M/S. SHREE LAKHI METALS AND STEELS PVT. LTD., ,KOLKATA vs. PRINCIPAL CIT, CENTRAL - 3, KOLKATA , KOLKATA

It transpires at the outset that the PCIT’s section 263 show cause notice dated 21/02/2018 had sought to revise the regular assessment in issue framed in the assessee’s case on three issues i.e., director’s overseas study expense of Rs.15,41,632/- is not allowable as business expenditure under section 37 of the Act, commission paid of Rs.15,87,200/- allowed without enquiry and the Assessing Officer’s failure is not verifying source of funds amounting to Rs.40,03,079/- and Rs.83,70,818/- used in purchasing residential flat and land; respectively.

Mr. Surana, informs us during the course of hearing that the assessee wishes to press for only the first issue of allowability of its director’s overseas study expense since the Assessing Officer’s consequential assessment framed on 30/12/2018 has not disallowed the latter two claims (supra). He files copy of the said assessment order on Assessment Year: 2013-14 M/s. Shree Lakhi Metals and Steels Pvt. Ltd record. We therefore proceed to deal with the sole surviving issue of allowability of assessee’s director foreign study expense.

This assessee is a company trading in iron and steel. It filed its return declaring income of Rs.7,61,120/-. The assessing officer completed as regular assessment on 17/03/2016 disallowing various sets of expenditure of travelling, car running and maintenance and advertisement involving varying sums. Case file suggests that the PCIT thereafter issued section 263 revision show cause notice on the above three issues. His main ground requiring our instant adjudication is that the assessee had incurred foreign study expenditure of its director Mr. Kaushal Chandgothia amounting to Rs.15,41,362/- which had wrongly been accepted as allowable business expenditure under section 37 of the Act. He termed the Assessing Officer’s regular assessment as erroneous causing prejudice to the interest of the Revenue therefore in other words. This taxpayer filed its written submissions dated 28/02/2018 contesting the PCIT’s revision proposal. The same stands declined in the revision order under challenge as follows:- “4. I have considered the submission made on behalf of the assessee and the facts on record. It is observed that the assessee is engaged in trading of iron & steel. The assessee in reply to show cause notice submitted that proper enquiry was conducted by A.O wherein the AO has specifically called for the details of Director's study expenses incurred by the assessee which were duly replied for by the assessee wherein details of study expenses along with Board Resolution dated 18-05-2012 approving such expenses, along with supporting bills issued by Sheffield Hallam University, UK and service agreement dated 31-03-2009 were submitted before the AO in the course or assessment proceedings u/s143(3) of the Act. It was claimed by the assessee that A.O has duly verified all the study expenses and allowed the same after making necessary enquires during the course of assessment proceedings u/s 143(3) of the Act. It was also claimed that assessee has incurred these expenses during the A. Y. 2013-14 for study of Director of assessee company Mr. Kaushal Chandgothia at Sheffield Hallam University, UK and completing MBA course. It was claimed that said expenses were business expenses allowable u/s 37(1) of the Act as the said expenses were incurred for objects of the assessee company wholly and exclusively for the purposes of business of the assessee and hence the same should be allowed as business expenses. It was also submitted that the assessment order U/S 143(3) was passed by the AO after due application of mind, thus the same cannot be called as erroneous or prejudicial to the interest of revenue and hence the same could not be interfered by learned Pr. CIT by invoking revisionary powers u/s. 263 of the Act. On the strength of the abovementioned Board Resolution and invoices issued by Sheffield Hallam University, UK and service agreement dated 31-03-2009, it is claimed by the assessee that the said expenses incurred on study of said newly appointed Director namely Mr. Kaushal Chandgothia at Sheffield Hallam University, UK are business expenses or the assessee company which are wholly and exclusively incurred for business of the assessee company satisfying the mandate of Section 37(1) of the Act. No appointment letter issued by assessee company in favour of said Mr. Kaushal Chandgothia is filed. No document is placed on record to reflect what are the roles, responsibilities and job profile of the said Director, Mr. Kaushal Chandgothia. The period of appointment of said Mr. Kaushal Chandgothia is also not on record and whether it will extend beyond his period of study at Sheffield Hallam University. UK is also not on record. It is also not on record as to the commitment/bond executed by said Mr. Kaushal Chandgothia, Director to serve the assessee company exclusively post his education for certain period of time so that the assessee company Assessment Year: 2013-14 M/s. Shree Lakhi Metals and Steels Pvt. Ltd can recoup its expenses on his education and reap tile benefits of his education for company's business post completion of his education with Sheffield Hallam University, UK for certain number of years. Even business plans to develop the assessee company and role which Mr. Kaushal Chandgothia, Director after completion of his education in UK can play in developing the assessee company's business were submitted. No Vision statements/ projections of the future plans of the assessee company's business were placed. Even what happened post completion of education of said Mr. Kaushal Chandgothia in UK was not on record as to whether he came back to India and joined the assessee company to play a larger role to enhance business of the assessee company was not put on record by the assessee On perusal of the audited financial statements, it could not be found that any remuneration was paid to the said Director, Mr. Kaushal Chandgothia during the year under consideration as no salary is found debited in the audited P&L account even Directors fee paid for attending board meetings also did not find mention in the Profit and Loss Account. It is also not on record as to what reimbursements/damages which the assessee will be entitled to recover from said Mr. Kaushal Chandgothia in case he breaches his continuation to serve the assessee company post completion of his education with Sheffield Hallam University, UK. Even course content of the MBA course being studied by said Mr. Kaushal Chandgothia with Sheffield Hallam University, UK and its correlation with the assessee's business was not brought on record by the assessee before the AO. The said expenses of Rs. 15,41,632/- were reflected by the assessee under the head 'Director Study expenses' in the audited financial statements as also before the AO it was claimed that these expenses are towards study of the said Director, but these expenses are pertaining to the formal education of Mr. Kaushal Chandgothia, Director which will lead to the award of MBA degree from UK in favour of Mr. Kaushal Chandgothia on the successful completion of education programme. The assessee has used the nomenclature of these head of expenses as 'Director Study expenses' ill the books of accounts and audited financial statements which are the education expenses incurred by the assessee company which will lead to award of formal MBA degree in favour of Mr. Kaushal Chandgothia by Sheffield Hallam University, UK. The dictionary meaning of the word viz. Education or study is defined as the system of teaching people, usually at a school or college. Thus, as could be seen there is a vast difference in the meaning of education and training, while education is more concerned with formal education at school or college leading to award of degree etc in favour of pupil which permanently enhances the intellectual trait of a person, while training is for improving skills related to a job. In this case, the expenses were incurred for formal education leading to formal degree being MBA awarded in favour of Mr. Kaushal Chandgothia. The above expenses incurred by the assessee which definitely required greater scrutiny by the AO before allowing the same as business expenses of the assessee and to see that mandate of Section 37(1) of the Act is satisfied or not. Since, relevant and tangible material was not placed before the AO by the assessee during the course of assessment proceedings u/s 143(3) of the Act, the opinion formed by the AO could not have been proper in the absence of relevant material on record as the AO could not have made proper verifications. Thus, in the absence of relevant and vital information as detailed above, the AO could not have made proper verifications which ought to have been made to have come to the conclusion that these are business expenses allowable u/s 37(1) being incurred wholly and exclusively for the purposes of business of the assessee, which has certainly rendered the assessment order as erroneous as well as prejudicial to the interest of Revenue and thus amenable to interference by Pr. CIT by invocation of revisionary powers u/s 263 as the said expenses stood allowed as business expense despite being absence of relevant and tangible material on record before the AO. The enquiry conducted by the A.O was clearly vitiated due to absence of such crucial and vital information on record. In the absence of such crucial & vital information on record and based on material which was not on record, the AO could not have formed an opinion and have come to the conclusion that these are business expenses incurred wholly and exclusively for the purposes of business satisfying the mandate of Section 37(1) of the Act. making the assessment order being erroneous and prejudicial to the interest of Revenue liable to revisionary powers u/s 263 of the Act by Pr. ClT.”

