M/s. M. Kuppuswamay PSG & Co. LLP., CHENNAI V. ACIT, CHENNAI

ITA 3126/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5883 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 09-11-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B SAGADEVAN JCIT D R
• Assessee Lawyers: K S B ALAKRISHNAN
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

, C/ SMC , IN THE INCOME TAX APPELLATE TRIBUNAL C/SMC BENCH, CHENNAI . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER I.T.A.NO.3126 /MDS./2016 ( ASSESSMENT YEAR : 2012-13) M/S.M.KUPPUSWAMY PSG & CO. LLP, 54/3, CP RAMASWAMY ROAD, ABHIRMAPURAM, CHENNAI 600 018. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE-3, CHENNAI-34. PAN AAPFM 3067 E ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : MR.K.S.BALAKRISHNAN,ADVOCATE / RESPONDENT BY : MR.B.SAGADEVAN, JCIT, D.R ! ' / DATE OF HEARING : 06.11.2017 #$%& ! ' /DATE OF PRONOUNCEMENT : 06.11.2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-4, CHENNA I DATED 26.08.2016 PERTAINING TO ASSESSMENT YEAR 2012-13. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS F OR ADJUDICATION. ITA NO. 3126/MDS/2016 2 1. THE ORDERS OF THE ASST. COMMISSIONER OF INCOME T AX AND THE COMMISSIONER OF INCOME TAX (APPEALS) ARE ERRONEOUS IN LAW, FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN ALL PROBABILIT IES THEREOF. 2. BOTH THE AUTHORITIES BELOW FAILED TO NOTE THAT T HE APPELLANT FIRM, AFTER UNANIMOUS DECISION BY ELDERLY RTNERS4 SPONSORED ONL Y ` 8,50,000/- BEING 50% OF THE TUITION FEES PAYABLE TO LANCASTER UNIVER SITY ON BEHALF OF MR.G. ANUSH, IN ORDER TO ENHANCE THE SCOPE OF PROFE SSIONAL WORK, HANDLED OUTSIDE INDIA. 3. THE AD AS WELL AS THE CIT (APPEALS) ERRED IN CON CLUDING THAT THE EXPENSES INCURRED TO GAIN KNOWLEDGE, IS ONLY A CAPITAL EXPEN DITURE AND FAILED TO CONSIDER THE VALUABLE SERVICE HAS BEEN RENDERED BY MR.G. ANUSH TO THE FIRM, WHO CONTINUED AS A PARTNER EVEN AFTER THE COM PLETION OF THE PROGRAMME AND PROVIDED BENEFICIAL INPUTS AND EXPERT ISE TO THE FIRM. 4. THE AD OVERLOOKED AND IGNORED THE FACT THAT THE FIRMS EXPORT PERFORMANCE WAS ON THE INCREASE FROM THE FINANCIAL YEAR 2008 ON WARDS AND THE FIRM WAS BENEFITTED BY THE VALUABLE SERVICES PROVIDED BY MR.G. ANUSH, BOTH BEFORE AND AFTER UNDERGOING HIS MASTERS PROGRAMME. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE PREFERRE D AND ADMITTED AT THE TIME OF HEARING, THE APPELLANT HEREIN PRAYS THAT TH E PROFESSIONAL EXPENDITURE OF ` 8,50,000/- MAY BE ALLOWED AS AN ALLOWABLE BUSINESS EXPENDITURE U/S 37 AND JUSTICE BE RENDERED. