2024 (1) TMI 496 - HC - Income Tax

Allowable business expenses - disallowing the expenditure claimed u/s 37 being the sum paid to the Bellary Agenda Task Force BATF as not incurred wholly and exclusively for the purpose of business - HELD THAT - In the present case, it is clear from the material referred that the Deputy Commissioner having constituted the BATF which included development of infrastructure had convened a meeting of all stakeholders, including the assessee. As is evident from the Minutes of the meeting recorded on 28.02.2009, the contribution of the assessee as is recorded in the Minutes would be preserved and used for development works in Sandur Taluk. It is required in terms of Section 37 of the I.T. Act that the expenditure is expended wholly and exclusively for the purpose of the business. It is a settled position of law that the expenditure that could be relatable to Commercial Expediency would fall within the ambit of expenditure under Section 37(1) I.T. Act It is clear that the expenditure made to the BATF was to be expended for the purpose of road infrastructure. Such expenditure has a nexus with the business of the assessee insofar as road infrastructure is required for the purpose of transportation of iron ore. It could be stated that the expenditure was wholly and exclusively for the purpose of business. It is also to be noticed that though there was no legal obligation to make such contribution, however, as noticed by the ITAT, the contribution made at the behest of the Deputy Commissioner would go a long way towards generating goodwill and benefit of it would yield in the long run in earning profit. It could also be stated that the expenditure could be related to Commercial Expediency , as any amount contributed to the BATF would generate goodwill of the local community as well as the Government Authorities. It must also be emphasised that the concept of Commercial Expediency is from the perspective of an assessee and cannot be judged from the perspective of what the Revenue construes it to be Commercial expediency. Insofar as the contention of the Revenue that by virtue of amendment made to Section 37 of the I.T. Act by insertion of explanation to the effect that expenditure incurred relating to Corporate Social Responsibility as referred to under the Companies Act, 2013 shall not be deemed to be an expenditure for the purposes of Section 37 of the I.T. Act, however it must be noticed that the said explanation has been inserted vide Finance Act, 2014 and it is made out from the said Amendment Act that the amendment would take effect from 01.04.2015. The same interpretation regarding prospective application of the amendment has been considered by the High Court of Delhi in the case of Principal Commissioner of Income Tax Vs. P.E.C. Limited 2022 (12) TMI 759 - DELHI HIGH COURT As the subject matter of dispute relates to assessment year 2010-11, it can be stated that the said explanation to Section 37 of the I.T. Act would not apply as regards the present subject matter of dispute. Thus the substantial question of law is held in the affirmative.

Summary

Issues Involved:
1. Whether the contribution made by the respondent to Bellary Agenda Task Force (BATF) is allowable as 'business expenditure' under Section 37(1) of the Income Tax Act, 1961.
2. The applicability of the amendment to Section 37 of the I.T. Act regarding Corporate Social Responsibility (CSR) expenditure.

Summary:

Issue 1: Allowability of Contribution as Business Expenditure

The appeal by the Revenue questions the correctness of the ITAT's order which allowed the assessee's contribution to BATF as a deductible business expenditure under Section 37(1) of the I.T. Act. The Assessing Officer had disallowed this expenditure, claiming it was not incurred wholly and exclusively for business purposes but for CSR activities. The Commissioner of Income Tax upheld this disallowance. However, ITAT set aside the disallowance, recognizing the expenditure as allowable under Section 37(1).

The High Court considered whether the contribution of Rs. 11,60,00,000/- to BATF was allowable as 'business expenditure' under Section 37(1). The Court noted that BATF was constituted by the Deputy Commissioner for infrastructure development, including road improvements, which were essential for the assessee's business of transporting iron ore. The contribution was made pursuant to a meeting convened by the Deputy Commissioner, indicating a nexus with the business operations.

The Court referred to the Apex Court's judgment in S.A. Builders Ltd. v. Commissioner of Income-tax, which emphasized that "commercial expediency" includes expenditures incurred by a prudent businessman for business purposes, even if not under legal obligation. The Court found that the expenditure was for the development of road infrastructure, crucial for the assessee's business, thus satisfying the criteria of being expended wholly and exclusively for business purposes.

Issue 2: Applicability of Amendment to Section 37 on CSR Expenditure

The Revenue contended that the amendment to Section 37, which disallows CSR-related expenditures as business expenses, should apply. However, the Court clarified that this amendment, introduced by the Finance Act, 2014, is effective from 01.04.2015 and applies to assessment year 2015-16 onwards. Since the disputed assessment year is 2010-11, the amendment does not apply to this case.

Conclusion

The substantial question of law was answered in the affirmative, upholding the ITAT's order. The Court directed the Assessing Officer to delete the disallowance and quantify the deduction, confirming that the contribution to BATF is an allowable business expenditure under Section 37(1) for the assessment year 2010-11. The appeal was dismissed.