2. The assessee is a firm dealing in iron and aluminium casting and doing job work. There are three partners in the assessee firm of which one is a male partner while the other two are lady partners. The male partner is Shri Subhang M. Shah while the two female partners are his mother and brother's wife.
3. According to the assessee, Shri S.M. Shah, the male partner, proceeded to U.S.A. for further studies and getting admitted in North Carolina State University, Raleigh, NC for obtaining degree in M.S. in Management. He already had degree of civil engineering from Gujarat University. The assessee pleaded that the course of management at the university included subjects like computer science, economics, operation research, computer programming, automatic and speedy process management, system analysis, industrial climate and environment and water pollution controls, etc. The assessee further pleaded that under the agreement amongst the partners the firm was to bear half the expenses incurred by the said partner in prosecuting the studies abroad subject to maximum of Rs. 2,25,000 and the said partner undertook to serve as partner for four years after completion of studies and in case he failed to do so he would return the amount with interest. According to the assessee the knowledge supposed to be acquired by said partner by studying abroad was to benefit the firm in the long run and for that reason the expenses were allowable under Section 37(1). The assessee claimed deduction of Rs. 60,560 for assessment year 1984-85.
4. The Income-tax Officer held that subjects covered by higher studies had no direct nexus with the business of the assessee and that the connection if any was extremely remote and was imaginary. According to him, Shri S.M. Shah had gone abroad for higher studies for his personal advancement and that fact had no connection with the business of the firm and as such deduction was not allowable. He accordingly, disallowed the claim for deduction.
5. The assessee filed appeal before CIT(Appeals) who after recording the arguments of the assessee disposed of the matter by a short order as follows :- 2. On behalf of the appellant, reliance has been placed on a number of other Tribunal's judgments. In all these judgments, it is clear that in such an eventuality expenses incurred for higher study abroad are to be considered as incidental and incurred in normal course of the conduct of the business. In view of the foregoing, I am inclined to accept the contention of the appellant and delete the whole addition.
6. The submission of the learned Departmental Representative was that the business of the assessee was iron and aluminium casting and the study course which was pursued by Shri S.M. Shah abroad had no direct nexus with said business and as such it could not be said that the expenses had been incurred wholly and exclusively for the purpose of business. According to him, the expenses were personal expenses of Shri S.M. Shah and those expenses were being claimed as expenses of the firm in order to claim deduction in computation of profits and gains of business. He relied on the following observations in Siddho Mal & Sons v. ITO [1980] 122 ITR 839 (Delhi):- Relationship by itself, without more, cannot lead to the inference of excluding the possibility of a payment being wholly and exclusively for the purpose of business. Dealing with relatives in contrast with or in preference to strangers is neither prohibited by law nor can be tabooed. Indeed, it is natural to do so but this does not give a licence to cover up dishonest transaction or impermissible transfers. The Courts and authorities are not to wear blinkers to overlook or condone the passing off of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions.
The learned Departmental Representative also relied on the decision in CIT v. Om Parkash Behl [1981] 132 ITR 342 (Punj. & Har.) and Prince v.MAPP [1971] 79 ITR 671 (Ch. D) 7. The learned counsel for the assessee submitted that by pursuing the studies abroad the partner was to obtain information which would benefit the firm in the course of business in long run and as such expenses were allowable. He submitted that the fact that there was no necessity for the firm to send the partner abroad was irrelevant and relied on the decision of Supreme Court in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261, in which the Supreme Court observed that "wholly and exclusively" did not mean "necessarily". He also relied on the decision of Gujarat High Court in CIT v. Natwarlal Tribhovandas [1973] 87 ITR 703 and a decision of Bombay Bench of the Tribunal reported in Taxes and Planning, a copy of which was filed in the paper book.
8. We have considered the rival submissions and facts on record. The primary condition for allowance of deduction is that the expenses are incurred wholly and exclusively for the purpose of business. The first adverb "wholly" in the phrase " laid out or expended wholly and exclusively", in Section 37(1) refers to the quantum of expenditure, the sum of moneys spent while the second adverb "exclusively" has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e., solely, for promoting the business, the expenditure will not qualify for deduction - see Siddho Mal & Son case (supra) and Meattles Ltd. v. CIT [1968] 68 ITR 79 (Delhi). In the latter case, it was pointed out that, in order to ascertain whether the expenditure has been incurred "wholly and exclusively" for the purposes of assessee's business, one must look to the direct purpose for which the money is laid out or expended and not to the remoter result which may flow from or motivate the expenditure.
