2022 (10) TMI 1140 - AT - Income Tax

Allowable business expenditure - peripheral development expenses inasmuch as the said expenditure is a business expenditure within the meaning of section 37 - submission that the assessee has been unable to show any business connection in respect of incurring of the expenditure - HELD THAT - Admittedly the assessee is not in the business of mining therefore the said expenditure cannot be said to be peripheral development expenditure. In such circumstances we are left with only issue as to whether the said expenditure was business expenditure or not. The evidence produced by the assessee clearly shows that the expenditure has been incurred at the direction from BMC. The payments have been made by cheque to the contractor sponsored by the BMC. Obviously the beautification work had been done at the direction of the BMC and a Board is required to put up specifying that the work has been done by a particular individual or company. This is also in the form of advertisement. Here as it is noticed that the expenditure has been incurred at the instruction of the BMC we are of the view that it cannot be said the payment has been made for extraneous consideration. This being so we are of the view that the expenditure is incurred for the purpose of business of the assessee and same is allowable. Appeal of the assessee is allowed.

Summary

Issues involved:
Confirmation of addition of peripheral development expenses as business expenditure under section 37 of the Income Tax Act.

Detailed Analysis:

1. Issue of Addition of Peripheral Development Expenses:
The appeal was filed against the order of the ld CIT(A) confirming the addition of Rs.11,66,666 as peripheral development expenses for the assessment year 2011-12. The assessee contended that the said expenditure qualified as a business expenditure under section 37 of the Income Tax Act. The Assessing Officer had expressed inability to verify if the expenditure was incidental to the business. The ld AR argued that the expenditure was made as per the instructions of the Bhubaneswar Municipal Corporation (BMC) and was supervised by BMC, aimed at the welfare of local residents. Supporting documents were presented, including a letter from the Mayor of BMC acknowledging the work done. The ld CIT(A) disallowed the expenditure, stating it did not bring gains for the business and was made for extraneous reasons. However, the expenditure was incurred based on BMC's instructions, indicating a business connection. The Tribunal noted that the expenditure was directed by BMC, payments were made to BMC-sponsored contractors, and the work involved public acknowledgment, resembling advertisement. Consequently, the Tribunal held that the expenditure was business-related and allowable.

2. Nature of Expenditure and Business Connection:
The contention revolved around whether the peripheral development expenses qualified as business expenditure for the assessee. The Revenue argued that since the assessee was not engaged in mining activities, the expenditure did not pertain to peripheral development. However, the evidence presented indicated that the expenditure was carried out under BMC's direction, with payments made to BMC-approved contractors. The Tribunal observed that the work was done as per BMC's instructions, necessitating public acknowledgment through a board, akin to advertisement. Despite the lack of mining business, the Tribunal concluded that the expenditure was incurred for the business purpose of the assessee, as it was done under BMC's direction and was therefore allowable as business expenditure.

3. Decision and Conclusion:
Ultimately, the Tribunal allowed the appeal of the assessee, overturning the addition of peripheral development expenses. The Tribunal's decision was based on the finding that the expenditure, though not directly related to the assessee's primary business activity, was incurred under BMC's direction and for the purpose of business. The Tribunal emphasized that the expenditure was not made for extraneous reasons but in line with BMC's instructions, indicating a business connection. As a result, the Tribunal held that the expenditure qualified as a business expense under section 37 of the Income Tax Act and was therefore allowable.