We have given our thoughtful consideration to rival contentions against and in favour of the PCIT’s action assuming section 263 revision jurisdiction for disallowing

Assessment Year: 2013-14 M/s. Shree Lakhi Metals and Steels Pvt. Ltd the assessee’s director’s study expenditure claimed as not incurred wholly and exclusively for the purpose of its business. There is hardly any dispute about the settled legal proposition in the hon’ble apex court’s landmark decision Malabar Industrial Co. Ltd. vs. Commissioner of Income-tax [2000] 243 ITR 83 that section 263 revision exercise has to simultaneously satisfy twin tests of the assessment being erroneous as well as causing prejudice to the interest of the Revenue. Their lordships make it clear that each and every loss of the revenue as a consequence to the order of an assessing authority cannot be treated as prejudicial to the interests of the revenue if the said authority adopts one of the possible views or where two view are possible and the Assessing Officer takes one of the two views that which the Commissioner of Income Tax does not agree. We keep in mind the other settled legal propositions to deal with the rival pleadings.

It is therefore clear that the PCIT’s assumption of section 263 revision jurisdiction in facts of the instant case seeking to disallow the assessee’s director’s foreign study expenditure is not sustainable going by the above legal position. We hold that the PCIT has erred in exercising his revision jurisdiction seeking to disallow the impugned claim on merits after holding that the assessment order accepting the assessee’s explanation amounted to an erroneous assessment causing prejudice to the interest of the Revenue. This order under challenge is reversed accordingly.

This assessee’s appeal is allowed partly in above terms. Kolkata, the 17th day of May, 2019. Sd/- Sd/- [J. Sudhakar Reddy] [S.S. Godara] Accountant Member Judicial Member Dated : 17.05.2019 {SC SPS}