2023 (11) TMI 1197 - HC - Income Tax

Revenue loss on compulsory fertilizer bonds and school expenditure for employees' children both allowed as deductible business expenses

HC allowed respondent's claim for revenue loss on diminution of GOI Fertilizer Bonds received in lieu of cash subsidy, following precedents that bonds ... Nature of loss - provisions of diminution of Government of India Fertilizer Bonds [GoI Bonds] - GOI Fertilizer bonds were provided to the respondent in lieu of cash subsidy, thus the reduction in the value of the bonds was claimed as a revenue loss by the respondent as it was incurred in the course of business - HELD THAT:- In DCM Shriram case [2015 (12) TMI 1769 - DELHI HIGH COURT] the Delhi High Court as well as the tribunal from which the appeal was preferred held that the fertilizer bonds were accepted in the course of business in lieu of fertilizer subsidy by the Government of India. The company had no intention to hold bonds as such and the same had been received by the company under compulsion in lieu of cash fertilizer subsidy amount. Thereby, the loss incurred due to the diminution in the value of the bonds may be regarded as a revenue loss and can be claimed as deduction while computing taxable income for the period under consideration. The Supreme Court in the case of Patnaik Company Limited [1986 (7) TMI 6 - SUPREME COURT] held that since the investment in the fertilizer bond was made by the respondent under commercial expediency it did not bring an asset of a capital nature and the diminution in the value of the said bond are allowable as revenue loss. Having regard to the facts of the present case and after placing reliance on the above decisions the claim by the respondent as revenue loss on account of the diminution in the value of the GOI Bonds is held in favour of the Respondent. Thus, the appeal of the appellant on this ground is dismissed. Nature of expenditure - expenditure on school for the benefit of its employees - whether “school expenses” can be treated as business expenditure? - HELD THAT:- As the words 'for the purpose of business' used in section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency may require providing facilities like school, hospital, etc., for the employees of their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under section 37(1) of the Act. It may also be stated, as observed in Season J. David and Co. P. Ltd. [1979 (5) TMI 3 - SUPREME COURT] that the fact that somebody other than the assessee is also benefited or incidentally takes advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. But, nevertheless, it must be an 'expenditure' allowable as deduction under the Act. 'Expenditure' primarily denoted the ideal 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 present, as opposed to a contingent liability of the future. As decided in P. Balakrishnana, CIT v. Travancore Cochin Chemicals Ltd. [1999 (10) TMI 33 - KERALA HIGH COURT] this payment was made towards contribution of the share of expenditure in running of the FACT School, wherein the children of the employees were studying. The expenditure met wholly and exclusively for the welfare of the employees of the assessee not covered under Sections 30 to 36 of the Act and not in the nature of capital expenditure or personal expenses is allowable under Section 37(1). Moreover, the expenditure of this nature leads to an increase in efficiency of the business. Thus, the court held this to be a business expense under 37(1) and also outside the purview of 40A(9). Tribunal is fully justified in allowing the above expenditure towards contribution for the running of the school, as an expenditure for the smooth functioning of the business of the assessee and also an expenditure wholly and exclusively for the welfare of the employees of the assessee and, thus, allowable under Section 37(l) as well as Section 40A(10) as business expenditure. Thus, the tribunal decided correctly and there is no reason to set aside the orders of the Tribunal. Issues Involved:1. Whether the diminution of Government of India Fertilizer Bonds is an allowable deduction.2. Whether 'school expenses' can be treated as business expenditure.Summary:I. Diminution of Government of India Fertilizer Bonds:The appellant challenged the Income Tax Appellate Tribunal's (ITAT) decision allowing the respondent to claim the diminution in the value of Government of India Fertilizer Bonds as a revenue loss. The respondent, engaged in manufacturing and trading fertilizers, received these bonds in lieu of cash subsidies. The ITAT, relying on the Delhi High Court's decision in DCM Shriram Consolidated Limited and the respondent's own case for the assessment year 2009-10, held that the bonds were received in the course of business and any reduction in their value could be claimed as a revenue loss. The court found that the decisions in Sajjan Mills and Indian Overseas Bank, cited by the appellant, were factually different and not relevant to the present case. Following the Supreme Court's ruling in Patnaik & Co. Ltd v. CIT, the court upheld the ITAT's decision, confirming that the diminution in the value of the bonds is an allowable business expenditure. The appeal on this ground was dismissed.II. School Expenses as Business Expenditure:The second issue involved the disallowance of expenses incurred by the respondent for running a school for its employees' benefit. The ITAT had allowed this deduction, viewing it as an incidental and additional business expenditure under Section 40A(9) and Section 37(1) of the Income Tax Act, 1961. The appellant argued that the expenditure had no direct nexus with the business and was not allowable under the said sections. The respondent contended that the expenditure was for the welfare of the staff and thus a business expense. The court, referencing several precedents including CIT v. Travancore Cochin Chemicals Ltd. and Mysore Kirloskar v. CIT, held that expenses incurred for the welfare of employees, such as running a school, are allowable as business expenditure under Section 37(1) and Section 40A(10). The court concluded that the ITAT correctly allowed the deduction, and there was no reason to set aside its orders. The appeal on this ground was also dismissed.Disposition:All the ITAs were disposed of, with the court upholding the decisions of the ITAT in favor of the respondent.