ground of personal element in para 4 as under:


      "4. Assessee has debited vehicle expenses of ` 2,21,330/- in
      the Profit & Loss A/c filed. Similarly, assessee has claimed the
      depreciation of ` 19,359/- on account of vehicle owned.
      Considering the personal element involved, 1/5th of the total
      expenses amounting to ` 48,138/- is hereby disallowed and
      added back to the income returned to the assessee."

12.    It is clear from the assessment order that the A.O has not pointed

out any fact or circumstances indicate the personal use of the vehicles

and further no basis has been given for ad-hoc disallowance of 20% on
                                        8
                                            ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                                  Jet Speed Audio Pvt. Ltd.

this    account.   The   CIT(A)   has   also     not    discussed       any     fact    or

circumstances but just confirm the disallowance made by the A.O in

para 3.2 as under:


       "3.2 I have considered the rival submissions and the materials
       on record. Personal element in such expenses cannot be ruled
       out. In my opinion, disallowance @ 20% is quite justifiable.
       This ground also deserves to be rejected."

13.     It is clear from the findings of the authorities below that no

specific averment or incident has been brought on record to indicate

that the vehicle has been used other then the business purposes. Even

otherwise in the case of company if it is found that the vehicle has been

used for personal purpose then it can be considered as perquisites in

the hands of the user employee. Accordingly, in the facts and

circumstances of the case we do not find any justification on ad-hoc

disallowance of 20% on this account. Hence the same is deleted.


                        2006-07
For the assessment year 2006-


14.     The assessee has raised the second ground as under:


       "The Commissioner of Income Tax(Appeals) erred, in the
       circumstances of the case and in law, upholding the Assessing
       Officer order of disallowing the claim of bad debts of ` 33,445/-
       "

15.     The assessee has claimed an amount of ` 33,445/- as a part of

bad debts. This amount have been advanced to an old employee

namely Shri Vijay Jadhav and had not been recovered by the assessee.

The A.O disallowed the said claim at the ground that this amount is not

a bad debts and the assessee is not eligible to claim expenditure of the
                                      9
                                          ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                                Jet Speed Audio Pvt. Ltd.

same as bad debts. On appeal, the CIT(A) confirmed the disallowance

made by the A.O.


16.      Before us the Ld. A.R has submitted that an advance of ` 50,000/-

was given to an employee who subsequently left the service of the

assessee and accordingly a sum of ` 33,445/- remained outstanding.

The Ld. A.R has submitted that since the employee had already left the

service of the assessee it was not possible to recover the assessee

amount therefore the same may be allowed as business loss if not as

bad debts. On the other hand, the Ld. D.R has relied upon the orders of

the authorities below and submitted that the loan given by the assessee

does not qualified as allowable claim of expenditure therefore, same

cannot be allowed even as business loss.


17.      Having considered the rival submissions as well as relevant

material on record we are of the view that the assessee has failed to

establish that the amount paid to the employee was for the purpose of

the business of the assessee. Advancing loan which is not the business

activity of the assessee and further having no nexus with the business

of the assessee cannot be allowed as bad debts or business loss, if the

assessee is not able to recover the same. Accordingly, we do not find

any error or illegality in the orders of the authorities below qua this

issue.


18.      In the result, the appeals of the assessee for the assessment

years 2005-06 and 2007-08 are allowed and assessment year 2006-07

is partly allowed.
                                    10
                                         ITA No.1706/M/2009, 161/M/2011 & 4760/M/2010
                                                               Jet Speed Audio Pvt. Ltd.

Order pronounced in the open Court on this 11th day of December
2013

                     Sd/-                                     Sd/-

                 (     )                              (  )
                                                            
         (RAJENDRA)                              (VIJAY PAL RAO)
       Accountant Member                          Judicial Member

Place: Mumbai : Dated: 11th December 2013
Subodh
Copy forwarded to:
1      Appellant
2      Respondent
3      CIT
4      CIT(A)
5      DR


                                /TRUE COPY/
                                  BY ORDER




                            Dy /AR, ITAT, Mumbai

 
 
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