Decided on February 07,1994



Ram Swarup, Judicial Member - (1.) THESE appeals by the assessee are directed against the CIT (Appeals') order dated 30-10-1991, relating to the assessment years 1984-85, 1985-86, 1986-87 and 1987-88.
(2.) The assessee/appellant derives income from Distributorship of Kirloskar Pump, Electric Motor, Oil Engines and some other accessories. The business of the above nature is being carried on for the last several years. All the partners of the firm belong to Muthey family. One of the partners was Shri Vasant Muthey. His son Vijay Muthey after doing his B.Com., obtained Diploma in Business Management from Pune University. He joined the assessee-firm on 1-7-1981 and worked up to May 1982, on a salary of Rs. 1,200 per month. It is notable that for the assessment year 1983-84, the Assessing Officer allowed the deduction of salary paid to Shri Vijay Muthey. Under Clause 2 of the said agreement the minimum period of employment was kept as seven years from 1-7-1981. The counsel for the assessee at the time of hearing 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 in 1986. He started performing his active duties from that time. Expenditure of the following amount was incurred by the assessee-firm on the training of Shri Vijay in United States as below :� JUDGEMENT_13145_TLIT0_19940.htm The salaries paid to him amounted to Rs. 18,000, Rs. 24,000, Rs. 36,000 and Rs. 30,000 respectively for the years under consideration. During the regular assessment proceedings, the Assessing Officer while examining the expenditure incurred by the assessee on providing educational facilities to Shri Vijay, came to the conclusion that the entire expenditure including the salary, expenses for the years were hit by the provisions of Section 40A(2) of the Act. Therefore, for the reasons recorded by him in para 8 of his order, the Assessing Officer held that Shri Vijay was sent to USA for training and was provided salary only because he was the son of one of the partners and no services were rendered by him during all these years when he was in USA. Therefore, he disallowed the expenditure mentioned above for the years under consideration.
(3.) WHEN the matter was taken in appeal to the CIT (Appeals), he agreed with the Assessing Officer that the only reason why the assessee-firm paid educational expenses and salary to Shri V.V. Muthey was that he was the son of a partner of the firm. He held that the assessee did not engage or employ any other person with similar qualification and did not send any other person abroad for any training. He held� that the so-called agreement with Shri Vijay Muthey was only a colorable device to justify the payment of his educational expenses and salary to him. It is further notable that it is not this ground which has been relied upon by the Assessing Officer for making the disallowance. The assessee is in appeal before us.;

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