The Bombay High Court has held that there needs to be a direct nexus between the cost of higher education paid by an assessee and the business activities of the assessee in order for such cost to be claimed as business expenditure under the Income Tax Act, 1961.
A division bench of Justice MS Sanklecha and Justice Sandeep Shinde was hearing an appeal filed by Indian Galvanics Cyrium Foils Ltd, an industrial company that manufactures copper foils.
Case Background
The appellant company incurred an expenditure of Rs.11,76,540 under the head ‘management training and development expenditure’. It was incurred for the higher education and training of one Harsh Kumar who had been sent to the USA for the course in Business Administration. Harsh is the son of one of the directors in the company.
During the assessment, it was explained by the company that the said expenditure was “incurred for the purpose of appellant’s business, so as to ensure better administration in the long run”.
It was the appellant’s case that an agreement was executed by the employee concerned, who then had committed to serve the company for 10 years. It was brought to notice of the Income Tax Officer that after completing education and training, Harsh had been serving the company for three years. It is on this premise that it was claimed that expenditure then incurred on his education and training was incurred wholly and exclusively for the purpose of business. His explanation was rejected by the assessing officer in an order dated February 28, 2000. The company challenged the said order before the Commissioner of Income Tax (Appeals) who allowed the appeal. Then, the Deputy Commissioner of Income Tax challenged the order allowing the appeal filed by the company before the Income Tax Tribunal which was allowed. Thus, the appellant challenged the said order before the high court.
Appellant’s lawyer Pulkit Sharma argued that there was indeed a nexus between the business activities of the company and the expenditure incurred by it. He said that the material placed on record is sufficient to prove this, he also relied on a judgment of the Supreme Court in Sakal Papers Pvt. Ltd. v. CIT, Poona (1977) to substantiate his point.
Appearing on behalf of the Revenue Department, Suresh Kumar submitted that Harsh had gone to the United States to study Business Administration which is general in nature and has no direct relations with the business activities of the company.
Kumar relied on two judgments in support of his submission Shreenath Motors (P) Ltd. v. Commissioner of Income-Tax-V, Mumbai [2014] and Divyakant C. Mehta v. Income-Tax Officer [2014].
The court accepted Suresh Kumar’s submission that the course of Business Administration was general in nature and had no direct nexus with business activities of the company. The court said:
“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 Appellant Assessee has proved nexus between the expenditure and its business activities.”
The court also noted the similar circumstances in the case of Divyakant C. Mehta v. Income-Tax Officer [2014] and finally ruled against the appellants. The court said: “We thus, conclude that amount which is claimed by the Appellants-Assessee as deductible allowance was not incurred wholly and exclusively for the purpose of business of the Appellants-Assessee.”