TaxTMI 
TaxTMI 
2019 (9) TMI 354
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....OUND OF THE CASE: 2, The appellant-assessee is carrying on the business of extraction of iron ore and also trading in iron ore. For the assessment years 2011-12 and 2012-13 return of income came to be filed by the assessee, was processed under Section 143(1) of Income Tax Act, 1961 (for short 'Act'). The assessing officer disallowed the amount claimed by the assessee as social welfare expenses in a sum of Rs. 1,61,30,480/- and Rs. 55,90,080/- for the respective assessment years on the ground that it was not gained/incurred in the course of business but for philanthropic purposes by separate assessment orders dated 26.03.2004 and 16.02.2015 respectively. 3. Being aggrieved by the said orders, assessee filed appeals before CIT(A) in ITA Nos.122 & 20/CIT(A)/HBA/2014-15. Said appeals came to be dismissed by order dated 29.01.2016 by upholding assessment orders. Further appeal to Income Tax Appellate Tribunal in ITA No.782 & 1495/BANG/2016 also came to be dismissed by affirming the orders of the assessing officer and the appellate authority. Hence, this appeal. 4. We have heard the arguments of Sri M.V. Seshchala, learned Senior Counsel appearing for appellants and Sri. Y.V. Ra....
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.... (9) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT (10) (1997) 223 ITR 101 (SC): SRI. VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. vs. CIT (11) (1979) 118 ITR 379 (MP): ADDL. CIT VS. KUBER SINGH BHAGAWANDAS (12) (2007) 288 ITR 1 (SC): S.A. BUILDERS LTD. vs. CIT (APPEALS & ORS. (13) (2004) 266 ITR 170 (MAD): CIT vs. MADRAS REFINERIES LTD. (14) (2007) 292 ITR 115 (MAD): CIT vs. CHEMICALS & PLASTICS INDIA LTD. (15) (2009) 317 ITR 338 (MAD): CIT vs. VELUMANICKAM LODGE (16) ITA NO.603/2004: CIT vs. M/S. KONKAN MARINE AGENCIES Hence, he prays for allowing the appeals by answering substantial question of law in favour of assessee. 6. Per contra, Sri Y.V. Raviraj, learned Standing counsel appearing for the revenue would support the orders under challenge and would elaborate his submission by contending that if at all assessee was inclined to donate, they should have paid the said amount to the Government of Karnataka and sought exemption under Section 80G of the Act. He would contend when said exercise was not undertaken by the assessee and on the other hand the amount is spent for con....
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....t in all possible manner to achieve the gigantic task of restoring normalcy and bringing hopes to the lives of more than 5.41 lakh persons. 10. The assessee who is carrying on the business of extraction of iron ore and trading in iron ore thus entered into a Memorandum of Understanding with Government of Karnataka on 01.12.2009, whereunder assessee agreed to construct 256 houses at Honnarahalli and subsequently, on mutual understanding, constructed 169 houses at Gundiganur village, Siraguppa taluk for providing shelter to flood affected persons who had lost their roof over their head and for the purpose of construction of houses, assessee spent an amount of Rs. 1,61,30,480/- during the assessment year 2011-12 and Rs. 55,90,080 during the assessment year 2012-13. The amount so spent by the assessee was reflected in the Profit and Loss Account by debiting the said amount under the head "Social Welfare (CM Relief Fund)". Hence, assessing officer called upon the assessee to explain the nature of expenditure which had been debited to the Profit and Loss Account. The same was replied to by the assessee by bringing it to the notice of the assessing officer that said amount was s....
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.... and gains of business or profession" under this Section. 13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the business or profession". These two expressions namely, "wholly" and "exclusively" being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives the said amount. Thus, the purpose and intent must be the sole purpose of expending the amount as a business expenditure. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency wou....
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....to public welfare legislation, the term involves utility, and has reference to matters which are wholly for legislative cognizance. The term is said to be nearly synonymous with "necessity" where that term is used in a sense not importing an absolute necessity, as in the case of governmental interference with private property when necessary for the public good, and has been distinguished from "emergency" see 29 C.J.S. p 762 note 38, and "reasonableness". 17. The Hon'ble Apex Court in the case of CIT vs DELHI SAFE DEPOSIT COMPANY LIMITED reported in (1982)133 ITR 756 (SC) has held a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on the business, may be expended wholly and exclusively for the purpose of the trade. As to what would be the test of commercial expediency was the subject matter of consideration by the Hon'ble Apex Court in the case of CIT vs PANIPAT WOOLLEN AND GENERAL MILLS COMPANY LIMITED reported in (1976)103 ITR 66 and held: "8. Great stress was laid xxx share the losse....
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....ofit in the profit and loss account. 19. The expression "wholly and exclusively" found in Section 37 of the Act cannot be understood in a narrowed manner. In other words, it has to be given interpretation so as to achieve the object of the Act. Thus, where the amount is expended and claimed as an expenditure allowable under Section 37(1) of the Act, it need not be that such disbursement is made in the course of, or arises out of, or is connected with the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. 20. In fact, the Hon'ble Apex Court approving the observation of ATHERTON's case - 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: "..a sum of money expended, non of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade", can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of t....
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....d beliefs that a business or undertaking is a product of combined efforts of all, then, such expenditure incurred by the business undertaking may partake the character of commercial expediency. Such expenditure depends upon the terrain in which it travels. 23. In the matter of SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS COMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by the District Collector would be against public policy or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee's business or which results in the benefit of the assessee's business has to be regarded as an allowable deduction under Section 37(1)'. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the....
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....nditure if it was incurred on grounds of commercial expediency." 25. It has been held under English income-tax that sums paid to an employee as pension or gratuity are deductible as money laid out and expended for the purposes of trade, profession or avocation in the case of SMITH vs INCORPORATED COUNCIL OF LAW REPORTING FOR ENGLAND AND WALES - (1914) 3 KB 574 and it reads thus: "The respondents, the Incorporated Council of Law Reporting for England and Wales, were a limited company incorporated under s.23 of the Companies Act, 1867, with no power to pay any portion of their earnings to their members by way of profits. In 1911 the respondents gave a gratuity of 1500/- to one of their reporting staff on his retirement after long service. The payment was not made under any contract between the respondents and the reporter, but it was within the powers conferred by the respondents' memorandum and articles of association, and it was the habit of the respondents, to give gratuities to reporters on retirement after long service. The 1500/- was included in the respondents' trading accounts for 1911 as an item of expenditure, and an additional assessment to income tax un....
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....knowledge, and for which it must depend on the findings of the Commissioners." 26. Keeping the above principles in mind, when the facts on hand are examined, it would clearly indicate that assessee has incurred the expenditure towards construction of 169 houses for the villagers who had lost their home due to natural calamity. In order to cater to the needs of those destitute persons who had lost the roof over their head on account of natural calamity, assessee constructed the houses by expending the amount. However, assessing officer and the authorities have held that it was not incurred for the purpose of business. One glaring factor which cannot go unnoticed is, that a MOU came to be entered into by the appellant on 01.12.2009 with the Government of Karnataka, as already noticed herein above, whereunder assessee agreed to construct houses to rehabilitate the flood victims at the earliest possible time and for undertaking the said task, the appropriate Government provided the assessee the land free from encumbrances, upon which the construction of houses came to be commenced, executed and handed over within the time limit agreed to under the MOU. It was the term of the MOU ....
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....und for the benefit of the public and with a view to secure benefit to the assessee's business cannot be regarded as payment opposed to public policy. It came to be further held making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Act, when such payment has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. Infact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related ....