Purpose test for deductibility upheld: expenses wholly and exclusively for earning voluntary contributions are allowable.

Tribunal considered whether expenses related to voluntary contributions meet the statutory 'wholly and exclusively for earning income' test and found that deductibility turns on purpose and supporting books/documents rather than donor registration. It held that ad hoc percentage disallowance without rejecting accounts or identifying defective evidence is arbitrary and unsustainable, and that exemption/registration schemes do not preclude claiming deductions where the purpose test and evidentiary support are satisfied; the disallowance was directed to be deleted for the assessment years under review.

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Issues: Whether the disallowance of expenses claimed under Section 57(iii) of the Income-tax Act, 1961 in relation to voluntary contributions received by the assessee was permissible.

Analysis: The Court examined whether expenditures claimed under Section 57(iii) satisfy the statutory requirement that they be laid out or expended wholly and exclusively for the purpose of making or earning income. The tribunal noted that voluntary contributions were treated as income under Section 2(24) and assessed under "Income from Other Sources". It observed that the Assessing Officer made an ad-hoc percentage disallowance without rejecting the books of account or specifying defects in the evidence; the order did not identify which portions of expenses were substantiated or infirm. The tribunal applied binding and persuasive precedents establishing that Section 57(iii) focuses on the purpose of expenditure rather than on whether income was actually earned, and that expenses supported by books and documents and incurred wholly for the assessee's objects are deductible. The tribunal further considered whether registration under Sections 12A/80G is a prerequisite for claiming deduction under Section 57(iii) and concluded that those exemption/registration provisions govern charitable exemption but do not bar an assessee from receiving donations or claiming Section 57 deductions when expenditures meet the statutory test.

Conclusion: The ad-hoc disallowance under Section 57(iii) was arbitrary and unsustainable; the expenses incurred wholly and exclusively for earning voluntary contributions are allowable. The Assessing Officer is directed to delete the disallowance for the assessment years in question.

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