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE I S A FIRM OF CHARTERED ACCOUNTANTS, AND FILED ITS RETURN OF INC OME ON 27-09-2012, ADMITTING A TOTAL INCOME OF ` 19,36,530/-. THE ASSESSEE HAD CLAIMED THE SPONSORSHIP AMOUNT OF ` 8,50,000/- BEING THE 50% OF THE TUITION FEES PAID TO LANCASTER UNIVERSITY ON BEHALF OF MR.G .ANUSH, A PARTNER ITA NO. 3126/MDS/2016 3 OF THE ASSESSEE FIRM FOR UNDERGOING A PROGRAM IN S TRATEGIC CONSULTING. DURING THE SCRUTINY PROCEEDINGS, THE A O ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE TUITION FEES P AID TO MR.G. ANUSH SHOULD NOT BE DISALLOWED A REVENUE EXPE NDITURE OF THE FIRM BEING PERSONAL IN NATURE. IN RESPONSE, THE ASS ESSEE FIRM REPLIED IN THE LETTER DATED 09.03.15 & 13.3.15 STATING THAT :- A) ENHANCE THE SCOPE OF WORK HANDLED OUTSIDE INDIA. B) THE FIRM REQUIRED TO DEVELOP CAPABILITIES IN ARE AS LIKE STRATEGIC CONSULTING AND NETWORK ARCHITECTURE C) AS MOST OF THE PARTNERS WERE ABOVE 50 YEARS, ONE OF THEIR YOUNGEST PARTNERS MR.G. ANUSH WOULD UNDERGO THE PROGRAM AND THE FIRM SPONSORED ONLY 50% OF HIS UNIVERSITY FEE. D) MR.G.ANUSH COMPLETED THE PROGRAM IN SEPTEMBER 20 12 AND POST RETIREMENT FROM THE FIRM IN MARCH 2013, STILL CONTI NUED AS PARTNER GIVING INPUTS TO THE FIRM . 3. 1 FROM THE ABOVE SUBMISSIONS OF THE ASSESSEE , T HE AO WAS OF THE OPINION THAT: I) DOING COURSE OF MBA BUSINESS ADMINISTRATON WAS TO INCREASE THE KNOWLEDGE CAPACITY AND TO INCREASE THE OVERALL ABILITY TO HANDLE THE ISSUES WITH SPECIALISED KNOWLEDGE. II) KNOWLEDGE GAINED WAS NOT FOR USING ONCE OR TWIC E, BUT THE BENEFIT WAS ENDURING IN NATURE. IT WOULD HELP AN IN DIVIDUAL TO ITA NO. 3126/MDS/2016 4 HANDLE CASES WITH MORE SPECIALISED KNOWLEDGE IN LON GER DURATION. II) IN THIS CASE OF MR. C. ANUSH, THE EXPENSES INCU RRED TO GAIN THE KNOWLEDGE WHICH HAS ENDURING BENEFIT CANNOT BE DEDU CTED AS REVENUE EXPENDITURE. IT IS ONLY CAPITAL IN NATURE W HICH CAN BE CAPITALISED PROVIDED MR. G. ANUSH REMAINED AS AN IN TEGRAL PART OF THE FIRM IN GUIDING THE FIRM TO GLORY WITH HIS N EWLY ACQUIRED SKILLS AND CAPABILITIES IN THE LONGER RUN. IV) BUT IT IS TO BE NOTED THAT AS PER THE ASSESSEE FIRMS SUBMISSION DATED 09.03.2015, THE PARTNER AFTER COMPLETING THE MBA PROGRAMME IN SEPTEMBER 2012, LEAVES THE FIRM IN MAR CH 2013 I.E., THE END OF THAT FINANCIAL YEAR ITSELF. 3.2 ACCORDING TO LD. ASSESSING OFFICER, MR. C. ANU SH CONTINUED TO BE A PARTNER OF THE FIRM TILL THE END OF THE FINANC IAL YEAR IN WHICH HE COMPLETED THE COURSE. AFTER THAT MR. G. ANUSH SETTL ED ABROAD AND WAS DOING PRACTICE THERE. THIS CLEARLY REVEALED THA T IT WAS AN ARRANGEMENT TO BOOK THE PERSONAL EXPENSES OF THE PA RTNER AGAINST THE RECEIPTS OF THE FIRM TO REDUCE THE TAXABLE INCO ME. MR. C. ANUSH NEITHER REMAINED A PARTNER NOR AN EMPLOYEE OF THE F IRM TO GUIDE THE FIRM WITH HIS SPECIALISED KNOWLEDGE. HENCE, IT WAS CONSIDERED AN ITA NO. 3126/MDS/2016 5 AFTERTHOUGHT TO SET OFF PERSONAL EXPENSES AGAINST B USINESS RECEIPTS OF THE FIRM. 3.3 THUS, THIS AMOUNT WAS DISALLOWED BY THE LD. AS SESSING OFFICER FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIVYAKANT C.MEHTA VS.ITO (2014) 365 ITR 423. A T THE TIME OF CONCLUDING THE ASSESSMENT, IT WAS CLEAR THAT THE BE NEFIT EXTENDED HAS NOT BEEN RECIPROCATED AND NO SERVICE HAS BEEN