2017 (6) TMI 779 - AT - Income Tax

Disallowance of expenditure incurred in construction of house meant for flood victims called Social Welfare Expenditure - Held that - Once the assessee discharges this onus assessee would be entitled to deduction u/s 37(1). In the present case no factual condition was laid by the assessee to establish that this expenditure was incurred for business purpose nor any attempt is discernible before the lower authorities. Mere bald assertion that the expenditure was incurred for promoting business cannot be accepted without establishing the nexus between expenditure and business. Therefore it amounts to application of income voluntarily towards charity which cannot be allowed as a deduction. Further an important aspect to be noted here is that the assessee has handed over constructed houses to the Government of Karnataka in terms of MoU. It is not the case of the assessee that the assessee was granted mining license in consideration of expenditure incurred by the assessee. Needless to mention these kind of contracts are opposed to public policy and void under the provisions of section 23 of the Contract Act. Therefore it cannot be said that the appellant had incurred this expenditure wholly and exclusively for the purpose of business. - Decided against assessee.

Summary

Issues:
1. Allowability of social welfare expenditure as a business deduction under section 37(1).
2. Disallowance of penalty amount debited to P&L Account.

Issue 1: Allowability of social welfare expenditure as a business deduction under section 37(1)
The appeal involved the question of whether the expenditure incurred by the assessee firm in constructing houses for flood victims, which were then handed over to the Government, could be claimed as a business deduction under section 37(1) of the Income-tax Act. The assessee contended that the expenditure was incurred to create goodwill and promote business, citing relevant case laws. However, the Revenue argued that the expenditure was towards charity and therefore not allowable as a business deduction. The Tribunal examined the conditions for claiming deduction under section 37(1), emphasizing that the expenditure must be laid out wholly and exclusively for the purpose of business. The Tribunal noted that the onus was on the assessee to prove the business purpose of the expenditure. In this case, the Tribunal found that the assessee failed to establish a nexus between the expenditure and business, leading to a conclusion that it was voluntary charity and not allowable as a deduction. Additionally, the Tribunal highlighted that the contract with the Government for constructing houses was not linked to any business benefit or consideration, further supporting the disallowance of the expenditure as a business deduction. Consequently, the Tribunal dismissed the grounds of appeal related to the social welfare expenditure.

Issue 2: Disallowance of penalty amount debited to P&L Account
The second issue in the appeal pertained to the disallowance of a penalty amount debited to the Profit and Loss Account. The Tribunal observed that there was no evidence provided to show that the penalty was not imposed for a breach of any legal provisions. As a result, the Tribunal upheld the decision of the Assessing Officer to disallow the penalty amount. Therefore, the appeal on this ground was also dismissed.

In conclusion, the Tribunal dismissed the appeals filed by the assessee concerning the social welfare expenditure and the penalty amount, affirming the decisions of the lower authorities. The judgment clarified the requirements for claiming deductions under section 37(1) and underscored the importance of establishing a direct link between the expenditure and the business purpose to qualify for such deductions.