KERALA KAUMUDI PVT. LTD. vs. THE COMMISSIONER OF INCOME TAX,

Whether the Tribunal was correct in having noticed the fact of no corresponding entry of credit in the subsidiary company, to disallow the claim, especially when the assesse was following the mercantile system of accounting and the liability accrued on the resolution of the Board of the assessee Company?

On facts it has to be noticed that the assessee is a publishing Company engaged inter alia in the publication of a popular vernacular newspaper. The assessee also had a subsidiary Company by name Kaumudi Cyber Studio (P) Ltd., in which one Deepu Ravi was the Managing Director. The said Deepu Ravi was also the son of one of the Directors of the assessee Company. The said person was send to USA for higher studies and after completion of the same, on his return, the assessee company had appointed him as a Director. 3.Pursuant to his appointment as a Director, noticing the fact that there was a resolution of the subsidiary company at the time of his departure for higher studies that he would be deputed to the assessee company, the Board of Directors of the assessee company took a decision to reimburse the amount expended for the foreign studies. It is in such circumstance a claim was made under Section 37 of the Income Tax Act, 1961, which was declined to be allowed by the Assessing Officer which order was reversed by the First Appellate Authority. The Revenue was in appeal before the Tribunal.

Before the Tribunal, the assessee had relied on a judgment of the Madhya Pradesh High Court which however, was found to be distinct on facts. The Tribunal relied on the decision of the Madras High Court as was placed before it by the Revenue. The said decisions are referred to in the questions framed. The learned Counsel appearing for the assessee also relied on yet another decision of the Bombay High Court in Sakal Papers (P) Ltd. v. Commissioner of Income-Tax, Poona[(1978) 114 ITR 256].

Kohinoor Paper Products(supra) was a case in which the firm consisting of three partners, who were closely related, sent one of the partners for higher studies in USA. The said partner who was sent for higher studies was also the son of one other partner. The expenditure incurred for his foreign study was claimed as business expenditure which was disallowed by the Assessing Officer. The Tribunal however, held that the expenses incurred by the assessee company was one for the purpose of business of the assessee. The High Court concurred with the finding of the Tribunal. In Sakal Papers (P) Ltd. again, the expenditure claimed as business expenditure was that incurred in sending the daughter of the Directors of a publishing Company, abroad, for specialised higher studies and to obtain practical training in Printing and Lithography. The daughter was working in the editorial department of the company when she was sent for higher studies. The company being engaged in publishing a leading Marathi newspaper and the person who was deputed for higher studies being employed in the company, as also studies, for which the person was sent abroad, being closely related to the business of the company, Bombay High Court allowed the same as business expenditure. The High Court reversed the Tribunals view that since there was no bond executed by the daughter to serve the Company after return, there could be found no business expenditure. The High Court differed with the finding of the Tribunal and held that given the relationship with the Directors there could be no such denial on the sole premise of absence of a bond.

In R.K.K.R Steels (P) Ltd., Madras High Court was concerned with a similar situation in which the Director of a company sent his son for higher education abroad and claimed expenditure incurred as business expenditure. The son took his MBA degree and then joined the company after completing his education. The learned Counsel for the appellant would submit that what distinguishes the Madras High Court judgment from the facts in the above case is that there was an intention at the time of decision to send the M.D for higher studies, that on return he would be deputed and employed in the assessee company.

The Madras High Court has found that the assessee did not have a contention of a scheme of sending people abroad for training with a stipulation that they would be employed in the company as quid pro quo of the benefit of training imparted to them. The Madras High Court specifically noticed the fact that the Managing Director out of his love and affection had send his son abroad for higher studies which could not be claimed as a business expenditure of the company merely for a reason that he joined the company as a director.

We agree with the Tribunal that the present case is similar and identical to that considered by the Madras High Court. The distinguishing factor in these two cases from the other two are that the person who had been deputed for higher studies was totally unconnected with the assessee Company. In Sakal Papers, the daughter of the Director was employed in the Company and in Kohinoor Paper Products the son of the Director himself was a Director. Here the son of the Director of the assessee company, send for higher studies was a Managing Director in one subsidiary company. Definitely the subsidiary company could have claimed the expenditure as business expenditure, but, not the assessee Company.

The contention raised, based on the resolution passed by the subsidiary company at Annexure B cannot be upheld. Annexure B resolution indicates that the subsidiary company had agreed to lend the person on deputation basis after his study in USA to the assessee company for a period of ten years. The decision taken by the subsidiary company does not bind the holding company. There is also no resolution seen of the holding company, deciding to send the Managing Director of the subsidiary company for higher studies and then take him into the fold of the holding company itself, by reason only of the education he acquired in the foreign country. The further resolution at Annexure C is by the assessee company wherein the Board merely agreed to reimburse the expenses. This again would be only by reason of love and affection the Board Members have, towards the person deputed especially noticing the fact that it is a closely held private limited company wherein all the Directors are siblings or closely related. In such circumstance, we do not think that there is any scope for interference to the Tribunal's order. We hence answer the question raised as 1 & 2 in favour of the revenue and against the assessee. As to question 3, having answered the other question against the assessee this does not arise to be answered. IT Appeal would stand dismissed. No costs. K. Vinod Chandran, Judge Ashok Menon, jma Judge