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Income Tax Appellate Tribunal, C/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
1. This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-4, Chennai dated 26.08.2016 pertaining to assessment year 2012-13.
The assessee has raised the following grounds for adjudication.
The orders of the Asst. Commissioner of Income Tax and the Commissioner of Income tax (Appeals) are erroneous in law, facts and in the circumstances of the case and in all probabilities thereof.
2. Both the Authorities below failed to note that the Appellant firm, after unanimous decision by elderly rtners4 sponsored only `8,50,000/- being 50% of the tuition fees payable to Lancaster University on behalf of Mr.G. Anush, in order to enhance the scope of professional work, handled outside India. — 3. The AD as well as the CIT (Appeals) erred in concluding that the expenses incurred to gain knowledge, is only a capital expenditure and failed to consider the valuable service has been rendered by Mr.G. Anush to the firm, who continued as a partner even after the completion of the programme and provided beneficial inputs and expertise to the firm. 4. The AD overlooked and ignored the fact that the firms export performance was on the increase from the Financial Year 2008 onwards and the firm was benefitted by the valuable services provided by Mr.G. Anush, both before and after undergoing his masters programme. 5. For these and other grounds that may be preferred and admitted at the time of hearing, the Appellant herein prays that the professional expenditure of `8,50,000/- may be allowed as an allowable business expenditure U/s 37 and justice be rendered.
The brief facts of the case are that assessee is a firm of Chartered Accountants, and filed its return of income on 27-09-2012, admitting a total Income of `19,36,530/-. The assessee had claimed the sponsorship amount of `8,50,000/- being the 50% of the tuition fees paid to Lancaster University on behalf of Mr.G.Anush, a partner of the assessee firm for undergoing a program in Strategic Consulting. During the scrutiny proceedings, the AO asked the assessee to show cause as to why the tuition fees paid to Mr.G. Anush should not be disallowed a revenue expenditure of the firm being personal in nature. In response, the assessee firm replied in the letter dated 09.03.15 & 13.3.15 stating that:-
a) Enhance the scope of work handled outside India. b) The firm required to develop capabilities in areas like strategic consulting and network architecture c) As most of the partners were above 50 years, one of their youngest partners Mr.G. Anush would undergo the program and the firm sponsored only 50% of his university fee. d) Mr.G.Anush completed the program in September 2012 and post retirement from the firm in March 2013, still continued as partner giving inputs to the firm.
3. 1 From the above submissions of the assessee , the AO was of the opinion that: i) Doing course of MBA — Business Administraton was to increase the knowledge capacity and to increase the overall ability to handle the issues with specialised knowledge. ii) Knowledge gained was not for using once or twice, but the benefit was enduring in nature. It would help an individual to handle cases with more specialised knowledge in longer duration. ii) In this case of Mr. C. Anush, the expenses incurred to gain the knowledge which has enduring benefit cannot be deducted as revenue expenditure. It is only capital in nature which can be capitalised provided Mr. G. Anush remained as an integral part of the firm in guiding the firm to glory with his newly acquired skills and capabilities in the longer run.
iv) But it is to be noted that as per the assessee firm’s submission dated 09.03.2015, the partner after completing the MBA programme in September 2012, leaves the firm in March 2013 i.e., the end of that financial year itself.
3.2 According to ld. Assessing Officer, Mr. C. Anush continued to be a partner of the firm till the end of the financial year in which he completed the course. After that Mr. G. Anush settled abroad and was doing practice there. This clearly revealed that it was an arrangement to book the personal expenses of the partner against the receipts of the firm to reduce the taxable income. Mr. C. Anush neither remained a partner nor an employee of the firm to guide the firm with his specialised knowledge. Hence, it was considered an afterthought to set off personal expenses against business receipts of the firm.
3.3 Thus, this amount was disallowed by the ld. Assessing Officer following the decision of the Hon’ble Bombay High Court in the case of Divyakant C.Mehta Vs.ITO (2014) 365 ITR 423. At the time of concluding the assessment, it was clear that the benefit extended has not been reciprocated and no service has been rendered by Mr.G.Anush to the firm. Since, personal expenses cannot be allowed uls.37(1) of the Act , therefore, the same was disallowed and added back to the total income of the assessee. Aggrieved by this order of the AO, the assessee carried the appeal before the Ld.CIT(A).
3.4 On appeal, the Ld.CIT(A) observed that from the perusal of the assessment order, it is noticed that the AO has rightly observed that pursuing the course of MBA would definitely increase the knowledge capacity of Mr G Anush and his capacity to handle the issues. It is also correct to hold that acquiring higher and specialised education has an enduring benefit. Hence, even if the expenditure was treated as an allowable expenditure, the same could be granted under the head of capital expenditure and not as revenue expenditure.
However, the partner Mr G.Anush left the assessee firm in March 2013 before the end of that relevant financial year itself. Thereafter, he settled abroad and started his own professional practice there.
