Expenses permissible

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

16 May 2013 Can Company pay to its director and his son expenses for travelling as Gift or sponsorship?
And what are its implication in Income Tax and Companies Act?

CA rohit swami

CA rohit swami (Expert)
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16 May 2013 PLEASE CHECK COMPANY'S MOA AND AOA OF COMPANY. IF THEY PERMITTES TO DIRECTOR THEN YOU SHOULD INCLUD IT IN REMUNERATION BY PASSING RESOLUTION.AND IT PERMISSABLE IN I.T ACT.

IF DIRECTOR'S SON ARE IN ANY DESIGNATION IN COMPANY THEN IT'S BUSINESS PROMOTION ACTIVITY AND EXPENSES MAY ALLOWABLE.

Ganeshbabu K

Ganeshbabu K (Expert)
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16 May 2013 Travelling expenditure of director son is not treated as business expenditure and it cannot be allowed as an expence for caluculation of taxable profit..

please refer following judgement given by madras court against assesse

Madras High Court
Cit vs R.K.K.R. Steels (P) Ltd. on 26 November, 2001
Equivalent citations: (2002) 178 CTR Mad 172
Author: R J Babu
JUDGMENT

R. Jayasimha Babu, J.

The Tribunal has accepted the assessee's case that the expenditure incurred on the education of the son of the director abroad should be treated as business expenditure, reversing the view of the Commissioner (Appeals) and the assessing authority. The assessment year is 1977-78.

2.

The assessee which is engaged in re-rolling and manufacturing of steel had claimed that the sum of Rs. 64,922 expended on meeting the cost of travel to USA and the expenditure connected with the education of the son of Balwant Rai who was the director of the company, is deductible as business expenditure as the said Rajiv Rai had acquired a M.B.A. degree and had later on joined the company. There was no agreement between Rajiv Rai and the company before he was sent to abroad. There was no requirement that he should join the company after completing his education. Being the son of the director of a private limited company which was apparently family owned he became a director of the company within a year after his return from U.S.A.

3.

It was canvassed for the assessee before the Tribunal that the fact that Rajiv Rai was the son of the director of the company should not be held against him and the expenditure incurred on his training was in fact, an expenditure which was to the benefit of the company as he subsequently became a director.

4.

If this logic were to be accepted, in every family owned business, all the expenditure incurred in bringing up the children who may later on be given a role in the business as partners or directors could be claimed as business expenditure incurred in training the prospective employees and directors of the business. The expenditure permissible for deduction is expenditure that is wholly and exclusively laid out for the purposes of business. The expenditure which a father incurs out of his natural love and affection for his children in meeting the cost of their education cannot become a business expenditure merely because he is also the owner or a director of a business in which the son or daughter subsequently takes part.

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Ganeshbabu K

Ganeshbabu K (Expert)
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16 May 2013 5.

It is not the case of the assessee that the assessee had a scheme of sending people abroad for training with the stipulation that after receiving the benefit of training they should work for the company and that moneys expended on such training were in fact, moneys which wore expended for the purpose of obtaining the benefit of their expert service after they acquire proficiency in the field in which they had been sent for training. It is evident that a director-father had, instead of incurring expenses from his personal account, which he should have, had, merely chosen to debit the expenditure of his son's education to the business of which he was the director. Such expenditure does not become business expenditure, merely because the father was in a position to debit the expenditure to the accounts of the business. The Tribunal was clearly in error in accepting and allowing the claim which had been rightly disallowed by the assessing officer and by the Commissioner (Appeals) in appeal.

6.

This court considered a similar claim of a father debiting the expenditure of the education of his sons to the business, in the case of M. Subramaniam Bros. v. CIT (2001) 250 ITR 769 (Mad). In that case, the father had sent his son abroad for higher education. The son as a minor had been admitted to the benefits of partnership and only after returning he took part in running the business of the firm. It was held by the court that the expenditure incurred on the education of the son before he joined the business was not an expenditure in respect of which deduction would be granted.

7.

The question referred to us as to whether on the facts and circumstances of the case, the expenditure on foreign travel amounting to Rs. 64,922 of Rajiv Rai, son of the director of the company can be said to have been incurred for the purpose of the business and was admissible deduction, is answered in favour of the revenue and against the assessee.