DONATION MADE TO COURT LIBRARY BUILDING BY AN ADVOCATE IS NOT BUSINESS EXPENDITURE

[Mr. M. GOVINDARAJAN]

     Sec.37 (1) of the Income Tax Act provides that any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of business and profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

     In the case 'A.M. Mathur V. Deputy Commissioner of Income Tax' - (2009) 308 ITR 168 (Indore) the tribunal answered for the question whether the donation made to court library building by an Advocate is allowable deduction.  To get eligible deduction under Sec. 37(1) the requirements are to be fulfilled by the assessee.  The facts of the interesting case are as follows:

     The assessee is a senior Advocate and derives professional income from practicing at Supreme Court and High Court.   He enjoys high reputation amongst his juniors and his colleagues.  The assessee had donated a sum of Rs. 2 lakhs to a public trust registered under Sec. 12A of the Income Tax Act with specific direction that the amount should be utilized for the purpose of library at Madhya Pradesh High Court, Indore.  He claimed the said amount as business expenditure under Sec. 37 (1) of the Act on the contention that the said expenditure is neither capital nor personal in nature.

     The Assessing Officer observed that the claim for deduction was not supported by relevant details and he has failed to prove that the expenditure was incurred wholly and exclusively to his profession which led to its disallowance.   Further in the assessment order the fact of the case is that the assessee claimed deduction of Rs.2 lakhs given to MP High Court Bar Association for construction of court library building.

     The assessee filed an appeal before the Commissioner (Appeals) against the order of Assessing Officer.  In the appeal the appellant submitted-

§         The donation is given to Shri A.M. Mathur Charitable Trust, with a specific direction that it should form a corpus which would be invested in a manner so that the interest thereon would be utilized for the purchase of books and magazines and to provide other library facilities to the advocates practicing in the court;

§         The amount was set aside for the larger benefit of his junior, colleagues, his own reputation and credibility amongst his professional colleagues which has improved further;

§         All the ingredients in Sec. 37 are fulfilled in the case as the expenditure is neither capital nor personal in nature;

§         Instead of spending the entire sum in one go, he thought it appropriate to give it to a corpus which could utilize the interest on acquiring latest books and journals;

The assessee has also submitted the copy of bye laws of the trust and also a bill for Rs.10,054/- showing that books were purchased.

     The Commissioner (Appeals) placed the following findings:

§         The sole condition precedent for claiming deduction under Sec. 37 is the existence of nexus with the purposes of business or profession as the case may be.   The expenditure must be incurred with a view to bring profit or monetary advantage and to promote the assessee's business interest.  It should not be merely for altruistic consideration or in order to win public applause at the cost of exchequer;

§         A donation made to a charitable trust may make an assessee entitled to relief under Sec. 80G of the Income Tax Act, subject to fulfillment of requirements of the said section but he cannot get deduction under Sec. 37(1) without proving any direct nexus or the business expediency as onus in this respect lies on him;

§         Even the terms of the trust deed reveal that purchase of journals and books for the Bar Association is only one of the several charitable purposes for creation of the trust to which the corporate money was donated, such as medical relief, scientific research, relief to the poor, education and advancement of any other object of general public utility.  Thus in the light of these facts also, it cannot be concluded that the amount was donated only for the help of the junior advocates.

The tribunal dismissed the appeal on the contention that the appellant did not prove that the said donation was made for and in the interest of his profession and failed to discharge the onus in the matter.

     The assessee filed appeal before the tribunal being aggrieved against the order of the Commissioner (Appeals). He sought for admission of additional evidences before the tribunal viz., income tax return and audited accounts for the assessment years 2002 - 03 to 2005 - 06, copies of trust deed of 'Anand Mohan Mathur Subscription', balance sheet of the trust as on 31.3.1999, income and expenditure account ending March 31, 1999 of the trust, exemption certificate of trust under Sec. 80G of the Income Tax Act and certificate from the trust for the donation received from the assessee.

