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2022 (1) TMI 416 - AT - Income TaxAllowable business expenditure - expenditure pursuant to a letter addressed by the Deputy Commissioner, Bellary wherein assessee participated in the State Government Programme ( Bhagyalakshmi Scheme ) by contributing sum which is acknowledged by the Deputy Commissioner as donation - AO disallowed the same only for the reason that certificate u/s. 80G was not obtained - HELD THAT - Admittedly, the entire payment has gone for social development of an area wherein mining activities were undertaken and assessee was one of the licensee to the mines allotted by the Indian Bureau of Mines. See M/S VEERABHADRAPPA SANGAPPA CO. VERSUS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1, BELLARY. 2020 (12) TMI 1145 - ITAT BANGALORE In the present case assessee has contributed funds at the specific request of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on account of social responsibility, but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit. Hence this expenditure would be in the realm of business expenditure . Accordingly, we hold this expenditure is allowable as deduction. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the AO to delete this disallowance - See MADRAS REFINERIES LTD. 2003 (11) TMI 47 - MADRAS HIGH COURT , KAMAL AND CO. 1992 (12) TMI 19 - RAJASTHAN HIGH COURT and DEVELOPMENT TRUST PVT. LIMITED 1991 (9) TMI 43 - ALLAHABAD HIGH COURT - we direct the Ld.AO to delete the disallowance made - Decided in favour of assessee.
Issues Involved:
1. Confirmation of disallowance of ?11,24,000/- towards Economic Social and Economic Development of the Society. 2. Applicability of Section 37 of the Income Tax Act for the aforementioned expenditure. Issue-wise Detailed Analysis: 1. Confirmation of Disallowance of ?11,24,000/-: The primary issue in this case was whether the expenditure of ?11,24,000/- incurred by the assessee towards Economic Social and Economic Development of the Society was allowable as a business expenditure under Section 37 of the Income Tax Act. The Assessing Officer (AO) disallowed this expenditure on the grounds that it was not directly related to the business of the assessee and that the assessee did not obtain a certificate of exemption under Section 80G. The assessee argued that the expenditure was incurred as part of its Corporate Social Responsibility (CSR) to enhance its reputation and facilitate smooth business operations. The expenditure included distributing frocks to school children in the vicinity of the mining area, which was claimed to improve the local community's goodwill towards the assessee. The assessee cited various judgments to support its claim that CSR expenditure could be considered a business expenditure if it indirectly facilitated business operations. 2. Applicability of Section 37 of the Income Tax Act: The Tribunal examined whether the expenditure could be considered as incurred "wholly and exclusively for the purposes of the business" under Section 37 of the Act. The Tribunal referred to several judgments, including those of the Karnataka High Court and the Madras High Court, which had allowed similar expenditures as business expenses. The Tribunal noted that the concept of business is not static and has evolved to include social responsibility activities that enhance the business environment and goodwill. The Tribunal observed that the assessee incurred the expenditure in response to a letter from the Deputy Commissioner, Bellary, participating in a State Government Programme ("Bhagyalakshmi Scheme"). The expenditure was acknowledged as a donation to the State Government, and the AO disallowed it solely because the certificate under Section 80G was not obtained. The Tribunal emphasized that the expenditure was for the social development of the area where the assessee conducted its mining activities, which indirectly benefited the business. The Tribunal also referenced the Karnataka High Court's judgment in the case of Kanhaiyalal Dudheria, which allowed similar expenditures for constructing houses in flood-affected villages as business expenses. The High Court had held that such expenditures, even if not directly connected to the business, could be allowed if they were incurred for promoting the business and were commercially expedient. Conclusion: The Tribunal concluded that the expenditure incurred by the assessee was allowable as a business expenditure under Section 37 of the Act. It directed the AO to delete the disallowance of ?11,24,000/-. The Tribunal's decision was based on the principle that expenditures incurred for social responsibility activities, which indirectly facilitate business operations and enhance goodwill, can be considered as business expenses. Final Judgment: The appeal of the assessee was allowed, and the AO was directed to delete the disallowance of ?11,24,000/-. The Tribunal's order was pronounced in the open court on 04th January 2022.
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