Deduction is available towards Construction of houses for the needy persons by the assessee as it was not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit: Karnatak HC




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Deduction is available towards Construction of houses for the needy persons by the assessee as it was not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit: Karnatak HC

 

Observation by the Karnatka HC in the case of M/S. Kanhaiyalal Dudheria (Rep. By Its Partner, Sri. Navratanmal Bachhawat) Vs. JCIT cold be of wider benefit for the taxpayers. In the given case, the court has held that construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of “business expenditure”. Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside.

It has ordered in favour of the assessee. The complete order copy is as under:

M/S. KANHAIYALAL DUDHERIA (REP. BY ITS PARTNER, SRI. NAVRATANMAL BACHHAWAT) vs. JOINT COMMISSIONER OF INCOME TAX AND ANR.

HIGH COURT OF KARNATAKA

ARAVIND KUMAR &BELLUNKEA.S., JJ.

I.T.A.No.100016/2018 c/w I.T.A.No.100017/2018

31st July, 2019

(2019) 105 CCH 0415 KarHC

(2019) 310 CTR 0617 (Kar) : (2019) 418 ITR 0410 (Karn) : (2020) 269 TAXMAN 0170 (Karnataka)

Legislation Referred to

Section 10(2)(xv), 23, 36(1)(iii), 37, 37(1), 80G, 135, 143(1)

Case pertains to

Asst. Year 2011-12 and 2012-13

Cases referred:

Addl. CIT vs. Kuber Singh Bhagawandas (1979) 118 ITR 379 (MP)

C.J. Patel & Co. vs. CIT (1986) 158 ITR 486 (GUJ)

CIT & Another vs. Infosys Technologies Limited reported in (2014)360 ITR 174(Kar)

CIT vs. Chemicals & Plastics India Ltd. (2007) 292 ITR 115 (MAD)

CIT vs. Delhi Safe Deposit Company Limited reported in (1982)133 ITR 756 (SC)

CIT vs. M/s. Konkan Marine Agencies ITANO.603/2004

CIT vs. Madras Refineries Ltd. (2004) 266 ITR 170 (MAD)

CIT vs. Malayalam Planation Ltd. (1964) 53 ITR 140 (SC)

CIT vs. Nainital Bank Limited reported in (1966)62 ITR 638 (SC)

CIT vs. Panipat Woollen& General Mills Co. Ltd. (1976) 103 ITR 66 (SC)

CIT vs. Velumanickam Lodge (2009) 317 ITR 338 (MAD)

Eastern Investment Limited vs. Commissioner of Income Tax reported in (1951) 20 ITR 1

Indian Molasses Company vs. CIT reported in (1959)37 ITR 66 (SC)

Jaswant Trading Company vs. Commissioner of Income Tax reported in (1995)212 ITR 24

S.A. Builders Limited vs. CIT(Appeals) And Others reported in (2007) 288 ITR 1 (SC)

Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC)

Shahzada Nand& Sons vs. CIT (1977) 108 ITR 358 (SC)

Smith vs. Incorporated Council of Law Reporting For England And Wales – (1914) 3 KB 574

Sri Venkata Satyanarayana Rice Mill Contractors Company vs. CIT reported in (1997) 223 ITR 101 (SC)

Counsel appeared:

M.V. Seshachala, Sr. Counsel, H.R. Kambiyavar, Adv. for the Petitioner.:Y.V. Raviraj, Adv. for the Respondent.

JUDGMENT

Having heard the learned Advocates appearing for parties on 05.07.2019, we have admitted the above appeals to consider the following substantial question of law:

“Whether the authorities below were justified in disallowing a sum of Rs.1,61,30,480/- incurred towards construction of 169 houses for the villagers who had lost their homes due to natural calamity on the ground that it was not an expenditure allowable under Section 37 of the Income Tax Act, 1961, despite MOU dated 02.07.2010 having been entered by the petitioner with the jurisdictional Deputy Commissioner, Government of Karnataka?”

