In the absence of written agreement to join back the firm, the expenditure incurred on higher education abroad of grandson of firm’s partners working

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Pushpsons International Vs ACIT (ITAT Delhi) – The agreement to serve has not been placed on record and its terms have not been paraphrased in anysubmission. Further, it has not been shown that the understanding, if any, came to an end only when he became a partner and not when he left India. Factually, no service has been rendered to the assessee in the period of absence for education. Therefore, it is held that the disallowance of Rs. 36,000/- was rightly made.

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘F’ DELHI
BEFORE SHRI I.P.BANSAL AND SHRI K.G. BANSAL

I.T.A. No. 417(Del)/2007 Assessment year: 2003-04

Pushpsons International Vs. Assistant Commissioner of Income-tax

ORDERPER K.G. BANSAL : AM

The assessee has taken two effective grounds, bearing nos. 2 and 4, that on the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in confirming the disallowance of –(i) Rs. 12,30,799/- out of staff training, welfare and traveling expenses; and (ii) Rs. 36,000/- out of salary. Ground no. 3 is in aid of ground no. 2, in which the finding of the ld. CIT(Appeals) that the business of the assessee does not require high quality technical inputs, advance technology or globally competitive skills has been assailed.

2. The background facts are that the assessee-firm is engaged in the business of export of durries, curtains, rugs, made-ups etc. The firm consists of five partners- (i) Dr. M.R. Jain & Sons, HUF; (ii) Shri Pankaj Jain; (iii) Shri Dinesh Jain; (iv) Smt. Sangeeta Jain and (v) Smt. Niti Jain with 30%, 17.50%, 17.50%, 17.50% and 17.50% shares respectively. The return was filed on 2.12.2003 declaring total income of Rs. 43,13,920/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 (the Act) on 25.03.2004. Subsequently, statutory notices were issued under sections 143(2) and 142(1) with a view to scrutinize the return. It was inter-alia found that the assessee-firm incurred expenses in respect of education of Shri Gaurav Shyam for pursuing Master’s Degree in Strategic Marketing from De Mont FortUniversity, U.K., amounting to Rs. 12,30,799/-. Shri Gaurav Shyam is the grandson of Dr. M.R. Jain, who is a partner on behalf of Dr. M.R. Jain & Sons, HUF.The details of the expenses so incurred are as under:-

Date	Amount (Rs.)	Debit Head	Particulars
11/09/2002	6,89,7 15	Staff training & welfare	D.D.isued to De Mont Fort University for admission of Mr. Gaurav Shyam in M.Sc. Strategic Marketing
13/09/2002	1,82,500	-do-	D.D. for accommodation
13/09/2002	38,550	-do-	GBP 599 purchased for Mr. Gaurav Shyam
26/09/2002	80,500	-do-	Air ticket for Mr. Gaurav Shyam
08/10/2002	1,305	-do-	Visa charges
15/01/2003	77,800	-do-	GBP 1000-T. cheques purchased for Mr. Gaurav Shyam
15/01/2003	77,695	-do-	GBP 1000-Travelers cheque purchased for Mr. Gaurav Shyam for living expenses in U.K.
21/01/2003	83,034	Foreign traveling	Delhi-London ticket for Mr. Gaurav Shyam for business need.
	12,30,799

2.1 The assessee was required to explain as to how this expenditure can be said to have been incurred wholly and exclusively for the purpose of business. Various submissions were made in this behalf, but the AO held that the expenses were incurred for providing education to the grandson of a partner and these expenses were not incurred for the purpose of business. Therefore, the amount of Rs. 12,30,799/- was added to the total income. This finding has been confirmed by the ld. CIT(Appeals). Therefore, the assessee is in appeal before us.

3. It has been submitted by the ld. counsel for the assessee that Shri

Gaurav Shyam had completed the BBA course in March, 2002. Thereafter, he joined the firm as an apprentice from July, 2002, and he remained with the firm up to March, 2003. He was sent abroad for pursuing Master’s Degree in Strategic Marketing from De Mont Fort University, U.K., for one year. In this period, his expenses were paid by the assessee-firm. He was also paid the stipend while he was pursuing Master’s Degree abroad. On his return, the firm was reconstituted with effect from 01.04.2004 and he became a partner in the firm. No written agreement has been entered into with him before his departure from India or thereafter for pursuing the MBA course or serving the firm. However, the understanding was that he will become a partner in the firm on return after completing studies abroad. This understanding was put into practice when he joined the firm as partner on 01.04.2004. It may be mentioned here that the deed of reconstitution of the firm, by which Shri Gaurav Shyam became the partner, has not been placed on record. It has been further submitted that while pursuing education, he wrote a dissertation on the subject “U.K. Perception of Indian floor covering”.

