2019 (9) TMI 354 - HC - Income Tax

Expenditure allowable u/s 37(1) - contribution made by an assessee to a public welfare cause - disallowing a sum incurred towards construction of 169 houses for the villagers who had lost their homes due to natural calamity - HELD THAT - Assessee has incurred the expenditure towards construction of 169 houses for the villagers who had lost their home due to natural calamity. In order to cater to the needs of those destitute persons who had lost the roof over their head on account of natural calamity, assessee constructed the houses by expending the amount. AO and the authorities have held that it was not incurred for the purpose of business. One glaring factor which cannot go unnoticed is, that a MOU came to be entered into by the appellant on 01.12.2009 with the Government of Karnataka, as already noticed herein above, whereunder assessee agreed to construct houses to rehabilitate the flood victims at the earliest possible time and for undertaking the said task, the appropriate Government provided the assessee the land free from encumbrances, upon which the construction of houses came to be commenced, executed and handed over within the time limit agreed to under the MOU. It was the term of the MOU that the donor (assessee) has joined hands with the Government of Karnataka to bring a total relief in the lives of the people who were worst affected by the unprecedented rain and floods and the said project was undisputedly a philanthropic project. As agreed to between the parties that the donor himself would incur financial liability, maintain high standard of quality construction and would construct the houses as per the design offered by the Government of Karnataka, apart from ensuring quality of material used for the construction is of the superior quality. That apart, the work completion certificate has been issued by the Deputy Commissioner, Ballary and it is also certified that a sum been expended by the assessee for construction of 169 Aasare houses at Gundigana village. Thus, it boils down to the fact that construction of houses has been carried out by the assessee as agreed to under the MOU. Tribunal has rejected the contention of the assessee that expenditure incurred for the purpose of business and the onus being on the assessee has not been discharged. It is also further held that no factual condition was laid by the assessee to establish the expenditure so incurred was for business purpose nor any attempt was made before the lower authorities. It further held that assessee has made a bald assertion. It cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee s business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee s business has to be examined in the light of the observations made by us herein above. Assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the assessee in its wisdom and as prudent business decision has entered into MOU with the Government of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of business expenditure . Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside. While examining the claim for deduction under Section 37(1) the assessing officer would not blindly or only on the say of the assessee accept the claim. AO would be required to scrutinise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) and not otherwise. - Decided against the revenue and in favour of the assessee.

Issues Involved:
1. Whether the authorities were justified in disallowing the expenditure incurred towards the construction of houses for villagers affected by natural calamity under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:

Background:
The appellant-assessee, engaged in the business of iron ore extraction and trading, filed returns for the assessment years 2011-12 and 2012-13. The assessing officer disallowed the claimed social welfare expenses for constructing houses for villagers affected by natural calamity, deeming the expenditure not incurred in the course of business but for philanthropic purposes.

Submissions by the Appellant:
The appellant argued that the Government of Karnataka requested assistance in constructing houses for those affected by natural calamity. The appellant entered into an MOU with the Government, constructing 169 houses, incurring ?1,61,30,480/- and ?55,90,080/- for the respective assessment years. The appellant contended that the expenditure should be considered under 'Commercial Expediency' and as a legitimate business expenditure, aimed at earning goodwill and facilitating smooth business operations.

Submissions by the Respondent:
The respondent argued that the appellant should have donated the amount to the Government and sought exemption under Section 80G. The expenditure did not qualify under Section 37(1) as it was not wholly and exclusively for business purposes. The respondent relied on the judgment in JASWANT TRADING COMPANY vs. COMMISSIONER OF INCOME TAX.

Court's Analysis:
1. Section 37 of the Income Tax Act: The court examined whether the expenditure was laid out wholly and exclusively for business purposes. The emphasis was on the expressions "wholly" and "exclusively," indicating the motive behind the expenditure. The court noted that if the expenditure promotes business, it qualifies under Section 37.

2. Commercial Expediency: The court referred to various judgments, including INDIAN MOLASSES CO. (P) LTD. vs. CIT and CIT vs. DELHI SAFE DEPOSIT CO. LTD., to elucidate that expenditure incurred voluntarily for commercial expediency, even if benefiting a third party, qualifies as business expenditure.

3. Precedents and Definitions: The court cited definitions from Black’s Law Dictionary and previous judgments to clarify the terms "business expense" and "commercial expediency." The expenditure must be for promoting business and not necessarily under a legal obligation.

4. Case-Specific Analysis: The court noted that the appellant entered into an MOU with the Government to construct houses for flood victims, incurring the expenditure as a business decision to earn goodwill and facilitate business operations. The court emphasized that commercial expediency varies by business and context.

5. Tribunal's Error: The court found that the Tribunal erred in concluding that the MOU was opposed to public policy. The court referred to the judgment in SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. vs. CIT, which held that contributions to public welfare funds directly connected to business operations are allowable deductions.

Conclusion:
The court concluded that the expenditure incurred by the appellant for constructing houses was for business purposes, considering the commercial expediency and the goodwill generated. The substantial question of law was answered in favor of the appellant. The court allowed the appeals, set aside the Tribunal's order, and remitted the assessment proceedings to the assessing officer for further examination in light of the court's observations.

Order:
1. Appeals allowed.
2. Tribunal’s order set aside.
3. Assessment proceedings remitted to the assessing officer.
4. No orders as to costs.

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