BRIEF BACKGROUND OF THE CASE:

  1. The appellant-assessee is carrying on the business of extraction of iron ore and also trading in iron ore. For the assessment years 2011-12 and 2012-13 return of income came to be filed by the assessee, was processed under Section 143(1) of Income Tax Act, 1961 (for short ‘Act’). The assessing officer disallowed the amount claimed by the assessee as social welfare expenses in a sum of ` 1,61,30,480/- and ` 55,90,080/- for the respective assessment years on the ground that it was not gained/incurred in the course of business but for philanthropic purposes by separate assessment orders dated 26.03.2004 and 16.02.2015 respectively.
  2. Being aggrieved by the said orders, assessee filed appeals before CIT(A) in ITANos.122& 20/CIT(A)/HBA/2014-15. Said appeals came to be dismissed by order dated 29.01.2016 by upholding assessment orders. Further appeal to Income Tax Appellate Tribunal in ITANo.782& 1495/BANG/2016 also came to be dismissed by affirming the orders of the assessing officer and the appellate authority. Hence, this appeal.
  3. We have heard the arguments of Sri M.V.Seshchala, learned Senior Counsel appearing for appellants and Sri.Y.V.Raviraj, learned Standing Counsel appearing for respondent/Income Tax Department.
  4. It is the contention of Sri.Seshachala that Government of Karnataka had requested the assessee in question and similarly placed persons to help the poor and needy people by providing houses, who had lost the same owing to natural calamity that occurred in north interior Karnataka during the last week of September and first week of October’ 2009 and in furtherance of it, assessee had entered into a MOU with Karnataka State Government, whereby assessee was required to construct the houses and deliver the same to Government and accordingly, assessee had constructed 169 houses in villages GundiGanur in SiriguppaTaluk and handed over possession of same to Government of Karnataka, for which assessee had incurred expenditure to the tune of `1,61,30,480/- during the financial year 2010-11 and `55,90,080/- during the financial 2011-12. It is his contention that authorities below had committed a serious error in disallowing the amount expended by the assessee towards construction of 169 houses and said expenditure would come within the definition of ‘Commercial Expediency’. He would also submit that said expenditure was a legitimate business expenditure and had been incurred for a philanthropic cause and on account of call given by the Hon’ble Chief Minister, Government of Karnataka. He would also submit that said expenditure was on account of business compulsion and assessee had entered into MOU with Government of Karnataka and as such said expenditure was incurred for the purposes of earning goodwill of the villagers and Government of Karnataka, which would in- turn permit smooth conduct of petitioner’s business without any hindrance. In support of his submission he relies upon the following judgments:

(1) (1959)37ITR66(SC):INDIAN MOLASSES CO. (P) LTD. vs. CIT

(2) (1966) 62 ITR 638 (SC): CIT vs. NAINITAL BANK LTD.

(3) (1986) 158 ITR 486 (GUJ): C.J.PATEL& CO. vs. CIT

(4) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT

(5) (1964)53ITR140(SC):CITvs. MALAYALAM PLANATION LTD.

(6) (1982) 133 ITR 756 (SC): CIT vs. DELHI SAFE DEPOSIT CO. LTD.

(7) (1976) 103 ITR 66 (SC): CIT vs. PANIPATWOOLLEN& GENERAL MILLS CO. LTD.

(8) (1977) 108 ITR 358 (SC): SHAHZADANAND& SONS vs. CIT

(9) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT

(10)(1997) 223 ITR 101 (SC): SRI. VENKATASATYANARAYANARICEMILL CONTRACTORS CO. vs. CIT

(11) (1979) 118 ITR 379 (MP): ADDL. CIT VS. KUBER SINGH BHAGAWANDAS

(12) (2007) 288 ITR 1 (SC): S.A.BUILDERS LTD. vs. CIT (APPEALS &ORS.

(13) (2004)266ITR170(MAD): CITvs. MADRAS REFINERIES LTD.

(14) (2007)292ITR115(MAD): CITvs. CHEMICALS & PLASTICS INDIA LTD.

(15) (2009)317ITR338(MAD): CITvs. VELUMANICKAM LODGE

(16) ITANO.603/2004: CIT vs. M/S. KONKAN MARINE AGENCIES

Hence, he prays for allowing the appeals by answering substantial question of law in favour of assessee.

