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Facts
The assessee, engaged in manufacturing and export of leather goods, declared a turnover of Rs.36,04,83,480/- for AY 2018-19. The AO made additions totaling Rs.89,25,743/- on account of disallowances including Performance Bonus, Education Expenses, expenses u/s 14A, and Business Promotion Expenses.
Held
The Tribunal partly allowed the appeal. The disallowance of Business Promotion Expenses was deleted as it was made on an ad-hoc basis without specific discrepancy. The issue of education expenses for the director's son was restored to the AO for verification. Grounds related to assessment proceedings legality were dismissed.
Key Issues
Whether expenses incurred on director's son's education and business promotion expenses were business-related and thus allowable. Whether the assessment proceedings were legally sustainable.
Sections Cited
143(2), 143(3), 144B, 37, 14A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
Before: SHRI KUL BHARAT & SHRI NIKHIL CHOUDHARY
PER KUL BHARAT, VICE PRESIDENT.: This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi dated 13.02.2024, pertaining to the assessment year 2018-19. The assessee has raised the following grounds of appeal: -
1. Because the notice u/s 143(2) dated 23.09.2019 by Assessment Unit, NeAC for scrutiny of ICDS Compliance and Adjustment and not for scrutiny of assessment as a whole, the assessment framed by NeAC, making disallowances other than ICDS Compliance and Adjustment makes the assessment bad in law, the same be quashed.
2. Because the notice u/s 143(2) being issued for limited scrutiny and there being no approval obtained from the competent authority nor there being any order for converting the limited scrutiny to complete scrutiny, the assessment framed is bad in law and be quashed.
Page 2 of 7 3. Because the assessment framed u/s 143(3) without following the requisite procedure as laid down u/s 144B, there being complete violation of the same, the assessment is bad in law, the CIT(A) has erred in upholding the same, the assessment framed be quashed.
Because the authorities below have erred on facts and in law in disallowing a sum of Rs. 48,10,336/u/s 37 incurred on the education of the director’s son holding the Same to have not been incurred for the purposes of business overlooking the facts and circumstances, of need and training of human resources, such expenses being incurred wholly and exclusively for the purposes of business and not being capital or personal in nature, the disallowance made is arbitrary, the same be deleted.
Because the authorities below have erred, in ignoring the explanations, submissions and evidences filed, and have arbitrarily held that the expenditure of Rs. 48,10,336/- incurred over the education of the Director’s son is not for the purpose of business, thereby have erred in making the disallowance, the same be deleted.
Because the authorities below have erred on facts and in law in disallowing of Rs. 5,63,957/- out of business promotion expenses, consisting of a sum of Rs. 2,63,957/- relating to purchase of foreign currency and Rs. 3,00,000/- on adhoc basis without pointing out any item of disallowance holding the same to be personal in nature and not for the purpose of business, the disallowance is without any basis the same be deleted.
Because the authorities below have failed to appreciate that this assessment being of a limited company, and the company being a separate legal entity there is nothing like personal expenses incurred by a company, the expenses incurred are all for the purposes of business, the disallowances made, are all without any basis, unwarranted the same be deleted.
8. Because in any case and all circumstances none of the expenses incurred and debited under the head business expenses are personal in nature, all expenses have been incurred for the purposes of business, consisting of maintaining cordial relationship are to be seen in broader business concepts, there being no reason to disallow the same, the expenses claimed be allowed.”
The facts giving rise to the present appeal are that in this case, the case was selected for complete scrutiny assessment. A notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued and served upon the assessee. The assessee is a company duly registered under the Companies Act, and is engaged in the business of manufacture and export of leather goods during the year under appeal. The assessee during the relevant financial year declared a turnover of Rs.36,04,83,480/. Thereafter, the Assessing Officer after having considered the Page 3 of 7 explanation of the assessee made additions on account of disallowance of Performance Bonus to Directors amounting to Rs.35,27,550/-, disallowance of Education Expenses incurred on the Director’s son amounting to Rs.48,10,336/-, disallowance u/s 14A of the Act of Rs.23,900/- and disallowance out of Business Promotion Expenses of Rs.5,63,957/-. Thus, the total disallowance of Rs.89,25,743/- was made and the total income of the assessee was assessed at Rs.1,81,39,853/- against declared income of Rs.92,14,110/-. Aggrieved against this, the assessee carried the matter in appeal before the Ld. CIT(A), who partly allowed the appeal thereby he deleted the addition of Rs.23,900/- made on account of disallowance of expenses u/s 14A of the Act and performance bonus of Rs.35,27,550/- rest of the other additions namely expenses incurred on the education of son of the director and ad hoc disallowances were sustained. Aggrieved by this, the assessee is in appeal before this Tribunal against the additions sustained by the Ld. CIT(A).
