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TMI Blog2009 (3) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... uch the expenditure incurred during the course of the business ought to have been allowed as deduction under s. 37(1) of the Act. (4) That it is contended that the appellant is engaged in the business and the expenditure on direct operation is nothing but application of income and expenditure incurred in the course of the business for which it had been established and set up. Accordingly, the expenditure on direct operation is an allowable expenses under s. 37 of the Act. (5) That in the alternative and without prejudice to each of the aforesaid grounds, in the event, if it is held that the aforesaid expenditure was merely grants in aid and could not be allowed as deduction, then, there could not have been any assessment made as a "person" under the IT Act, 1961 and the assessment made is illegal and without jurisdiction. (6) That the outgoings on account of grants in aid are outgoings in the process of earning income and not an outgoing out of income having been earned. It is contended that the expenditure has been incurred in accordance with the objects of OIDB and as such an expenditure incurred is during the ordinary course of its business. (7) The AO had erred in not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable expense under s. 37 of the Act. (7) That in the alternative and without prejudice to each of the aforesaid grounds, in the event, if it is held that the aforesaid expenditure was merely grants in aid and could not be allowed as deduction, then, there could not have been any assessment made as a "person" under the IT Act, 1961 and the assessment made is illegal and without jurisdiction. (8) That the outgoings on account of grants in aid are outgoings in the process of earning income and not an outgoing out of income having been earned. It is contended that the expenditure has been incurred in accordance with the objects of OIDB and as such an expenditure incurred is during the ordinary course of its business. (9) The provisions of s. 234B has no application in the instant case. (10) The interest calculations under s. 234B are wrong and require revision. (11) The above grounds are independent and without prejudice to one another. (12) The appellant reserves its right to make addition, alteration, modification and withdrawal of any of its grounds at the time of hearing. 2. The assessee is a public sector undertaking constituted by an Act of Parliament in 25th year of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 2002-03 ------------------------------------------------------------ 1. Balmer Lawrie & Co. Ltd. 1,75,71,000.00 ------------------------------------------------------------ 2. Centre for High Technology 7,87,71,500.00 ------------------------------------------------------------ 3. Directorate General of Hydrocarbons 45,03,00,000.00 ------------------------------------------------------------ 4. Indian Institute of Technology 40,00,000.00 ------------------------------------------------------------ 5. Government of Rajasthan. Department of Petroleum &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------ 10. RRL Jorhat 7,77,000.00 ------------------------------------------------------------ TOTAL (A) 84,59,15,679.64 ------------------------------------------------------------ Others ------------------------------------------------------------ 11. C.I.P.E.T. 0.00 ------------------------------------------------------------ 12. P.C.R.A. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48,679.64 ------------------------------------------------------------ Financial year 2003-04, asst. yr. 2004-05 ------------------------------------------------------------ Sl. No. Grantee institutions Rs. In crores ------------------------------------------------------------ 1. DGH 31.47 ------------------------------------------------------------ 2. PCRA 21.35 ------------------------------------------------------------ 3. ONGC Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------ 10. TERI 0.09 ------------------------------------------------------------ Total 77.21 ------------------------------------------------------------ 5. Further sum of Rs. 18.83 crores was paid to State Government as per Note 11 to annual report: "11. Payment of royalty In April, 2003, CCEA approved the proposal of Government to meet its commitment on fiscal stability in PSCs relating to discovered fields from first and second rounds out of OID Fund. Accordingly, the OIDB paid an amount of Rs. 18.83 crores towards royalty to State Government during 2003-04." 6. Thus, for asst. yr. 2004-05 a consolidated sum of Rs. 96.04 crores (Rs. 77.21 cr. + Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1959) 37 ITR 66 (SC) according to which expenditure has been held to be equal to expense and expenses is money laid out by calculation and intention even though in any use of the word this element may not be present, as one speaks of a joke at another's expense. But the idea of spending in the sense of "paying out or away" money is the primary meaning which is relevant and expenditure is what is paid out or away and is something which is gone irretrievably. Reference was also made to raise the similar proposition to the decision in the case of M.P. Financial Corporation vs. CIT (1986) 51 CTR (MP) 249 : (1987) 165 ITR 765 (MP) and decision of Hon'ble Kerala High Court in the case of CIT vs. N.C. John & Sons Ltd. (1994) 119 CTR (Ker) 461 : (1994) 208 ITR 57 (Ker) to contend that for claiming deduction as an expenditure the amount should have been spent by the assessee as an amount paid out or paid away. To be a payment which is made irrecoverably, there should not be any possibility of the money forming once again part of funds of the payer. The payer should also not have any control over the money given or spent away. 9. Referring to the decision of Hon'ble Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1). Such a contribution, whether voluntary or at the instance of the authority concern, when made for the benefit of public and not regarded as a payment opposed to public policy should be held allowable as an expenditure. He pleaded that there is no law which prohibits to making such donations and, thus, it was pleaded that benefit of s. 37(1) could not be denied to the assessee when the payment is made for the purpose of assessee's business. 