Taxation Law Project Work

~ Case Study ~
Echjay Forgings Ltd. v. ACIT & Anr. (2010)

Submitted To-

CS. Monica Suri

Submitted By-

Ambika Gupta Kartik Tyagi (Group Leader) Prince Arora

B.A., LL.B (Hons.)

Acknowledgment………………………………………………………………….1

Abstract……………………………………………………………………………2

Need of the Study…………………………………………………………………2

Introduction………………………………………………………………………4

Research Methodology…………………………………………………..……….4

Statement of the Problem………………………………………………….……..4

Facts of the case…………………………………………………………….……5

Decision of the Tribunal……………………………………………………..…..6

Section 37, IT Act, 1961…………………………………………….……………7

Validity of the Decision of the Tribunal…………………………………………8

Authorities cited……………………………………………………………....….10

Limitations of the study………………………………………………………….10

Suggestions.………………………………………………………………….…..10

Conclusion………………………………………………………………………11

References………………………………………………………………….……12
 ACKNOWLEDGMENT

We have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals and organizations. We would like to extend our sincere thanks
to all of them.

We are highly indebted to CS. Monica Suri for their guidance and constant supervision as well as for
providing necessary information regarding the project & also for their support in completing the
project.

Our thanks and appreciations also go to our colleagues in developing the project and people who have
willingly helped us out with their abilities.

We would like to express our gratitude towards our parents for their kind co-operation and
encouragement which helped us in the completion of this project.
ABSTRACT

Tax is the compulsory public contribution and primary source of government revenue. Tax evasion
is an unlawful action which results in inequality of income distribution and brings the economic
growth to a halt, leading to economic instability. The act of tax evasion is usually associated with
informal economy. The inequality in the income distribution widens the tax gap, the amount of
unreported income of an individual. This is sum of the total difference between amount to be reported
and the actual amount reported. This paper attempts to understand the relationship between tax
revenue and tax evasion with government’s revenue. In contrast, the paper also studies the principle
of tax avoidance and states how an individual or a corporate organisation can legally use tax laws to
reduce the tax burden. Both the activities are in a range making a state’s tax system unfavourable.
Ultimately tax avoidance and tax evasion reduces the government’s revenue source, but the latter
reduces the income flow for the government significantly. The paper shows that a large number of
people considered paying taxes as burden even if the amount of tax is significantly less. This is may
be due to the fact that tax payers feel that their tax money isn’t utilised efficiently by the government
or the tax rate is high.

NEED OF THE STUDY

In recent times, there has developed a practice of showing favouritism towards one’s own family
members or friends in economic or employment terms. Favours or jobs are often granted to friends
or relatives, without any regard to merit. These practices can have a damaging effects on businesses-
such as eroding the support of non-favored employees or reducing the quality and creativity of
management. In response to this, even some large companies have instituted ‘anti-nepotism’ policies
in their framework.
 INTRODUCTION

Tax, is the payment we make to the Government, for a good/service. It is this money that Government
uses for all the functions it is expected to do. Military, Infrastructure - Economic and social, Basic
amenities, Welfare etc.

In India, the Taxes are classified in to two types, direct taxes and indirect taxes.
A. Direct Taxes are those which are paid directly by the individual or organization to the imposing
authority. They are levied on income and profits.
Examples,
o Corporation tax
o Taxes on income
o Estate duty
o Interest Tax
o Wealth Tax
o Gift Tax
o Land Revenue
o Agricultural tax
o Hotel receipts tax
o Expenditure tax
o Others

B. Indirect Taxes are those which are not paid directly by the individual or organization to the
imposing authority. They are levied on goods and services and not on income and profits.
Examples,
o Customs
o Union excise duties
o Service tax
o State Excise duty
o Stamp and registration fees
o General Sales tax
 o Taxes on vehicle
o Entertainment tax
o Taxes on goods and passengers
o Taxes and duties on electricity
o Taxes on purchase of sugarcane
o Others

RESEARCH METHODOLOGY

An Empirical method of research was adopted. This Research paper is purely based on secondary
data. Various figures are obtained from the different websites, journals, Taxman magazines,
newspapers and reference books on Taxation Law.

