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2019 (8) TMI 1288 - HC - Income TaxDisallowance u/s 37(1) - expenses being contribution / donation to educational institutions, trust, local bodies - commercial expediency - HELD THAT - The words used in Section 37(1) are wholly and exclusively for the purpose of business . In normal legal parlance the word wholly would mean entirely and the word exclusively would mean solely. Thus, it gives an impression or it could be argued that any element of expenditure not laid out entirely and solely for the purpose of profession or business would not be covered by Section 37(1). One needs to examine this from the perspective of the assessee who does make the expenditure. However, as explained in SASSOON J. DAVID AND CO. PVT. LIMITED VERSUS CIT 1979 (5) TMI 3 - SUPREME COURT the expression wholly and exclusively does not mean necessarily . It is for the assessee to decide whether any expenditure should be incurred in the course of its business. Amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case. The assessee company in the case on hand is engaged in the business of manufacturing chemicals and chemical products. It has been fairly admitted by the learned counsel appearing for the assess-company that its client is a polluting company. The assessee-company is conscious of its social obligations towards the society at large. The assessee-company is a Government undertaking and, therefore, is obliged to ensure all the protective principles of State policy as enshrined in the Constitution of India. The moneys has been for various purposes as enumerated above cannot be regarded as outside the ambit of the business concerns of the assessee. The approval needs to be that of a practical and prudent businessman rather than from the Revenue s strict classification of a right. The correct test should be of commercial expediency and not whether the payment was compulsory for the assessee to make or not. ITAT has not erred in law and on facts in deleting disallowance u/s 37(1) in respect of expenses being contribution / donation to educational institutions, trust, local bodies - Decided in favour of assessee.
Issues Involved:
1. Whether the ITAT erred in deleting disallowance under Section 37(1) of the Income Tax Act, 1961, for contributions/donations to educational institutions, trusts, and local bodies. Detailed Analysis: Issue 1: Deletion of Disallowance under Section 37(1) Facts and Background: - The assessee-company filed its return of income for A.Y. 2010-11 and claimed an expenditure of ?175,036,756 under Section 37(1) of the Act, citing Corporate Social Responsibility (CSR). - The contributions were made to various institutions for social and economic upliftment, education, and medical relief. - The Assessing Officer (AO) disallowed the claim, stating that the expenditure was not incurred wholly and exclusively for business purposes and suggested that such contributions should be claimed under Section 80G. Assessing Officer's Findings: - The AO held that the expenditure did not serve any business objective and was not directly connected to the business activities. - The AO also argued that the contributions, being voluntary, should be claimed under Section 80G and not Section 37(1). CIT(A) Findings: - The CIT(A) upheld the AO's decision, stating that the assessee failed to establish a direct nexus between the expenditure and the business. ITAT's Findings: - The ITAT allowed the claim, relying on its earlier decision for A.Y. 2009-10, where similar expenditures were allowed under Section 37(1) as business expenses. - The ITAT emphasized that CSR expenditures, although voluntary, were incurred to enhance the company's image and were thus allowable as business expenses. Revenue's Arguments: - The Revenue argued that the ITAT erred in law and on facts by relying on its previous decision without considering the distinct facts of A.Y. 2010-11. - The Revenue contended that the assessee failed to prove that the expenditures were for commercial expediency and business purposes. Assessee's Arguments: - The assessee argued that the principle of consistency should be applied, as the ITAT had allowed similar claims in previous years. - The assessee cited various judicial precedents to support the claim that CSR expenditures, even if voluntary, are allowable under Section 37(1) if they promote the business. High Court's Analysis: - The High Court noted that the ITAT relied on its earlier order for A.Y. 2009-10, which allowed similar expenditures under Section 37(1). - The court emphasized the principle of consistency, citing the Supreme Court's decisions in Radhasoami Satsang and other cases, which state that the Revenue should not take different stands on similar issues across different years unless there is a material change in facts. - The court observed that the expenditures were incurred for the company's business benefit, enhancing its image and fulfilling its social obligations. - The court also noted that the Explanation 2 to Section 37(1), which disallows CSR expenditures under Section 135 of the Companies Act, 2013, is not retrospective and applies only from 1st April 2015. Conclusion: - The High Court upheld the ITAT's decision, allowing the expenditures under Section 37(1) as they were incurred wholly and exclusively for business purposes. - The court dismissed the Revenue's appeal, emphasizing the principle of commercial expediency and the evolving concept of business, which includes CSR activities. Final Judgment: - The Tax Appeal was dismissed, affirming that the expenditures incurred by the assessee for CSR activities were allowable under Section 37(1) of the Income Tax Act, 1961.
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