2020 (8) TMI 667 - AT - Income Tax

Disallowing social welfare expenditure - Whether expenditure incurred for construction of houses to rehabilitate flood victims would be in the realm of business expenditure allowable u/s 37? - A.O. was of the opinion that expenditure incurred for social welfare expenditure is in the nature of donation given to Chief Minister Relief Fund but not in the nature of expenditure incurred wholly and exclusively for the purpose of business, which can be allowed u/s 37(1) - HELD THAT - Identical issue has been considered in the case of Kanhaiyya Lal Dhuderia Vs. JCIT 2019 (9) TMI 354 - KARNATAKA HIGH COURT where under similar set of facts, the High Court after considering various case laws considered by the Ld. A.O. came to the conclusion that where assessee entered into an MOU with State Government wherein assessee agreed to construct houses to rehabilitate flood victims, since assessee incurred this expenditure not only as a social responsibility but also keeping in mind goodwill and benefit it would yield in long run in earning profit, impugned expenditure would be in realm of business expenditure allowable u/s 37(1). Therefore, by respectfully following the decision of Hon ble High Court of Karnataka, we are of the considered view that expenditure incurred under the head Social Welfare Expenditure for construction of houses to flood victims is in the nature of expenditure incurred wholly and exclusively for the purpose of business and deductible u/s 37(1) of the Act. Hence, we direct the A.O. to delete additions made towards disallowance of social welfare expenditure. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of ?1,79,91,250/- claimed as "Social Welfare Expenditure" under section 37(1) of the Income-tax Act.
2. Nexus between the expenditure and the business activities of the assessee.
3. Applicability of judicial pronouncements and precedents to the case.
4. Interpretation of the MOU between the assessee and the Government of Karnataka.
5. Consideration of the expenditure as a donation to the Chief Minister Relief Fund.

Issue-wise Detailed Analysis:

1. Disallowance of ?1,79,91,250/- claimed as "Social Welfare Expenditure" under section 37(1) of the Income-tax Act:

The assessee, a partnership firm engaged in the business of excavation, trading in Iron-Ore, and running a Petrol Pump, filed its return of income for the assessment year 2011-12. The Assessing Officer (A.O.) noticed that the assessee had debited a sum of ?1,79,91,250/- under "Social Welfare Expenditure/Construction of Houses for Flood Victims." The A.O. disallowed this amount, considering it a donation to the Chief Minister Relief Fund, which could only be eligible for exemption under section 80G of the Income-tax Act, not as a business expenditure under section 37(1).

2. Nexus between the expenditure and the business activities of the assessee:

The assessee argued that the expenditure incurred had a direct nexus with its business activities, enhancing cordial relationships with local authorities. The expenditure was claimed to be incurred wholly and exclusively for the purpose of business, thus deductible under section 37(1). The A.O. and the Commissioner of Income-tax (Appeals) [CIT(A)] disagreed, stating that the expenditure was not directly related to the business activities but was in the nature of a donation.

3. Applicability of judicial pronouncements and precedents to the case:

The assessee cited the decision of the Hon’ble Karnataka High Court in Kanhaiyalal Dhuderia Vs. JCIT, where under similar facts, the court held that expenditure for constructing houses to rehabilitate flood victims was a business expenditure allowable under section 37. The Tribunal found the facts of the present case to be similar to those in the cited case and decided to follow the High Court's ruling.

4. Interpretation of the MOU between the assessee and the Government of Karnataka:

The MOU required the assessee to construct houses for flood victims at its own cost. The CIT(A) observed that the assessee did not fully comply with the MOU to claim exemption of the expenditure. However, the Tribunal, referencing the High Court's decision, noted that the MOU's terms indicated that the expenditure was not merely a donation but also served business purposes by fostering goodwill and potential long-term benefits.

5. Consideration of the expenditure as a donation to the Chief Minister Relief Fund:

The A.O. and CIT(A) considered the expenditure as a donation eligible for exemption under section 80G, not as a business expense under section 37(1). The Tribunal, however, found that the expenditure, although philanthropic, was also aimed at benefiting the business in the long run. The High Court had previously ruled that such expenditures, even if they benefit the public, can be considered business expenses if they also serve the business's interests.

Conclusion:

The Tribunal concluded that the expenditure incurred for constructing houses for flood victims was in the nature of business expenditure deductible under section 37(1). The appeal filed by the assessee was allowed, and the A.O. was directed to delete the additions made towards the disallowance of social welfare expenditure. The judgment emphasized that contributions to public welfare, if connected to business interests, could be considered legitimate business expenses.