3.1 It is argued that Shri Gaurav Shyam had been the employee of the assessee-firm, who was sent abroad for gaining useful knowledge relevant to the business of the assessee-firm and such knowledge was used because he joined the firm as partner. Therefore, the expenditure had been incurred wholly and exclusively for the purpose of business, deductible under section 37(1) of the Act in computing the total income. In order to support this contention, reliance has been placed on the decision reported in 114 ITR 256; 159 ITR 673; 226 ITR 220; 1 SOT 830; 7 SOT 755 and 80 ITR 687.

3.2 In reply, the ld. DR referred to various findings of the AO. In particular, our attention has been drawn towards the fact that in the financial year 2004-05, the major source of income of Shri Gaurav Shyam had been salaries from Panipat Weaving & Processing (P) Ltd. and Pushpsons Fibrol Pvt. Ltd., being Rs. 3,99,600/- and Rs. 2,16,300/- respectively, aggregating to Rs. 6,15,900/-. Both these firms are connectedconcerns. Therefore, it was submitted that the primary purpose of education abroad was not to advance the business of the assessee but to educate Shri Gaurav Shyam for earning income by way of salaries. The argument that the expenditure was the personal expenditure, not connected with the business of the assessee, has been supported by relying on the decision reported in 328 ITR 286; 328 ITR 290 and 104 ITD 516. It is further submitted that the business of the assessee has not expanded on Shri Gaurav Shyam becoming the partner in the firm, which also shows that the education was not primarily with a view to obtain benefit for the business. He was not under any obligation to serve the assessee-firm as no such agreement had been drawn prior to his leaving India for U.K.

3.3 In the rejoinder, the ld. counsel distinguished the facts of the case as reported in 104 ITD 516 and submitted that the decision reported in 328 ITR 286 supports the case of the assessee.

4. We have considered the facts of the case and submissions made before us. Before proceeding further, we may note on more fact mentioned in the assessment order. The turnover of the assessee-firm for financial year 200-0 1 to financial year 2004-05 has been mentioned on page no. 4. These details are reproduced below:-

Financial Year	Sales (In lacs)
2000-01	673.93
2001-02	603.83
2002-03	534.94
2003-04	660.69
2004-05	556.72

4.1 We may also summarize the relevant facts in brief. These are that Shri Gaurav Shyam is the grandson of Dr. M.R. Jain, who is a partner in the firm on behalf of his HUF. He, on completion of BBA course in March, 2002, was taken as a Trainee Apprentice in July, 2002, and statedly remained in this position up to March, 2003. He went to U.K. to pursue Master’s Degree in Strategic Marketing in a part of the period. He is stated to have written a dissertation but there is no evidence regarding the same on the record. Admittedly, he was taken as a partner in the firm from 01.04.2004, but the deed of reconstitution of the firm is also not on record. Thus, his share in the firm is not known. No written agreement had been drawn on the basis of which his educational expenses were borne by the assessee. The expenses inter-alia include the payment of admission fee, accommodation charges, air-ticket, visa charges, foreign currency purchased on different dates and traveling charges. The question is-whether, the expenses have been incurred in the course of business?

4.2 In the case of Sakal Papers Pvt. Ltd. Vs. CIT, (1978) 114 ITR 256, the facts are that the assessee-company was a leading publisher of Marathi newspaper. It was a closely held company with only two shareholders. The company incurred expenditure in respect of education of Ms. Leela Parulekar, the daughter of both the directors and share-holders, on her education in USA. She was holding master’s degree in Arts from Poona University with English and French as special subjects. She had been working in the editorial department from September, 1975, starting as an apprentice. A resolution was passed by the company that she should be sent abroad for education in journalism and business administration in a good university in USA, which would be good for progress of the paper. University and course were selected by Ms. Parulekar in consultation with one of the directors. In pursuance of the resolution, she went to USA and attended Graduates’ School of Journalism at Columbia University at New York and secured Master’s Degree in Journalism. She further spent three months for obtaining practical training in printing and lithography. Expenditure of Rs. 29,654/- was incurred by the company in this year, which included the passage money and expenses. Out of this amount, a sum of Rs. 6,000/- was claimed as deduction for the year in question. On return from the U.S, she joined the editorial department, where she has been working with the company. However, no agreement had been drawn between her and the company binding her or committing her to serve the company for a specified period of time. The Tribunal held in favour of the assessee by mentioning inter-alia that she had been serving with the assessee-company, secured degree and training which will be of assistance to the assessee-company and served the assessee­company as a matter of fact after her return to India. In this situation, the factum of relationship with the directors was sufficient to confer assurance that the training will be utilized for the benefit of the assessee­company and in this circumstance the existence of agreement or bond was of no consequence.

