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 Deepak Sales & Properties Pvt. Ltd vs. ACIT (ITAT Mumbai) (Special Bench)
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March, 08th 2014


                                          Reserved on: 24.01.2014
                                         Pronounced on: 25.02.2014

+                        ITA 10/2014

       M/S. KOSTUB INVESTMENT LTD.            ..... Appellant
                     Through:   Ms. Prem Lata Bansal, Sr.
                     Advocate with Sh. Ram Avtar Bansal and
                     Sh. Naman Nayak, Advocates.


       COMMISSIONER OF INCOME TAX          ..... Respondent
                   Through: Sh. Sanjeev Sabharwal, Sr.
                   Standing Counsel with Sh. Ruchir Bhatia, Jr.
                   Standing Counsel.



1.     The present appeal is directed against an order of the Income
Tax Appellate Tribunal ("ITAT") dated 09.01.2012, and involves
decisions on the following question of law framed at the time of

ITA 10/2014                                                    Page 1
       "Did the Tribunal fall into error of law in holding that
       the appellant's claim that the amount has been spent
       during the Assessment Year 2006-07, for the higher
       education of Sh. Dushyant Poddar, a son of its Director,
       was not liable as "business expenditure" under Section
       37 of the Income Tax Act?"

2.     For the year under consideration, the appellant company
(hereinafter referred to as assessee) filed its return declaring loss at
`2,08,72,440/- under the normal provisions and book profit at
`1,35,42,270/- under Section 115JB of the Income Tax Act, 1961
("the Act"), on 24.11.2006. In the Profit and Loss Account annexed to
the return of income, assessee had claimed a sum of `23,16,942/- as
expenses incurred under the head "Education & Training Expenses".
These expenses had been incurred by the assessee on higher education
of Shri Dushyant Poddar, an employee of the company, who happens
to be the son of the Directors Shri Lalit Poddar and Smt Saroj Poddar,
for undertaking an MBA Course in the U.K.
3.     During the assessment proceeding, the Assessing Officer
("AO") required the assessee to justify its claim with respect to the
said expenses. The assessee produced the extract from the minutes of
the meeting of the Board of Directors dated 10.02.2005 in which
decision was taken to send Dushyant Poddar for further study in U.K.
and also the Employment Bond entered into with him. The assessee
explained to the AO that Dushyant Poddar was a Graduate having
completed his B.Com (H) from Delhi University and working with it
(i.e. the assessee) for a salary of `10,000/- p.m. Since he was a
brilliant student and the company was in need of Manager (Marketing)

ITA 10/2014                                                       Page 2
who could study the mood of the investment market and the prospects
taking into consideration the economy of India and other advanced
countries and an individual who could also take decisions with respect
to investment in shares and securities, the Board of Directors in the
meeting held on 10.02.2005 took a conscious decision to send
Dushyant Poddar for pursuing the course of MBA from U.K. and to
incur the expenditure up to the extent of `30 lakhs on his study and
4.     The assessee also stated in the resolution that on coming back to
India after completion of the studies, Dushyant Poddar will serve the
assessee company at least for 5 years on a remuneration as mutually
agreed with the Board of Directors subject to minimum of `10,000/-
and maximum of `25,000/- p.m. The assessee relied on a resolution of
the Board of Directors to say that in the event of breach of bond,
suitable action for recovery of the amount would be taken against
Dushyant Poddar. He also furnished the bond, as required. Eventually,
Dushyant Poddar was sent to U.K. for further study. The assessee
incurred an expenditure of `23,16,942/- during the year under
5.     The AO in his order refused to accept the assessee's contentions
and rejected the argument that the sum of `23,16,942/- could be
claimed as a deduction under Section 37 of the Act. Aggrieved by this
disallowance, the assessee carried the matter in appeal. The CIT
(Appeals) upheld the disallowance in the appellate proceedings. The
CIT examined the bond furnished by Dushyant Poddar and observed
that it was on plain paper and the other query ­ as to what was the

ITA 10/2014                                                       Page 3
employee's response to the University's query with respect to funding
for education ­ remained unanswered. The CIT (Appeals) also was
influenced by the fact that the bond was executed on 01.04.2005 after
Dushyant Poddar had been selected for completing his MBA from the
U.K. University. In view of these reasons, the assessee's appeal was
rejected. The further appeal to the ITAT was dismissed by the
impugned order. In the impugned order, the ITAT relied upon the
reasoning of the previous decision of this Court in Natco Exports Pvt.
Ltd. v. CIT, 2012 (345) ITR 188, particularly the observations that
while claiming such deductions, a distinction has to be made between
personal expenditure and that which is incurred for the purpose of
business. The ITAT's view ­ that in the absence of any policy in the
company to fund the higher education ­ the applicant's aspirations can
be believed, except in the case of benefit accruing to Dushyant
Poddar, the son of a Director. In these circumstances, the disallowance
was upheld.
6.     In support of the appeal, the assessee argues that the
requirement spelt out in Natco Exports (supra) has to be seen
contextually. In that case, the course opted for by the employee ­
daughter of a Director ­ had no relation with the assessee's business.
She, unlike Dushyant Poddar, had not taken-up employment with the
assessee company and had chosen to apply for higher educational
studies directly from the University. It was in the context of such facts
that the decision in Natco Exports (supra) was rendered. Learned
counsel relied upon a judgment of the Bombay High Court in Sakal
Papers Private Limited v. Commissioner of Income Tax, 1978 (114)

