2013 (12) TMI 366 - HC - Income Tax

Contributions under instructions of State Government - Whether allowable as deduction u/s 37(1) or not - Held that - Business expediency is a wide term and includes all those decisions or actions which are taken by the company itself wholly or exclusively for the business purpose. The decision should be taken by the company itself and not by the outsider - Under the Companies Act or Income Tax Act, no privilege has been conferred on the government except exemption granted in pursuance to the provision contained therein - So far as running of business by the government companies incorporated under Section 617 of the Act is concerned, it must be done by the Company itself and not by the government - Government may take policy decision but does not seem to have got right to interfere with the routine functioning of the government companies with regard to business expediency - The expenditure made like in the present case on the direction of the government shall not be business expenditure and deduction shall not be allowable. Diversion of fund by the government to meet out the requirement of a government departments seems to be not permissible - It was not a policy decision to secure business interest of the assessee but the decision to meet out the requirement of estate department - No decision was taken by the Board of assessee in terms of letter of government that it requires houses for its officers at Lucknow to meet out the business expediency - In the absence of any decision by the Board or the Managing Director, the expenditure incurred seems to be not business expenditure and no deduction is allowable - Decided against assessee.

Issues Involved:
1. Whether the contributions of Rs. 1 lac and Rs. 10 lacs made by the appellant under the instructions of the State Government are allowable as deductions under Section 37(1) of the Income Tax Act, 1961 from the income of the appellant.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction by Assessing Authority:
The assessing authority disallowed the deduction for contributions of Rs. 1 lac for a library for PCS officers and Rs. 10 lacs for the construction of flats for senior officers. The authority reasoned that these contributions were not incurred for business purposes and thus did not qualify as business expenditure under Section 37(1) of the Income Tax Act. The assessing authority emphasized that the contributions were made for welfare activities for weaker sections, which do not directly relate to the business activities of the appellant.

2. Appellate Authority's Viewpoint:
The appellate authority upheld the assessing authority's decision, stating that the contributions were made under the direction of the State Government but were not allowable because the appellant, being a company incorporated under the Companies Act, should independently determine the utilization of its funds. The appellate authority noted that the company's affairs should be managed by its Board of Directors and not by the State Government.

3. Tribunal's Decision:
The Tribunal initially remanded the matter for reconsideration but ultimately dismissed the appeal, stating that the contributions were not for the benefit of Scheduled Castes, Scheduled Tribes, and other backward classes. The Tribunal concluded that the contributions were not made for business purposes but were solely in pursuance of directions from the State Government, which does not qualify them as business expenditure under Section 37(1).

4. Legal Framework and Company's Memorandum of Association:
The court examined the company's Memorandum of Association, which vests control of the company's affairs in its Board of Directors and Managing Director. The Memorandum outlines the specific powers of the Board, including the management of business affairs and the utilization of funds. The court emphasized that any business expenditure should be decided by the company itself, considering business expediency, and not by external directives from the government.

5. Business Expediency and Government Directives:
The court highlighted that business expediency is a matter for the company to determine and not the government. The decision to incur business expenditure should be made by the company itself, following the statutory provisions, rules, and regulations, and not based on government directives. The court warned that allowing the government to direct business expenditures could lead to corruption and misuse of company resources.

6. Case Law References:
The court referred to several cases, including CIT vs. Bombay Dying and Manufacturing Co. Ltd., CIT vs. Mysore Cements Ltd., and Aluminium Corporation of India Ltd. vs. CIT, to illustrate that business expenditures must be decided by the company itself and should be wholly and exclusively for business purposes. The court distinguished these cases from the present case, noting that in those cases, the expenditures were decided by the companies themselves and were directly related to their business activities.

7. Section 37(1) of the Income Tax Act:
The court reiterated that under Section 37(1), any expenditure incurred by an assessee should be for business purposes and not prohibited by law. The decision to incur such expenditure must be taken by the assessee itself, considering business expediency.

8. Conclusion and Judgment:
The court concluded that the contributions made by the appellant were not business expenditures as they were made solely based on government directives without considering business expediency. The court affirmed the Tribunal's order and dismissed the appeal, answering the substantial question of law against the appellant and in favor of the revenue. The court emphasized that the decision-making process regarding business expenditures should be within the company's control and not influenced by external directives from the government.

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