4.3 In the case of Hindustan Aluminium Corporation Ltd. Vs. CIT, (1986) 159 ITR 673, the facts are that the assessee sent 28 of its employees to USA for practical training and experience in running the aluminium factory. The agreement with the employees inter- alia provided that after coming back from USA, they shall work with the company at least for a period of five years at the settled remuneration of Rs. 570/- per month. The assessee incurred total expenditure of Rs. 7,16,916/- in the relevant year. This expenditure was spread over a period of five years and the amount of Rs. 1,43,383/- was debited as business expenditure. The Hon’ble Court mentioned that 28 employees were sent to USA for training in pursuance of an agreement with Kaiser of USA. These employees were not the entire work force of the assessee-company. The employees were specially selected for advance training with the purpose of running its factory efficiently and competently. The employees bound themselves to serve the assessee-company for a period of five years on their return from USA. The expenditure, in the circumstances, cannot be said to have obtained a benefit of enduring nature so as to hold it in the nature of capital expenditure. The aim and object wer integrally connected with efficient running of the business. Therefore, it is revenue in nature. The expenditure had been incurred in pre-production and post-production stages and the Tribunal had given a finding that only the expenditure incurred in post-production stage was revenue in nature. The Hon’ble Court held that such distinction did not hold good on the facts of this case. Having considered the facts of the two cases, it can be very well said that they are completely distinguishable. There was no relationship of the employees with any director. 28 employees were sent abroad for training who committed to serve the assessee-company for a long period of five years at a pre-fixed salary. The case of the ld. counsel is that there was a condition of coming back and serving the assessee‑company, which has been fulfilled in this case also. There is no evidence of the commitment. Further, we are of the view that this is not the crux of the decision as the question primarily revolves around the expenditure being capital or revenue in nature. The assessee has not sent any one else abroad except Shri Gaurav Shyam in earlier or subsequentperiods, while 28 employees were sent abroad in that case by the assessee-company. Therefore, the ratio of this case does not advance the case of the assessee.

4.4 In the case of CIT Vs. Kohinoor Paper Products, (1997) 226 ITR 220, one of the questions before Hon’ble Madhya Pradesh High Court was-whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing Rs. 42,974/- spent on education of a partner in USA as business expenditure? The facts of the case are that the firm was constituted on 11.06.1979, consisting of three partners, namely, Shri Gopal Chandra Bharagava, his younger brother, Shri Narendra Bhargava and his son Shri Deepak Bhargava. At the time of constitution of the firm, Shri Deepak Bhargava was a student of B.Sc. After obtaining M.Sc. degree in 1982, he proceeded to USA for higher studies and joined Western Michigan University. The expenses incurred on the education were claimed as foreign tour expenses. The Tribunal gave a finding that the foreign tour to USA for higher studies was exclusively for the purpose of business of the assessee. Therefore, the appeal of the assessee was allowed. The Hon’ble Court mentioned that Shri Bhargava, the partner, after completion of higher education and gaining experience, which was beneficial to the firm, kept himself engaged in its business. The Tribunal has given a finding that subsequent events also establish the intention and purpose of sending him abroad, who was to return with better education and greater experience. The Hon’ble Court held that since it is a finding of fact, which is based on facts on record, no question of law arises. The case of the ld. counsel is that the expenditure was incurred on a partner, who subsequently joined the firm and contributed to its business. Therefore, the facts are in pari-materia However, we find that the facts are distinguishable. Shri Bhargava had worked as partner of the firm for some length of time and also obtained M.Sc. degree in this period. It has been recorded as a matter of fact by the Tribunal that his education and experience was beneficial for the business of the firm. The expenditure is neither capital in nature nor personal in nature. However, in this case, Shri Gaurav Shyam was an apprentice and had worked with the firm for a very short period from July, 2002 to September, 2002. It is yet to be seen whether his education was useful for the business of the assessee-firm for the reason that the finding of the ld. CIT(Appeals) is quite contrary; and the business of the assessee was not such which required the study of strategic-sale globally. The comparative chart of sales given above shows that there was rather decrease in the turnover. Shri Gaurav Shyam became a partner in the firm but the major source of his income was salaries from two connected concerns. Nonetheless, the ratio which comes clearly from the decision is that the material question to be seen is as to whether the expenditure was incurred wholly and exclusively for the purpose of business. While doing so, all circumstances have to be taken into account. The fact that he was grand-son of a partner or that there was no written contract may not become material if the expenditure is found as a matter of fact to have been incurred for the purpose of business.