13. It was pleaded that the grants made by the assessee could under no circumstances be regarded as illegal payments or payments opposed to public policy. It is not a case where the money is contributed to a private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. The Government of India directs the assessee to spend money for the specific schemes which are beneficial to the general public and payments to such schemes cannot be regarded as being opposed to public policy. 14. It was pleaded that what is to be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions in the light of the material placed before us. No doubt that giving grant has clearly been mentioned in the relevant Act as one of the functions of the Board as described in OIDB Act. Prior to asst. yr. 2002-03, the income of the assessee was exempted by OIDB Act itself. Though in the grounds of appeal first ground taken by the assessee is regarding allowability of such grants under s. 36(1)(xii) of the IT Act, 1961, but learned Authorised Representative has not addressed us on such ground. We will revert on the said section later on after considering the arguments raised by learned Authorised Representative and learned Departmental Representative. 18. As it can be seen from the arguments of the learned Authorised Representative the assessee is claiming such grants as an expenditure incurred by it under s. 37(1) of the Act. Sec. 37(1) of the Act read as under: "37(1): Any expenditure (not being expenditure of the nature described in ss. 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 the business or profession shall be allowed in computing the income chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and reference can be made to the decision of Hon'ble Supreme Court in the case of Haji Aziz & Abdul Shakoor Brothers vs. CIT (1961) 41 ITR 350 (SC). 23. It has to be remembered that the words "wholly and exclusively" both refer to the expenses incurred by the assessee for the purpose of his business. While determining as to whether the deduction claimed has been wholly and exclusively spent on such business, it is permissible to find out whether the amount has really gone for the purpose of business or not. 24. The word "business" used in s. 37(1) connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose which is carried on with the end in view of making or earning profit. Thus, in order to be deductible under s. 37(1) the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. 25. In view of the above discussion, the grants given by the assessee even though they are in accordance with the objects stated in the Act and even if they are made or disbursed as per directions of Central Government and in the public interest, but the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961, is incurred for the objects and purposes authorised by the Oil Industry (Development) Act, 1974 (47 of 1974); (ii) such expenditure is not in the nature of capital expenditure; (iii) such expenditure is not eligible for deduction under any other provision of the IT Act, 1961; and (iv) a separate account of the expenditure claimed under the said clause is maintained by the Oil Industry Development Board. 2. This notification shall be applicable w.e.f. 1st day of April, 2008, that is, for the asst. yr. 2008-09 and subsequent assessment years. Note-This notification shall not affect any legal proceeding initiated by the Oil Industry Development Board in respect of the asst. yr. 2003-04 to the asst. yr. 2007-08 and such proceeding shall be continued as if this notification had not been issued. (Notification No. 21/2008/F. No. 149/222/2007- TPL) Pankaj Jindal, Under Secy." &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities in the areas as specified in the said Acts. By the Finance Act, 2001 and Finance Act, 2002, tax exemption of certain bodies set up through an Act of Parliament was withdrawn. Subsequent to the removal of the tax shield, a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such developmental activities may not be allowed as a deduction while computing the income under the head 'Profits and gains of business or profession'. 31.2 The Act has inserted a new cl. (xii) in sub-s. (1) of s. 36 so as to provide that any expenditure (not being capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head 'Profits and gains of business or profession'. 31.3 This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nafter referred to as "royalty") though are made as per the objects stated in the relevant Act, but the same cannot be allowed as these grants do not fulfil the criteria or conditions laid down in s. 37(1) of the Act. Sec. 36(1)(xii) was inserted on the statute for a specific purpose and it has been explained in the above-mentioned Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] that this clause is introduced so as to provide that any expenditure "not being capital expenditure" incurred by a corporation or body corporate by whatever name called, constituted or established by Centre or State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head "Profits and gains of business or profession". It is also mentioned in the said circular that such entities which are created under an Act of Parliament have the basic object and function of carrying on of developing activities in the areas as specified in these Acts. By Finance Act, 2001 and Finance Act, 2002 tax exemption of certified bodies set up through an Act of Parliament wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring benefit of the business of the assessee and reference in this regard can be made to the decision of Full Bench of Hon'ble Andhra Pradesh High Court in the case of Praga Tools Ltd. vs. CIT (1980) 16 CTR (AP)(FB) 356 : (1980) 123 ITR 773 (AP)(FB). 32. In the present case the grants and royalty paid to State Government and claimed under the head 'Expenses on direct operations/grants' cannot be said to be for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business of the assessee as by making such grants assessee has not acquired any asset and such grants have not brought any advantage of enduring benefit to the assessee. Therefore, these grants and payment of royalty cannot be called t be "capital expenditure" incurred by the assessee. 33. In view of the above discussion, it has to be held that these grants and payment of royalty are allowable under s. 36(1)(xii) as assessee has fulfilled all the conditions specified in that section. 34. To conclude, it is held that these grants and payment of royalty claimed under the head "Expenses on direct operations/grants" are not allowable under s. 37(1), but they are allowable under s. 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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