SOUJANYA COLOR PRIVATE LIMITED,MUMBAI vs. DCIT CIRCLE-3, MUMBAI

DCIT Circle-3 Soujanya Color Pvt. Ltd. बिधम/ Room No. 2, B ‘Wing, 6th C-35/36, TTC Industrial floor, Ashar IT Park, Area, MIDC Pawane, Vs. Road, No. L6 Z, Wagle Navi Mumbai-400 705 Estate , Thane-400 604 स्थायीलेखासं./जीआइआरसं./PAN No. AAMCS0859G (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Ms. Hiral D. Sejpal, AR प्रत्यथीकीओरसे/Respondentby : Shri V. Vinod Kumar, DR सुनवाईकीतारीख/ : 13.01.2020 Date of Hearing घोषणाकीतारीख / : 10.02.2020 Date of Pronouncement आदेश / O R D E R PER S. RIFAUR RAHMAN (ACCOUNTANT MEMBER): The present appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals)-2, Pune, in short ‘Ld. CIT(A)’ dated 15.02.18 for AY 2014-15.

6. Aggrieved by the above order of AO, assessee preferred appeal before Ld. CIT(A) and filed before him the following submission which are reproduced below:-

"The Appellant company is engaged in the business of manufacturing of colorants both architectural as well as industrial. It is also involved in trading of goods and provision of services which are ancillary to its business activities. The appellant filed its Return of lncome for the year under consideration on November 28, 2014 declaring a total income of Rs. 3,36,78,620/-.

Thereafter the case was selected for scrutiny under CASS. Notices u/s 143(2)1142(1) were served upon the appellant company. In response of the said notices, the authorized representative of the appellant company attended and furnished the details as called from time to time.

An assessment was done u/s 143(3,) of the Income Tax Act, 7967 ('the Act') determining the total income at Rs. 3,59, 72,460. The Dy. Commissioner of Income Tax, Circle — 3, Thane (theAO1) disallowed the training expenses which were incurred by the Appellant company for the director, namely, Mr. Jashan Bhumkar’s University fee for graduation from Berkeley University of California.

As Regards Ground No. 1:

The Appellant company has incurred training charges amounting to Rs. 49,39,185/- in the year under consideration of which Rs. 22,33,843/- have been spent for the education fees of Mr. Jashan Bhumkar, the director of the appellant company Mr. Jashan Bhumkar is a director of the appellant company since April 15, 2010. He was pursuing graduation in the field of advanced chemical technology and was specializing in the field which is directly relevant to the current business of the appellant company.

In the AY 2014-15, the appellant company entered into an 'Education Sponsorship Agreement' with Mr. Jashan Bhumkar and agreed to pay the University fee for the final year of graduation and in return Mr. Jashan Bhumkar agreed to join the appellant company for a minimum period of 3 years after completing his graduation from the Berkeley University of California. A board resolution was passed approving the agreement on May 30, 2013. Mr. Jashan Bhumkar, after completing his graduation in 2014, pursued mastered in the same field and on its completion, he started working with the appellant company from September 21, 2015. The effect of his expertise knowledge can be seen in terms of the increase in profits and turnover of the appellant company which shot up from Rs. 74 crore to Rs. 96 crore i.e. an increase by 30%. The product portfolio of the company has expanded by the addition of a product i.e. color composite. The company has also expanded its market to Latin America and these have been taken care of solely by Mr. Jashan Bhumkar on the basis of expertise gained.

As of today, Mr. Jashan Bhumkar is still working on a yearly remuneration and the benefits of his expertise are being reaped by the appellant company.

The appellant company sends its talented employees for training so that they can gain expertise knowledge which in turn is beneficial for the company's prospects and brings economic benefits. In addition to this, the appellant company also conducts training programmes/sessions for the employees in the premises of the company itself. The detailed summary of training expenses incurred by the appellant company over a period of time are as follows.

Sr. No. A.Y. Amount 1 2013-14 17,94,659 2 2014-15 49,39,184 3 2015-16 80,250 4 2016-17 66,070 Further, assessment for the FY 2012-13 was carried out, wherein training expenses were incurred for the director of the company and the same was allowed by the assessing officer. In the year under consideration, training expenses are incurred on the director and hence, the same should be allowed keeping in view the principle of consistency.

Further, considering the financial position of the family of Mr. Jashan Bhumkar and their returns filed, their annual withdrawal for the AY 2014-15 is- approximately Rs. 2 crore. The education fees ofRs. 22,33,843/- of Jashan Bhumkar could have been easily spent by his family, but since the knowledge gained by Jashan Bhumkar was in the interest of the appellant company, his education fees were sponsored by the company keeping in mind the long-term prospects. The company follows a blanket policy in this regard.

