TREATMENT OF EXPENDITURE FOR HIGHER EDUCATION ABROAD FOR EMPLOYEES

[DR.MARIAPPAN GOVINDARAJAN]

Section 37(1) of the Income Tax Act, 1961 (‘Act’ for short) provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.

In this article the issue to be discussed about the treatment of expenditure for higher education abroad for employees with reference to decided case laws.

In ‘Divyakant C. Mehta V. Income Tax Officer and another’ – 2014 (7) TMI 1084 - BOMBAY HIGH COURT the appellant is an Advocate. He filed returns for the year 2005-06 in which he claimed the deduction of ₹ 22,25,614/- towards the expenditure incurred for higher education expenses for his daughter. The Assessing Officer held that the appellant was not entitled to claim deduction. The justification given by the appellant for claiming this expenditure is that the she joined the appellant’s firm of Advocates. She gave an undertaking that on attaining higher qualification and degree from the university abroad, she would come back and joint the firm for a minimum period of 5 years and therefore as a part of the firm being an employee, she was encouraged to go abroad to obtain higher educational degree.  The Assessing Officer rejected the contention of the appellant and disallowed the expenditure.

On appeal the Commissioner (Appeal) confirmed the decision of the Assessing Officer.  He has observed that in the firm of the appellant there were at least 14 associate advocates and none were given an opportunity to go abroad prior for higher education. Some of them worked with him for at least 15 years. In the present case within a period of 2 to 3 months after the daughter became an advocate and joined the firm as associate she went abroad.

The Tribunal also dismissed the appeal and the appellant filed appeal before High Court. He submitted the following before the High Court-

• Each one of the authority was bound by the judgment of Bombay High Court in ‘Sakal Papers Private Limited V. Commissioner of Income tax’ – 1977 (11) TMI 36 - BOMBAY High Court;
• Merely because the assessee had sent his daughter abroad for higher education, it does not mean that the deduction cannot be claimed;
• The relationship has nothing to do in this case when the daughter was serving in the firm of the appellant-assessee.

The High Court heard both sides and observed as follows:

• The appellant-assessee is a firm of advocates. The daughter joined him and immediately was sent for education abroad. The assessee has not been able to bring on record anything and particularly the scheme so as to provide higher education abroad to the employees or associates;
• Not only she was allowed to continue and stay abroad but permitted to join any firm after completing the higher education. Thus, this was not the decision taken in the interest of the activities and profession of the firm of advocates but for furthering the career prospects of the child/daughter;
• The appellant relied on the judgment ‘Sakal Paper Private Limited’ (supra) which will not be helpful to the appellant. In this case the company was a closely held with two shareholders.  They are publishing a leading Marathi Newspaper. Their daughter having Master degree in English and French worked in editorial department, started as an apprentice.  In pursuance of a resolution of the directors she was sent to USA for specialized education in journalism and business administrations, which the directors believed would be good for progress of the paper.  She attended several top ranking schools of journalism abroad and had returned and joined the editorial department and was working with the company. There was no agreement for rejoining the company after the course completion. The High Court held that the expenditure was proper and cannot be disallowed to the company, particularly when as a result of that expenditure the trainee had secured both a degree and training which would be of assistance to the company.  All this aspects were completely absent in the present case;
• This was nothing but a desperate attempt to avoid tax liability and by taking resort to departure of the daughter who incidentally happened to be an Advocate.

The High Court held that the appeal does not give rise to any substantial question of law and dismissed the appeal.

In ‘Kostub Investment Limited V. Commissioner of Income Tax’ – 2014 (2) TMI 1072 - DELHI HIGH COURT the assessee, for the assessment year 2006 – 07 claimed a sum of ₹ 23,16,942/- as expenses incurred under the head ‘education and training expenses’.  These expenses had been incurred by the assessee on higher education of an employee of the company, who happened to be the son of director, for undertaking an MBA course in the U.K. The claim was disallowed by the Assessing Officer and appellate authorities. The High Court held that there might be a tendency in business concerns to claim deduction under Section 37, and foist personal expenditure but such a tendency itself cannot result in an unspoken bias against claims for funding higher education abroad of the employees of the concern. The son of the director was a commerce graduate. The assessee’s business was in investments and securities. He wished to pursue an MBA after serving for a year with the company and committed himself to work for a further five years after finishing MBA. There was nothing on record to suggest that such a transaction was not honest. Thus the expenditure claimed by the assessee to fund the higher education of its employer to the tune of ₹ 23,16,942/- had an intimate and direct connection with its business i.e., dealing in securities and investments. It was, therefore, appropriately deductible under Section 37 (1) of the Act.

As held by the High Court in ‘Kostub Investment Limited’ (supra) the burden of showing that the expenditure would be wholly and exclusively for the purpose of business under Section 37(1) of the Income Tax Act, 1961, is upon the assessee and personal expenditure cannot be claimed as business expenditure.

It was further held that it would be unwise for the court to require all assessees and business concerns to frame a policy with respect to how educational funding of its employees generally and a class thereof, i.e., children of its management or directors would be done. Nor would it be wise to universalize or rationalize that in the absence of such a policy, funding of employees of one class-unrelated to the management – would qualify for deduction under Section 37(1). There is no such intent in the statute which prescribed that only expenditure strictly for business can be considered for deduction.  Necessarily, the decision to deduct is to be case-dependent.