Apropos to the grounds of appeal
, Ld. Counsel for the assessee reiterated the submissions as made before the Ld. CIT(A). He submitted that the lower authorities have not considered the facts in right perspective. He contended that the expenditure incurred on the education of son of Director is concerned such expenditure is allowable, since it is well settled position of law that if such education is necessary for the business of the assessee, the expenditure would partake character of business expenses. He contended that the Ld. CIT(A) failed to appreciate the fact that the son of Director has now joined business of the assessee company and is utilizing his knowledge acquired by him for furtherance of business interest of the assessee company. He submitted that the authorities below Page 4 of 7 have failed to appreciate that the knowledge in computer is utilized in all sphere of business, thus, it is exclusively used for the benefit of the company. The authorities below failed to appreciate that the knowledge of computers with business administration is basic requirement for any field of business. In this regard, Ld. Counsel placed reliance on the judgment of the Hon’ble Madhya Pradesh High Court, rendered in the case of CIT vs Kohinoor Paper Products (1997)
92. Taxman 316 (MP) (Civil Case No. 546 to 548 of 1994, order dated 27.08.1996, Kostub Investments Ltd vs CIT (2014) 45 taxmann.com 123 (Del) (ITA. No. 10/2014 vide order dated 25.02.2014). The reliance also placed on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs UP Asbestos Ltd (2013) 260 CTR (All) 194. He contended that in the series of case laws, it is well settled that taxing authority has no jurisdiction to question the prudence of the businessmen. He further submitted that the business is run by the members of family. He contended that ultimately knowledge so required would be utilized for the business purpose only. Ld. DR opposed these submissions and strongly supported the orders of authorities below. He contended that it is noted by the lower authorities that no such expenditure was incurred in past. The personal expenses expended for the Director of company is given colour of business expenditure. Moreover, there was no evidence before AO suggesting that the higher education would be helpful in the business of the assessee, hence such expenses have been rightly disallowed.
4. In respect of ad hoc disallowance, Ld. Counsel for the assessee contended that as far as the disallowance of Rs.5,63,957/- is concerned the Business Promotion Expenses are allowable expenses, a sum of Rs.2,63,957/- was related to Page 5 of 7 purchase the foreign currency a sum of Rs.3,00,000/- was disallowed on ad hoc basis without pointing out any items of disallowance holding the same to the personal in nature and not for the purpose of business. He submitted that the Assessing Authority cannot make ad hoc disallowance purely on the basis of conjectures and surmises without bringing any relevant material on record warranting for such ad hoc disallowance. He submitted that in the light of various judicial pronouncements such ad hoc disallowance of expenditure deserves to be deleted.
5. On the other hand, the Ld. Departmental Representative supported the orders of the lower authorities and submitted that the authorities have pointed out as to why the explanation offered by the assessee was not acceptable. Thus, the impugned disallowance is justified.
6. We have heard the Ld. Representatives of the parties and perused the material available on record. The AO made disallowance out of Business Promotion Expenses purely on ad hoc basis. The Ld. CIT(A) sustained the same. We find that the finding is based purely on the basis of surmises and is not based upon any specific discrepancy. Therefore, the impugned addition cannot be sustained. The AO ought to have pointed out as to how 10% of total expenses were not incurred for business purposes. We find merit into the contention of the assessee that disallowance is made on ad hoc basis without pointing out specific discrepancy as to how 10% expenditure is not incurred for the business of the assessee company. The AO at least should have given same instances of expenditure that cannot be allowable as the business expenditure. We, therefore, direct the AO to delete this addition.
Page 6 of 7 7. Now coming to the addition made with regard to disallowance of expenses incurred on the studies of Director’s son. The basis of such disallowance is that course of study is not related to the business of the assessee and it would not be helpful in any manner to the business what has been carrying out. Another objection is with regard to the fact that the assessee company has not sent any other employee in past for studying abroad. Therefore, without specific nexus between business activity and the course of study, the expenditure cannot be allowed. It is stated by Ld. Counsel for the assessee appearing on behalf of the assessee that the candidate has joined service of the assessee. However, in terms of bond executed by the candidate the amount for non-working period has been recovered from the candidate. These facts were not available with the lower authorities, therefore, veracity of the same at this stage cannot be been verified. Undisputedly, such expenses are allowable if the assessee proves that the expenditure has been incurred for the growth and benefit of the business of assessee. In the present case, the candidate who happened to be son of one of the Directors had executed a bond for working with the assessee company. It is also stated that post acquisition of degree the candidate worked abroad for two years and the amount related to this period has been recovered from him as per the terms of the bond. It is stated that currently, he is working with the assessee company. In our considered view, the reasoning for making disallowance is misplaced, even if, the company sponsors first time for higher studies if such study is helpful in the business of assessee, the expenditure incurred on such studies would be allowable. However, looking to the fact new information regarding recovery of amount and present employment with the company Page 7 of 7 has come to fore. Therefore, we deem it expedient to restore this issue to the file of AO for verification of its correctness. If, it is found that the company has recovered the part of the amount and the person concerned is working for the company, the AO would allow the claim of the assessee. Hence, the ground nos. 4 & 5 of the assessee’s appeal are allowed for statistical purposes. The ground nos. 6, 7 and 8 are allowed. The assessee has also challenged the legality of assessment proceedings vide ground nos. 1 to 3. However, in the absence of specific submissions as to how these grounds are sustainable. We, therefore, dismiss the same.
In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 29/07/2025.