As regards Ground No. 2:

The appellant company, during the assessment proceedings, had verified the invoices, Board Resolution and the 'Education Sponsorship Agreement' with the AO, but the same was not taken on record by the AO.

2. The Appellant prays that the AO be directed to allow the claim of training expenses amounting to Rs. 22,33,843 as claimed by the Appellant Company.

Ground No. 2 The Appellant craves leave to add to, alter any/ or amend the foregoing grounds of appeal.

10. Before us, Ld. AR brought to our notice the findings of Ld. CIT(A)/AO and also brought to our notice at page no. 1 of the paper book in which the company has approved the expenditure by way of resolution which is filed in the paper book. She further brought to our notice copy of education sponsorship arrangement which is placed at page no. 2 and she brought to our notice Clause 1.1, 1.2, 4.3 and 4.4 and submitted that executive director has incurred all the expenditure/ fees of graduation and only for the 3rd year of graduation, assessee company has agreed to sponsor only college fees with a condition that Shri Jashan Bhumkar will work with company for a period of 3 years and also at the time of choosing the major subject, Shri Jashan Bhumkar has selected advance study in chemicals, since the line of the business of the assessee also in chemical field. She further submitted that Shri Jashan Bhumkar has joined the company after graduation and still serving as director in the company, holding an important position. She further submitted that Ld. CIT(A) has relied upon various case laws, which is not relevant to the facts of the present case and she relied on the case law as mentioned below:-

11. She submitted that the Hon’ble High Courts has distinguished the case law relied by Ld. CIT(A) and as per the facts of the decision of Hon’ble Madras High Court in the case of Aswathanarayana & Eswara vrs. DCIT (supra), one of the partner went for higher studies and after completion of the higher education, the partner has joined the company.

12. Ld. AR further submitted that the decision of Hon’ble Madras High Court in the case of M. Subramaniam Bros. Vrs. CIT in 250 ITR 769, there was no covenant by the partner serving the firm and further distinguished the case of CIT vrs. R.K.K.R. Steels Pvt. Ltd. in 258 ITR 306, wherein there was no agreement between the company and son of the director who was sent to abroad and also there was no requirement to join the company after completing his education. She submitted that in the given case of the assessee, assessee has entered into an agreement and also there is a condition that son of the director will work for a minimum period of 3 years in the company. She further submitted that Ld. CIT(A) has observed that assessee has not given any opportunity for further studies to any other employees. She further submitted that assessee has given opportunity to other senior officers particularly in this assessment year itself and senior officer was also sent abroad for further studies. Therefore, she prayed that addition made by the AO be deleted.

2.The assessee is a professional firm of Consulting Engineers & Architects. For the assessment year 2001- 02, the appellant filed a return of income admitting loss of Rs.6,65,428/-. The assessment was completed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) determining the total assessed loss at Rs.4,20,588/-. The Assessing Officer disallowed a sum of Rs.2,65,588/- being foreign education and training expenses of partner Shri H.E.Sriprakash Shastry as being not related to the business of the firm and in doing so, followed the decision of this Court in the case of M.Subramaniam Bros. vs. Commissioner of Income Tax reported in (2001) 250 ITR 0769 and the decision in Commissioner of Income Tax vs. R.K.K.R Steels reported in (2002) 258 ITR 0306.

3.The assessee contended that Mr.H.E.Sriprakash Shastry is the son of Shri.Eswara, one of the partners of the firm, who had completed his B.E.Civil Engineering in the year 2000 and became a partner of the firm in April 2000 and he was sent to the University of New South Wales, Sydney, Australia during February 2001 for specializing in construction management and upon completion of the higher education training, the said partner is continuing with the firm and specialized knowledge and training acquired by him in the field of Construction of Management is of immense benefit to the firm in its professional activities.

10.At the first blush, the contention advanced by the learned Standing Counsel for the Revenue appears to be impressive. However, we find that on a closer scrutiny into the material papers, what is sought to be challenged before this Court is the perversity in the findings of the CIT(A) as well as the Tribunal by ignoring material facts, which have been placed before the Tribunal as well as before the CIT(A). Therefore, when the grounds canvassed by the assessee by placing materials before the Assessing Officer or for that matter before the CIT(A) were not taken into consideration, then it goes to the root of the matter thereby, the Court would be empowered to test the correctness of the impugned orders as to whether the order suffered from non-application of mind or failure to look into the material information placed before the authorities, which would amount to an error of law. Therefore, after hearing the learned counsel for the parties on the factual aspects, we find that this appeal is entertainable and a substantial question of law arises for consideration.

11.As pointed out earlier, the Assessing Officer as well as the CIT(A) as well as the Tribunal did not go into the factual aspects of the matter, though placed before them by the assessee. Two decisions of the Honble Division Bench of this Court in R.K.K.R Steels (supra) and M.Subramaniam Bros. (supra) were relied on to support the disallowance. It has to be seen as to whether these two decisions can apply to the facts and circumstances of the case.

