TMI Blog1994 (2) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... ept as seven years from 1-7-1981. The counsel for the assessee at the time of bearing stated that Shri Vijay continues to serve the assessee-firm even to-day. As per clause 4 of this agreement, he was entitled to a salary of Rs. 1,200 per month for the first year, then Rs. 2,000 per month for the next two years and Rs. 3,000 per month for the next four years. As is stated above, the Assessing Officer has not challenged the payment of Rs. 1,200 per month to Shri Vijay under section 40A(2) of the Act for the assessment year 1983-84. Under clause 5 of the agreement it was provided that Shri Vijay was to go on training courses abroad and could not be treated to be on leave and was to be paid monthly salary as stated in clause 3 and discussed supra. As per the said agreement, all expenses in connection with the educational facilities including examinations were to be met by the employer. On coming back, he was required to serve the firm for the minimum period as agreed at that relevant time. As stated above, there is no dispute that Shri Vijay Muthey continues to serve the firm till this day. It has also brought on record that Shri Vijay came back to India from United States of America ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT (Appeals) that the agreement was a colourable device. It was submitted that no material has been brought out by him in his order to hold such a view. The counsel for the assessee submitted that Shri Vijay was already a Graduate and Diploma holder in Business Management. He in fact served the firm for one year before leaving for USA. He was, therefore, an employee at the time when he left for the foreign country. There is no finding given either by the Assessing Officer or by the CIT (Appeals) that the expenditure incurred by the assessee on meeting the educational expenses and payment of salary was incommensurate with the qualifications of Shri Vijay. He submitted that the assessee has incurred this expenditure as a trader voluntarily for the purposes of commercial expediency. This expenditure was not personal in nature and was, therefore, incurred wholly and exclusively for the purposes of business. There is no prohibition in law for incurring such expenditure. The following decisions were relied upon by the assessee: (i) Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC). (ii) Shahzada Nand Sons v. CIT [1977] 108 ITR 358 (SC). (iii) Sakal Papers (P.) Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly on this issue is Sakal Papers (P.) Ltd.'s case. In that case the assessee was a closely-held company with only husband and wife being share-holders. Their daughter was an M.A. with English and French as special subjects. She worked in the editorial department from September 1955, starting as an apprentice. In 1960, by a special resolution passed by the Directors she was sent to United States of America for specialised education in journalism and business administration.... She attended various courses at different Universities in Columbia and New York and obtained practical training. On her return from USA, she again joined the editorial department and was working with the company even in the later years. The Assessing Officer, however, disallowed the claim of Rs. 29,654 incurred on her training abroad on the ground that it was incurred on account of her relations with the Directors; that similar facilities of education were available in India; that the paper was in Marathi and her proficiency was in other foreign languages. When the matter went to the AAC, he agreed with the view of the Assessing Officer but allowed the expenses as revenue expenditure. When the matter was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of hosiery goods carried on by the assessee. The CIT(A) having confirmed, the matter was taken to the ITAT. The Tribunal held that the training in modern business management is always beneficial to the carrying on of any business. The knowledge that the partner was gaining was definitely going to help the assessee-firm. They also held that the expenditure incurred by the firm also did not result in capital expenditure. Of course in this case the disallowance made by the Assessing Officer and confirmed by the CIT(A) is not on account that the same is capital expenditure. This decision of the Tribunal is strictly applicable to the facts of this case. In Eastern Investments Ltd.'s case, it was held that the only ground under which a disallowance can be made under section 40A(2) is to hold that it was not expenditure incurred for the purpose of earning the income, profits and gains of the assessee and that even if it was so, it was at any rate not expenditure incurred solely for that purpose. They had laid down certain tests for allowance of such an expenditure. According to Their Lordships, the criterions are that the expenditure is incurred by an assessee as a trader voluntari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular page 386) have commented upon the use of the word "necessarily". By the Income-tax Bill, 1961, it was provided under section 37(1) : "Any expenditure .................................................................................... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed ............................................." The inclusion of the word "necessarily" led to a storm of protests from the Public and various Chambers of Commerce. The result was that the Select Committee deleted the word "necessarily" and relied upon the phrase "wholly and exclusively" only. This further confirms the view that it is not for the Assessing Officer to decide the test of expenditure but it is for the businessman to rely on such a test. It is notable in this case that the Assessing Officer or the CIT(A) have not made out any case of disproportionate expenditure being incurred on the education of Shri Vijay in U.S.A. So, therefore, the charge of incommensurate expenditure has not been laid against the assessee and, therefore, the application of provisions of section 40A(2) itself become highly debatable. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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