Both these appeals are assessee's appeals directed against two separate orders of learned Commissioner (Appeals)-I, Mumbai dated 30-7-1992 for assessment year 1989-90 and dated 20-7-1993 for assessment year 1990-91; and since, one issue in both the appeals is common, both these appeals are disposed off by this common order for the sake of convenience.
Ground Nos. 1 and 2 in both the years is regarding not allowing the expenses incurred for the training of Shri Vinay Kumar Mohota under section 37(1) of Income Tax Act, 1961 being Rs. 1,27,526 in assessment year t989-90 and Rs. 81,387 in assessment year 1990-91.
Briefly stated, the facts of the case are that Shri Vinay Kumar Mohota, son of Joint Managing Director of the assessee-company was appointed as an apprentice by the assessee-company from 1-4-1986 at a monthly stipend of Rs. 300 as per the agreement dated 1-8-1986 between the assessee-company and Shri Vinay Kumar Mohota and the assessee company agreed to send Mr. Mohota for training abroad in United States of America at Rhode Island University for a period of five years and, company agreed to bear and pay cost of good lodging, boarding, training fee, if any, washing and other sundry expenses of the apprentice for the term of five years and as per this agreement, the company agreed to pay a maximum of US$ 15,000 per year during this period of five years of apprenticeship. It was also provided in the agreement that Mr.
Mohota will join the assessee-company after his return from abroad for a period of five years and in case, he fails or declines to serve the assessee-company for the said period, he had to reimburse the entire educational and living expenses, air passage and other monies paid to him for the said purpose and also pay to the company Rs. 20,000 as liquidated damages for nonfulfilment of the contract. This agreement is appearing on page Nos. 1 to 4 of the paper book. This agreement with Mr. Mohota was approved by the Board in the meeting held on 22-10-1986 and copy of this Board resolution is appearing on page No. 5 of the paper book. These expenses were claimed by the assessee-company as revenue expenditure; but the same were disallowed by the assessing officer in both the years by holding that these expenses are not related to the business of the assessee-company. On appeal, order of the assessing officer was upheld by learned Commissioner (Appeals) by holding that the expenditure was not laid out wholly and exclusively for the purpose of business and, therefore, not allowable under section 37(1). Now, the assessee is in further appeal before us.
It was contended by learned AR of the assessee that as per agreement between the assessee-company and Mr. Mohota as appearing on page Nos. 1 to 4 of the paper book, Mr. Mohota was sent for higher studies abroad with an understanding that he will come back and join the assessee- company for minimum five years; and it was submitted that in fact also, Mr. Mohota has come back in September 1992, and is serving in assessee-company from November 1992 till date at a paltry salary of Rs. 3, 100 per month during November 1992 to April 1993; Rs. 4,500 per month during May, 1993 to December, 1996 and Rs. 7,000 per month from January, 1997 till date and in support af this contention, the affidavit of Mr. R.S, Kothari, Chief Executive of the assessee-company was submitted and kept on record. It was also submitted that after joining of Mr. Mohota, the turnover and cash profit of the assessee-company has increased from Rs. 42.93 crores and Rs. 1.26 crores respectively in the year 1993 to Rs. 90.42 crores and Rs. 6.40 crores respectively in the year 1998; and in support of this contention, our attention was drawn to page No. 4 of the affidavit dated 7-5-2003. Reliance was placed on the following judicial pronouncements :Sakal Papers (P.) Ltd. v. CIT It was also submitted that as per para No. 3 of the assessment -order for assessment year 1989-90, the assessing officer has proceeded on thebasis that as per the agreement, Mr. Mohota was to pay liquidated damages of Rs. 20,000 for violation of the contract, but as per the agreement, this liquidated damage of Rs. 20,000 was in addition to refund of entire expenses incurred by the assessee-company on his education. It was also submitted that the assessing officer has proceeded by considering that the total expenditure involved is Rs. 18 lakhs; but in fact only Its. 5,21,548 was incurred during four years, out of which expenses in two earlier years i.e. in assessment years 1987-88 and 1988-89 were allowed and only a sum of Rs. 1,27,526 incurred in assessment year 1989-90, a sum of Rs. 81,387 incurred in assessment year 1990-91 were disallowed. It was submitted that the case of the assessele is fully covered by the Judgment of Hon'ble Jurisdictional High Court rendered in the case of Sakal Papers (P.) Ltd. (supra) and by the judgment of Hon'ble M.P. High Court in the case of Kohinoor Paper Products (supra); and hence, disallowance in both the years should be deleted.