  1. Per contra, Sri Y.V.Raviraj, learned Standing counsel appearing for the revenue would support the orders under challenge and would elaborate his submission by contending that if at all assessee was inclined to donate, they should have paid the said amount to the Government of Karnataka and sought exemption under Section 80G of the Act. He would contend when said exercise was not undertaken by the assessee and on the other hand the amount is spent for construction of houses, such expenditure cannot be allowed as an expenditure under Section 37 of the Act. He would also contend that an expenditure to be eligible for allowance under Section 37(1) of the Act, it should not be an expenditure of the nature described in Sections 30 to 36 not being capital expenditure or personal expenses but laid out or expended wholly and exclusively for the purposes of the business of the assessee. He would also further contend that earning good will with the local administration as claimed by the assessee does not become part of business expenditure under Section 37(1) as claimed by the assessee. Hence, relying upon the judgment of High Court of Rajasthan in the matter ofJASWANT TRADING COMPANY vs. COMMISSIONER OF INCOME TAX reported in (1995)212 ITR 24, he prays for dismissal of the appeals.

ANSWER TO SUBSTANTIAL QUESTION OF LAW:

  1. The pivotal issue which arises for our consideration in these appeals relates to disallowance of a sum of Rs.1,61,30,480/- and Rs.55,90,080/- for the assessment years 2011-12 and 2012-13 which has been incurred by the appellant-assessee for construction of 169 houses for the villagers who had lost their homes due to natural calamity.
  2. It is not in dispute that an MOU came to be entered into between appellants and the Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, a copy of which has been made available for our perusal. It would clearly indicate on account of unprecedented floods and abnormal rain which severely ravaged the North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon’ble Chief Minister to all to lend their hands for restoring normalcy.
  3. It is in this background, Hon’ble Chief Minister of Karnataka had made fervent appeal to all philanthropist, industrial and commercial enterprises to extend their wholehearted support in all possible manner to achieve the gigantic task of restoring normalcy and bringing hopes to the lives of more than 5.41 lakh persons.
  4. The assessee who is carrying on the business of extraction of iron ore and trading in iron ore thus entered into a Memorandum of Understanding with Government of Karnataka on 01.12.2009, whereunder assessee agreed to construct 256 houses at Honnarahalli and subsequently, on mutual understanding, constructed 169 houses at Gundiganur village, Siraguppataluk for providing shelter to flood affected persons who had lost their roof over their head and for the purpose of construction of houses, assessee spent an amount of Rs.1,61,30,480/- during the assessment year 2011-12 and Rs.55,90,080 during the assessment year 2012-13. The amount so spent by the assessee was reflected in the Profit and Loss Account by debiting the said amount under the head “Social Welfare (CM Relief Fund)”. Hence, assessing officer called upon the assessee to explain the nature of expenditure which had been debited to the Profit and Loss Account. The same was replied to by the assessee by bringing it to the notice of the assessing officer that said amount was spent towards construction of 169 houses and said expenditure was claimed as allowable business expenditure under Section 37 of the Income Tax Act.
  5. The above expenditure having been disallowed as already noticed herein above by the assessing officer is now the subject matter of this appeal and substantial question of law framed herein above is being adjudicated. Hence, it would be necessary to extract Section 37 of the Act which has been pressed into service by the assessee to claim said expenditure is to be allowed as business expenditure. It reads:

“37. 1) “Any expenditure” (not being expenditure of the nature described in sections 30 to 36, 21[* * *] 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. 1—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.]

Explanation. 2-For the removal of doubts, it is hereby declared that for the purposes of sub- section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.]”

  1. A plain reading of Section 37 would indicate that such expenditure not being expenditure of the nature described in Sections 30 to 36 or capital expenditure or personal expenses of the assessee would be an expenditure under this Section or in other words, any expenditure laid out or expended wholly and exclusively for purposes of the business would be allowable in computing the income chargeable under the head “Profit and gains of business or profession” under this Section.
  2. A plain reading of Section 37 would also indicate that emphasis is on the expression “wholly and exclusively for the purposes of the business or profession”. These two expressions namely, “wholly”and “exclusively” being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives the said amount. Thus, the purpose and intent must be the sole purpose of expending the amount as a business expenditure. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency would also arise.
  3. The Hon’ble Apex Court in the case ofINDIAN MOLASSES COMPANY vs CIT reported in (1959)37 ITR 66 (SC) has held that expenditure what is paid out or away and is something which is gone irretrievably would be deductible for purpose of income tax. It has been held:

“Expenditure” is equal to “expense” and “expense” is money laid out by calculation and intention though in many uses of the word this element may not be present. But the idea of “spending” in the sense of “paying out or away” money is the primary meaning “Expenditure” is thus what is “paid out or away” and is something which is gone irretrievably. Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure.”

