2017 (9) TMI 1700 - HC - Income Tax

Disallowance of sum contributed to the trust registered u/s. 12AA and holding the said amount to be business expenditure - Held that - The expenses actually given in donation to the trust was to be with the requirement of trust for the benefit and betterment of quality of milk to meet the health of the animals it was so held by the Tribunal - Tribunal has rightly considered the argument raised by counsel for the appellant and decision cited by him were dealt with. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the ITAT was justified in deleting the additions made by the Assessing Officer by way of disallowance of contributions to a trust registered under Section 12AA, treating them as business expenditure instead of donations allowable under Section 80G.

Issue-Wise Detailed Analysis:

1. Justification of ITAT in Deleting Additions by Assessing Officer:
The primary issue revolves around whether the contributions made by the appellant to a trust registered under Section 12AA of the Income Tax Act, 1961, can be treated as business expenditure under Section 37(1) or should be considered donations eligible for deduction under Section 80G.

Appellant's Argument:
The appellant, a cooperative society engaged in the procurement and processing of milk, argued that the contributions to the trust were for the purpose of enhancing animal productivity, which directly benefited their business. They contended that these contributions were made to facilitate better quality and quantity of milk, which is essential for their business operations.

CIT(A)'s Findings:
The CIT(A) observed that the contributions made to the trust could not be considered as business expenditure under Section 37(1) since the appellant did not incur the expenditure directly. The CIT(A noted that the trust, although registered under Section 12AA and eligible under Section 80G, primarily spent the contributions on honorarium, work incentives, and vehicle maintenance rather than directly on the healthcare of milch animals. The CIT(A upheld the disallowance made by the Assessing Officer but allowed the deduction under Section 80G.

Tribunal's Findings:
The Tribunal found that the contributions made by the appellant to the trust were directly linked to the procurement of better quality and quantity of milk. It was noted that the trust incurred expenses for providing veterinary care, regular treatment, emergency care, preventive care, breed improvement, and nutritional supplements for the animals. The Tribunal concluded that these expenses were incurred wholly and exclusively for the purpose of the appellant's business and allowed the deduction under Section 37(1).

High Court's Analysis:
The High Court considered the Tribunal's findings and various case laws cited by both parties. The court emphasized that for an expenditure to qualify under Section 37(1), it must be laid out wholly and exclusively for the purposes of the business. The court noted that the burden of proof lies on the assessee to demonstrate the direct nexus between the expenditure and the business.

The court referred to several judgments, including:
- Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT: This case established that voluntary payments made on grounds of commercial expediency to facilitate business operations could be considered business expenditure.
- Season Rubber Ltd. v. CIT: The court held that contributions made to a school and hospital development committee were not deductible as business expenditure since the benefit to the business was remote.
- CIT v. Bharat Heavy Electrical Limited: The court found that donations made for promoting education in areas where the assessee had units were not deductible as business expenditure due to lack of direct business connection.

The High Court concluded that the Tribunal was justified in treating the contributions as business expenditure under Section 37(1) because the expenses were directly related to the appellant's business operations. The court dismissed the appeals, affirming the Tribunal's decision.

Conclusion:
The High Court upheld the Tribunal's decision, allowing the contributions made by the appellant to the trust as business expenditure under Section 37(1) of the Income Tax Act, 1961. The court found that the contributions were directly linked to the appellant's business operations and were incurred wholly and exclusively for the purpose of business, thereby rejecting the Assessing Officer's disallowance and the CIT(A)'s partial allowance under Section 80G. All appeals were dismissed in favor of the assessee.