TMI Blog2009 (3) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... ively 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the appellant in accordance with the object being direct operation expenditure in the nature of grants for which it had been set up and as such the expenditure incurred during the course of the business ought to have been allowed as deduction under s. 37(1) of the Act. (4) That it is contended that the appellant is engaged in the business and the expenditure on direct operation is nothing but application of income and expenditure incurred in the course of the business for which it had been established and set up. Accordingly, the expenditure on direct operation is an allowable expenses under s. 37 of the Act. (5) That in the alternative and without prejudice to each of the aforesaid grounds, in the event, if it is held that the aforesaid expenditure was merely grants in aid and could not be allowed as deduction, then, there could not have been any assessment made as a "person" under the IT Act, 1961 and the assessment made is illegal and without jurisdiction. (6) That the outgoings on account of grants in aid are outgoings in the process of earning income and not an outgoing out of income having been earned. It is contended that the expenditure has been incurred in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income and expenditure incurred in the course of the business for which it had been established and set up. Accordingly, the expenditure on direct operation is an allowable expense under s. 37 of the Act. (7) That in the alternative and without prejudice to each of the aforesaid grounds, in the event, if it is held that the aforesaid expenditure was merely grants in aid and could not be allowed as deduction, then, there could not have been any assessment made as a "person" under the IT Act, 1961 and the assessment made is illegal and without jurisdiction. (8) That the outgoings on account of grants in aid are outgoings in the process of earning income and not an outgoing out of income having been earned. It is contended that the expenditure has been incurred in accordance with the objects of OIDB and as such an expenditure incurred is during the ordinary course of its business. (9) The provisions of s. 234B has no application in the instant case. (10) The interest calculations under s. 234B are wrong and require revision. (11) The above grounds are independent and without prejudice to one another. (12) The appellant reserves its right to make addition, alteration, mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Financial year No. 2002-03 ------------------------------------------------------------ 1. Balmer Lawrie Co. Ltd. 1,75,71,000.00 ------------------------------------------------------------ 2. Centre for High Technology 7,87,71,500.00 ------------------------------------------------------------ 3. Directorate General of Hydrocarbons 45,03,00,000.00 ------------------------------------------------------------ 4. Indian Institute of Technology 40,00,000.00 ------------------------------------------------------------ 5. Government of Rajasthan. Department of Petroleum 85,00,000.00 ------------------------------------------------------------ 6. National Geophysical Research Institute 4,80,00,000.00 ------------------------------------------------------------ 7. ONGC Ltd. 8,46,13,000.00 (R D Projects) + 6,80,45,599.64 (implementation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------------------------ 1. DGH 31.47 ------------------------------------------------------------ 2. PCRA 21.35 ------------------------------------------------------------ 3. ONGC Ltd. (i) R D 2.71 (ii) NGHP 1.11 3.82 ------------------------------------------------------------ 4. CHT 4.58 ------------------------------------------------------------ 5. AAC 1.64 ------------------------------------------------------------ 6. NGRI 2.10 ------------------------------------------------------------ 7. PPAC 4.60 ------------------------------------------------------------ 8. OISD 3.55 ------------------------------------------------------------ 9. IOCL 4.01 ----------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns on the basic point that grants given by the assessee to various institutions cannot be considered to be an expenditure and the moot issue in the present case is that whether such grants constituted an "expenditure" as envisaged in s. 37(1) of IT Act, 1961. He contended that the term "expenditure" is not defined in the Act and in the absence of a statutory definition, the Court has to consider the meaning of the said word in the manner it is generally understood by those who deal with the subject in question and the meaning which best harmonizes with the subject of the enactment and may not strictly to be grammatical or etymological or may not even in its popular use. 8, He referred to the decision of Hon'ble Supreme Court in the case of Indian Molasses Co. Ltd. vs. CIT (1959) 37 ITR 66 (SC) according to which expenditure has been held to be equal to expense and expenses is money laid out by calculation and intention even though in any use of the word this element may not be present, as one speaks of a joke at another's expense. But the idea of spending in the sense of "paying out or away" money is the primary meaning which is relevant and expenditure is what is paid out or awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. It was pleaded that to make an expenditure to be eligible under s. 37(1), the conditions to be fulfilled are as follows: (a) Not falling within the expenditure covered by the ss. 30 to 36. (b) The expenditure should not be capital in nature. (c) The expenditure should not be of personal in nature. (d) The expenditure should have been incurred in the normal course of business and for the purpose of the business. 