12.Insofar as M.Subramaniam Bros. (supra) is concerned, the son of the assessee, who went abroad, was initially admitted as a partner of the firm even when he was a minor and had a share of the benefits of the partnership, he attained majority in the year 1974 and did not take active part in the business of the firm, but continued his B.Com., studies and then completed M.Com. After completing his studies in India, he went abroad to do M.B.A. and he returned to India in the year 1979. Only after his return, he appears to have taken some part in the business activities of the firm. Taking note of the facts and circumstances of the case, the Court held that the expenditure incurred by the assessee-firm on higher education abroad of one of its partners, who was the son of the main partner, was not allowable as deduction as this cannot be regarded as a deputation made by the firm in connection with the business notwithstanding a covenant by the said partner to serve the firm for a period of five years.

13.In the case of R.K.K.R Steels (supra), the facts were that the assessee was engaged in re-rolling and claimed expenditure for meeting the cost of travel to USA and the expenses connected with the education of the son of the Director of the company, who had acquired an M.B.A. Degree. There was no agreement between the company and son before he was sent to abroad. There was no requirement that he should join the company after completing his education. In the said facts and circumstances of the case, the Court held that the expenditure, which a father incurs out of his natural love and affection for his children in meeting the cost of their education, cannot become a business expenditure merely because he is also the owner or a director of a business in which the son of the daughter subsequently takes part.

14.In the instant case, we find that substantial factual material was placed before the Assessing Officer as well as before the CIT(A) and the Tribunal. To that extent, the learned counsel for the appellant has filed the copy of the written submissions filed before the CIT(A). From the facts placed, it is seen that the assessees son has completed his B.E. degree in April 2000 and joined as a partner of the firm in the same month. All the partners of the firm, including Mr.H.E.Sriprakash Shastry, who are all qualified engineers, were having plans to take up work with multinationals, who were looking at India for setting up industries. Hence, the partners considered it a professional necessity to send Mr.H.E.Sriprakash Shastry to Australia to specialize in the field of construction management at the University of New South Wales. This specialization was directly connected with profession carried on by the assessee and he was sent to University of New South Wales in February 2001. The assessee firm stated that foreign higher education and training of one of their partners will have an advantage in obtaining professional assignments from industrial projects promoted with foreign collaboration.

15.Materials were placed before the authorities below that after the partner completed his studies and returned back to India several multinational contracts were acquired by the firm as well as much professional fee was earned by the firm. These facts and figures were placed before the Tribunal and the authorities as well. Unfortunately, the Assessing Officer did not deal with any of the factual position placed by the assessee firm, but was merely guided by the fact that it is the son of one of the partners, who was sent for higher education abroad and there was no agreement between the firm and the partner that he should work for the firm after completion of the course. The assessing authority lost sight of the undisputed factual position that the partner had returned back to the firm and continued to work for the firm, even while the assessment proceedings were being dealt with. Therefore, there is genuinity and bonafide in the claim of the assessee.

16.Admittedly, the material placed by the assessee before the Tribunal shows that there were substantial pecuniary advantage earned on the partner acquiring a foreign degree thereby leading to contracts with multinationals some of whom have been named such as Nokia and Leighton (India) Private Limited, who appointed them as architects for the projects near Sriperumbudur. On this factual issue, it would be useful to refer to the decision in the case of Sakal Papers Pvt.Ltd. vs. Commissioner of Income Tax reported in (1978) 114 ITR 0256, wherein the educational expenditure of the daughter of its Directors were held to be deductible under Section 37 of the Act. Learned Standing Counsel for the Revenue pointed out that in the said case prior to the daughter being selected and sent for education aboard, for nearly 5 years she has worked as an apprentice in the firm.

17.In our considered view, the son of the partner had already been inducted as a partner of the firm before he was sent abroad, in the sense that prior to the son being sent to Australia for higher education, he had already been inducted as a partner and there is material to show that on his return, there has been value addition to the business of the firm and he continued with the firm as its partner.

18.The learned counsel for the assessee referred to the decision in the case of Commissioner of Income Tax vs. Kohinoor Paper Products reported in (1997) 226 ITR 0220 (M.P.).

19.In the said case, the Court after referring to Section 37(1) of the Act held that the expenditure incurred in the training was held to be allowable deduction, as in the said case one Shri Deepak Bhargava was sent to U.S.A. for higher education, but it was obviously for business purposes of the assessee firm and he stayed abroad though for a long period, it is a fact that after completion of his studies, the aforesaid person kept himself engaged in the business of the firm and the experience gained by him proved beneficial to the firm.

