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2009 (3) TMI 225 - AT - Income TaxDisallowance on Payment of grants and royalty - Whether such grants constituted an "expenditure" as envisaged in s. 37(1) or could be allowed u/s. 36(1)(xii) - Grants given by the assessee to various entities and royalty to State Government - HELD THAT:- It can be seen that s. 37 deals with expenditure in general referred to here, for brevity, as business expenditure. It lays down that any expenditure not being expenditure of the nature described in s. 30 to s. 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Essential and positive condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business. Therefore, the expenses which are permitted as deduction are such as are made for the purpose of carrying on the business i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profit of the business, but that must also be for the purpose of earning profits of the business and reference can be made to the decision of Hon'ble Supreme Court in the case of Haji Aziz & Abdul Shakoor Brothers vs. CIT[1960 (11) TMI 15 - SUPREME COURT]. The grants given by the assessee even though they are in accordance with the objects stated in the Act and even if they are made or disbursed as per directions of Central Government and in the public interest, but the same does not fulfill the criteria as laid down in the s. 37 to come within the purview of allowability as the same cannot be said to be an expenditure incurred wholly and exclusively for the purpose of business. Therefore. the claim of the assessee that these grants should be allowed u/s. 37(1) cannot be accepted and is liable to be rejected. Accordingly rejected. Whether such grants can be called to be "capital expenditure" so as to exclude these expenditures from the ambit of s. 36(1)(xii) - According to well-established law, capital expenditure is an expenditure which is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the assessee. Thus, the primary condition to bring such "grants" to be termed as "capital expenditure" is that it should be made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business of the assessee and reference in this regard can be made to the decision of Full Bench in the case of Praga Tools Ltd. vs. CIT [1979 (11) TMI 80 - ANDHRA PRADESH HIGH COURT]. In the present case the grants and royalty paid to State Government and claimed under the head 'Expenses on direct operations/grants' cannot be said to be for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business of the assessee as by making such grants assessee has not acquired any asset and such grants have not brought any advantage of enduring benefit to the assessee. Therefore, these grants and payment of royalty cannot be called to be "capital expenditure" incurred by the assessee. Therefore, it has to be held that these grants and payment of royalty are allowable u/s. 36(1)(xii) as assessee has fulfilled all the conditions specified in that section. To conclude, it is held that these grants and payment of royalty claimed under the head "Expenses on direct operations/grants" are not allowable u/s. 37(1), but they are allowable u/s. 36(1)(xii).
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