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TMI Blog2019 (8) TMI 1288X X X X Extracts X X X X X X X X Extracts X X X X ..... f its business. Amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(1) of the Act in respect of expenses being contribution / donation to educational institutions, trust, local bodies ?" 3. The facts giving rise to this tax appeal be summarized as under : 3.1 The assessee-company filed its Return of Income for the A.Y. 2010-11 electronically with digital signature on 29/09/2010 declaring its total income at ₹ 293,22,38,330/-. Later, on 24/11/2011, the company filed its revised return declaring its total income to the tune of ₹ 292,11,96,415/-. The return of income filed was processed under Section 143(1) of the Act, 1961 accepting the total income as returned by the assessee-company. 3.2 The case was selected for scrutiny under the CASS and in such circumstances, a statutory notice under Section 143(2) of the Act was issued by the DCIT, Bharuch Circle, Bharuch dated 26/08/2011. Later, a notice under Section 142(1) of the Act was issued by the DCIT, Bharuch Circle, Bharuch on 11/07/2012. The case thereafter, was assigned to the Additional CIT, Bharuch Range, Bharuch by the CIT-III, Baroda vide order passed under Section 120 of the Act. Accordingly, a notice under Section 142(1) read with Section 129 of the Act, 1961 alongwith the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become responsible actors in society, so that their every action leads to sustainable growth and economic development. The then Minister of Corporate Affairs while addressing conference of Company Secretary at Kolkata had said that "CSR is no longer charity or philanthropy; instead it should be imbibed in the corporate culture that leads to responsible business." Company has incurred the following expenses in fulfillment of its corporate social responsibility and has been claimed as deduction u/s 37 of the Income tax Act : Name of the Institution Particulars in Brief Amount in 1 Shramik Vikas Sansthan Cost of purchase of Amber Charkhas for tribal women under the scheme of Khadi Board. 70000 2 Shramik Vikas Sansthan For construction of Hostel for 50 boys and 50 girls at Bhekhadia village. 600000 3 Narmada Rural Development Society Contribution towards providing Potable Drinking Water in the Villages of Bharuch District. 13769440 4 Narmada Rural Development Society For up gradation of E-Gram programme to Village Computer Entrepreneurs (VCE) 341600 5 Higher Education Support Trust For helping poor children for Higher Education 110000 6 Indian society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business. Contribution to the Public Welfare Fund at the instance of the Government authorities was allowed as a deduction on the ground that it was motivated by commercial consideration." 3.5 The Assessing Officer disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S as per order of Gujarat State Government who was a major share holder in the assessee company. Moreover, it was in the interest of the company also because the assessee company being a fertilizer producing company, the future prospects for the assessee were better because of expansion of irrigated area of land and the prospective demand of fertilizer for agricultural activities therein …..." The assessee failed to bring any material on the record which can connect these payments with the provisions of sec. 37(1) of the I.T. Act, 1961. However, from the list of above payments, it appears that contribution of 4,50,000/- made to Gujarat Coop. Onion Grovers Federation Ltd. for storage facility of onion to Small and Marginal farmers at Bhavnagar may be in the business interest of the company because the assessee company is a fertilizer producing and its contribution for storage facility of onion to farmers may encourage the farmer to increase the production of onion using fertilizer by virtue of storage facility being made available to them. Remaining payments are not connected with the business activities of the assessee and also the assessee failed to bring any fact in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the long run, the expenditure will be allowable as deduction. In order to claim deduction u/s 37(1), the money must be expended to directly or indirectly facilitate the business of the assessee. In this case, the efforts of the assessee in contributing to various agencies efforts to provide education, health-care, vocational employment etc. are laudable and for its efforts, it is eligible for deduction u/s 80G, where ever applicable, and the Assessing Officer has also allowed it at the rate of 50%. However, what has been frowned upon by the Assessing Officer, is the efforts of the assessee to get 100% deduction by claiming all these expenses u/s 37(1) of the Act, without fulfilling the pre conditions of section 37(1). Perusal of the submissions and the records reveals that the assessee has failed to establish that the claimed expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. The assessee has failed to explain how the incurring of these expenses has directly or indirectly helped the purpose of its business. The assessee is a manufacturer of fertilizers and chemicals and any expenditure u/s 37(1) will be allowable to it only if it establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmity in the order of CIT(A), accordingly same is uphold, therefore, this ground of appeal is dismissed." 20. In the light of above facts we find that the issue is covered in favour of the assessee, therefore, respectfully following the same this ground of appeal of the Assessee is allowed. 21. In the result, appeal of the Assessee is partly allowed." 3.8 Thus, the Appellate Tribunal relied on its earlier order passed for the Assessment Year 2009-10 and took the view that the assessee-company was entitled to claim deduction towards the expenditure incurred for discharging its corporate social responsibility under Section 37(1) of the Act. 3.9 The Revenue being dissatisfied with the order passed by the Appellate Tribunal has come up with the present appeal. 