RENDE RED BY MR.G.ANUSH TO THE FIRM. SINCE, PERSONAL EXPENSES CA NNOT BE ALLOWED ULS.37(1) OF THE ACT , THEREFORE, THE SAME WAS DISA LLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED BY THIS ORDER OF THE AO, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 3.4 ON APPEAL, THE LD.CIT(A) OBSERVED THAT FROM TH E PERUSAL OF THE ASSESSMENT ORDER, IT IS NOTICED THAT THE AO HAS RIG HTLY OBSERVED THAT PURSUING THE COURSE OF MBA WOULD DEFINITELY INCREAS E THE KNOWLEDGE CAPACITY OF MR G ANUSH AND HIS CAPACITY TO HANDLE T HE ISSUES. IT IS ALSO CORRECT TO HOLD THAT ACQUIRING HIGHER AND SPEC IALISED EDUCATION HAS AN ENDURING BENEFIT. HENCE, EVEN IF THE EXPENDI TURE WAS TREATED AS AN ALLOWABLE EXPENDITURE, THE SAME COULD BE GRAN TED UNDER THE ITA NO. 3126/MDS/2016 6 HEAD OF CAPITAL EXPENDITURE AND NOT AS REVENUE EXPE NDITURE. HOWEVER, THE PARTNER MR G.ANUSH LEFT THE ASSESSEE F IRM IN MARCH 2013 BEFORE THE END OF THAT RELEVANT FINANCIAL YEAR ITSELF. THEREAFTER, HE SETTLED ABROAD AND STARTED HIS OWN PROFESSIONAL PRACTICE THERE. HENCE, MR. G. ANUSH NEITHER REMAINED A PARTNER NOR AN EMPLOYEE OF THE FIRM TO GUIDE THE FIRM WITH HIS SPECIALISED KNO WLEDGE. ACCORDING TO LD.CIT(A), THE AO HAS RIGHTLY RELIED ON THE RATIO O F THE JUDGEMENT IN THE CASE OF DIVYAKANT C. MEHTA VS ITO(2014) 365 ITR 423 (BOMBAY) TO SUBSTANTIATE ITS FINDINGS THAT THE EXPENDITURE W AS PERSONAL IN NATURE WHICH COULD NOT BE ALLOWED AS REVENUE EXPEND ITURE. THE FACTS INVOLVED IN THAT REFERRED CASE ARE QUITE SIMILAR TO THAT OF THE PRESENT CASE. IN THIS REFERRED CASE, ASSESSEE WAS A FIRM OF ADVOCATES. THE DAUGHTER OF MAIN ADVOCATE JOINED HIM AND IMMEDIATEL Y WAS SENT FOR EDUCATION ABROAD. THE ASSESSEE WAS NOT ABLE TO BRIN G ON RECORD ANYTHING AND PARTICULARLY THE SCHEME SO AS TO PROVI DE HIGHER EDUCATION ABROAD TO THE EMPLOYEES OR ASSOCIATES. TH E COMMISSIONER (APPEALS) HAD OBSERVED THAT IN THE FIRM OF THE APPE LLANT-ASSESSEE, THERE WERE AT LEAST 14 ASSOCIATE ADVOCATES AND NONE WERE GIVEN AN OPPORTUNITY TO GO ABROAD FOR HIGHER EDUCATION. SOME OF THEM HAD ITA NO. 3126/MDS/2016 7 WORKED WITH HIM FOR 15 YEARS IN THE REFERRED CASE W ITHIN D PERIOD OF 2 TO 3 MONTHS AFTER THE DAUGHTER BECAME AN ADVOCATE A ND JOINED THE FIRM AS ASSOCIATE, SHE WENT ABROAD. THE AUTHORITIES FOUND THAT NOT ONLY SHE WAS ALLOWED TO CONTINUE AND STAY ABROAD, B UT PERMITTED TO JOIN ANY FIRM AFTER COMPLETING THE HIGHER EDUCATION . THUS, IT WAS HELD BY THE HONOURABLE COURT THAT THIS WAS NOT THE DECIS ION TAKEN IN THE INTEREST OF THE ACTIVITIES AND PROFESSION OF THE FI RM OF ADVOCATES BUT FOR FURTHERING THE CAREER PROSPECTS OF THE CHILD/DA UGHTER. FURTHER, LD.CIT(A) OBSERVED THAT IN THE PRESENT CASE OF THE ASSESSEE ALSO, IT IS NOTICED THAT THERE WAS NO SCHEME FRAMED TO PROVI DE HIGHER EDUCATION ABROAD TO THE EMPLOYEES OR ASSOCIATES OF THE FIRM. NO OTHER PARTNER OR EMPLOYEE OF THE FIRM WAS GIVEN THI S OPPORTUNITY. LIKEWISE, IN