Statutory deduction for authorised development payments allowed under special provision, while business expenditure claim failed.

Grants and royalty paid by a corporation were not deductible under section 37(1) because they were not incurred wholly and exclusively for carrying on business and were treated as an application of income. They were, however, allowable under section 36(1)(xii) because the assessee was constituted under the Oil Industry (Development) Act, 1974, the payments were made for authorised statutory objects, and they did not create any capital asset or enduring benefit. The special deduction provision, supported by the statutory notification governing the assessee, prevailed for these expenditure claims. The result was rejection of the section 37(1) claim and allowance under section 36(1)(xii).

---

---

Issues: Whether the grants and royalty paid by the assessee could be deducted as business expenditure under section 37(1) of the Income-tax Act, 1961, and, in the alternative, whether the same were allowable under section 36(1)(xii) of the Income-tax Act, 1961.

Analysis: Section 37(1) allows only expenditure laid out or expended wholly and exclusively for business purposes and excludes items that are merely an application of income. The grants and royalty, though made in accordance with the statutory objects of the assessee and in furtherance of development activities, were not incurred wholly and exclusively for carrying on the assessee's business and therefore did not satisfy the test under section 37(1). Section 36(1)(xii), however, specifically allows expenditure incurred by a corporation or body corporate constituted by a Central, State or Provincial Act for the objects and purposes authorised by that Act, subject to the requirement that the expenditure is not capital in nature. The assessee was constituted under the Oil Industry (Development) Act, 1974, the payments were made for authorised developmental objects, and the payments did not create any asset or enduring benefit for the assessee, so they were not capital expenditure. The statutory notification issued for the assessee also supported the claim under the special deduction provision.

Conclusion: The claim under section 37(1) was rejected, but the grants and royalty were held allowable under section 36(1)(xii), in favour of the assessee.

---