4.5 The facts in the case of CIT Vs. Dr. M.S. Shroff, (1971) 80 ITR 687 (Del) are that the assessee is an ophthalmic surgeon in New Delhi. He derives income by way of salary and also from his profession. The assessee visited several hospitals in different countries in Europe and Egypt, with a view to keep himself abreast with the latest techniques in ophthalmology. An expenditure of Rs. 10,079/- was incurred on the tour, which included expenditure on tickets and visa also. This amount was claimed as expenditure against the professional income. The Tribunal found as a matter of fact that the assessee had visited foreign countries on his own and that he had not been deputed by his employer, Dr. Shroff’s charity hospital. The main object was to keep himself up-to-date in the techniques of his profession. However, it has been contended that he also drew some benefit incidentally in his capacity as employee. It was held that this was not a relevant circumstance and, therefore, the appeal was decided in favour of the assessee. The Hon’ble Court mentioned that the question as to how far the expenditure incurred by a salaried employee, who proceeds on a study tour abroad and thereby acquires knowledge and experience which not only benefits his employer but also adds to his professional and mental equipment can be apportioned, is one on which opinions may differ. The question at any rate is a mixed question of fact and law and depends upon the facts of each case. In the present case, it does not seem necessary to answer this question because on the facts the claim of the assessee has been allowed by the Tribunal that benefit to self is merely incidental. Therefore, the question was answered in favour of the assessee and against the revenue. Here again, the decision is that the facts of each case have to be looked into for coming to an appropriate conclusion in the matter.

4.6 Since the essential question to be seen is whether the expenditure has been incurred in the course of business and the same has to be decided on the facts of the case, we do not think it necessary to mention in detail the facts of the case reported in 1 SOT 30 and 7 SOT 755.

4.7 We may now discuss the cases relied upon by the ld. DR. The facts in the case of Echjay Forgings Ltd. Vs. ACIT & Another, (2010) 328 ITR 286 (Bom.), are that the assessee-company was engaged in manufacturing various engineering items. During the year under consideration, Shri Dhananjay Doshi, one of the director’s son, was selected and sent abroad for higher studies in the field of industrial engineering on the condition that he would serve the company for a period of at least five years after completion of the study on a reasonable remuneration to be decided by the Board of Directors. An expenditure of Rs. 11,83,697/- was incurred on the education. The finding of the ld. CIT(Appeals) was that there was no evidence that Shri Dhananjay Doshi was recruited as a trainee by open competitive examination or through any regular selection process. It is also not clear as to what he was doing as a trainee as relevant documents had not been furnished. Therefore, the only logical conclusion is that there is no nexus between the expenditure incurred on foreign education abroad and the business of the assessee­company. This finding was confirmed by the Court. The facts were sought to be distinguished by the ld. counsel by mentioning that there was no evidence of appointment as trainee and the capacity of the director’s son was not established.

4.8 In the case of Ocean City Trading (India) Pvt. Ltd., (2010) 328 ITR 290 (Bom.), one of the questions was-whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that expenses incurred by the appellant in relation to the training of the employee abroad was not wholly and exclusively for the purpose of the business of the appellant? The Hon’ble Court mentioned that it did not see any reason to interfere with the decision of the Tribunal having regard to the factual position. It has been noted that the assessee was not able to substantiate that sending Shri Nawal Kumar for training abroad was for the benefit of the business of the assessee. The decision in the case of Echjay Forgings Ltd. (supra) has been placed on record where this court affirmed the decision of the Tribunal for similar reason.

