The main legal point established in the judgment is that expenditure claimed under Section 37 of the Income Tax Act must be shown to be wholly and exclusively for the purpose of business, and personal expenditure cannot be claimed as business expenditure. However, if the expenditure has an intimate and direct connection with the business, it may be deductible under Section 37(1).

S. Ravindra Bhat, J.

1. The present appeal is directed against an order of the Income Tax Appellate Tribunal (“ITAT”) dated 09.01.2012, and involves decisions on the following question of law framed at the time of admission:

“Did the Tribunal fall into error of law in holding that the appellant’s claim that the amount has been spent during the Assessment Year 2006-07, for the higher education of Sh. Dushyant Poddar, a son of its Director, was not liable as “business expenditure” under Section 37 of the Income Tax Act?”

2. For the year under consideration, the appellant company (hereinafter referred to as assessee) filed its return declaring loss at Rs.2,08,72,440/- under the normal provisions and book profit at Rs.1,35,42,270/- under Section 115JB of the Income Tax Act, 1961 (“the Act”), on 24.11.2006. In the Profit and Loss Account annexed to the return of income, assessee had claimed a sum of Rs.23,16,942/- as expenses incurred under the head “Education & Training Expenses”. These expenses had been incurred by the assessee on higher education of Shri Dushyant Poddar, an employee of the company, who happens to be the son of the Directors Shri Lalit Poddar and Smt Saroj Poddar, for undertaking an MBA Course in the U.K. 3. During the assessment proceeding, the Assessing Officer (“AO”) required the assessee to justify its claim with respect to the said expenses. The assessee produced the extract from the minutes of the meeting of the Board of Directors dated 10.02.2005 in which decision was taken to send Dushyant Poddar for further study in U.K. and also the Employment Bond entered into with him. The assessee explained to the AO that Dushyant Poddar was a Graduate having completed his B.Com (H) from Delhi University and working with it (i.e. the assessee) for a salary of Rs.10,000/- p.m. Since he was a brilliant student and the company was in need of Manager (Marketing) who could study the mood of the investment market and the prospects taking into consideration the economy of India and other advanced countries and an individual who could also take decisions with respect to investment in shares and securities, the Board of Directors in the meeting held on 10.02.2005 took a conscious decision to send Dushyant Poddar for pursuing the course of MBA from U.K. and to incur the expenditure up to the extent of Rs.30 lakhs on his study and training.

4. The assessee also stated in the resolution that on coming back to India after completion of the studies, Dushyant Poddar will serve the assessee company at least for 5 years on a remuneration as mutually agreed with the Board of Directors subject to minimum of Rs.10,000/- and maximum of Rs.25,000/- p.m. The assessee relied on a resolution of the Board of Directors to say that in the event of breach of bond, suitable action for recovery of the amount would be taken against Dushyant Poddar. He also furnished the bond, as required. Eventually, Dushyant Poddar was sent to U.K. for further study. The assessee incurred an expenditure of Rs.23,16,942/- during the year under consideration.

5. The AO in his order refused to accept the assessee’s contentions and rejected the argument that the sum of Rs.23,16,942/- could be claimed as a deduction under Section 37 of the Act. Aggrieved by this disallowance, the assessee carried the matter in appeal. The CIT (Appeals) upheld the disallowance in the appellate proceedings. The CIT examined the bond furnished by Dushyant Poddar and observed that it was on plain paper and the other query – as to what was the employee’s response to the University’s query with respect to funding for education – remained unanswered. The CIT (Appeals) also was influenced by the fact that the bond was executed on 01.04.2005 after Dushyant Poddar had been selected for completing his MBA from the U.K. University. In view of these reasons, the assessee’s appeal was rejected. The further appeal to the ITAT was dismissed by the impugned order. In the impugned order, the ITAT r