  1. In the matter ofCIT vsNAINITAL BANK LIMITED reported in (1966)62 ITR 638 (SC) it came to be held that mere liability to satisfy an obligation by an assessee is undoubtedly not expenditure, it is only when assessee satisfies the obligation by delivery of cash or property or by settlement of accounts that there is expenditure.
  2. In order to understand and appreciate the expression “commercial expediency”,it would not be out of context to ascertain the meaning of “business expense“. In Black’s Law Dictionary, 9th edition, the said expression has been defined as:

“business expense. (1858) An expense incurred to operate and promote a business; esp., an expenditure made to further the business in the taxable year in which the expense is incurred..Most business expenses – unlike personal expenses are tax deductible.”

Whereas, the extraordinary expense is defined as under:

“Extra-ordinary expense – an unusual and unfrequent expense, such as a right/off – of goodwill or a large judgment. As used in a Constitutional provision authorizing a State to incur extra-ordinary expenses, the term denotes an expense for the general welfare compelled by an unforeseen condition such as a natural disaster or war also termed as extra-ordinary item.”

Likewise, expression “expediency” has been defined as:

“Expediency.A word of large import, comprehending whatever is suitable and appropriate in reason for the accomplishment of the specified object. As supplied to public welfare legislation, the term involves utility, and has reference to matters which are wholly for legislative cognizance.

The term is said to be nearly synonymous with “necessity” where that term is used in a sense not importing an absolute necessity, as in the case of governmental interference with private property when necessary for the public good, and has been distinguished from “emergency” see 29 C.J.S. p 762 note 38, and “reasonableness”.

  1. The Hon’ble Apex Court in the case ofCIT vs DELHI SAFE DEPOSIT COMPANY LIMITED reported in (1982)133 ITR 756 (SC) has held a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on the business, may be expended wholly and exclusively for the purpose of the trade. As to what would be the test of commercial expediency was the subject matter of consideration by the Hon’ble Apex Court in the case of CIT vsPANIPATWOOLLEN AND GENERAL MILLS COMPANY LIMITED reported in (1976)103 ITR 66 and held:

“8. Great stress was laid xxx share the losses. The test of commercial expediency cannot be reduced in the shape of ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a strait- jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. It seems to us that in ultimate analysis the matter would depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which it sought to be achieved for incurring those expenses. If the expenses incurred amount to a profit of an enduring nature they may be treated as capital expenditure, whereas if the expenses merely serve to promote or increase the commercial activity they may amount to an expenditure which is incurred for the purpose of the business.”

  1. The circumstances in which the expenditure incurred and claimed as allowable under Section 37 of the Act would have to be examined on the facts obtained in each case. There cannot be any straight jacket formula in this regard. What might be commercial expediency to one business enterprise may not be so for another business undertaking. It varies from one business to another, expediency depends on nature of business, the motive and purport of the business carried on to earn profit are also the factors which will have to be considered, determined and answered in the facts obtained in each case. In other words, commercial expediency varies from one assessee to another. By a precise mathematical formula, it cannot be defined as to what can be commercial expediency in a given case nor it can be put in a water tight compartment. To put it differently, the revenue authorities or the Courts when faced with such situation, will have to place itself in the position of such business men and ascertain whether the expenses so incurred can be said to have been expended for the purpose of the business or the transaction was merely camouflage for the purpose of reducing the tax component by depicting it as an expenditure by reducing the quantum of profit in the profit and loss account.
  2. The expression “wholly and exclusively” found in Section 37 of the Act cannot be understood in a narrowed manner. In other words, it has to be given interpretation so as to achieve the object of the Act. Thus, where the amount is expended and claimed as an expenditure allowable under Section 37(1) of the Act, it need not be that such disbursement is made in the course of, or arises out of, or is connected with the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits.
  3. In fact, the Hon’ble Apex Court approving the observation ofATHERTON’scase – 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held:

“..a sum of money expended, non of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade”, can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of the expenditure and its depressing effect on the taxable profits would not deflect the applicability of the section. The acid test, “did the expenditure fall on the assessee in this character as trader and was it for the purpose of the business”.

