1976 (6) TMI 27 - HC - Income Tax

Company's Political Donation Not Deductible as Business Expense under Income-tax Act

The court ruled against the assessee, a private limited company in bus transport, regarding the deductibility of a donation made to a political party ... Business Expenditure, Wholly And Exclusively Issues Involved:1. Deductibility of a donation made to a political party under Section 37(1) of the Income-tax Act, 1961.2. Establishing a nexus between the donation and the business of the assessee.Detailed Analysis:1. Deductibility of a Donation Made to a Political Party under Section 37(1) of the Income-tax Act, 1961:The primary issue in this case was whether the sum of Rs. 20,000 donated by the assessee to the Congress Party could be admissible as a deduction under Section 37(1) of the Income-tax Act, 1961. Section 37(1) states that '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'.'The court referred to the Supreme Court's interpretation in Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140, 150 (SC), which elucidated that the expression 'for the purpose of the business' is broader than 'for the purpose of earning profits.' It encompasses various activities related to running and preserving a business, but the expenditure must be incurred in the capacity of a person carrying on the business.2. Establishing a Nexus Between the Donation and the Business of the Assessee:The court examined several precedents to determine if a donation to a political party could be considered business expenditure. The Calcutta High Court in Indian Iron and Steel Co. Ltd., In re [1957] 27 Comp Cas 361, 364 (Cal) expressed strong views against such deductions, stating that contributions to political funds could lead to unhealthy competition among businesses and undue influence of big business on politics.The court noted that almost all decided cases required a clear nexus between the donation and the business. In J. K. Cotton Spg. & Wvg. Mills Co. Ltd. v. Commissioner of Income-tax [1966] 62 ITR 813 (All), the court found no direct nexus between the donation and the business, making it impossible to hold that the expenditure was wholly and exclusively for business purposes.Similarly, in Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379, 395 (Cal), the Calcutta High Court discussed the legitimacy and business expediency of donations to political parties, concluding that each case must be decided on its own facts to establish a connection between the donation and the business.In Orissa Cement Ltd. v. Commissioner of Income-tax [1969] 73 ITR 14 (Delhi), the Delhi High Court emphasized that the expenditure must be directly and intimately connected with the business to qualify for deduction. The court upheld the disallowance due to the lack of connection between the payment and the business.In Ambala Bus Syndicate Private Ltd. v. Commissioner of Income-tax [1974] 95 ITR 383 (Punj), the Punjab and Haryana High Court allowed the deduction where the donation was made to prevent nationalization, directly benefiting the business.In Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. [1975] 100 ITR 139 (Bom), the Bombay High Court followed previous decisions and disallowed the deduction.In Additional Commissioner of Income-tax v. Badrinarayan Shrinarayan Akodia [1975] 101 ITR 817, 820 (MP), the Madhya Pradesh High Court disallowed a donation to the Chief Minister's Drought Relief Fund due to the lack of connection with the business.Conclusion:In the present case, the court found no material evidence to establish a nexus between the donation and the business of the assessee. The assessee, a private limited company in bus transport, failed to demonstrate any business advantage or benefit from the donation. Consequently, the court held that the donation did not qualify as an expenditure laid out wholly and exclusively for business purposes under Section 37(1) of the Income-tax Act, 1961.Judgment:The court answered the question in the negative, ruling against the assessee. The assessee was ordered to pay the costs of the Commissioner, with counsel's fee fixed at Rs. 500.