Contributions to local people and institutions in area of business are allowable if paid for commercial expedience and business purposes. A discussion and learning from a recent judgment of ITAT which was result of un-necessary additions made by lower authorities.

[DEV KUMAR KOTHARI]

Recent Judgment, which is under study in this article:

2022 (7) TMI 622 - ITAT KOLKATA - SASA MUSA SUGAR WORKS PVT. LTD. VERSUS DCIT, CIR – 10 (2) , KOLKATA

C.O. No.15/Kol/2017 (Arising out of ITA No. 2312/Kol/2016)  Dated: - 4-7-2022

In case of Sasa Musa (supra.) assessee had made contributions to local people and institutions in normal course of business. And claimed such expenses as business expenses. A sum of Rs.3000 was disallowed for consideration under section u.s. 80G in computation but claim was made for consideration as allowable business expenditure for the same.

In the computation the following explanation was given below computation sheet:

Contribution to local institutions:

Contribution to local institutions have been made on request of employees and business associates. They are normal business expenses. The employees also get benefit from such institutions. The expenses also help to improve goodwill and reputation of business. The expenses are now-a- days  essential in view of greater social responsibility attached to the business. We rely on –

SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS COMPANY VERSUS COMMISSIONER OF INCOME-TAX [1996 (10) TMI 2 - SUPREME COURT]

and  COMMISSIONER OF INCOME-TAX VERSUS BATA INDIA LIMITED [1993 (3) TMI 89 - CALCUTTA HIGH COURT]

During hearing a judgment of ITAT on this issue  and some other issues for AY 1992-93 in case of Vishnu Sugar Mills Ltd was also relied on by assesse.

However Learned AO and CIT(A) ignored  explanations and disallowances remained in assessment.

Therefore , appeal was preferred before  Tribunal. Tribunal has deleted addition , let us hope revenue will not prefer appeal before the High Court, because there is no substantial question of law and also because of low tax effect on this issue. And also because, if an appeal is preferred , it is likely that the honorable High Court will consider it as a case of harassment of assessee.

Learning and conclusions:

Before discussing the issue in this article, author feel that for benefit of readers , it would be more appropriate to discuss points of his learning in this matter. The case is very old. It started when AO  made un-necessary additions and demand ignoring binding precedence and by not following consistency. And then filed a departmental  income tax appeal (ITA)  and assesses  had to file appeal by way of Cross Objections. The appeals were heard many times and over long period of time. The Departmental appeal was decided after many hearings  and was dismissed on ground of lower tax effect. And on that day   appeal of assessee by way of Cross Objection  (CO) was adjourned with direction to Fix for hearing only CO. Then a dispute was raised in earlier hearing as to whether CO can survive when departmental ITA has been dismissed. All these lead to many hearings.

Grounds of appeal:

In this case a bit elaborative grounds were filed. On insistence of honorable Bench in earlier hearings, concise grounds of appeal were filed. These were also not considered concise during hearing by another bench earlier. However, author explained that grounds of appeal must at least borne out main contentions this will facilitate in ease of adjudications by honorable Bench.  If the main contentions is borne out  from grounds of appeal, perhaps appeal can be decided  if it is covered by precedence – on bench being satisfied that the precedence relied on is applicable.

Therefore, grounds of appeal still being contentious were  accepted by bench and hearing was adjourned many time due to want of time or further hearing required etc.

Importance of paper book, explanations and brief notes:

In this case we find that honorable Tribunal has considered voluminous three paper books which also included all supporting documents and explanations. The Index to paper book, page references and brief submissions were presented in a manner that all relevant pages can be easily identified.

We find that although hearing took place on 05.04.2022 and date of pronouncement is 04.07.2022. Honorable Members have worked hard and devoted time then only they could finalize   well-written order and it was pronounced on 90th day from date of hearing. In absence of such paper books and hard work by members, it was not possible.