4.9 In the case of Dr. S.N. Naik Vs. ACIT, (2007) 104 ITR 516, the facts are that the assessee-doctor claimed the deduction of fees for the admission of his son in a medical college as business expenditure. The AO held that the expenditure was incurred qua the father and not qua the business-man. The CIT(Appeals) upheld the disallowance in spite of the pleading that the assessee was facing the difficulty in conducting his medical profession because of the charge of medical negligence by Maharashtra Medical Council, resulting into suspension of his license for six months. Therefore, he had to employ outside doctor who remained with the hospital only for few months and left on getting better opportunities. In these circumstances, the son was persuaded to joint MBBS course so that he could join the profession. The Tribunal considered a number of decisions. It was mentioned that contrary to the facts of the case of Sakal Papers Pvt. Ltd., where admitted position was that the education of the directors’ daughter was for improving the business of the assessee, the facts in this case are that the son of the assessee was not doing any work in medical establishment. He was simply a student at that time. Therefore, the expenditure incurred was the personal expenditure of the assessee so as to equip the son with professional qualification. The ld. counsel distinguished the facts by mentioning that Shri Gaurav Shyam was an existing employee, who later on became partner in the firm. The market competition is increasing and his education was expected to benefit the business of the assessee. In such a situation, it is not necessary to show that the sales of the assessee increased after the joining of the son as a partner. Having considered the facts of the case, there is some distinction as in the case of Dr. S.N. Naik, his son was not working with the assessee and he was not working in medical field also.

4.10 As mentioned earlier, each case has to be decided on its own facts. In this case, the grand-son of one of the partners had worked for a short period as apprentice, when he was sent abroad for higher education. No commitment was taken that he will return and work as an employee of the assessee-firm. He was not selected as apprentice on the basis of any open examination or interview. No record of discussion between partners had been placed on record to show that they considered him fit for education. After obtaining education, he became a partner in the firm but the terms and conditions of the deed are not known. He is also stated to have written a dissertation, but its contents are not known. What is striking is that he took up employment with two related companies and got salary of about Rs. 6.00 lakh from these companies. The turnover of the assessee did not increase on joining the firm as partner. These facts show that the primary purpose was to equip Shri Gaurav Shyam with necessary qualification to pursue his career subsequently. Joining the firm as partner is only incidental. The major portion of his income was by way of salaries. The facts of the case do not show that the business of the assessee-firm increased. In fact, there was a reduction in turnover. Although none of the factors when taken individually can lead to any conclusion in the matter, the overall conclusion which emerges clearly is that the foreign education was not undertaken in the course of business of the assessee. The same was obtained for pursuing successful career thereafter. The absence of any prior agreement and bond may also not be conclusive in the matter but they point towards the same. Further, the agreement of partnership is terminable at will and it is not known whether any restrictions were placed on him in the agreement for continuing as partner for any noticeable length of time. It may also be mentioned that the ld. CIT(Appeals)’s finding regarding acquisition of high quality technical inputs etc. in the context of the business of the assessee may not be material. However, as mentioned earlier, the facts lead to a definite conclusion that the expenditure was not incurred in the course of business. Accordingly, it is held that the ld. CIT(Appeals) was right in disallowing the expenditure.

5. The disallowance of stipend of Rs. 36,000/- has been made because Shri Gaurav Shyam did not serve the assessee in the period of his foreign education. Although no lengthy arguments were made in this behalf, it is clear that he was not doing any work of the assessee-firm in this period. His education abroad was not for the purpose of business of the assessee. Therefore, it cannot be said that the expenditure was incurred in the course of business of the assessee. At this juncture, we may also reproduce the dictionary meaning of the word “apprentice” from Webster’s Comprehensive Dictionary of the English language, 2003 edition, which reads as under:-

“1. One who is bound by a legal agreement to serve another for an agreed period of time in order to learn a trade or business.

2. Any learner or beginner”.

5.1 The agreement to serve has not been placed on record and its terms have not been paraphrased in any submission. Further, it has not been shown that the understanding, if any, came to an end only when he became a partner and not when he left India. Factually, no service has been rendered to the assessee in the period of absence for education. Therefore, it is held that the disallowance of Rs. 36,000/- was rightly made.

6. In the result, the appeal is dismissed.

This order was pronounced in the open court on 21st April, 2011.