20.The aforementioned two decisions, Sakal Papers Pvt.Ltd. (supra) and Kohinoor Paper Products (supra), are clear answers to the contentions advanced by the Revenue.

21.The learned Standing Counsel for the Revenue contended that in the decision in the case of Commissioner of Income Tax and Another vs. RAS Information Technologies (P) Ltd., reported in (2011) 200 taxman 305 (Kar), the material on record disclosed that the son of the Managing Director entered into an agreement with the assessee company, under which he agreed to work for the company on completion of his course abroad and even while pursuing his post-graduation course in manufacturing and engineering abroad for which financial assistance was provided, he kept the company updated about the latest trends and developments in the field and was also sending key inputs in the form of articles, research papers etc., to enable the company to keep itself updated of the technical know-how and knowledge.

22.As pointed out by us earlier, substantial facts were placed before the three authorities, who concurrently ignored the same, as there is no considerable or discussion on the same. In fact, the Tribunal did not even attempt to examine the said issue, in spite of specific grounds being raised by the assessee before the Tribunal that abundant material was placed before the Assessing Officer explaining the necessity of foreign education and training for professional firm and its usefulness for the firm after the partner completed specialized education and training and continued to serve the firm as a partner. Furthermore, the assessee specifically stated that the Assessing Officer and the CIT(A) did not choose to discuss any of them (materials placed), for the reasons best known to them. We are satisfied that there was substantial facts placed before the authorities, which were completely ignored.

23.As pointed out by the Hon'ble High Court of Delhi in Kostub Investment Ltd. vs. Deputy Commissioner of Income Tax [(2014) 365 ITR 0436 (Delhi)], there might be a tendency in business concerns to claim deductions under Section 37, and foist personal expenditure, but such a tendency itself cannot result in an unspoken bias against claims for funding higher education abroad of the employees of the concern.

24.We have examined the facts placed before the lower authorities and we find that the assessee is a partnership firm consisting of two brothers, two sons of one brother. All the four partners are duly qualified Engineers (B.E.) and the firm is carrying on Engineering Consultancy Profession for leading Indian Corporate Clients. One of the partner's son, Mr.H.E.Sriprakash Shastri, joined the firm in April 2000 after completing his B.E., degree. He had taken active part in the conduct of the business of the firm from the date of his induction as partner. Even while doing his B.E. Degree course, he is stated to have been attending the office of the firm and getting acquainted with reinforced concrete design, planning estimates and construction management. After graduation, he was made a working partner of the firm and he has worked on several projects, which have been mentioned by the assessee. In February 2001, he was sent to Australia for higher education. The duration of the course and training is for a period of two semesters and the course underwent was directly related to the profession carried on by the firm and this accrued in favour of the firm, as could be seen from the facts placed before the CIT(A), where the professional fee received by the firm had substantially increased.

25.On return, after completion of the post graduate degree, the partner continued to work for the firm and materials were placed to show that several important contracts have been secured by the firm, which they attribute to the educational qualification and expertise acquired by the partner of the firm abroad. There was no material place by the Revenue to demonstrate that any part or whole of the stand taken by the assessee was either false or untrue. Viewed from this angle, this Court is fully satisfied that this is not a case where there is a misuse of the provision of Section 37 of the Act to foist a personal expenditure as a business expenditure. Therefore, we are of the considered view that the expenditure was allowable and the authorities concurrently erred in not taking into consideration the factual position placed, in spite of specific grounds raised before the Tribunal, which would render the decision perverse.

26.The learned Standing Counsel for the Revenue pointed out that no ground has been raised by the assessee stating that the finding rendered by the Assessing Officer, CIT(A) and the Tribunal are perverse.

27.Perusal of the grounds of appeal filed before the CIT(A) shows that the assessee has specifically raised the point regarding non-consideration of the materials placed before the assessing authority. Yet the CIT(A) did not make an endeavour to examine the stand taken by the assessee, resulted in non-consideration of the materials placed. This undoubtedly would be perversity writ large on the face of the orders passed by the Assessing Officer and the CIT(A). Therefore, in our considered view, the assessee cannot be non-suited merely because, he has not used the expression perverse in the grounds of appeals before the CIT(A) as well as before the Tribunal. There is no dispute raised by the Revenue with regard to the factual position that the concerned partner went abroad for completion of the higher studies/education and on his return continued with the firm. Non-consideration of the factual issues, which are germane and which ought to have been considered, leads to perversity. Thus, the Tribunal committed serious error of law thereby vitiating the entire proceedings more particularly, the aspects which goes to the root of the matter.

28.Thus, for the above reasons, we are of the considered view that the authorities concurrently committed serious error of law and failed to address the issues which ought to have been addressed, ignored materials which ought to have been considered and applied the decisions which are wholly distinguishable on facts.