THE PRESENT CASE AS WELL, THE PARTNER AND MR ANUSH WAS ALLOWED TO LEAVE THE FIRM IMMEDIATELY AFTER THE END OF THE RELEVANT FINANCIAL YEAR AND WAS ALLOWED TO SETTLE ABROAD TO PURSUE HIS OWN PROFESSION THERE. THEREFORE, AS RIGHTLY POINTED OUT IN THE ABOVE REFERRED CASE, THIS WAS NOT THE DECISION TAKEN IN T HE INTEREST OF THE ACTIVITIES AND PROFESSION OF THE ASSESSEE BUT FOR F URTHERING THE FUTURE CAREER PROSPECTS OF THE SON OF THE MAIN PARTNER OF THE ASSESSEE FIRM. ITA NO. 3126/MDS/2016 8 3.5 THE LD.CIT(A) CAME TO A CONCLUSION THAT IN THE INSTANT CASE, THE FIRM DID NOT DERIVE ANY BENEFIT NEITHER DURING THE RELEVANT ASSESSMENT YEAR NOR THEREAFTER ONCE MR G ANUSH HAD LEFT THE FI RM TO SETTLE ABROAD. THERE WAS NO POLICY MATTER FRAMED BY THE AP PELLANT IN THE FIELD OF HIGHER EDUCATION ABROAD TO THE PARTNERS OR THE EMPLOYEES OF THE FIRM. HENCE, IT HAS, RIGHTLY BEEN HELD BY THE A O THAT THIS WAS NOT THE DECISION TAKEN IN THE INTEREST OF THE ACTIVITIE S AND PROFESSION OF THE ASSESSEE FIRM OF CHARTERED ACCOUNTANTS BUT WAS FOR FURTHERING OF CAREER PROSPECTS OF MR G. ANUSH, WHO WAS SON OF THE MAIN PARTNER OF THE ASSESSEE FIRM. ACCORDINGLY, THE LD.CIT(A) SUSTA INED THE DISALLOWANCE OF ` 8, 50,000/- INCURRED TOWARDS THE HIGHER EDUCATION O F MR. G. ANUSH. AGAINST THE ORDER OF LD.CIT(A), NOW THE ASSESSEE IS IN APPEAL BEFORE US. 4. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE MAIN CONTENTION OF LD.A.R IS THAT MR G. ANUSH WAS COMPLETED CHARTERED ACCOUNTANT ARTICLE-SHIP WITH THE ASSESSEES FIRM, AND AT THE TIME OF GOING ABROAD FOR EDUCATION , HE WAS A PARTNER AND HE COMPLETED THE EDUCATION IN SEPTEMBER, 2012 A ND JOINEDTHE ITA NO. 3126/MDS/2016 9 FIRM AS A PARTNER UPTO MARCH, 2013. BEING SO, THE AMOUNT HAS BEEN SPENT ON THE EDUCATION OF THE PARTNER TO BE ALLOWED IN THE ASSESSMENT YEAR UNDER CONSIDERATION. MR G. ANUSH COMPLETED HI S MBA DEGREE IN FOREIGN IN SEPTEMBER, 2012 AND RETIRED FROM THE FIR M ON MARCH, 2013. HENCE, AFTER THE COMPLETION OF THE MBA DEGREE, HE W AS IN THE FIRM ONLY 6 MONTHS, THEREAFTER HE SETTLED IN ABROAD AND DOING PRACTICE THERE ONLY. IT IS ALSO SUBMITTED THAT MR G. ANUSH S FATHER WAS SENIOR PARTNER OF THE FIRM AND ALL THE OTHER PARTNERS UNAN IMOUSLY AGREED TO BEAR THE EXPENDITURE BY THE FIRM. IF THE CONTENTIO N OF THE LD.A.R IS ACCEPTED, IN EVERY BUSINESS, ALL THE EXPENDITURE IN CURRED IN BRINGING UP CHILDREN OF THE PARTNERS, WHO MAY BE ADMITTED A S A PARTNER BEFORE SENDING FOR EDUCATION ON ABROAD OR LATER ON BEING G IVEN A ROLE IN THE BUSINESS AS A PARTNER OR A DIRECTOR COULD BE CLAIM ED AS BUSINESS EXPENDITURE INCURRED ON SUCH PERSON. THE EXPENDITU RE PERMISSIBLE TO BE ALLOWED IS AN EXPENDITURE I.E. WHOLLY AND EXCLUS IVELY LAID DOWN FOR THE PURPOSE OF BUSINESS. IN THE PRESENT CASE, THOUG H AT THE TIME OF SENDING MR G. ANUSH FOR EDUCATION AT ABROAD,WAS A P ARTNER, THERE WAS NO AGREEMENT WITH HIM TO CONTINUE AS A PARTNER