ITA 10/2014                                                        Page 4
ITR 256 for the proposition that even in the absence of commitment or
contract or bond, an expenditure which is otherwise proper cannot be
disallowed to the company, especially when it can result in the trainee
securing a degree that would be of assistance to the assessee.
Likewise, the expenditure incurred for pursuit for higher studies by a
partner which can yield beneficial results to the company was held to
be business expenditure under Section 37 in Commissioner of Income
Tax v. Kohinoor Paper Products, 1997 (226) ITR 220 (MP). Learned
counsel also relied upon the decision of the Karnataka High Court in
CIT v. Ras Information Technologies (Pvt) Ltd., 2011 (12) Taxman
158 (Kar).
7.     Learned counsel for the revenue relied upon Natco Exports
(supra) and submitted that the onus to show that the expenditure
would accrue to the advantage of the assessee's business has to be
discharged first and that while doing so, expenditure which is
otherwise personal cannot be generally allowed to be deducted. It was
submitted that in Natco Exports (supra), the decision of the Bombay
High Court in Sakal (supra) was noticed and the Court further held
that Sakal (supra) stood distinguished by Mustang Mouldings P. Ltd.
v. ITO, 2008 (306) ITR 361. It was submitted that given these
decisions and the fact which emerged from a cumulative reading of
the AO and the CIT (Appeals), the impugned order cannot be termed
as erroneous and does not call for interference.
8.     This Court has considered the materials on record. There can be
no doubt that the burden of showing that expenditure would be wholly
and exclusively for the purpose of business under Section 37(1) is

ITA 10/2014                                                       Page 5
upon the assessee and that personal expenditure cannot be claimed as
business expenditure. The question is whether these twin requirements
are said to have been satisfied in the circumstances of this case. The
first is what are the materials on record? The assessee furnished its
resolution authorizing disbursement of the expenses to fund Dushyant
Poddar's MBA. It secured a bond from him, by which he undertook to
work for five years after return within a salary band and he had in fact
worked after graduating from the University for about a year before
starting his MBA course. In Natco Exports (supra), the student had
applied directly when she was pursuing her graduation. There was a
seamless transition as it were between the chosen subject of her
undergraduate course and that which she chose to pursue abroad. In
the present case, the facts are different. Dushyant Poddar was a
commerce graduate. The assessee's business is in investments and
securities. He wished to pursue an MBA after serving for an year with
the company and committed himself to work for a further five years
after finishing his MBA. There is nothing on record to suggest that
such a transaction is not honest. Furthermore, the observation in Natco
Exports (supra) with respect to a policy appears to have been made in
the given context of the facts. The Court was considerably swayed by
the fact that the Director's daughter pursued higher studies in respect
of a course completely unconnected with the business of the assessee.
Such is not the case here. Dushyant Poddar not only worked but ­ as
stated earlier ­ his chosen subject of study would aid and assist the
company and is aimed at adding value to its business.

ITA 10/2014                                                       Page 6
9.     Whilst there may be some grain of truth that there might be a
tendency in business concerns to claim deductions under Section 37,
and foist personal expenditure, such a tendency itself cannot result in
an unspoken bias against claims for funding higher education abroad
of the employees of the concern. As to whether the assessee would
have similarly assisted another employee unrelated to its management
is not a question which this Court has to consider. But that it has
chosen to fund the higher education of one of its Director's sons in a
field intimately connected with its business is a crucial factor that the
Court cannot ignore. It would be unwise for the Court to require all
assessees and business concerns to frame a policy with respect to how
educational funding of its employees generally and a class thereof, i.e.
children of its management or Directors would be done. Nor would it
be wise to universalize or rationalize that in the absence of such a
policy, funding of employees of one class ­ unrelated to the
management ­ would qualify for deduction under Section 37(1). We
do not see any such intent in the statute which prescribes that only
expenditure strictly for business can be considered for deduction.
Necessarily, the decision to deduct is to be case-dependent.
10.    In view of the above discussion, having regard to the
circumstances of the case, this Court is of the opinion that the
expenditure claimed by the assessee to fund the higher education of its
employee to the tune of `23,16,942/- had an intimate and direct
connection with its business, i.e. dealing in security and investments.
It was, therefore, appropriately deductible under Section 37(1).

ITA 10/2014                                                        Page 7
11.    The AO is thus directed to grant the deduction claimed. The
impugned order and that of the lower authorities are hereby set aside.
The appeal is allowed in the above terms. No costs.

                                              S. RAVINDRA BHAT

                                               RAJIV SHAKDHER
FEBRUARY 25, 2014

ITA 10/2014                                                      Page 8
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