2019 (4) TMI 1027 - AT - Income Tax

Disallowance of expenditure claimed by it towards the Contractors Benevolent Fund (CBF) u/s 37(1) - HELD THAT - The assessee company is engaged in the business of executing civil contract works primarily for the State Government of Karnataka. Authorities below that the State Government of Karnataka had directed the PWD / user Department to deduct 0.1% of the sanctioned bill towards Contractors Benevolent Fund (CBF). The deduction of 0.1% admittedly effected by the PWD / user Department on the express instructions of the State Government of Karnataka towards Contractors Benevolent Fund (CBF) is undeniably out of sanctioned bill for contract works executed by the assessee. The business of the assessee, being execution of civil contracts of the State Government of Karnataka, in our view, the deduction of 0.1% thereof towards the Contractors Benevolent Fund (CBF) by the PWD / user Department on instructions of the State Government, even though not voluntary, is an amount incurred by the assessee wholly and exclusively in the furtherance and in the course of the assessee s business and consequently is expenditure to be allowed under section 37(1) - We consequently delete the disallowances for Assessment Year 2014-15 and Assessment Year 2015-16 made / upheld in respect of amounts incurred by the assessee towards Contractors Benevolent Fund (CBF) in the course of its business of executing civil contract works for the State Government of Karnataka. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenditure claimed towards Contractors Benevolent Fund (CBF) for Assessment Years 2014-15 and 2015-16.

Analysis:
Assessment Year 2014-15:
The assessee, a private limited company engaged in civil contracts, filed its return for AY 2014-15, declaring income under normal provisions and 'Book Profits'. The assessment concluded with an addition of expenditure towards 'Contractors Benefit Fund' (CBF), leading to an appeal dismissed by CIT(A). The main contention was the disallowance of the claimed expenditure of ?8,14,397 towards CBF, deemed necessary for starting the contract business. The Tribunal held that the deduction of 0.1% towards CBF by the Government, though not voluntary, was wholly and exclusively in connection with the assessee's business, thus allowing the expenditure under section 37(1) of the Act.

Assessment Year 2015-16:
For AY 2015-16, the assessee's return declared income, and the assessment resulted in disallowance of expenditure towards CBF, leading to an appeal dismissed by CIT(A). The main issue was the disallowance of ?9,28,728 towards CBF. The Tribunal reiterated that the deduction made towards CBF, even if not voluntary, was incurred in the course of the business and hence allowable under section 37(1) of the Act. The Tribunal referred to the decision of the Karnataka High Court to support the deduction of contributions towards benevolent funds.

The Tribunal, after considering the contentions of both parties, held that the deduction towards CBF by the Government on contract works executed by the assessee was wholly and exclusively in the furtherance of its business. Therefore, the disallowances made for both AYs 2014-15 and 2015-16 were deleted, allowing the appeals of the assessee.

In conclusion, the Tribunal allowed the appeals for both Assessment Years 2014-15 and 2015-16, emphasizing that the deductions towards Contractors Benevolent Fund were allowable under section 37(1) of the Income Tax Act.