AFTER COMPLETION OF EDUCATION. AS SEEN FROM THE FACTS OF THE CASE, A FTER COMPLETION OF ITA NO. 3126/MDS/2016 10 EDUCATION I.E WITHIN SIX MONTHS OF COMPLETION OF ED UCATION, HE LEFT OUT THE FIRM AS A PARTNER AND SETTLED IN ABROAD. IT IS NOT THE CASE OF ASSESSEE THAT THE ASSESSEE HAD A SCHEME OF SENDING PEOPLE ABROAD FOR TRAINING WITH A STIPULATION THAT AFTER RECEIVIN G THE BENEFIT OF EDUCATION, THEY SHOULD CONTINUE AS A PARTNER IN THE FIRM AND THAT MONEY EXPENDED ON SUCH EDUCATION WERE IN FACT, MONE Y, WHICH WERE EXPENDED FOR THE PURPOSE OF OBTAINING THE BENEFIT O F THEIR EXPERT SERVICE AFTER THEY ACQUIRED PROFICIENCY IN THE FIEL D IN WHICH THEY HAD SENT FOR TRAINING. IN THE PRESENT CASE, IT IS EVID ENT THAT THE PARTNER, INSTEAD OF INCURRING EXPENSES FOR HIS PERSONAL ACCO UNT, WHICH HE SHOULD HAVE, HAD, MERELY CHOSEN TO CLAIM THE EXPEND ITURE FROM THE FIRM WHERE HE IS A PARTNER FOR A SHORT TIME. SUCH E XPENDITURE DOES NOT BECOME BUSINESS EXPENDITURE MERELY BECAUSE MR G. AN USH WAS IN A POSITION TO CLAIM THE EXPENDITURE IN THE ASSESSEE F IRM. FURTHER, I RELY ON THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN TH E CASE OF M. SUBRAMANIAM BROS., REPORTED IN [2001] 250 ITR 769 ( MAD) WHEREIN THE FACTS INVOLVED IN THAT CASE, IS QUITE SIMILAR T O THAT OF THE PRESENT CASE IN HAND. IN THE CASE, THE JURISDICTIONAL HIGH COURT HELD THAT- THE ASSESSEE WAS A PARTNERSHIP FIRM CONSISTING OF FATHER AND TWO SONS AND A DAUGHTER. THE FATHER SENT HIS YOUNGER SON ABROAD FO R HIGHER EDUCATION WHEN HE ITA NO. 3126/MDS/2016 11 WAS 21. THE SON HAD BEEN ADMITTED TO THE BENEFITS O F PARTNERSHIP WHEN HE WAS A MINOR AND HAD NOT TAKEN PART IN THE BUSINESS ACTI VITY. ONLY AFTER HIS RETURN FROM ABROAD DID HE TAKE PART IN THE BUSINESS ACTIVITIES OF THE FIRM. FOR THE ASSESSMENT YEARS 1978-79 AND 1979-80 , THE FIRM CLAIMED THE AM OUNT SPENT ON EDUCATING ABROAD THE YOUNGER SON OF THE PARTNER AS BUSINESS E XPENDITURE. THE INCOME-TAX OFFICER AND THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSEES CLAIM WAS DISALLOWED EXPENDITURE OF RS. 31,019 INCURRED IN TH E ASSESSMENT YEAR 1978-79 AND RS. 20,764 IN THE ASSESSMENT YEAR 1979-80, RESP ECTIVELY ON THE GROUND THAT THE EXPENDITURE WAS OF PERSONAL NATURE AND NOT BUSI NESS EXPENDITURE. IN VIEW OF THIS, THE EXPENDITURE INCURRED ON EDUC ATION OF MR G. ANUSH CANNOT BE CONSIDERED AS A BUSINESS EXPE NDITURE OF THE ASSESSEE AND IT IS ONLY A PERSONAL EXPENDITURE OF M R G. ANUSH AND IT CANNOT BE ALLOWED WHILE COMPUTING THE INCOME OF ASS ESSEE. ALL THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 5. IN THE RESULT, THE APPEAL OF ASSESSEE IS DISMI SSED. ORDER PRONOUNCED ON 06 TH NOVEMBER, 2017. SD/- ( ) ( CHANDRA POOJARI ) /ACCOUNTANT MEMBER CHENNAI, DATED THE 06 TH NOVEMBER, 2017 . K S SUNDARAM. ' ( )!*+ ,+%! / COPY TO: 1 . / APPELLANT 3. ' ' -! () / CIT(A) 5. +0 1 )!)23 / DR 2. / RESPONDENT 4. ' ' -! / CIT 6. 1 45 6 / GF