9. In the present case, as already stated, the business of the assessee was dealing in iron and aluminium casting and undertaking job work. The business of the assessee had no connection with computer science. In the course of business management which the partner was to pursue at American University the subjects were as submitted before the Income-tax Officer, computer science, economics, operation research, computer programming, automatic and speedy process management, systems, analysis, etc. The course which was to be pursued by the partner in American University had no direct connection with the business of the assessee. In the case of Natwarial Tribhovandas (supra) on which the learned counsel for the assessee has relied, the business of the firm was construction and the partner had gone abroad for obtaining qualification in civil engineering. Thus, the course which the partner was pursuing had direct connection with the business of the firm. Such is not the case here. No High Court decision has been cited on behalf of the assessee which would indicate that even if a partner went abroad to pursue studies in subjects which had no direct connection with the business activity of the firm, deduction of such expenses would be allowable. In Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 the Supreme Court has held that in determining whether the amount expended by the assessee is deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, which is in pari materia with Section 37(1) of the Income-tax Act, 1961, the nature of expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles and that the expenditure must be incidental to the business and must be necessitated or justified by commercial expediency and that it must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as trader. The Supreme Court further emphasized in said decision that to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business i.e., between the expenditure and the character of the assessee as trader. In the present case the expenses on the studies of the partner abroad in subjects which had no direct connection with the business of the assessee cannot be said to be expenses incurred or laid out wholly and exclusively for the purpose of business. If the assessee had gone to obtain training in respect of iron and aluminium casting, the expenses would have been allowable because in that case the expenses would have connection with the business carried on by the assessee. In the present case, the partner has gone abroad to obtain a degree in management science and the subjects pursued were mainly related to computer science.
Consequently, in the present case, it cannot be said that the expenses were wholly and exclusively for the purpose of business.
10. In the decision of the Tribunal which was cited on behalf of the assessee the Tribunal recorded a finding that the expenses were for the purpose of business. Such a finding was a finding of fact recorded on the facts of the case. The facts of each case will have to be scrutinized separately and decision on this question would be required to be arrived at. On the question as to what factual inference should be drawn from a series of facts would depend on peculiar facts of each case and earlier decisions could not be a guide for that purpose.
11. In the present case, we further find that the assessee had submitted before the ITO the details about the activities of the said partner which is at page 14 of the paper book. The details given therein indicate that from June 1984 to the date on which the information was given to the ITO in January 1987 the said partner was working as teaching assistant in Department of Computer Science in America. This activity had absolutely no connection with the business of the assessee. It is thus evident that the dominant object of the said partner in pursuing the studies abroad was to obtain higher educational qualification in a subject which was totally unconnected with the business activity of the assessee firm and pursuing a different career based on the said qualification. Thus, the facts in our case are not totally similar to the facts in the decision of the Tribunal cited by the assessee. The facts in our case when considered in their entirety, an inference would be irresistible that the expenses in question had not been incurred wholly and exclusively for the purpose of business but they had been incurred solely for the personal benefit of the partner who wanted to pursue further studies in subjects unconnected with the business of the assessee. Considering the entire circumstances, we hold that the expenses in question were not allowable as deduction under Section 37(1) of the Act. The learned CIT(A) has not at all applied his mind to the facts of the case and his order cannot be sustained.
12. We may mention here that it was submitted before us that for assessment year 1985-86 the assessee had incurred expenses of Rs. 59,124 and the Income-tax Officer had disallowed the same and the matter was pending in first appeal before the CIT(A) and that for the assessment year 1986-87 the assessee had incurred expenses of Rs. 80,953 and the return of the assessee was accepted by the Department under Section 143(1) of the Act. Mere fact that the return of subsequent year was accepted under Section 143(1) would not mean that the expenses for assessment year 1984-85 were allowable. Allowability of expenses for assessment year 1984-85 has to be determined independently after considering the facts of the case. The return in which income shown is below Rs. 1 lakh is now accepted by the Department under Section 143 (1) as a matter of administrative policy and instructions to that effect have been given to the Income-tax Officers. Acceptance of return under Section 143(1) for subsequent years would therefore, be irrelevant as far as the point in controversy was concerned.
13. For reasons given above, we set aside the order of the CIT(A) and restore the order of the ITO disallowing the expenses in question.