How To Ensure Expenditure On Director’s Relative’s Education Is Deductible
CA Somil Agarwal
There are several judgements on the question of deductibility of expenditure incurred on education of a director’s relative. While some have held the expenditure to be incurred for business purposes, others have held it to be in the nature of personal expenditure. The author has carefully analyzed the judgements and culled out the core principles that need to be borne in mind to ensure that the expenditure is deductible
Section 37(1) of the Income Tax Act, 1961 allows such expenses against the taxable business profits, which inter alia are not personal expenses and are incurred wholly and exclusively for the purpose of business. There are certain types of expenses which on the face of it appear to be personal expense or at least an expense not incurred wholly and exclusively for the purpose of business. Such expenses invite incisive inquiry during the course of assessment proceeding. One such expense is the expense incurred by an assessee carrying on the business, on the higher education of the son(s)/daughter(s) of the directors/partners/proprietor and which is claimed as deduction by that assessee against the taxable business profits. Attempt of the Revenue remains to find holes in the explanation furnished by the assessee during the course of assessment proceeding showing the business nexus of the said expenditure and to disallow it. Once the expenditure so claimed is disallowed in assessment, matter is taken into appeals at various stages with all sorts of uncertainties creeping in. In fact such claim is a sensitive claim from the stand point of the Revenue and if such claim is disallowed, such situation is fraught with severe consequences for the assessee.
if an assessee seeks to claim such expenses as deductible business expenditure, he has to prove on facts by leading evidences that such expense was not personal expense, but was an expense wholly and exclusively incurred for the purpose of business
One thing which needs to be borne in mind is that the issue as to whether an expense is personal or has been incurred wholly and exclusively for the purpose of business is essentially a question of fact. Therefore, if an assessee seeks to claim such expenses as deductible business expenditure, he has to prove on facts by leading evidences that such expense was not personal expense, but was an expense wholly and exclusively incurred for the purpose of business. Before it is discussed as to what facts/evidences can help an assessee in claiming such expenditure as deductible business expenditure, it is expedient to note few judicial decisions rendered by Hon’ble Tribunal & Hon’ble High Courts under different factual matrix.
In has been held by Hon’ble Ahmedabad Bench of Tribunal in the case of ACIT vs. P.C. Hathi (2004) 86 TTJ 306 that where assessee incurred expenses on partner’s education in foreign country and the education was in the field of business management in law in USA, the expenditure was held to be business expenditure. Hon’ble Bench relied upon the case of B.K. Seshu vs ITO (1984) 10 ITD 365 (Hyd.) and Sakal Papers P. Ltd. vs. CIT (1978) 114 ITR 256 (Bom.).
expenditure incurred by the assessee company on foreign education and traveling expenses of the son of the Managing Director of assessee company who had joined the company after coming back from USA, cannot be treated as expenditure of personal nature as the company has been benefited by his higher education and training
It has been held by Mumbai bench of Tribunal in the case of J.B. Advani & Company Ltd. vs. JCIT (2005) 92 TTJ 175 that where daughter of the Director of the assessee-Company who was also an employee of the assessee company and continued to work for the assessee company pursuant to the agreement before leaving India, was sent abroad for higher studies in business administration, expenses on such education was treated as business expenditure.
It has been held by Karnataka High Court in the case of CIT vs. Ras Information Technologies (P) Ltd. (2011) 50 DTR 93 that where son of the managing director was sent for higher studies by the Assessee Company, expense incurred in connection therewith was found allowable when the court found that the study undertaken had nexus with the business and where the son entered into the agreement with the assessee company under which he agreed to work for the company on the completion of his course.
It has been held by Allahabad High Court in the case of CIT vs. U.P. Asbestos Ltd. (2012) 79 DTR 105 that expenditure incurred by the assessee company on foreign education and traveling expenses of the son of the Managing Director of assessee company who had joined the company after coming back from USA, cannot be treated as expenditure of personal nature as the company has been benefited by his higher education and training.
It has been held by Karnataka High Court in Krishna Fabrication vs. JCIT (2012) 343 ITR 126 that expenditure on the education of the children of Managing Director of the assessee company cannot be disallowed merely for the reason that they were children of Managing Director. Hon’ble High Court in this case however remanded the matter for examining the business connection of the expenditure.
Hon’ble M.P. High Court in CIT vs. Naidunia News & Network P Ltd. (2012) 80 DTR 126 confirmed the finding of the Tribunal where the foreign education expense of company’s ex-director’s son was allowed as deducible expense.
A close reading of these decisions would help an assessee to find out under which facts and circumstances, such expenses can be found by the Courts as having been incurred wholly and exclusively for the purpose of business. It would be evident that there cannot be any fixed yard sticks, which can be laid down in this regard. Still, if following aspects are taken care of, it will go a long way in favor of a taxpayer carrying on the business and claiming such expenditure as deductible business expenditure:-
(1) The son/daughter of the director should be major & not be minor.
(2) He/She should preferably be an employee of the assessee before he / she is sent abroad for higher education.
(3) The higher educational course to be undertaken should have intimate connection with the business of the assessee.
(4) There should be an enforceable undertaking by the son/daughter of the director given to the assessee to rejoin the business of the assessee for specified number of years after the completion of the course.
(5) Salary offered after the completion of the course should be competitive having regard to market conditions and the qualifications obtained.
(6) The likely benefit to be reaped by the assessee for which, the son/daughter was being sent abroad for higher education, should find exhaustive mention in the sponsorship letter.
(7) After completion of the course, the son/daughter should join the employment for the undertaken period.
(8) Detailed record should be kept to substantiate the contribution of the son/daughter in the overall performance of the business of the assessee and role of such higher education in that business.
(9) Sponsorship agreement should be comprehensively drafted so as to bring the business interest of the assessee at the forefront.
(10) Expenses on education including boarding and lodging alone may be deductible. Any personal expenditure of the son/daughter would be liable to be disallowed.
(11) Copy of degree / diploma as evidence of completion of higher education may be retained to be furnished at appropriate time.
(12) Board resolution authorizing the company-assessee to send the son/daughter for higher education in the interest of the business should preferably be passed.
There may be other evidences, the list of which cannot be exhaustive and would depend upon the facts and circumstances of the case. Need is to preserve such evidences and place them before the assessing authority during the course of assessment proceeding. In the end, it is reiterated at the cost of repetition that the allowability of such claim is essentially a question of fact.
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