As against this, it was submitted by learned DR of the revenue that this issue is fully covered against the assessee and in favour of the revenue by the Tribunal order in the case of Intersil India Ltd. v.Addl. CIT (IT Appeal No. 1357 (Mum.) of 2001, dated 29-10-2004), copy of which was submitted and kept on record. It was submitted that the facts are identical because in that case also, son of the Managing Director was sent abroad for management studies and expenses of Rs. 11.50 lakhs was incurred on that account. In that case also, son of the Managing Director Mr, Mohota was under obligation to serve the company for a minimum period of two years after completion of his education abroad. The Tribunal has held that the expenses on foreign education incurred on the son of the MD of the assessee-company cannot be allowed as deduction in computing business income of the assessee-company. It was also contended that the agreement as appearing on page Nos. 1 to 4 of the paper book is dated 1-8-1986 as per page No. 1, but signed on 22-10-1986 as per page No. 4 of the paper book; and Board resolution is also dated 22-10-1986 and as per this Board resolution, decision has been taken by the Joint MD to send his son and Board has approved the same afterwards. It was also contended that the fact that these expenses were allowed in earlier two years cannot be made a basis to allow the expenses in these two years also and in support of this contention, reliance was placed an the following judicial pronouncements :- In the rejoinder, it was submitted by learned AR of the assessee that as per this Tribunal order, there is no finding given as to whether the son of the MD has actually joined the company after completion of the studies or not and whether the company was benefited from his joining; whereas, in the present case, all the facts are on record that Mr.
Mohota has joined the assessee-company after returning from abroad and is serving with the assessee-company from November 1992 and company has progressed because of his services. Since, the turnover of the assessee-company has increased by more than 100% between 1993 to 1998 and the cash profit of the assessee-company has increased by more than 400% between 1993 to 1998, it was submitted that the facts in the present case are different; and, therefore, appeal of the assessee should be allowed as per facts of the present case.
We have considered the rival submissions and perused the materials on record. Regarding the contention of learned AR of the assessee that similar expenses in earlier two years were allowed by the assessing officer, we agree with learned DR of the revenue that this does not confer right in favour of the assessee and if there is mistake in earlier years, same can be rectified in subsequent years. We find that the Tribunal's order in the case of Intersil India Ltd. (supra) is squarely applicable in the present case because the facts are identical. Regarding the contention of learned AR of the assessee that there is no finding in this Tribunal's order about the actual joining of the son of the MD after coming back from abroad and actual benefit accruing to the assessee-company on his joining, we are of the considered opinion that the issue has been decided by the Tribunal on the basis that the only connection of Mr. Mohota in that case with the assessee-company at the relevant point of time was that he was son of the MD of the company and in the present case also, we find that the situation is identical because Mr. Mohota was appointed as an apprentice in the month of April 1986 after approval of his admission at American University; and hence, in fact, the only connection between the assessee-company and Mr. Mohota at the relevant point of time was that Mr. Mohota was son of Dy. MD of the assessee-company. It was contended that he was taken as a trainee apprentice along with five others and he was selected for sending abroad because of his excellent academic record but, we find that no evidence have been furnished in support of this contention that how his academic record was excellent justifying his sending abroad for higher education independent of his connection with the assessee-company as son of the Deputy. MD.We also find that in this Tribunal order, the judgment of Hon'ble Jurisdictional High Court rendered in the case of Sakal Papers (P) Ltd. (supra) relied upon by learned AR of the assessee has been considered and this judgment has been distinguished by the Tribunal because it was found that Their Lordships of Hon'ble High Court were adjudicating on the limited question as to whether education expenses incurred by the assessee-company can be disallowed for the only reason that there is no agreement between the assessee-company and the person, whose education cost are met by the assessee-company. It was also found that in this case, the person was selected for further studies after he has worked for five years for the assessee-company before being sent abroad for higher education; and hence, this judgment cannot be construed as authority for allowability of foreign education expenses incurred on Managing Director's children even if education received by the children is relevant to the assessee-company and even though after receiving such education, those children worked in the assessee-company. In the present case also, we find that the facts are different with the facts of the case of Sakal Papers (P) Ltd. (supra) because in the present case also, the son of the Dy. MD was not already working with the assessee-company and he was appointed as an apprentice after he was selected for admission in American University. The other Judgment in the case of Kohinoor Paper Products (supra) relied upon by learned AR of the assessee was also considered by the Tribunal in para No. 7 of this order and was found by the Tribunal that in this case, Their Lordships observed that "the question is based on appreciation of facts; and as such, it does not give rise to the questions as proposed". It is observed by the Tribunal that this rejection of Reference Application can hardly be construed as an authority for the proposition that foreign education expenses of the partner are to be allowed as a business deduction and in the case of M. Subramaniam Bros.