  1. The co-ordinate Bench in the matter ofCIT & ANOTHER vs INFOSYS TECHNOLOGIES LIMITED reported in (2014)360 ITR 174(Kar) while examining the claim of the assessee to treat the expenditure incurred by it for installing the traffic signals as business expenditure under Section 37(1) of the Act, had held ” for purpose of business” used in Section 37(1) of the Act should not be limited to meaning of earning profit alone and it includes providing facility to its employees also for the efficient working. It came to be held:
  2. As is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37(1) of the Act, if it satisfies otherwise the tests laid down by law. Similarly, the words ‘for the purpose of business’ used in Section 37(1) of the Act, should not be limited to the meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex- employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely phrase means something which comes out of the traders pocket.”
  3. The requirement of commercial expediency would be judged in the context of prevailing socio economic conditions and such thinking which places the general interest of the community above the personal interest of the individual and beliefs that a business or undertaking is a product of combined efforts of all, then, such expenditure incurred by the business undertaking may partake the character of commercial expediency. Such expenditure depends upon the terrain in which it travels.
  4. In the matter ofSRI VENKATASATYANARAYANARICE MILL CONTRACTORS COMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by the District Collector would be against public policy or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held ‘any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee’s business or which results in the benefit of the assessee’s business has to be regarded as an allowable deduction under Section 37(1)’. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly connected with the assessee’s carrying on the business. It is further held:

“10. From the abovesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under s.37(1) of the Act when such payment had been made for the purpose of assessee’s business.”

  1. In the case ofS.A.BUILDERS LIMITEDvs CIT(APPEALS) AND OTHERS reported in (2007) 288 ITR 1 (SC), it has been held by the Hon’ble Apex Court that expression “for the purpose of business” includes expenditure   incurred   voluntarily   for   commercial expediency, and it is immaterial if a third party also benefits thereby. It is further held:

“In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section   36(1)(iii) because in Section 37 also the expression used is “for the purpose of business”. It has been consistently held in decisions relating to Section 37 that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.”

“The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”

  1. It has been held under English income-tax that sums paid to an employee as pension or gratuity are deductible as money laid out and expended for the purposes of trade, profession or avocation in the case ofSMITH vs INCORPORATED COUNCIL OF LAW REPORTING FOR ENGLAND AND WALES – (1914) 3 KB 574 and it reads thus:

“The respondents, the Incorporated Council of Law Reporting for England and Wales, were a limited company incorporated under s.23 of the Companies Act, 1867, with no power to pay any portion of their earnings to their members by way of profits. In 1911 the respondents gave a gratuity of 1500/- to one of their reporting staff on his retirement after long service. The payment was not made under any contract between the respondents and the reporter, but it was within the powers conferred by the respondents’ memorandum and articles of association, and it was the habit of the respondents, to give gratuities to reporters on retirement after long service. The 1500/- was included in the respondents’ trading accounts for 1911 as an item of expenditure, and an additional assessment to income tax under Sched. D was in consequence made on the respondents of 500l., i.e., one-third of 1500l., in respect of their profits for that year. On appeal by the respondents to the Commissioners, they held that the 1500lwas allowable to the respondents as a business expense in calculating the profits of the year for income tax purpose.”