3.10 The challenge to the order passed by the Appellate Tribunal is on the following grounds : "(a) It is submitted that the learned ITAT has erred in law and on facts in deleting disallowance u/s 37(1) of the Act in respect of expenses on contribution/donation to educational institutions, trust, local bodies by relying on its own decision in ITA No.1363/Ahd/2013 for A.Y. 2009-10, without appreciating that the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1987) 166 ITR 836 (Kar); (4) Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. CIT, (1997) 223 ITR 101 (SC); (5) CIT vs. Madras Refineries Ltd., (2004) 266 ITR 170 (Mad); (6) CIT vs. Cheran Transport Corporation Ltd., (1996) 219 ITR 203 (Mad); (7) CIT vs. Chemicals and Plastics India Ltd., (2007) 292 ITR 115 (Mad); (8) CIT vs. Vatika Township P. Ltd., (2014) 367 ITR 466 (SC); (9) ACIT vs. Jindal Power Ltd. (2016) 70 taxmann.com 389 (Raipur- Trib) ANALYSIS :- 6. We take notice of the fact that the Appellate Tribunal relied on its earlier order passed on the very same issue for the Assessment Year 2009-10. The order passed by the Appellate Tribunal for the Assessment Year 2009-10 on the question of the applicability of Section 37(1) of the Act is selfexplanatory. In fact, the Assessing Officer and the CIT(A) should have followed the said order passed by the Appellate Tribunal. However, we have noticed that in a very casual manner, the CIT(A) declined to look into the order which was passed by the Appellate Tribunal for the Assessment Year 2009-10, observing as under : "The nature of the expenses claimed u/s 37(1) in assessee's own case in A.Y. 1994-95, 1995-96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to what should be proper apprehension by the Court of the legal result either of the construction of the document or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principal of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle - namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." These observation were made in a case where taxation was in issue. (15) This Court in Parashuram Pottery Works Co. Ltd. v. Income-Tax Officer, Circle 1, Ward A, Rajkot, (106 ITR 1 at p. 10 : 1977 SC 429 at p. 435) stated : "At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the doctrine of res judicata is not applicable to the income-tax proceedings since each assessment year is independent of the other, yet where an issue has been considered and decided consistently in a number of earlier years in a particular manner the same view should continue to prevail in the subsequent years unless there is some material change in the facts. In the case of Allied Finance (P) Ltd. (supra), the Tribunal had decided an issue in favour of the assessee by two orders and those two orders were followed by the Tribunal in the subsequent appeals. The department had accepted the correctness of the basic two orders and did not file any appeal against them. It, however, challenged the subsequent orders of the Tribunal and while refusing to entertain the appeal, the Delhi High Court held that there was no reason to discard the principle of consistency which requires that when the revenue has accepted a particular view by not filing an appeal that view should be adhered to, unless there is a just cause for departure. The High Court deprecated the practice of pick and choose. 6.4 The basis of the rule of consistency seems to us, with respect, to be the classic observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndamental aspect" permeates in different assessment years. In arriving at this conclusion, this court referred to an interesting passage from Hoystead v. Commissioner of Taxation [1926] AC 155 (PC) wherein it was said (page 328 of 193 ITR) : "Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be proper apprehension by the Court of the legal result either of the construction of the document or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principal of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle - namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." 30. Reference was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : "Section 37 :(1) Any expenditure (not being expenditure of the nature described in sections 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 chargeable under the head "Profits and gains of business or profession". [Explanation 1. - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2. - For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purpose if the business or profession.] (2) [***] [(2B) Notwithstanding anything containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on of the business, may yet be expended wholly and exclusively for the purposes of the trade." These observations have been referred to with approval by this Court while construing s. 10(2)(xv) of the 1922 Act. [See Eastern Investments Ltd. vs. CIT [1951] 20 ITR 1; CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601. In Travancore Titanium Products Ltd. vs. CIT (1966) 60 ITR 277 (SC) this Court, while construing the expression "for the purpose of business" in s. 10(2)(xv) of the 1922 Act, has said (page 282) : "The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, I.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business." In Indian Aluminium Co. Ltd. vs. CIT [1972] 84 ITR 735 (SC) decided by a Constitution Bench of this Court, the aforementioned test laid down in Travancore Titaniu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society at large and thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill incurred the aforesaid expenditure. In support of his contention, he also pressed into service the test of commercial expediency. He submitted that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee's business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. In support of this contention, he placed reliance upon the judgment of the Supreme Court in CIT v. Walchand and Co. P. Ltd. [1967] 65 ITR 381 (SC), Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) and J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 (SC). 