By TIOL News Service

CHENNAI, SEPT 17, 2018: THE issue before the Bench is - Whether expenditure incurred by a partnership firm for imparting foreign education to the son of one of the partners, who had already been inducted as a partner and also continued to work for the firm after his return, is an admissible business expenditure. And the verdict is YES.

Facts of the case

THE assessee is a professional firm of Consulting Engineers & Architects and filed return admitting loss of around Rs.6.65 lakhs. The AO completed the assessment and disallowed a sum of around Rs.2.65 lakhs being foreign education and training expenses of partner Mr H.E.Sriprakash Shastry as being not related to the business of the firm. However, the contention of the assessee was that such person was the son of one Mr 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 was continuing with the firm. Such contentions was rejected by the CIT(A). On further appeal, the Tribunal upheld the decision of the lower authorities.

The High Court held that,

++ 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. 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;

++ 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;

++ 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.

++ 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.

(See 2018-TIOL-1916-HC-MAD-IT)