“It seems to me that the question whether money is wholly and exclusively laid out or expended for purposes of a trade is a question of fact. Judges of the High Court may know, by the accident of their previous training, something about a particular trade. To take a personal instance, I may be assumed to know something about shipping, but there are many trades about which I should know absolutely nothing whatever, and there are equality many trades about which any of my learned Brethren would know nothing whatever except what they were told by the Commissioners. In many cases the question whether the money was wholly or exclusively laid out or expended for the purposes of the trade must depend upon a knowledge of the facts of the trade, of the way in which it is carried on, of the effect of payments made in that trade, all of which are questions of fact. There may be cases where it is clear even to a Judge who knows nothing about the trade, that a particular payment could not be wholly or exclusively laid out for the purposes of the trade. I do not desire to discuss politics, but I take examples which seem to me fairly clear. Payments for political purposes might conceivably be for the purposes of trade. It might be that a payment by a company to the Tariff Reform League might be of great advantage to its trade. It might be that a payment by a company to a political party which was supposed to be identified with the interests of a particular trade might be to the advantage of the trade; but one can easily imagine cases such as a payment by a company to the National Service League, where it would be impossible to conceive that anybody could find that such money was wholly or exclusively laid out or expended for the purposes of the trade. There may be cases in which the Court would have to say there is no evidence on which any tribunal could find that this sum was laid out or expended for the purposes of such trade, but in most cases it appears to me that it depends on the facts of the trade of which the Court has no knowledge, and for which it must depend on the findings of the Commissioners.”

  1. Keeping the above principles in mind, when the facts on hand are examined, it would clearly indicate that assessee has incurred the expenditure towards construction of 169 houses for the villagers who had lost their home due to natural calamity. In order to cater to the needs of those destitute persons who had lost the roof over their head on account of natural calamity, assessee constructed the houses by expending the amount. However, assessing officer and the authorities have held that it was not incurred for the purpose of business. One glaring factor which cannot go unnoticed is, that a MOU came to be entered into by the appellant on 01.12.2009 with the Government of Karnataka, as already noticed herein above, whereunder assessee agreed to construct houses to rehabilitate the flood victims at the earliest possible time and for undertaking the said task, the appropriate Government provided the assessee the land free from encumbrances, upon which the construction of houses came to be commenced, executed and handed over within the time limit agreed to under the MOU. It was the term of the MOU that the donor (assessee) has joined hands with the Government of Karnataka to bring a total relief in the lives of the people who were worst affected by the unprecedented rain and floods and the said project was undisputedly a philanthropic project. In fact, it was agreed to between the parties that the donor himself would incur financial liability, maintain high standard of quality construction and would construct the houses as per the design offered by the Government of Karnataka, apart from ensuring quality of material used for the construction is of the superior quality. That apart, the work completion certificate has been issued by the Deputy Commissioner, Ballary and it is also certified that a sum of Rs.2,22,76,162/- has been expended by the assessee for construction of 169 Aasare houses at Gundigana village. Thus, it boils down to the fact that construction of houses has been carried out by the assessee as agreed to under the MOU.
  2. Tribunal has rejected the contention of the assessee that expenditure incurred for the purpose of business and the onus being on the assessee has not been discharged. It is also further held that no factual condition was laid by the assessee to establish the expenditure so incurred was for business purpose nor any attempt was made before the lower authorities. It further held that assessee has made a bald assertion.
  3. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee’s business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee’s business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon’ble Apex Court in case ofSRI VENKATASATHYANARAYANA RICE MILL CONTRACTORS COMPANY‘s case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee’s business cannot be regarded as payment opposed to public policy. It came to be further held making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Act, when such payment has been made for the purposes of assessee’s business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. Infact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy.
  4. In the facts on hand, it requires to be noticed that assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the assessee in its wisdom and as prudent business decision has entered into MOU with the Government of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of “business expenditure”. Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside.
  5. However, it requires to be noticed that while examining the claim for deduction under Section 37(1) of the Act the assessing officer would not blindly or only on the say of the assessee accept the claim. In other words, assessing officer would be required to scrutinise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of the Act and not otherwise.
  6. For the reasons aforestated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee.

Hence, we proceed to pass the following :

ORDER

(i) I.T.A.Nos.100016/2018 and 100017/2018 are allowed.

(ii) Order dated 17.05.2017 passed by Income Appellate Tribunal, ‘B” Bench, Bengaluru in ITA Nos. 782 & 1495/Bang/2016 for the assessment years 2011-12 and 2012- 13 are set aside and appeals filed by the assessee before the Tribunal is allowed.

(iii) Assessment proceedings of the years 2011-12 and 2012-13 are remitted to the assessing officer to examine the claim of the assessee in the light of our observations made herein above.

(iv) No orders as to costs.




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