2004 (8) TMI 322 - AT - Income Tax

Expenses for implementing government 20-point programme held deductible as business expenditure under section 37(1), not donations

ITAT (Bombay) allowed the appeal, holding that expenses incurred on implementing the 20-point programme qualified as deductible business expenditure under ... Disallowance of expenditure u/s 37(1) on 20 point programme by calling the said expenditure as 'donation' - HELD THAT:- From the record, It is clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Just because the expenses are voluntary in nature and are not forced on the assessee by a statutory obligation, these expenses cannot cease to be a business expenditure. Keeping all these factors in mind, as also entirety of the case, we are not inclined, to sustain the disallowance as expenditure incurred on implementation of 20 point programme. We are, therefore, of the considered view that the authorities below indeed erred in law in declining deduction of expenses incurred on 20 point programme which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee's obligations towards society and as a responsible corporate citizen. The assessee thus succeeds - In the result, the appeal is allowed. Issues Involved:1. Disallowance of expenditure u/s 37(1) on 20 point programme.2. Partial disallowance of excise/custom duty paid during the year and included in the closing inventory u/s 43B.Summary:Issue 1: Disallowance of expenditure u/s 37(1) on 20 point programmeThe assessee, a public sector undertaking, appealed against the CIT(A)'s order confirming the disallowance of Rs. 10,55,648 incurred towards the implementation of the 20 point programme, which was claimed as business expenditure u/s 37(1). The AO had disallowed the expenditure, categorizing it as a donation and not incidental to business activities. The CIT(A) upheld this view, stating the expenditure did not directly relate to the business and was prompted by altruistic motives. However, the Tribunal referred to the Karnataka High Court's decision in Mysore Kirloskar Ltd. vs. CIT and the Supreme Court's ruling in Sri Venkata Satyanarayana Rice Mill vs. CIT, emphasizing that even donations can be deductible if dictated by business considerations. The Tribunal noted that the expenditure was incurred under the Government of India's directions, aligning with the business interests of the assessee. Consequently, the Tribunal allowed the deduction, recognizing the expenditure as a business necessity and a means to earn goodwill, thereby overturning the CIT(A)'s decision.Issue 2: Partial disallowance of excise/custom duty paid during the year and included in the closing inventory u/s 43BThe assessee contested the CIT(A)'s decision to partially disallow the excise/custom duty paid during the year, included in the closing inventory, citing the Gujarat High Court's ruling in Lakhanpal National Ltd. vs. ITO. The Tribunal acknowledged that the issue was covered in favor of the assessee by the Supreme Court's judgment in Berger Paints India Ltd. vs. CIT. Following this precedent, the Tribunal directed the AO to allow the deduction for the entire amount of excise and customs duty paid, irrespective of its inclusion in the closing stock valuation, thereby granting relief to the assessee.Other Grounds:Ground Nos. 3, 4, and 5 were not pressed and thus dismissed. Ground No. 6, being consequential, was allowed for statistical purposes.Conclusion:The appeal was partly allowed, with significant relief granted on the primary issues of disallowance of expenditure u/s 37(1) and excise/custom duty u/s 43B.