2014 (11) TMI 898 - HC - Income Tax

Allowability of expenses u/s 37 - Amount paid to Municipal Corporation for legalizing the construction of building Held that - Following the decision in JAMNA AUTO INDUSTRIES Versus COMMISSONER OF INCOME -TAX 2008 (1) TMI 62 - PUNJAB & HARYANA HIGH COURT and considering Explanation to Section 37(1) inserted retrospectively w.e.f 1.4.1962 it has been held that any payment made by an assessee on account of infraction of law would not be admissible deduction u/s 37 of the Act - However, any damages paid by the assessee for breach of contract on its part were deductible - the assessee had paid the compounding fee as compensation for condoning deviations from original sanctioned plan - In substance, the payment was in the nature of the amount paid on account of infraction of law as there was violation in the building plan of the assessee Decided against assessee. Claim u/s 80G deleted Donation made towards Prime Ministers Relief Fund for Gujarat Earth Quake Relief Fund Held that - The assessee was unable to show in the light of Explanation 5 to section 80G which was inserted by Finance Act 1976 effective from 1.4.1976 that the deduction was admissible - the assessee could not claim deduction u/s 80G of the Act in respect of donations by way of clothes sent to Prime Minister Relief Fund for Gujarat Earthquake relief the same being in kind and not in cash, cheque or draft - The Tribunal rightly declined the benefit u/s 80G - Decided against assessee. Eligibility for deduction u/s 37 - goods sent to the Prime Ministers Relief Fund for Gujarat Earth quake relief Held that - The Tribunal rightly observed that the contribution which was made by the assessee in kind to the Prime Minister s Relief Fund for Gujarat Earthquake relief was not on account of any business compulsion which could be termed to be falling within the expression wholly and exclusively - the expenditure incurred in the form of relief for earthquake victims although was for public good but would not have any impact on the business of the assessee - there being no commercial expediency in incurring such expenditure, it was not deductible u/s 37 - the assessee had given the donations in the form of clothes and claimed deduction u/s 37(1) by quantifying the same in monetary terms - it could not be said that it was essential for the assessee to have contributed towards the Prime Minister s Relief Fund for carrying on business activities the order of the Tribunal is upheld Decided against assessee.

Issues Involved:
1. Deduction under Section 37 for payment to the Municipal Corporation.
2. Deduction under Section 80G for donations to the Prime Minister's Relief Fund.
3. Deduction under Section 37 for the value of goods sent to the Prime Minister's Relief Fund.
4. Treatment of license income and export incentives under Section 80IA.

Detailed Analysis:

1. Deduction under Section 37 for Payment to the Municipal Corporation:

The Tribunal held that the amount paid to the Municipal Corporation for legalizing the construction of the building was not an allowable business expenditure under Section 37 of the Income Tax Act, 1961. The assessee argued that this payment was not a penalty for infraction of law but compensation for deviations from the original sanctioned plan. However, the court referenced the Full Bench judgment in Jamna Auto Industries, which stated that any payment made due to infraction of law is not deductible under Section 37. The Finance (No.2) Act, 1998, incorporated an explanation to Section 37(1) retrospectively from 1.4.1962, clarifying that any expenditure incurred for any purpose that is an offence or prohibited by law is not deductible. Thus, the payment made by the assessee was deemed inadmissible.

2. Deduction under Section 80G for Donations to the Prime Minister's Relief Fund:

The Tribunal declined the deduction under Section 80G for donations made in the form of clothes to the Prime Minister's Relief Fund for Gujarat Earthquake relief. The court emphasized Explanation 5 to Section 80G, which states that no deduction is allowed unless the donation is a sum of money. Since the donation was in kind and not in cash, cheque, or draft, it did not qualify for the deduction under Section 80G.

3. Deduction under Section 37 for the Value of Goods Sent to the Prime Minister's Relief Fund:

The assessee claimed that the value of goods sent to the Prime Minister's Relief Fund should be deductible under Section 37. The Tribunal observed that the contribution was not due to any business compulsion and did not fall within the expression "wholly and exclusively" for business purposes. The expenditure, although for public good, did not impact the business of the assessee. The Tribunal referenced the Supreme Court judgment in Sri Venkata Satyanarayana Rice Mills, which allowed deductions for contributions directly connected to business. However, it concluded that there was no evidence showing the contribution had any business benefit. Thus, the Tribunal denied the deduction under Section 37 for the value of goods.

4. Treatment of License Income and Export Incentives under Section 80IA:

The issue of whether the receipt from license income and export incentives on DEPB could be treated as profits and gains derived from the business for computing the deduction under Section 80IA was decided against the assessee. The court referenced the decision in Liberty India vs. CIT, which was affirmed by the Supreme Court, holding that such incomes do not qualify for deduction under Section 80IA as they are not derived from the business.

Conclusion:

The appeal was dismissed, affirming the Tribunal's decisions on all issues. The court upheld that payments for legalizing construction deviations are non-deductible under Section 37, donations in kind do not qualify for deduction under Section 80G, contributions to relief funds without business compulsion are non-deductible under Section 37, and license income and export incentives do not qualify for deduction under Section 80IA.

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