CONTRIBUTION BY PROFESSIONAL TO PROFESSIONAL INSTITUTE – PROFESSIONAL EXPENDITURE?

[Mr. M. GOVINDARAJAN]

Section 37(1) of the Income Tax Act, 1961 (‘Act’ for short) provides that any expenditure (not being expenditure of the nature described in sections 30 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 purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession”.

The issue to be discussed in this article is whether the contribution made by a professional to his professional institute amounts to professional expenditure with reference to decided case laws.

In ‘B.K. Khare & Co. V. Assistant Commissioner of Income Tax’ –2016 (12) TMI 349 - ITAT MUMBAI the assessee is a firm of Chartered Accountants since 1955.  During the assessment year the assessee firm contributed a sum of ₹ 20 lakhs to Pune Branch of Western India Regional Council of the Institute of Chartered Accountants of India towards the construction of a building for the Pune Branch of the Institute.  The assessee claimed the said payment as an expenditure incurred wholly and exclusively for the purposes of the profession.  Even though the Institute has a scheme under Section 80G of the Act for the deduction of donation from the income, the assessee only preferred to claim under Section 37(1).

The Assessing Officer was of the view that the expenditure incurred by the assessee is in the nature of a donation.  He held that the provisions of Section 80G are specific and will override the provisions contained in Section 37(1) of the Act, which are general in nature.  The assessee has not proved that the donation was made wholly and exclusively for the purpose of the firm.           

The assessee filed an appeal before the Commissioner (Appeals) who confirmed the order of the Assessing Officer.  Therefore the assessee came before the Tribunal for redressal through an appeal.

The Tribunal found the following facts from the records presented in this case-

• The Pune Branch of the Western Regional Council of the Institute of CharteredAccountants of India had proposed to construct a building for its administrative functions including an auditorium, IT center, reading room facilities for members and students, pantry, cafeteria and parking facilities;
• The Branch, for this purpose, proposed to raise funds through donation/contributions from members/students of the Institute to the extent of ₹ 3.65 crores to partly fund the total cost of ₹ 7 crores for the purchase of land and to provide the required facilities;
• The said new building was meant to cater all the needs of the members and students of the Institute in the Western Regional especially in around Pune;
• The Branch received the approval under Section 80G of the Act valid up to 31.03.2009;
• The assessee firm has major presence in Pune around half of its compliance clientele and 30-40% of the revenues are generated from Pune;
• The assessee firm employed more than75 personnel including members, semi qualified and articles;
• The firm and its partners have since been exposed to greater and exposure and participation in seminars, symposium etc.,

The assessee was of the view that by donating the amount, their firm has been able to attract good Articled clerks and other professional and therefore the firm contributed the said amount to the Pune Branch.  The assessee contended that the said payment satisfies the commercial expediency test as the contribution had a direct nexus with the carrying on the profession by the firm.

The Tribunal analyzed the meaning of the terms ‘commercial expediency’.  It relied on the Supreme Court judgment in ‘SA Builders’ – 2006 (12) TMI 82 - SUPREME COURT  in which the it was held that the expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.  The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on the grounds of commercial expediency.

In ‘Sri Venkata Satyanarayana Rice Mill Contractor Co’ – 1996 (10) TMI 2 - SUPREME Court the Supreme Court held that any contribution made the assessee to a fund which is directly connected or related to the carrying on of the assessee’s business or which results in benefit to the assessee’s business has to   be regarded as a deduction allowable under Section 37 of the Act.

In ‘Chemicals and Plastics India Limited’ – 2007 (2) TMI 194 - MADRAS High Court the Madras High Court upheld the claim for deduction of an amount of ₹ 1.5 lakhs paid towards construction of a building for Madras Chamber of Commerce in which the assessee is a member.  The Madras High Court held that the approach needs to be that of a practical and prudent businessman rather than from the Revenue’s strict classification of a right.  The High Court also held that the judgment of Supreme Court in ‘Sri Venkata Satyanarayana Rice Mill Contractor Co’ – 1996 (10) TMI 2 - SUPREME Court’ (supra) would apply to similar contributions made to non public welfare funds.  The activities of the Chamber of Commerce are closely linked with the welfare of the corporate entities who are members therein and whose interest are taken care by the Chamber of Commerce.

In ‘Rupsa Rice Mills’ – 1975 (10) TMI 15 - ORISSA High Court the Orissa High Court upheld the claim for deduction of a sum donated for constructing a primary health centre building located near the factory premises as it would provide treatment to the ailing workmen.

In ‘Shree Rajasthan Syntex Limited’ – 2009 (1) TMI 868 - RAJASTHAN HIGH COURT the Rajasthan High Court upheld the claim for deduction as business expenditure of contribution given to a trust for construction of a school building.  The High Court upheld the decision of the Tribunal that the donation was allowable as business expenditure.

In ‘Hindustan Petroleum Corporation Limited’ – 2012 (10) TMI 214 - ITAT MUMBAI the Mumbai Tribunal upheld the claim for deduction as a business expenditure of contribution made to Government of India’s 20 point program.

In view of the above decisions, the Tribunal held that there was a good professional reason for the firm to contribute to the building fund of the Pune Branch of the Institute that the said payment satisfies the commercial expediency test as the contribution had a direct nexus with the carrying on of the profession by the firm and directed the assessing officer to allow the contribution made by the assessee under Section 37(1) of the Act.