v. CIT (2001) 250 ITR 769 (Mad), Their Lordships of Hon'ble Madras High Court has dissented from the view taken by Hon'ble M.P. High Court in the case of Kohinoor Paper Products (supra) and observed that "the facts that one of the sons Vishwanathan was sent abroad for further education cannot be regarded as deputation made by the firm of one of its partners in connection with business". In para No. 4 of this Tribunal order, Judgment of Hon'ble Jurisdictional High Court rendered in the case of CIT v. Hindustan Hosiery Industries (1994) 209 ITR 383 (Bom.) and the relevant Tribunal order, part of which is also reproduced in the Tribunal order is very much relevant; and, therefore, this para No. 4 of the Tribunal order is reproduced below:-Hindustan Hosiery Industries v. Income Tax Officer (5 ITD 349) a coordinate bench of this Tribunal was in seisin of a materially indentical situation. The assessee firm in that case was engaged in the business of manufacture and sale of hosiery goods. One of the partners of the said concern was sent to USA for further education in business management. The expenditure of Rs. 36,786 incurred on such foreign education of the partner was claimed as a deduction by the assessee-firm, inter alia, on the ground that the said expenditure was for the benefit of the assessee firm inasmuch as application of business management techniques in a competitive atmosphere would give assessee-firm a clear edge in successfully carrying out the business. This claim was rejected at the assessment and first appeal stage, but, on the matter being carried in the second appeal before this Tribunal, the claim was allowed for the following reasons:- 'The expenditure under consideration incurred for the training of one of young partners in the techniques of modern business management has been definitely incurred wholly and exclusively for the purposes of business. The mere fact that it has incidentally benefited the partner himself is immaterial.' 'The knowledge that the partner was adjoining by the studies abroad was such that it would definitely benefit the business carried on by the assessee-firm, and, so the expenditure in acquiring that knowledge had a direct nexus with the business carried on by the firm. This is evident from the increase in sales in the subsequent years. As a matter of fact, the benefit arising out of the acquisition of aforesaid knowledge by the partner ensured to the assessee-firm as the partner is still working with the said firm even today.' The stand so taken by the Tribunal was, however, not approved by Their Lordships of Hon'ble Bombay High Court who, in the Judgment reported in 209 ITR at page 383. Observed as follows :- 'We have carefully gone through the order of the Tribunal. It is not possible to accept the submission of learned counsel for the assessee that the expenditure in question was incurred in relation to the business of the assessee-firm. We have considered the rival submissions and perused the materials on record. We have no hesitation in recording our conclusion that to the fact that the expenditure incurred by the assessee has no nexus with the business of the assessee. We agree with the conclusion arrived at by the Income Tax Officer and learned Commissioner (Appeals).' It is thus clear that Hon'ble Bombay High Court has rejected the school of thought that merely because the assessee would also benefit from the foreign education being received by the partner would be a reason good enough to hold that the expenditure so incurred on the foreign education as business expenditure. Their Lordships have also rejected the contention that the expenditure in acquiring that knowledge had a direct nexus with the business carried on by the firm, which could be evident from the results in the subsequent years and the fact that person so receiving the education actually worked with the assessee in subsequent years. The facts of the case before Their Lordships were much better inasmuch as the person whose education costs were met was a partner, whereas in the present case, he is son of the MD and without any formal status in the assessee-company." From the above, we find that in the case of Hindustan Hosiery Industries (supra) also, there was increase in sales in the subsequent years; but in spite of this, it was held by Hon'ble High Court that merely because the assessee would also benefit from the foreign education being received by the partner, would not be a reason good enough to hold that the expenditure so incurred on the foreign education is allowable as business expenditure. In the present case, much stress was laid by learned AR of the assessee on the fact that the assessee-company is immensely benefited from the higher education of Mr. Mohota; but we find that the returned income of the assessee has increased from Rs. 27.67 lakhs in assessment year 1989-90 to Rs. 115.68 lakhs in assessr ept year 1990-91, the period during which, Mr. Mohota was abroad for higher studies and was not working with the assessee- company; and hence, this assertion of learned AR of the assessee that the turnover and profit of the assessee has increased during 1992 to 1998 only because of the services of Mr. Mohota is also without any basis because the returned income of the assesseecompany increased from Rs. 27.67 lakhs in assessment year 1989-90 to Rs. 115.68 lakhs in assessment year 1990-91 without, any services of Mr. Mohota.
Considering the facts and circumstances of the case in totality, we are of the considered opinion that this issue is fully covered against the assessee by this Tribunal order in the case of Intersil India Ltd. (supra) as relied upon by learned DR of the revenue and respectfully following the same, both these grounds of the assessee are rejected in both the years.
Ground No. 3 of the appeal for assessment year 1990-91 is regarding the expenses of Rs. 1,40,200 incurred for increase in the authorized capital of the company.
At the outset, it was fairly conceded by learned AR of the assessee that this issue is covered against the assessee by the Judgment of Hon'ble Apex Court rendered in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT (1997) 225 ITR 792 (SC) and respectfully following the same, this ground of the assessee is rejected.