Delhi High Court

Natwar Lal Gupta vs Ito on 1 December, 2004

Equivalent citations: (2004) 86 TTJ Del 1006

ORDER

B.R. Jain, A.M.

This appeal by the assessed has been preferred against the order dated 1-9-2003 of Commissioner (Appeals)-XXX, New Delhi, for assessment year 1097-98. In various 'grounds, the assessed has challenged the sustenance of addition of Rs. 11,73,015 spent by the employer company on higher education of the appellant treating the same as perquisite under section 17(2)(iv) of Income Tax Act, 1961.

2. Shri Ajay Vohra, learned counsel for the assessed, stated that the appellant is a qualified CFA and was working in Nishigandha Trading (P) Ltd. since 1992. The company intended to diversify its business in the field of merchant Banking, advising of public issue of shares, debentures, portfolio management, etc. For this purpose, it was decided by the Board of Directors to send, inter alia, the appellant to the London Business School for MBA course with specialisation in finance, which knowledge and experience would benefit the company in its business. The entire cost of higher education was borne by the company and the amount was directly paid to the University by the employer company after obtaining necessary RBI permission.

3. The employer company required the appellant to execute a bond to serve the company for seven years on return in consideration of the employer company sponsoring the appellant for higher education. In case the appellant did not serve the company for the seven years' period, the amount spent by the company on the higher education of the appellant was to be recovered as loan carrying interest at the rate of 20 per cent per annum.

4. The assessing officer treated the amount spent by the company as perquisite liable to tax in the hands of the appellant under clause (iv) of section 17(2) of the Income Tax Act. The Commissioner (Appeals) has confirmed the order of the assessing officer and the appellant is in appeal before the Tribunal. It was further submitted that the employer company had deputed the appellant to go for higher studies in London. The decision was taken by the company on its own volition and voluntarily.

5. The expenditure on higher studies of the appellant was incurred by the employer company de hors the contract of employment and purely out of discretion. The appellant could not claim any vested right arising out of the terms of his employment for the employer company to sponsor and incur cost on higher education of the appellant (Refer CIT v. L.W Russel (1964) 53 ITR 91 (SC).

6. The expenditure was incurred by the employer company in the best interest of its business and the same has accordingly been allowed business deduction in the hands of the employer company, accepting that the expenditure was incurred wholly and exclusively for purposes of its business.

7. The term "perquisite" was defined to mean something that benefits a man by going into his own pocket (Refer Owen v. Pook (Inspector of Taxes) (1969) 74 ITR 147 (HL) at p. 158). The expenditure has been incurred by the employer company to benefit its own business; the benefit to the appellant is only incidental. The incurring of the expenditure was foremost and primarily prompted to equip the employer company to carry on business in the field of finance by having available person(s) having specialised knowledge and experience.

8. Sec. 17(2)(iv) of the Act applies in respect of any obligation of the employee met by the employer. The said section pre-supposes a pre-existing obligation, which the employee is to meet, but which is discharged by the ex-employer. In other words, if the employer had not stepped in to meet the expenditure, the employee would have been obliged to do so (Refer CIT v. LaIa Shri Dhar (1972) 84 NR 192 (Del)).

9. In the instant case, the employee on his own would not have enrolled for MBA course in London Business School, which would have been beyond his means. The decision to sponsor the appellant for higher education was taken by the employer company in its own discretion, voluntarily and suo motu, in the best interests of its business. It cannot, therefore, be said that by incurring the said expenditure, the employer company had met any obligation of the appellant. The provisions of section 17(2)(iv) of the Act are, therefore, not applicable.

10. After the appellant had completed his studies, the appellant intimated the employer of his intention of returning and rejoining the employer company. The employer company requested the appellant not to return for the time being in view of the unfavorable market conditions in India and seek alternative employment overseas to gain valuable experience. The employer company still, however, retains hen on the services of the appellant and could require the appellant to return to India by giving two months notice (Refer letter dated 30-4-1998 at p. 19 of the paper book). The aforesaid only seeks to defer the commencement of the seven year period.

11. Although the appellant is not technically employed with the employer company since 1-7-1998, the appellant continues rendering advice to the employer company and guide its investment decisions. The investment decisions made by the appellant till date, have benefited the employer company substantially, broad details of which are as below :

Financial Year

Profit from sale of shares

Dividend on shares

Gain/loss from redm of mutual fund units

Dividend on units

Vyaj Badla income

Interest income

Rs.

1999-00

3,44,316

20,989

16,48,240

59,257

2000-01

6,53,132

58,977

2,717

1,54,860

2,10,122

2001-02

2,76,980

95,361

94,491

8,72,918

1,51,296

2002-03

1,550

1,89,890

1,33,138

1,78,260

2003-04

6,78,845

1,59,822

1,553

up to 5-12-03

Total

12,66,191

5,25,039

2,30,468

10,29,331

18,58,362

38,812

12. Hypothetically stating, in case the appellant was not to return to India and not serve the employer company for the seven years period, the amount spent by the employer company would be recoverable from the appellant as a loan carrying interest at the rate of 20 per cent per annum. In such circumstances, the amount spent could only be considered as loan recoverable from the appellant 1~ut could not be regarded as perquisite.

13. The department had taken proceedings under section 201 of the Act against the employer company for alleged default in not deducting tax at source on the amount of expenditure incurred by the employer company on the higher education of the appellant, treating the same as perquisite.

