2019 (8) TMI 1767 - AT - Income Tax

Addition on account of project expenses - Allowable business expenses or not? - HELD THAT - As relying on own case 2018 (12) TMI 762 - DELHI HIGH COURT it would be incongruous for the Revenue to urge that the purpose and goal behind the activities undertaken by the assessee was not commercial but charity as the intent and motive behind them was not to earn profit. The expenditure incurred to carry out social and economic development would in this background constitute a 'business' or 'commercial' activity undertaken by the assessee. It would be a contradiction in terms, if we hold that the expenditure would be non-deductible expenditure or expenditure without business expediency. Under section 37 it does not matter whether or not the expenditure was in the nature of donation or Section 80G of the Act was not attracted. The conditions stated in Section 37 matter and constitute the test. Expenditure incurred in furtherance of and connected with the business and commercial activities for which the respondent- assessee was established cannot be disallowed as expenditure not relatable and incurred for 'business' purposes. On the question of capital expenditure, the assessing officer did not refer to or examine whether the capital assets created were for third party villagers - assessee was not the owner of the assets created and developed. The assets created were not capital assets in the hands of the respondent-assessee. The respondent-assessee had contributed, developed, financed aid created assets which belonged to third persons. The expenditure incurred therefore would not be capital in nature in the hands of the respondent assessee - Decided against revenue.

Issues Involved:
1. Deletion of addition on account of project expenses.
2. Nature of project expenses – whether capital or revenue.
3. Applicability of Section 37(1) of the Income Tax Act, 1961.
4. Business expediency of the incurred expenses.
5. Previous judicial precedents and their relevance to the current case.

Detailed Analysis:

1. Deletion of Addition on Account of Project Expenses:
The Revenue challenged the deletion of an addition of ?6,66,30,684/- made by the Assessing Officer (AO) on account of project expenses. The AO argued that these expenses were not incurred wholly and exclusively for business purposes, as required by the Income Tax Act, and should not be deductible while computing taxable income. The Tribunal noted that in previous assessment years (AY 2008-09 and 2009-10), similar additions were deleted by the CIT(A) and upheld by the Tribunal, with the Revenue's appeals dismissed by the Delhi High Court.

2. Nature of Project Expenses – Capital or Revenue:
The Tribunal examined whether the project expenses were capital or revenue in nature. The AO had disallowed the expenses, considering them as capital expenditures not incurred wholly and exclusively for business purposes. However, the CIT(A) and the Tribunal in earlier years had found that the expenses were revenue in nature, incurred for social upliftment projects, and not for creating capital assets for the assessee. The Tribunal reiterated that the assets created (e.g., forests, check dams) became the property of the villages and were managed by village communities, not the assessee.

3. Applicability of Section 37(1) of the Income Tax Act, 1961:
Section 37(1) allows deduction of expenses incurred wholly and exclusively for business purposes. The AO had disallowed the expenses under this section, arguing that they did not meet the criteria. However, the Tribunal found that the expenses were indeed incurred for business purposes, as they were necessary for the assessee's social and economic development activities, which were integral to its business operations. The Tribunal followed the precedent set in earlier years, where such expenses were allowed as deductions under Section 37(1).

4. Business Expediency of the Incurred Expenses:
The Tribunal highlighted that the assessee's activities, including social and economic development projects, were essential for its business operations. The Delhi High Court had noted that the assessee's engagement in these activities was necessary to receive grants and undertake the sale and marketing of fertilizers. The Court emphasized that the expenses were incurred to run, operate, and continue the business, making them deductible under Section 37 of the Act.

5. Previous Judicial Precedents and Their Relevance to the Current Case:
The Tribunal heavily relied on previous judicial precedents, including its own orders for AY 2008-09 and 2009-10, and the Delhi High Court's dismissal of the Revenue's appeals against these orders. The Tribunal found that the facts and circumstances of the current case were identical to those in the earlier years. The consistency in judicial decisions across multiple years reinforced the Tribunal's conclusion to dismiss the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the addition of ?6,66,30,684/- on account of project expenses. The Tribunal found that the expenses were revenue in nature, incurred wholly and exclusively for business purposes, and deductible under Section 37(1) of the Income Tax Act. The Tribunal's decision was consistent with previous judicial precedents, including the Delhi High Court's rulings. The order was pronounced in the open court on 08/08/2019.

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