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TMI Blog2019 (9) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... e earliest possible time and for undertaking the said task, the appropriate Government provided the assessee the land free from encumbrances, upon which the construction of houses came to be commenced, executed and handed over within the time limit agreed to under the MOU. It was the term of the MOU that the donor (assessee) has joined hands with the Government of Karnataka to bring a total relief in the lives of the people who were worst affected by the unprecedented rain and floods and the said project was undisputedly a philanthropic project. As agreed to between the parties that the donor himself would incur financial liability, maintain high standard of quality construction and would construct the houses as per the design offered by the Government of Karnataka, apart from ensuring quality of material used for the construction is of the superior quality. That apart, the work completion certificate has been issued by the Deputy Commissioner, Ballary and it is also certified that a sum been expended by the assessee for construction of 169 Aasare houses at Gundigana village. Thus, it boils down to the fact that construction of houses has been carried out by the assessee as agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OCATE) ARAVIND KUMAR J., JUDGMENT Having heard the learned Advocates appearing for parties on 05.07.2019, we have admitted the above appeals to consider the following substantial question of law: "Whether the authorities below were justified in disallowing a sum of ₹ 1,61,30,480/- incurred towards construction of 169 houses for the villagers who had lost their homes due to natural calamity on the ground that it was not an expenditure allowable under Section 37 of the Income Tax Act, 1961, despite MOU dated 02.07.2010 having been entered by the petitioner with the jurisdictional Deputy Commissioner, Government of Karnataka?" BRIEF BACKGROUND OF THE CASE: 2, The appellant-assessee is carrying on the business of extraction of iron ore and also trading in iron ore. For the assessment years 2011-12 and 2012-13 return of income came to be filed by the assessee, was processed under Section 143(1) of Income Tax Act, 1961 (for short 'Act'). The assessing officer disallowed the amount claimed by the assessee as social welfare expenses in a sum of ₹ 1,61,30,480/- and ₹ 55,90,080/- for the respective assessment years on the ground that it was not gained/incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hindrance. In support of his submission he relies upon the following judgments: (1) (1959) 37 ITR 66 (SC): INDIAN MOLASSES CO. (P) LTD. vs. CIT (2) (1966) 62 ITR 638 (SC): CIT vs. NAINITAL BANK LTD. (3) (1986) 158 ITR 486 (GUJ): C.J. PATEL & CO. vs. CIT (4) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT (5) (1964) 53 ITR 140 (SC): CIT vs. MALAYALAM PLANATION LTD. (6) (1982) 133 ITR 756 (SC): CIT vs. DELHI SAFE DEPOSIT CO. LTD. (7) (1976) 103 ITR 66 (SC): CIT vs. PANIPAT WOOLLEN & GENERAL MILLS CO. LTD. (8) (1977) 108 ITR 358 (SC): SHAHZADA NAND & SONS vs. CIT (9) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT (10) (1997) 223 ITR 101 (SC): SRI. VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. vs. CIT (11) (1979) 118 ITR 379 (MP): ADDL. CIT VS. KUBER SINGH BHAGAWANDAS (12) (2007) 288 ITR 1 (SC): S.A. BUILDERS LTD. vs. CIT (APPEALS & ORS. (13) (2004) 266 ITR 170 (MAD): CIT vs. MADRAS REFINERIES LTD. (14) (2007) 292 ITR 115 (MAD): CIT vs. CHEMICALS & PLASTICS INDIA LTD. (15) (2009) 317 ITR 338 (MAD): CIT vs. VELUMANICKAM LODGE (16) ITA NO.603/2004: CIT vs. M/S. KONKAN MARINE AGENCIES Hence, he prays for allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon'ble Chief Minister to all to lend their hands for restoring normalcy. 9. It is in this background, Hon'ble Chief Minister of Karnataka had made fervent appeal to all philanthropist, industrial and commercial enterprises to extend their wholehearted support in all possible manner to achieve the gigantic task of restoring normalcy and bringing hopes to the lives of more than 5.41 lakh persons. 10. The assessee who is carrying on the business of extraction of iron ore and trading in iron ore thus entered into a Memorandum of Understanding with Government of Karnataka on 01.12.2009, whereunder assessee agreed to construct 256 houses at Honnarahalli and subsequently, on mutual understanding, constructed 169 houses at Gundiganur village, Siraguppa taluk for providing shelter to flood affected persons who had lost their roof over their head and for the purpose of construction of houses, assessee spent an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... souvenir, brochure, tract, pamphlet or the like published by a political party.]" 12. A plain reading of Section 37 would indicate that such expenditure not being expenditure of the nature described in Sections 30 to 36 or capital expenditure or personal expenses of the assessee would be an expenditure under this Section or in other words, any expenditure laid out or expended wholly and exclusively for purposes of the business would be allowable in computing the income chargeable under the head "Profit and gains of business or profession" under this Section. 