TaxTMI 
TaxTMI 
2023 (11) TMI 1197
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.... issue that arises for considerations is whether "school expenses" can be treated as business expenditure. This issue arises in ITA No. 3 of 2019 and ITA No. 4 of 2019. As a result of the overlap in the issues in the aforementioned appeals, they are being dealt with together. I. FACTUAL MATRIX OF THE CASE: 2. The assessee [the respondent] had filed two appeals against the orders passed by the CIT[A] Bhubaneswar for the assessment years 2010-11 & 2014-15 before the Income Tax Appellate Tribunal, Cuttack Bench. The respondent is an entity engaged in the business of manufacturing and trading of fertilizers. The original assessment under Section 143(3) was completed on 28.04.2014 on a total income of Rs. 2295,87,95,426. The said income was modified to Rs. 115,57,95,426. The AO reassessed the total income at Rs. 171,91,70,480 making an addition of Rs. 56,33,75,052. The latter amount was on account of disallowance of the diminution in value of the GOI Fertilizer Bond. Aggrieved by the order passed by the AO, the respondent preferred an appeal to the CIT[A]. The CIT[A] upheld the order of Assessing Officer. Aggrieved by the order of the CIT[A], the respondent approached the Income T....
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....of the school by the DAV School Management is within the premises of the respondent and it has no direct nexus with the business. Further, the expenditure incurred was being debited to the profit and loss account. Thus, it is not an allowable deduction as per Section 40A(9) and Section 37(1) of the Income Tax Act, 1961. (ii) The appellant contends that the reduction in value of the GOI Fertilizer Bonds cannot be claimed as the loss has not actually been incurred but it is merely on the anticipation of loss that a deduction is being claimed. In asserting so, reliance was placed on the decisions of the Supreme Court in Sajjan Mills Limited v. CIT 156 ITR 585 (SC) [hereinafter referred to as "Sajjan Mills"] and of the Madras High Court in Commissioner of Income Tax, Tamil Nadu-1 v. Indian Overseas Bank[hereinafter referred to as "Indian Overseas Bank"] 151 ITR 446. III. SUBMISSIONS OF RESPONDENTS: 7. Per contra, learned counsel for the Respondent intently made the following submissions: (i) The payment to DAV School Management is neither falling under "setting up" nor under "formation of" nor under "as contribution to" any fund/trust. As a result of this, it is outsi....
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....der consideration. The Supreme Court in the case of Patnaik Company Limited vs. CIT [1986] 161 ITR 365 (SC), 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 by the Delhi High Court and the Supreme Court of India, this Court is of the view that the decision of the ITAT, Cuttack Bench is correct and 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. 10. As far as the second issue of payment of a corpus to DAV School Management, the reasoning of this Court is as follows: As per Section 40A (9) of the Income Tax Act, 1961, no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society regist....
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....e must be "laid out or expended wholly and exclusively for the purpose of business". The word "wholly" refers to the quantum of expenditure and the word "exclusive" refers to the move, object or purpose of the expenditure. While applying section 37(1), it must be kept in mind that the expenditure claimed therein need not be "necessarily" spent by the assessee. It might be incurred "voluntarily" and without any "necessity", but it must be for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. 11. In Season J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261, the Supreme Court observed (at page 275 and 276) has succinctly echoed the similar sentiment which are as follows: "It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37....
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....nds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payment of a revenue character. But the income-tax law does not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in present and a liability de futuro which, for the time being, is only contingent. The Former is deductible but not the latter". 14. Yet in some other cases like:- P. Balakrishnana, CIT v. Travancore Cochin Chemicals Ltd. [2000] 243 ITR 284, the assessee is a Public Sector Unit engaged in the manufacture and sale of certain chemicals. During the Previous year, the assessee had made certain payments to the FACT school. The assessee claimed that the payment should be included under the welfare expenditure as the said expenditure was essential for the smooth running of the assessee's business. The assessing officer held that the above payment had no direct relation with the business activity of the assessee and was more or less in the nature of a donation and, therefore, disallowed the claim under Section 40A(9). On appeal by the assessee, the Commissioner....
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....tted. The assessee-company donates a certain sum every year to meet the expenditure of the school. In the accounting year relevant to the assessment year, the assessee has donated Rs. 62,000/- and claimed out of it 61.1 per cent, by way of deduction under Section 37(1) of the Act. Such claim was made on the ground that 61 per cent of the school children are the children of the employees and the ex-employees of the assessee. The income tax officer did not allow the exemption as claimed. The Commissioner of Income Tax and the Appellate Tribunal also held similar view. Rather they allowed 50% deduction for the same expenditure under Section 80G as donation. There the Karnataka High Court held: "(i) that 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 might require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as a deduction under Section 37(1) of the Act. Neverthe....