STATEMENT OF THE PROBLEM

Can expenditure incurred by a Co. on higher studies of the director’s son abroad be claimed as
business exp. Under Section 37 of the Income Tax Act, 1961 on the contention that he was
appointed as a trainee in the co. under “apprentice training scheme”, where there was no proof of
existence of such scheme?
 FACTS OF THE CASE

The facts in the case of Echjay Forgings Ltd. Vs. ACIT & Another, (2010) 328 ITR 286 (Bom.),
are as follows-

1. The Assessee- company was engaged in manufacturing various engineering items like steel
forgings, automobile components, rings, etc.

2. For AY 1998-99, Shri Dhananjay Doshi, one of the director’s son, was selected and sent abroad
for higher studies in the field of industrial engineering on the condition that he would serve the
company for a period of at least five years after completion of the study on a reasonable
remuneration to be decided by the Board of Directors.

3. An Expenditure of Rs. 11,83,697/- was incurred on the education.

4. The finding of the ld. CIT was that there was no evidence that Shri Dhananjay Doshi was recruited
as a trainee by open competitive examination or through any regular selection process. It is also
not clear as to what he was doing as a trainee as relevant documents had not been furnished.
Therefore, the only logical conclusion is that there is no nexus between the expenditure incurred
on foreign education abroad and the business of the Assessee-company. This finding was
confirmed by the Court. The facts were sought to be distinguished by the ld. counsel by mentioning
that there was no evidence of appointment as trainee and the capacity of the director’s son was not
established.

DECISION

1. On this issue, it was observed that there was no evidence on records to show that any other person
at any time was appointed as trainee or sent abroad for higher education. Further, there was no
nexus between the education expenditure incurred in abroad for director’s son & business of
Assesses. Therefore, the aforesaid expenditure. was NOT deductible under Section 37 of the
Income Tax Act, 1961.
2. there was no evidence on record to show in what capacity the Director’s son was sent abroad. It
was sought to be canvassed that he was appointed as a trainee. The letter of appointment (of the
Director’s son) had neither any reference number nor it was backed by any previous application
 made by the trainee. Moreover, there was no evidence on record to show that any other person at
any point of time was appointed as a trainee.
3. In the aforesaid facts and circumstances of the case, the appeal was dismissed in limine for want
of substantial question of law.

RELEVANT PROVISION OF THE INCOME TAX ACT, 1961 INVOLVED

“37. (1) 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”.

[Explanation. —For the removal of doubts, it is hereby declared that any expenditure incurred by an
Assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to
have been incurred for the purpose of business or profession and no deduction or allowance shall be
made in respect of such expenditure.]”

Conditions for allowance under Section 37

The provision in issue is Section 37 of the Income Tax Act, 1961, which is a residuary Section for
the allowability of business expenditure. As per Section 37(1) of the Act, an expenditure can be
claimed as a deduction while computing income from "business or profession" if the following
condition are fulfilled—

a. Such expenditure should not be covered under the specific section i.e. Sections 30 - 36.
b. Expenditure should not be of capital nature.
c. The expenditure should be incurred during the previous year.
d. The expenditure should not be of personal nature.
e. The expenditure should have been incurred wholly or exclusively for the purpose of the business or
profession.
f. The business should be commenced.
 VALIDITY OF THE DECISION OF THE TRIBUNAL IN LIGHT OF SECTION 37

The question at any rate is a ‘mixed question of fact and law’ and depends upon the facts of each case.
In the present case, it does not seem necessary to answer this question because on the facts the claim
of the Assessee has not been allowed by the Tribunal that benefit to the Director’s son, Mr. Dhananjay
Doshi is not merely incidental. The intention of the Director was not bona fide to the extent of
claiming deductions under Section 37, Income Tax Act. Therefore, the question was not answered in
favor of the Assessee. Here again, the decision is that the facts of each case have to be looked into
for coming to an appropriate conclusion in the matter.

AUTHORITIES CITED IN THE PRESENT CASE

1. Sakal Papers Pvt. Ltd. v. CIT (1978) 114 ITR 256

The facts of the case are as follows-

a. The Assessee-company was a leading publisher of Marathi newspaper. It was a closely held
company with only two shareholders.

b. The company incurred expenditure in respect of education of Ms. Leela Parulekar, the daughter
of both the directors and share-holders, on her education in USA. She was holding master’s degree
in Arts from Poona University with English and French as special subjects. She had been working
in the editorial department from September, 1975, starting as an apprentice.

c. A resolution was passed by the company that she should be sent abroad for education in journalism
and business administration in a good university in USA, which would be good for progress of the
paper. University and course were selected by Ms. Parulekar in consultation with one of the
directors.

d. In pursuance of the resolution, she went to USA and attended Graduates’ School of Journalism at
Columbia University at New York and secured Master’s Degree in Journalism. She further spent
three months for obtaining practical training in printing and lithography.

e. Expenditure of Rs. 29,654/- was incurred by the company in this year, which included the passage
 money and expenses. Out of this amount, a sum of Rs. 6,000/- was claimed as deduction for the
year in question.

f. On return from the U.S, she joined the editorial department, where she has been working with the
company. However, no agreement had been drawn between her and the company binding her or
committing her to serve the company for a specified period of time.