15. The principle laid down by the Supreme Court in all the three judgments is similar. These judgments state that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee's business, reasonableness of the expenditure has to be judged from the point of view of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and even if that was so the question of allowing the expenditure under Section 37(1) of the Act would not arise. 18. In our opinion, the expenditure towards the religious funds, charitable institutions, social clubs or for charity do not stand to the test of commercial expediency. In any case, the expenditure under these heads cannot be stated to be exclusively for the purposes of business of the respondent-assessee and to allow it. That apart, the respondent-assessee has failed to place any material, in support of their case so as to claim the aforementioned expenditure under this head as contemplated by Section 37(1) of the Act as being commercial expediency. In the circumstances, we answer the question in favour of the Revenue and against the assessee. The order of the Tribunal is accordingly set aside to this extent." 8. We are of the view that as long as the expenses are incurred wholly and exclusively for the purpose of earning the income from the business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee can claim deduction under s. 10(2) (xv) of the Act even though there was no compelling necessity to incur such expenditure. It is I.T.A. No.99/BLPR/2012 Assessment year: 2008-09 relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read "any expenditure.. laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law." 8.2 The words used in Section 37(1) of the Act are "wholly and exclusively for the purpose of business". In normal legal parlance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Supreme Court in relation to a claim for deduction in respect of the same item of expenditure. In T. S. Krishna v. CIT [1973] 87 ITR 429 (SC), a claim for deduction in respect of wealth-tax paid on shares held by the assessee was held to be not a permissible deduction under s. 57(iii) even apart from or irrespectives of the provisions of s. 58(1A). As against this, we have the decision in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, wherein wealth-tax paid by the assessee, which was a trading company, on assets held by it for the purpose of its business, was held to be deductible as a business expense under s. 10(2)(xv). These two decisions illustrate that different approaches are necessary when the same item of expenditure has to be judged from the standpoint of s. 37(1) on the one hand and s. 57(iii) on the other and that the scope of the provisions is not the same. Reference may also be made in this connection to the decision of this court in Commissioner of Expenditure-tax V/s. Mrs. Manorama Sarabhai [1966] 59 ITR 262. In that case, it was pointed out that the words "for the purpose of" were used in s. 5(a) of the Expendituretax Act, 1957, in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), 'promoted by altruistic motives', it does not cease to be an expenditure deductible under section 37(1)." 8.8 In Mysore Kirloskar Ltd.'s case (supra), the Hon'ble Court proceeded to observe : "Even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon'ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 1012 : " …... any contribution made by an assessee to a public welfare fund which is directly con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case. 9. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive : it largely thrives upon the confidence the management which its constituents have in its management. To maintain that confidence the management has often to make concessions and thereby to preserve the goodwill of the business and its relations with the clientele. The bank could have, if so advised, taken its stand strictly on its legal obligations, and could have recovered the amounts due by the constituents at the same time denying liability to make any compensation for the loss of jewellery pledged with it. But such a stand might very well have ruined its business, especially in the rural areas in which it operated. The bank had evidently two courses open : to enforce its rights strictly according to law, and thereby to loss the goodwill it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing the second alternative, in our judgment, the bank laid out expenditure for the purpose of its business. Paying to the constituents the price of the jewellery stolen in a robbery or a burglary was therefore expenditure for the purpose of the business. There can be no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fide incurred. The Tribunal has come to the conclusion that the expenditure in question has been incurred. The contention that, as the Government was conducting the prosecution, there was no necessity for the assessee to engage his own lawyers is not substantial. It was for the assessee to decide how best to protect his own interest. It was the duty of the assessee to see that the prosecution was properly conducted. He was interested in successfully prosecuting the case. The fact that he did not leave the carriage of the case in the hands of the prosecuting agency of the Government is no ground for disallowing the expenditure. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. So far as the apportionment is concerned we are not told why we should not consider the same as a reasonable estimate." 9.3 In Sassoon J. David and Co. (P) Ltd. (supra), the Supreme Court interpreted the expression "wholly and exclusively" used in Section 10(2)(xv) of the Act. The Supreme Court took the view that the expression "wholly and exclusively" does not mean "ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investment Ltd. v. CIT [1951] SCR 594 ; 20 ITR 1 (SC). