Bombay High Court
The appellant had paid fees to a Management & Research institute on behalf of one of its director as training fees of director and had also paid salary to the director. Both were disallowed by the Assessing Officer during scrutiny. Aggrieved, the appellant-assessee preferred an appeal before CIT(Appeals). However, the disallowances were upheld by CIT (Appeals). The dissatisfied appellant therefore appealed before ITAT. The appellant contended that it was looking to grow and expand its business as well as it’s marketing needs and for this reason, it sponsored the son of another Director of the Appellant-Assessee, for an advanced course in marketing with the S.P. Jain Institute of Management & Research. Hesubmitted that the above studies and training had eventually helped the Appellant-Assessee in its business and had direct nexus with the growth of the business. It was held that the expenditure incurred for the education of the director was out of personal consideration. CIT (Appeals) held that the salary paid to the director cannot be claimed as deduction since the director was doing his management course and was not possible for him to work in capacity as a director at the same time when he was a student.
M/s Shreenath Motors Pvt.Ltd. – Appellant – Versus - Commissioner of Income Tax - Respondent
Judgement and Facts of the case
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.324 OF 2012
INCOME TAX APPEAL NO.325 OF 2012
M/s Shreenath Motors Pvt.Ltd.
Commissioner of Income Tax
For Appellant: Mr S.C. Tiwari, Ms Natasha Mangat
For Respondent: Mr AbhayAhuja
S.C. DHARMADHIKARI &
B.P. COLABAWALLA JJ.
Reserved on: 27th June, 2014.
Pronounced on : 3rd July, 2014.
Oral Judgement [Per B. P. Colabawalla J.]:-
1. These two Appeals under section 260A of the Income Tax Act, 1961 are filed by the Appellant-Assessee against a common order dated 18th November, 2011 (hereinafter referred to as the “impugned order”) passed by the Income Tax Appellate Tribunal, (Mumbai I Bench), (hereinafter referred to as “the ITAT”) in relation to Assessment Years 2005-06 and 2006-07. Since the common questions of facts and law arise in both the Appeals, the same have been heard together and are being disposed off by this composite order and judgment.
2. Mr Tiwari, the learned counsel appearing on behalf of the Appellant- Assessee, submitted that in the facts of the present case, a substantial question of law arises in both the appeals and reads as under :-
“(A) Whether on the facts and in the circumstances of the case of the appellant and in law the Tribunal has erred in holding that the expenditure on remuneration and training of working Director is not allowable under section 37 of the Income Tax Act 1961 ?”
3. According to Mr.Tiwari, the ITAT had erred in confirming the disallowance of expenditure on remuneration and training of a working Director of the Appellant-Assessee that was incurred legitimately for the efficient management and conduct of the Appellant-Assessee’s business. He submitted that the expenditure was not only legitimate but had a direct nexus with the business of the Appellant-Assessee and was therefore allowable as a deduction under section 37 of the Income Tax Act, 1961. It is in this light that the learned counsel has questioned the correctness of the impugned order of the ITAT.
4. For the sake of convenience, we shall refer to the facts in Income Tax Appeal No.324 of 2012. The brief facts are that for the Assessment Year 2005-06, the Appellant-Assessee filed its return of income declaring a total income of Rs.1,31,88,558/- accompanied with the Auditor's Report under section 44AB of the Income Tax Act 1961. This return of income was selected for scrutiny by the Assessing Officer who eventually completed the assessment and passed an Assessment Order dated 31st December, 2007 under section 143(3) of the Act determining the total income at Rs.1,41,67,196/- after making disallowances / additions on various counts. The disallowances for the purposes of the present appeal are Rs.1,75,000/- for fees paid on behalf of Mr. Krishna Kachalia, a Director of the Appellant- Assessee, to S P Jain Institute of Management & Research as well as the salary paid to the said Mr. Krishna Kachalia in the sum of Rs.3,12,500/-.
5. Aggrieved by this assessment order dated 31st December 2007, the Appellant-Assessee preferred an Appeal before the CIT(Appeals) who, after giving an elaborate hearing to the Appellant-Assessee, passed his order on 9th July 2009 partly allowing the Appeal. However, the CIT (Appeals) upheld the disallowances with reference to the amounts of Rs.1,75,000/- and Rs.3,12,500/- respectively.
6. Being dissatisfied with the order of the CIT(Appeals), the Appellant- Assessee filed an Appeal before the ITAT. The main grievance of the Appellant-Assessee against the order of the CIT (Appeals) was upholding the disallowance of the aforesaid sums of Rs.1,75,000/- and Rs.3,12,500/- which were incurred by the Appellant-Assessee for training fees and remuneration paid to it’s Director, Mr. Krishna Kachalia. These disallowances have been upheld even by the ITAT in the impugned order, and thus the present Appeal.
7. Mr Tiwari submitted that the Appellant-Assessee was looking to grow and expand its business as well as it’s marketing needs and for this reason, it sponsored Mr Krishna N. Kachalia, who is the son of another Director of the Appellant-Assessee, Mr Shailesh Kachalia, for an advanced course in marketing with the S.P. Jain Institute of Management & Research. He submitted that the above studies and training of Mr Krishna Kachalia had eventually helped the Appellant-Assessee in it’s business since he was independently looking after the VOLVO Division, the dealership of which he was instrumental in acquiring. He submitted that it was only because of Mr Krishna Kachalia that the Appellant-Assessee was able to obtain the distributorship of VOLVO. He further submitted that Mr Krishna Kachalia was stationed at Borivali, looking after Used Car Division as well as the workshop activities and was therefore appointed as a Director of the Appellant-Assessee sometime in 2003 and was paid a salary of Rs3,12,500/-. He submitted that these expenses have a direct nexus with the growth of the business of the Appellant-Assessee and therefore all the authorities below had wrongly disallowed the claim of the Appellant-Assessee for the fees paid to S.P. Jain Institute of Management & Researchon behalf of Mr Krishna Kachalia as well as the payment of salary to him.
To read the full judgement, please find the attached file.