Held,

The Tribunal held in favour of the Assessee by mentioning inter-alia that she had been serving
with the Assessee - company, secured degree and training which will be of assistance to the
Assessee - company and served the Assessee company as a matter of fact after her return to India.
In this situation, the factum of relationship with the directors was sufficient to confer assurance
that the training will be utilized for the benefit of the Assessee company and in this circumstance
the existence of agreement or bond was of no consequence.

2. CIT Vs. Dr. M.S. Shroff, (1971) 80 ITR 687 (Del)

The facts of the case are as follows-

a. The Assessee is an ophthalmic surgeon in New Delhi. He derives income by way of salary and
also from his profession. The Assessee visited several hospitals in different countries in Europe
and Egypt, with a view to keep himself abreast with the latest techniques in ophthalmology.

b. An expenditure of Rs. 10,079/- was incurred on the tour, which included expenditure on tickets
and visa also. This amount was claimed as expenditure against the professional income.

c. The Tribunal found as a matter of fact that the Assessee had visited foreign countries on his own
and that he had not been deputed by his employer, Dr. Shroff’s charity hospital. The main object
was to keep himself up-to-date in the techniques of his profession.

d. However, it has been contended that he also drew some benefit incidentally in his capacity as
employee. It was held that this was not a relevant circumstance and, therefore, the appeal was
decided in favour of the Assessee.
 Held,

The Hon’ble Court mentioned that the question as to how far the expenditure incurred by a salaried
employee, who proceeds on a study tour abroad and thereby acquires knowledge and experience
which not only benefits his employer but also adds to his professional and mental equipment can
be apportioned, is one on which opinions may differ.

LIMITATIONS OF THE STUDY

1. In the present case, there was no evidence on record to show in what capacity the Director’s son
was sent abroad. It was sought to be canvassed that he was appointed as a trainee.
2. The letter of appointment (of the Director’s son) had neither any reference number nor it was backed
by any previous application made by the trainee.
3. Moreover, there was no evidence on record to show that any other person at any point of time was
appointed as a trainee.
4. The study is based on secondary data and the limitations of using secondary data may affect the
results.
All of the abovementioned points made the whole case lurking on one side (favouring the revenue
authorities).

SUGGESTIONS

In the present case, had there been a contract between the Assessee company and the Director’s son,
Mr. Dhananjay Doshi that upon his coming back to India from abroad, he would serve for the parent
company for a specific period, then in that case the Assessee company could have been successful
in its attempt to claim deductions under Section 37 of the Income Tax Act, 1961.
CONCLUSION

Tax evasion is primary cause of low government revenue. This is due to the fact that there exist
corrupt tax collectors, inefficient tax structure that the most of the developing countries around the
world suffer tax evasion. This results in accounted money and creation of a parallel economy. The
tax structure and collection tiers are to be changed if there needs to be change in a country’s
economy. Tax relaxation is required for reducing the amount of tax evasion and stricter punishments
are to be enforced for the crimes of tax evasion to reduce the gap. People do consider paying taxes,
even if the person is economically sound. It may be due to the fact that their tax money doesn’t
reach the government for social welfare measures.
 REFERENCES

Primary Sources

 Dr. Vinod K. Singhania & Dr. Monica Singhania, Students’ Guide to Income Tax, Taxmann
Publishers (60th Ed. 2019).

 T N Manoharan, Students Handbook on Taxation, Snow white Publishers (2019 Ed.).

Secondary Sources

 https://www.taxpublishers.in/

 https://taxguru.in/

 http://www.gyaanvijayacademy.com/

 http://www.lawyerservices.in/
 Deccan Chronicle Holdings Limited vs . Indiabulls Housing Finance Ltd . and Ors
. ( 26 . 10 . 2018 - HYHC )