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." 9.4 In S.A. Builders Ltd. (supra), the Supreme Court in context with Section 37 of the Act itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of he Act. In Madhav Prasad's case [1979] 118 ITR 200 (SC), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's csae [1979] 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has bee repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." 9.5 In Mysore Kirloskar Ltd. (supra), the High Court of Karnataka in context with Section 80G of the Act, observed as under : "The basic requirement for invoking sections 37(1) and 80G are, therefore, quite different, but none the less, the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied. But such money must be "laid out or expended wholly and exclusively for the purpose of business". The word "wholly" refers to the quantum of expenditure and the word "exclusively" refers to the motive, object or purpose of the expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertheless, it must be an "expenditure" allowable as deduction under the Act. The question that, however, still remains is whether the donation claimed by the assessee for deduction can be said to be an "expenditure" as contemplated under section 37(1) of the Act. "Expenditure" primarily denotes the idea of "spending" or "paying out or away". It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. Some of these principles have been explained by the Supreme Court in Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66, wherein it has been observed (at pages 75 and 76) : "The income-tax law does not allow as expenses all the deduction a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expenditure but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court held as under: "From the aforesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected 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 section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established byt eh district Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industry." 9.8 In Cheran Transport Corporation Ltd. (supra), the Madras High Court observed as under : "However, we may incidentally add that the Supreme Court, while dealing with a business loss as distinguished from a business expenditure has laid down, approving the earlier decisions, including that of the Orissa High Court in CIT vs. Industry & Commerce Enterprises (P) Ltd. [1979] 118 ITR 606 that where Government bonds, as securities, were purchased by the assessee with a view to increase his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as business loss. In that case, according to the statement of case drawn up, the assessee was told that if it subscribed for the Government bonds, preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government departments. However, it must be stated that the aspect of contravention of public policy or contravention of any law, was not considered in the abovesaid Supreme Court case also. Anyway, in view of the factual difference b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the main incidents which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to revenue. On the whole, an objective application of the judicial mind to the facts of each case is necessary." 8. The approach, hence, needs to be that of a practical and prudent businessman rather than from the Revenue's strict classification of a right. As the Supreme Court held in the decision reported in [1997] 223 ITR 101 (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT), what is to be seen is not whether the payment was compulsory for the assessee to make or not. The correct test is that of commercial expediency. The apex court considering the various decisions held that any contribution made by the assessee to a fund which is directly connected or related to the carrying on of the assessee's business or which results in benefit to the assessee's business, has to be regarded as a deduction allowable under section 37 of the Income-tax Act, 1961. Although the case related to a contribution to a public welfare fund, the ratio decidendi will guide the decision in this case too. 9. It may be noted that in the decision reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips v. Eyre [1870] LR 6 QB 1, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 32. The obvious basis of the principle against retrospective is the principle of "fairness", which must be the basis of every legal rule as was observed in the decision reported in L'Office Cherifien des Phosphates v. YamashitaShinnihon Steamship Co. Ltd. [1994] 1 AC 486. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lluting company. The assessee-company is conscious of its social obligations towards the society at large. The assessee-company is a Government undertaking and, therefore, is obliged to ensure all the protective principles of State policy as enshrined in the Constitution of India. The moneys has been for various purposes as enumerated above cannot be regarded as outside the ambit of the business concerns of the assessee. The approval needs to be that of a practical and prudent businessman rather than from the Revenue's strict classification of a right. The correct test should be of commercial expediency and not whether the payment was compulsory for the assessee to make or not. 10.1 The Supreme Court in Panipat Woollen & General Mills Co. Ltd. AIR 1986 SC 2082 has held that it is not open to the court to go behind the commercial expediency which had to be determined from the point of view of a businessman. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a straight jacket. The test merely means that the court will please itself in the position of a businessman and find ..... X X X X Extracts X X X X X X X X Extracts X X X X
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