By TIOL News Service

MUMBAI, JULY 09, 2018: THE ISSUE is - Whether expenses incurred by company on higher education of one of its director's son can be allowed as deduction u/s 37 as business expenditure. And the answer is NO.

Facts of the case:

The assessee company, engaged in the business of manufacturing copper foils, had returned income for the relevant AY. During the assessment proceeding, the AO noted that the assessee had incurred expenses for higher education and training of Mr Harsh Kumar (son of one of the directors, Mr Arun Kumar Dalmia) who was sent to USA for course in "Business Administration". The assessee explained that the said expenses was incurred for the purpose of assessee's business, so as to ensure better administration in long run. It was further found that an agreement was executed by the employee who then had committed to serve assessee for 10 years. The assessee had also submitted that after completing education and training, Mr Harsh Kumar was serving the assessee for three years. Therefore, the assessee claimed that expenditure which was then incurred wholly and exclusively for the purpose of business. However, the assessee's explanation was rejected and disallowed the assessee's claim. On assessee's appeal, relief was granted by the CIT(A). On Revenue's appeal, the ITAT restore the disallowance as made by the AO.

High Court held that,

++ son of one of the directors of the assessee company was sent to USA for completing course in Business Administration which was 'general' in nature and had no direct nexus with the business activities of the assessee. The assessee did not place better particulars on record like, basic qualification of Mr. Harsh Kumar; subjects in which he did his administration course; how such subjects has-had nexus to business activities of assessee and so on. Though a contract was placed on record whereby, Mr. Harsh Kumar had agreed to render his services after completing his education and training, but that itself was not sufficient to hold that the assessee has proved nexus between the expenditure and its business activities;

++ in the case of Divyakant C. Mehta, the assessee had claimed deduction of Rs.22,25,614/- as expenditure incurred for higher education for his daughter. Justification for the said deduction was that she joined his firm of advocates and had given undertaking that on attending higher qualification and degree from university abroad, she would join firm for minimum period of five years and thus, said expenditure was incurred for the business of the assessee and was allowable as deduction. Facts of the case in hand are almost similar, in-as-much as son of one of the directors was sent abroad for acquiring degree in 'Business Administration' and expenditure incurred for higher education was claimed as deduction which was sought to be supported by contract/agreement which was in nature of commitment of Mr. Harsh Kumar that he would serve assessee after acquiring degree in 'Business Administration'. We thus, conclude that amount which is claimed by the assessee as deductible allowance was not incurred wholly and exclusively for the purpose of business of the assessee.

(See 2018-TIOL-1282-HC-MUM-IT)