Hence, Mr. G. Anush neither remained a partner nor an employee of the firm to guide the firm with his specialised knowledge. According to Ld.CIT(A), the AO has rightly relied on the ratio of the judgement in the case of Divyakant C. Mehta vs ITO(2014) 365 ITR 423 (Bombay) to substantiate its findings that the expenditure was personal in nature which could not be allowed as revenue expenditure. The facts involved in that referred case are quite similar to that of the present case. In this referred case, assessee was a firm of advocates. The daughter of main advocate joined him and immediately was sent for education abroad. The assessee was not able to bring on record anything and particularly the scheme so as to provide higher education abroad to the employees or associates. The Commissioner (Appeals) had observed that in the firm of the appellant-assessee, there were at least 14 associate advocates and none were given an opportunity to go abroad for higher education. Some of them had worked with him for 15 years In the referred case within d period of 2 to 3 months after the daughter became an Advocate and joined the firm as associate, she went abroad. The Authorities found that not only she was allowed to continue and stay abroad, but permitted to join any firm after completing the higher education. Thus, it was held by the Honourable Court that this was not the decision taken in the interest of the activities and profession of the firm of Advocates but for furthering the career prospects of the child/daughter. Further, Ld.CIT(A) observed that in the present case of the assessee also, it is noticed that there was no scheme framed to provide higher education abroad to the employees or associates of the firm. No other partner or employee of the firm was given this opportunity.
Likewise, in the present case as well, the partner and Mr Anush was allowed to leave the firm immediately after the end of the relevant financial year and was allowed to settle abroad to pursue his own profession there. Therefore, as rightly pointed out in the above referred case, this was not the decision taken in the interest of the activities and profession of the assessee but for furthering the future career prospects of the son of the main partner of the assessee firm.
3.5 The Ld.CIT(A) came to a conclusion that in the instant case, the firm did not derive any benefit neither during the relevant assessment year nor thereafter once Mr G Anush had left the firm to settle abroad. There was no policy matter framed by the appellant in the field of higher education abroad to the partners or the employees of the firm. Hence, it has, rightly been held by the AO that this was not the decision taken in the interest of the activities and profession of the assessee firm of Chartered Accountants but was for furthering of career prospects of Mr G. Anush, who was son of the main partner of the assessee firm. Accordingly, the Ld.CIT(A) sustained the disallowance of `8, 50,000/- incurred towards the higher education of Mr. G. Anush. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
I have heard both the parties and perused the material on record. The main contention of ld.A.R is that Mr G. Anush was completed Chartered Accountant article-ship with the assessee’s firm, and at the time of going abroad for education, he was a partner and he completed the education in September, 2012 and joinedthe firm as a partner upto March, 2013. Being so, the amount has been spent on the education of the partner to be allowed in the assessment year under consideration. Mr G. Anush completed his MBA degree in foreign in September, 2012 and retired from the firm on March, 2013.
Hence, after the completion of the MBA degree, he was in the firm only 6 months, thereafter he settled in abroad and doing practice there only. It is also submitted that Mr G. Anush’s father was senior partner of the firm and all the other partners unanimously agreed to bear the expenditure by the firm. If the contention of the ld.A.R is accepted, in every business, all the expenditure incurred in bringing up children of the partners, who may be admitted as a partner before sending for education on abroad or later on being given a role in the business as a partner or a director could be claimed as business expenditure incurred on such person. The expenditure permissible to be allowed is an expenditure i.e. wholly and exclusively laid down for the purpose of business. In the present case, though at the time of sending Mr G. Anush for education at abroad,was a partner, there was no agreement with him to continue as a partner after completion of education. As seen from the facts of the case, after completion of education i.e within six months of completion of education, he left out the firm as a partner and settled in abroad. It is not the case of assessee that the assessee had a scheme of sending people abroad for training with a stipulation that after receiving the benefit of education, they should continue as a partner in the firm and that money expended on such education were in fact, money, which were expended for the purpose of obtaining the benefit of their expert service after they acquired proficiency in the field in which they had sent for training. In the present case, it is evident that the partner, instead of incurring expenses for his personal account, which he should have, had, merely chosen to claim the expenditure from the firm where he is a partner for a short time. Such expenditure does not become business expenditure merely because Mr G. Anush was in a position to claim the expenditure in the assessee firm. Further, I rely on the judgement of jurisdictional High Court in the case of M.
Subramaniam Bros., reported in [2001] 250 ITR 769 (Mad) wherein the facts involved in that case, is quite similar to that of the present case in hand. In the case, the jurisdictional High Court held that”-
“The assessee was a partnership firm consisting of father and two sons and a daughter. The father sent his younger son abroad for higher education when he was 21. The son had been admitted to the benefits of partnership when he was a minor and had not taken part in the business activity. Only after his return from abroad did he take part in the business activities of the firm. For the assessment years 1978-79 and 1979-80 , the firm claimed the amount spent on educating abroad the younger son of the partner as business expenditure. The Income-tax Officer and the Tribunal was right in holding that the assessee’s claim was disallowed expenditure of Rs. 31,019 incurred in the assessment year 1978-79 and Rs. 20,764 in the assessment year 1979-80, respectively on the ground that the expenditure was of personal nature and not business expenditure.” In view of this, the expenditure incurred on education of Mr G. Anush cannot be considered as a business expenditure of the assessee and it is only a personal expenditure of Mr G. Anush and it cannot be allowed while computing the income of assessee. All the grounds raised by the assessee are dismissed.