14. Cancelling the order passed under section 201 of the Act, the Commissioner (Appeals) vide order dated 19-1-2001, passed in appeal No. Commissioner (Appeals)-V/60/TDS-Il(2)/2000-01, held that there was no benefit caused to the appellant as a result of incurring of the expenditure by the employer company-, on the contrary, the benefit was to the business of the employer company. The Commissioner (Appeals) held as under:

"I have considered the entire issue very carefully. The deductor company had the need for highly qualified financial experts as it is a finance company and offered financial services specially after the liberalisation of the Indian economy. To achieve its goal of expansion in the said field, in its wisdom, it took a decision that before expanding its business in the field of financial services, which promised good scope after liberalisation, the company must train and depute some of its employees. In pursuance of this goal, a resolution was passed by the Board of Directors apprising the company and its Chairman to do whatever was needful, including sending some of its employees for.study at the cost of the company, Mr. Natwarlal Gupta and Mrs. Sabita Gupta, expressed their willingness to pursue higher studies abroad and the cost was to be borne by the company. The most important condition of bearing the cost of their education abroad was that the employees on their return, must serve for 7 years in the company and in the event of not serving or quitting before the expiry of their seven year term, they were required to return the entire cost of education along with interest. The cost of the education was directly paid to the concerned university by the company. Necessary permission was obtained from

"A RBI for the said purpose. An agreement was signed by the concerned employees viz., Shri Natwarlal Gupta and Mrs. Sabita Gupta, wherein the employees agreed to the request and the terms and conditions of the company for going in for their higher study. In terms of the agreement, a bond was signed. The employees were required to serve a minimum period of 7 years at the salary and perks prevailing in India for the post given by the company. It was also stipulated that during the said period, the concerned employee will not render any service or advice to any other person in the field of the business in which the company is engaged. All these stipulations and agreement go to show that the deductor company had taken all steps to send the employees abroad at the cost of the company and on such terms and conditions which were agreeable to both the deductor company and the employees concerned. In such a situation it cannot be said that any perquisite resulted in the hands of the employees. In the hands of the company, the expenditure has been treated as an admissible deduction. In the hands of the employees, it cannot be proceeded for further training in the interest of the company's business. Therefore, the expenditure incurred orf the executives viz., Mr. Natwarlal Gupta and Mrs. Sabita Gupta could not have been added in their salary as perquisite for calculation at source..."

The order of the Commissioner (Appeals) has been accepted by the department and has become final.

In case of another employee, Mrs. Sabita Gupta, who was similarly sponsored for higher education, no perquisite has been added in her hands. Different yardsticks cannot be adopted in the case of different assesseds. For the reasons aforesaid, the addition on account of perquisite under section 17(2)(iv) of the Act calls for being deleted."

15. On the other hand, learned departmental Representative while relying on the findings of the authority below, contended that the amount in question has actually been paid by the employer in this case which is in respect of an obligation which was being payable by the appellant. The expenditure incurred was not at all having any connection with the business of the employer. The higher education has gone to the benefit of the appellant. Even after pursuing the higher education, the appellant has not returned back and remained abroad. He is no longer in the employment of the Indian company who is claimed to have sponsored him for higher education abroad. In fact, this is a case where the appellant had,gone abroad for higher studies along with his wife Smt. Sabita Gupta who is other employee of the same employer. The subsequent services after completion of higher education claimed to have been rendered by the appellant to the employer are in different capacity and rendering of the services does not go to justify the claim that his study abroad has benefited theemployer company substantially. The case law referred by the learned counsel for the assessed do not support the plea as those cases were in the context of contingent payment to be made by the employee. It is also not a fact on record that there is any factual benefit to the employer company. It is also the matter of fact that the assessed has gained personal knowledge and his qualification has been improved so as to give benefit to the assessed. The assessed was obliged to pay fees for the MBA course in London Business School. In case he did not meet this obligation, it was not possible for him to pursue the studies. The employer has made the payment of all such school fees and other expenses for which the assessed had an individual obligation. Such a payment is fully covered by the provisions of section 17(2)(iv) of the Income Tax Act and is liable to be taxed as pquisites in the hands of the assessed. A prayer, therefore, has been made to er reject the grounds taken by the appellant.

16. We have heard the parties with reference to material available on record and case law referred. The appellant is a specified employee whose income under the head salaries exceeds Rs. 24,000. The decision tb undergo higher education abroad was taken by the employer of its own volition at the cost of the company. The appellant had agreed to the conditions before actually enrolling for MBA course in London Business School. In case the appellant did not return to India after completion of his studies, there lies a different remedy for contravention of the terms of agreement. But for that reasons alone, it cannot be said that payment was made on behalf of the employee or for meeting out his obligation. The appellant in fact, did not have any obligation to pursue the said higher education, payment for which was made by the employer by sponsoring him in the interest of its business. Sec. 17(2)(iv) treats only those sums as perquisites which have actually been paid by the employer in respect of any such obligation which employee was himself liable to pay. In the instant case, there is no material on record to show * that the appellant had any obligation to pursue higher education on his own and incur any expenditure. The revenue itself did not treat similar payment as perquisite in the hands of appellant's wife Smt. Sabita Gupta, another assessed. On that count also a different view cannot be taken in the appellant's case in the light of decision of apex court in the case of Union of India v. Satish Panalal Shah (2001) 168 CTR (SC) 1 (2001) 249 ITR 221 (SC). The payment made by the employer under the facts and circumstances cannot be termed as a perquisite within the meaning of section 17(2)(iv) of the Act liable to tax in the hands of the appellant,

17. In the result, the appeal of assessed stands allowed.