2007 (2) TMI 194 - HC - Income Tax

Claim as business expenditure u/s 37 - Payment towards the construction of building - commercial expediency test - HELD THAT - Since the contribution made by the company is for the Chamber of Commerce whose activities are closely linked with the welfare of the corporate entities who are members therein and whose interest are taken care of by the Chamber of Commerce, irrespective of whether the expense incurred is compulsory or otherwise. Hence, considering the fact that the payment is made for the purpose of the business, it satisfies the commercial expediency test to accept the case of the assessee. Thus, we do not find any justification to accept the case of the Revenue that the provisions of section 37 have to be viewed in a very strict manner. It may be noted that section 37 itself is concerned with an expenditure laid out or expended wholly or exclusively for the purpose of the business or profession to qualify for deduction. With the necessity no longer a valid test, we reject the Revenue's appeal. In the circumstances, the first question is answered against the Revenue. As regards the second question, whether the premium payable on redemption of debentures in future years is to be spread over and part of it allowed as a deduction in this year, the same is covered by the decision of this court reported in 2006 (2) TMI 151 - MADRAS HIGH COURT (CIT v. First Leasing Co. of India Ltd.), to which one of us was a party, and is therefore answered against the Revenue. Hence, both the questions are answered against the Revenue and the appeal is dismissed. Thereby, we confirm the order of the Tribunal and dismiss the tax case.

Summary

Issues:
1. Allowability of payment towards the construction of a building of the Chamber of Commerce as a business expenditure.
2. Treatment of premium payable on redemption of debentures in future years.

Analysis:

Issue 1:
The appeal by the Revenue questions the deduction claimed by the assessee for contributing Rs. 1.5 lakhs to the Madras Chamber of Commerce as a business expenditure for the assessment year 1988-89. The assessing authority initially rejected the claim under Section 37 of the Act, considering the payment as a gratuitous one akin to a donation. However, the Commissioner of Income Tax (Appeals) allowed the deduction, emphasizing the indirect benefits to the business due to the contribution. The Tribunal upheld this decision, highlighting the role of the Chamber in representing various industries before the Government. The Revenue argued that the Chamber's assistance was not specific to any member's business and even if intertwined, it should be treated as capital expenditure. The Court referred to precedents emphasizing the nexus between expenditure, business nature, and benefit acquired, leaning towards a liberal view on revenue expenditure. It noted that the contribution, being for business purposes, met the commercial expediency test, rejecting the Revenue's strict interpretation of Section 37.

Issue 2:
Regarding the second question on the treatment of premium payable on debentures' redemption in future years, the Court relied on a previous decision where it was held that such premiums should be spread over time for deduction. The Court, in alignment with this precedent, answered this question against the Revenue as well. Consequently, both issues were decided against the Revenue, leading to the dismissal of the appeal, affirming the Tribunal's order, and no costs were awarded. The judgment underscored the evolving concept of business encompassing societal welfare and the importance of commercial expediency in determining allowable deductions under the Income Tax Act, 1961.