In a major setback to those who spend on the overseas education of their children and claim tax deduction by classifying them as business expenditure, a Mumbai bench of Income-tax Appellate Tribunal (ITAT) held that tax is payable on such expenses even if the education has a bearing on the business of the company.

The ITAT held that such expenditure cannot be construed business expenditure even if the son/daughter join the company after completion of the studies.

There were some judicial precedents in which such expenses were granted as business income on the basis of conclusive evidence that the education of the son/daughter had benefited the company and its business. These judicial precedents were cited before the ITAT in support of the claim for exemption.

In this case, the managing director of a company, Intersil India claimed over Rs 11 lakh as deduction on account of study and training expense. The expenditure was in relation to the management education of the MDs son abroad.

The claim for deduction was also supported by an agreement between the son and the company by which the son was bound to serve the company for a minimum of two years after completion of his study abroad. In support of the claim earlier ITAT orders, in the case of Jhalani Holdings, Hindustan Hosiery Industries and Trikaya Grey Advertising India were brought to the notice of ITAT.

But the ITAT bench observed that such judicial precedents by ITAT were reversed by the High Court and hence not applicable to the present case. The Bombay High Court had rejected the earlier appeals in similar cases on the basis that merely on the ground that the company would benefit from the foreign education of the persons under question; such expenses should not be construed as business expenditure.

In one of the earlier cases, the High Court had decided against allowing such expenditure even in a case of education expenditure incurred by a partner of the company. The ITAT pointed out that in the present case, the education expenditure was on a son of a managing director, who had no formal status in the company.

The ITAT was deciding on an appeal (no 1357 of 2001) filed by the company against the decision of the commissioner (Appeal) who confirmed the disallowance by the assessing officer.