13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the business or profession". These two expressions namely, "wholly" and "exclusively" being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitutional provision authorizing a State to incur extra-ordinary expenses, the term denotes an expense for the general welfare compelled by an unforeseen condition such as a natural disaster or war also termed as extra-ordinary item." Likewise, expression "expediency" has been defined as: "Expediency. A word of large import, comprehending whatever is suitable and appropriate in reason for the accomplishment of the specified object. As supplied to public welfare legislation, the term involves utility, and has reference to matters which are wholly for legislative cognizance. The term is said to be nearly synonymous with "necessity" where that term is used in a sense not importing an absolute necessity, as in the case of governmental interference with private property when necessary for the public good, and has been distinguished from "emergency" see 29 C.J.S. p 762 note 38, and "reasonableness". 17. The Hon'ble Apex Court in the case of CIT vs DELHI SAFE DEPOSIT COMPANY LIMITED reported in (1982)133 ITR 756 (SC) has held a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. To put it differently, the revenue authorities or the Courts when faced with such situation, will have to place itself in the position of such business men and ascertain whether the expenses so incurred can be said to have been expended for the purpose of the business or the transaction was merely camouflage for the purpose of reducing the tax component by depicting it as an expenditure by reducing the quantum of profit in the profit and loss account. 19. The expression "wholly and exclusively" found in Section 37 of the Act cannot be understood in a narrowed manner. In other words, it has to be given interpretation so as to achieve the object of the Act. Thus, where the amount is expended and claimed as an expenditure allowable under Section 37(1) of the Act, it need not be that such disbursement is made in the course of, or arises out of, or is connected with the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. 20. In fact, the Hon'ble Apex Court approving the observation of ATHERTON's case - 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely phrase means something which comes out of the traders pocket." 22. The requirement of commercial expediency would be judged in the context of prevailing socio economic conditions and such thinking which places the general interest of the community above the personal interest of the individual and beliefs that a business or undertaking is a product of combined efforts of all, then, such expenditure incurred by the business undertaking may partake the character of commercial expediency. Such expenditure depends upon the terrain in which it travels. 23. In the matter of SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS COMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by the District Collector would be against public policy or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby." "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." 25. It has been held under English income-tax that sums paid to an employee as pension or gratuity are deductible as money laid out and expended for the purposes of trade, profession or avocation in the case of SMITH vs INCORPORATED COUNCIL OF LAW REPORTING FOR ENGLAND AND WALES - (1914) 3 KB 574 and it reads thus: "The respondents, the Incorporated Council of Law Reporting for England and Wales, were a limited company incorporated under s.23 of the Companies Act, 1867, with no power to pay any portion of their earnings to their members by way of profits. In 1911 the respondents gave a gratuity of 1500/- to one of their reporting staff on his retirement after long service. The payment was not made under any contract between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey was wholly or exclusively laid out or expended for the purposes of the trade. There may be cases in which the Court would have to say there is no evidence on which any tribunal could find that this sum was laid out or expended for the purposes of such trade, but in most cases it appears to me that it depends on the facts of the trade of which the Court has no knowledge, and for which it must depend on the findings of the Commissioners." 26. Keeping the above principles in mind, when the facts on hand are examined, it would clearly indicate that assessee has incurred the expenditure towards construction of 169 houses for the villagers who had lost their home due to natural calamity. In order to cater to the needs of those destitute persons who had lost the roof over their head on account of natural calamity, assessee constructed the houses by expending the amount. However, assessing officer and the authorities have held that it was not incurred for the purpose of business. One glaring factor which cannot go unnoticed is, that a MOU came to be entered into by the appellant on 01.12.2009 with the Government of Karnataka, as already noticed herein above, whereunder assessee agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. In fact, Hon'ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY's case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers 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 came to be further held making of a donation for charitable or public cause or in the 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 has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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