12. Referring to the decision of Hon'ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. vs. CIT (1997) 137 CTR (SC) 267 : (1997) 223 ITR 101 (SC) and Patnaik Co. Ltd. vs. CIT (1986) 58 CTR (SC) 92 : (1986) 161 ITR 365 (SC), it was pleaded that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1). Such a contribution, whether voluntary or at the instance of the authority concern, when made for the benefit of public and not regarded as a payment opposed to public policy should be held allowable as an expenditure. He ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture should be incurred wholly and exclusively for the purposes of business or profession and unless expenditure is laid out or expended wholly and exclusively for the purpose of business, the expenditure cannot be allowed. Learned Departmental Representative pleaded that case law relied upon by the learned Authorised Representative are distinguishable on facts. It was contended that the grants had no relation with the business of the assessee. The grants were payments made by the assessee without any business expediency or business considerations and, thus, these could not have been allowed. In this manner, it was pleaded by learned Departmental Representative that order of the CIT(A) being in accordance with the law should be upheld. 17. We have carefully considered the rival submissions in the light of the material placed before us. No doubt that giving grant has clearly been mentioned in the relevant Act as one of the functions of the Board as described in OIDB Act. Prior to asst. yr. 2002-03, the income of the assessee was exempted by OIDB Act itself. Though in the grounds of appeal first ground taken by the assessee is regarding allowability of such grants under s. 36(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expenditure of the assessee. If the expenditure satisfies these negative test, then it has to satisfy the positive test, namely, that it is laid out wholly and exclusively for the purpose of assessee's business. 22. Thus, the 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 (1961) 41 ITR 350 (SC). 23. It has to be remembered that the words "wholly and exclusively" both refer to the expenses incurred by the assessee for the purpose of his business. While determining as to whether the deduction claimed has been wholly and exclusively sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 3 of the Oil Industry (Development) Act, 1974 (47 of 1974) for the development of oil industry, subject to the following conditions, namely: (i) the expenditure, claimed as deductible under the IT Act, 1961, is incurred for the objects and purposes authorised by the Oil Industry (Development) Act, 1974 (47 of 1974); (ii) such expenditure is not in the nature of capital expenditure; (iii) such expenditure is not eligible for deduction under any other provision of the IT Act, 1961; and (iv) a separate account of the expenditure claimed under the said clause is maintained by the Oil Industry Development Board. 2. This notification shall be applicable w.e.f. 1st day of April, 2008, that is, for the asst. yr. 2008-09 and subsequent assessment years. Note-This notification shall not affect any legal proceeding initiated by the Oil Industry Development Board in respect of the asst. yr. 2003-04 to the asst. yr. 2007-08 and such proceeding shall be continued as if this notification had not been issued. (Notification No. 21/2008/F. No. 149/222/2007- TPL) Pankaj Jindal, Under Secy." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of certain bodies set up through an Act of Parliament was withdrawn. Subsequent to the removal of the tax shield, a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such developmental activities may not be allowed as a deduction while computing the income under the head 'Profits and gains of business or profession'. 31.2 The Act has inserted a new cl. (xii) in sub-s. (1) of s. 36 so as to provide that any expenditure (not being capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head 'Profits and gains of business or profession'. 31.3 This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the asst. yr. 2002-03 and subsequent years. [Sec. 18(d)]" "Circular No. 3 of 2008, dt. 12th March, 2008 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenditure "not being capital expenditure" incurred by a corporation or body corporate by whatever name called, constituted or established by Centre or State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head "Profits and gains of business or profession". It is also mentioned in the said circular that such entities which are created under an Act of Parliament have the basic object and function of carrying on of developing activities in the areas as specified in these Acts. By Finance Act, 2001 and Finance Act, 2002 tax exemption of certified bodies set up through an Act of Parliament was withdrawn. Subsequent to removal of tax shield a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such development activities may not be allowed as a deduction while computing the income under the head "Profit and gains of business or profession". To cover up such situation, s. 36(1)(xii) has been inserted i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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