Contributions on request of employees and business associates:

Contributions on request of employees and business associates were claimed to be allowable. Although in this all contributions were made in nearby area of factory and offices. However , in case of wide area of operations even distant areas can also be considered. Because contributions to local institutions and on request of business associates  in business operational area are normal business expenses incurred for  maintaining good relations  and business  environment. These are also for goodwill maintenance. Therefore, such expenses are allowable. Even if section 80G apply to some contributions  still business expenditure will  covers  such contributions and can  be allowable as business expenditure, if commercial expedience like employees welfare and business relations were important to make such contribution and it was not merely as a charity for public purposes.

When business operations are  in very wide area, even contributions made to institutions which are not strictly or directly in local area but are covered in extended are like area in which  marketing of products takes place and sale are made, procurement of materials  is done,  online working  for assesses from other locations etc. In such cases, if a contribution is given out of commercial expedience, then it will be allowable similar to contributions given in proximity of factories and offices.  Therefore, local area is to be understood in manner of area of business operations of assesses and also new area where business opportunities are explored.

About  appeal on issue of allowable contributions: 

Assessee also took a ground for lower authorities not having  followed binding precedence relied on by assesee.  It is an important ground in relation to all other grounds taken by assessee. Regarding contributions to local institutions lower authorities ignored that such expenses were allowed in earlier years and even subsequent years. Furthermore golden rule that ‘a view in favor of assessee should be applied ‘ was also ignored by lower authorities.

The relevant ground before Tribunal is taken  from order of ITAT.

From order of ITAT with highlights added for analysis, catch points.:

“ 1) For that Ld. CIT(A) has passed order denying relief claimed, without full and proper consideration of facts and circumstances, details, written submissions and binding precedence relied on by the assessee further Ld. CIT(A) did not apply rule to apply view in favour of assessee. (original ground B.1)   

(Note by  author: This was considered as general ground  and was not specifically adjudicated by Tribunal , however, in respect of each ground  including above one these aspects have been considered by Tribunal as these aspects were pressed during hearing)

5) For that CIT(A) was wrong in confirming disallowance of Rs.34,000/- being petty contributions to local institutions and people, totaling Rs.33,400 (R/O to 34000 in P &L a/c). The disallowance may be deleted. (original ground no. 7)

On the issue of disallowance made by the ld. AO of Rs. 34,000/- incurred towards charity and donation, the ld. CIT(a) confirmed the addition made by the AO and dismissed the ground.

13. In respect of ground no. B.5 for addition of Rs.34,000/-, assessee claimed that these expenses includes small contributions to local people and institution on request of employees and business associates which are allowable as business expenses u/s 37(1) of the Act. Ld. Counsel submitted that inadvertently these were accounted under the head ‘charity and donation’ in the books of account which cannot be the basis for their disallowance. He also submitted that similar expenses have been allowed in the preceding years. Further, details of these expenses is placed on record at page 43 of the paper book which is reproduced as under –

(Note: These details can be seen in reported judgment on this website. These relates to contributions to local institutions and local people associated with business of assesse company. Out of such  contributions a sum of Rs.3000 was disallowed for consideration under S.80G. This can be seen in computation which has also been reproduced in order of ITAT)

13.1 From the details above furnished by the assessee, we note that the expenses are towards the community and social welfare activities which have taken place in the vicinity of work area of the assessee but the ld. AO is of the view that this expenditure is not related to the business and disallowed this claim. Section 37 of the Act contemplates that any expenditure not being expenditure of the nature described in sections 32 to 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 the business or profession shall be allowed in computing the income chargeable under the Head “Profits & Gains of Business or Profession”.

To our mind, ld. AO failed to appreciate the nature of business of the assessee and the surrounding social environment where it has been carrying out its business. From the details tabulated above, giving particulars for each of the payments totaling to Rs.34,000/-, we do not find any merit in the basis adopted by the authorities below to disallow the claim of the assessee.

 We, accordingly, delete the addition and allow the ground of cross-objection.

 Unnecessary litigation forced by revenue:

On reading of the judgment in case of Sasa Musa we find that the learned AO has un-necessarily made additions  on various counts in complete disregard of binding precedence and consistency.  

CIT (A) also did not follow binding precedence on many issues, even in case of assessee.

Department also challenged relief allowed by CIT(A) un-necessarily.  This forced assesses to challenge of assessment  and order of CIT(A) both.