     The appellant submitted the following before the Tribunal:

§         The above said documents may be admitted to justify the claim of the assessee and to show the proper utilization of the amount donated by the assessee;

§         The assessee has given donation to the above trust with a specific direction that it should form corpus which would be invested in  a manner so that the interest thereon could be utilized for the purchase of books and magazines and to provide other library facilities to the advocates practicing in the court;

§         The donation has a direct nexus with the business of the assessee and the expenditure is incurred for commercial expediency and he is entitled for deduction under Sec. 37 of the Income Tax Act.

The assessee also relied on some of the judgments.

     The Department submitted the following besides reiterating the findings of the lower authorities-

§         The assessee has given simple donation to the charitable trust and cannot put any condition for use of the interest on such donation;

§         There is nothing on record to establish that donation made by the assessee to the charitable trust was directly connected or related to the carrying on of the business and profession of the assessee;

§         In order to get 100 per cent deduction the appellant has tried to change the color of the transaction which is not permitted under the law;

§         The additional evidences are filed for the first time before the tribunal and no justification is given for not producing the same before the authorities below.

The tribunal after hearing both sides observed as follows:

§         The moment the assessee has donated the amount of Rs.2 lakhs to the charitable trust, the assessee has no right or control over the money and as such cannot issue any direction to the trust for utilization of the donated further because  the charitable trust shall have to use the funds of the trust only for the purposes of achieving its aims and objects;

§         The assessee has not been able to explain as to how the donation given to the trust was having direct nexus with his business and profession.   There is nothing on record to establish that donation given by the assessee to the trust was directly connected and related to his carrying on the business and profession;

§         It appears that the assessee made donations for personal and gratuitous purposes.

The tribunal also analyzed the case laws cited by the assessee which are as follows:

1.      Additional Commissioner of Income Tax V, Kuber Singh Bhagwandas - (1979) 118 ITR 379 (MP HC full bench)

In this case the donation to the Chief Minister's Drought Relief Fund having a direct nexus with the object of obtaining permits for export of food grain by food grain merchants, was allowable business expenditure.

2.      Shri Venkata Satyanarayana Rice Mill Contractors Co., V. Commissioner of Income Tax - 2008 -TMI - 5539 - SUPREME Court

In this case the assessee doing business of export of rice and contributing 50 paise per quintal to District Welfare Fund maintained by the District Collector without which contribution he would not get permit, the payment is directly connected with assessee's carrying on of business, is not against public policy, and is allowable under Sec. 37(1).

3.      Mysore Kirloskar Limited V. Commissioner of Income Tax - (1987) 166 ITR 836 (Karnataka HC)

Where money is spent by the assessee in connection with running of a school for the benefit of children of employees, ex-employees and the members of the public, the same can be allowed as business deduction under Sec. 37(1).

4.      Commissioner of Income Tax V. Chandulal Keshavlal and Co - 2009 -TMI - 32353 - SUPREME Court

Question whether amount waived by the assessee for the reason of commercial expediency is allowable business expenditure is a question of fact.

The tribunal also analyzed the case law relied by the Department.  In 'Himson Textile Engineering Industries Limited V. Deputy Commissioner of Income Tax - (2002) 82 ITD 362 (Allahabad) the court held that merely because donation has been made by the assessee in the light of request made by a customer should not by itself establish the nexus between the donation and business of the assessee. 

     Considering the facts and case laws the tribunal held that-

·        For the purpose of claiming deduction under Sec. 37 of the Income Tax Act the assessee shall have to prove that expenditure was wholly and exclusively incurred for the purpose of business and profession;

·        In this case the assessee has not brought any evidence or material on record to prove as to what business purpose is served in the matter by making the donation;

·        No commercial expediency is also established by the assessee;

The tribunal confirmed the findings of the Commissioner (Appeals) and dismisses the appeals.