Section 37 of the income tax Act, 1961 — Business Expenditure — The assessee could not produce any evidence to show that the assessee company had sponsored the application of Ms. Esha Arya from the beginning, thus, it was proved that there was no nexus between the higher education expense of Ms. Esha Arya and the business of the assessee and accordingly the entire sum was disallowed holding that it was not an expenditure incurred wholly and exclusively for the purpose of business.[2019] 52 ITCD 016 (DEL)
Facts: In the assessment year 2001-02, the appellant claimed expenditure of Rs. 29, 72,710/- on account of educational expenses of Ms. Esha Arya. The said expenditure was disallowed on the ground that it was personal in nature. On appeal, the learned CIT (A) dismissed the same. Similar expenditure was claimed in subsequent years i.e. 2002-03, 2003-04 and 2004-05 and they were also disallowed and additions of Rs. 16, 62,227/-, Rs. 21, 51,045/- and Rs. 3, 27,837/- were made by the Assessing Officer in the said years. The assessee preferred appeals against the said orders, which too were dismissed. In respect of all the four assessment years i.e. 2001-02 to 2004-05, the assessee preferred appeals before the Tribunal. Vide a consolidated order dated 27.02.2009, the Tribunal restored to the file of the Assessing Officer, the issue of disallowance of educational expenses incurred by the assesee, on behalf of Ms. Esha Arya, daughter of one of the Directors.
Held, that assessee has claimed expenditure in respect of educational expenses incurred by the assessee for overseas education of Ms. Esha Arya, daughter of one of the directors of the assessee company. The expenses were disallowed concurrently by all the authorities- the A.O, CIT (A) as well as the Income Tax Appellate Tribunal.
Section 37 postulates that expenditure which is wholly and exclusively incurred for the purpose of business can be allowed as a deduction in taxable business income. The onus is on the assessee to show and establish that the aforesaid twin conditions are satisfied. Personal expenses cannot be claimed as a deduction under Section 37. In the present case, Ms. Esha Arya, the daughter of one of the Directors was barely 18 years of age without any relevant education, qualification or experience when she was inducted as a whole time Director of the Company. The agreement with the company wherein she undertook to remain in the employment of the assessee company for a period of not less than one year from the date of completion of higher education/training was executed on 20.03.2000, the date when she was inducted as the Director of the Company. The terms of the said agreement also defy logic. It is highly improbable that a Company which would incur expenditure to the tune of Rs. 70 lacs approximate on overseas education, agreed to have Ms. Esha Arya make a commitment to work for the Company only for a period of one year and, in the event she was to leave the Company before the expiry of the said period, she was required to pay only Rs. 50,000/- as default money, which too could also be waived off at the discretion of the Director of the assessee. When these contradictions were pointed out, the Assessee produced the supplemental agreement dated 01.11.2000 wherein she agreed to serve the Company for not less than two years and in the event of default, reimburse 50% of the expenditure incurred on higher education. These facts cannot be ignored and one can easily infer that the expenses were not incurred wholly and exclusively for the business of the Company. Significantly, when the learned ITAT restored the matter to the file of the AO, in the first round of a challenge, the assessee, despite opportunity failed to produce the evidence that would justify the expenditure, as noted in the impugned order. The assessee could not produce any evidence to show that the assessee company had sponsored the application of Ms. Esha Arya from the beginning. The Assessing Officer thus concluded that there was no nexus between the higher education expense of Ms. Esha Arya and the business of the assessee and accordingly disallowed the entire sum holding that it was not an expenditure incurred wholly and exclusively for the purpose of business. While it may also be true that it is for the assessee to decide as to who should be employed, and what should be the terms of the Contract, however, it is for the Income Tax Officer to determine whether there is indeed a nexus between the expense and the business of the Company and for that, the enquiry conducted by him cannot be faulted with. The present case is similar to Natco Exports Pvt. Ltd. (supra). The distinction sought to be drawn by Mr. Santhanam on the ground that in the present case Ms. Esha Arya had executed a bond with the assessee Company is rejected because the bond is itself farcical and that is not the only relevant factor.The cumulative impact of all the events and circumstances noted in the impugned order, has led the Income Tax Authorities to hold that the deduction could not have been allowed.