TMI Blog2013 (12) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... eet out the requirement of a government departments seems to be not permissible - It was not a policy decision to secure business interest of the assessee but the decision to meet out the requirement of 'estate department' - No decision was taken by the Board of assessee in terms of letter of government that it requires houses for its officers at Lucknow to meet out the business expediency - In the absence of any decision by the Board or the Managing Director, the expenditure incurred seems to be not business expenditure and no deduction is allowable - Decided against assessee. - Income Tax Appeal No. - 100 of 2007 - - - Dated:- 23-3-2012 - Hon'ble Devi Prasad Singh And Hon'ble S.C. Chaurasia,JJ. For the Petitioner : Neerav Chitravanshi For the Respondent : D. D. Chopra ORDER (Delivered by Hon'ble Devi Prasad Singh, J.) 1. The instant appeal under Section 260-A of the Income Tax Act, 1961 (in short the Act) has been preferred against the order dated 23.3.2007 passed by the Income Tax Appellate Tribunal, Lucknow (in short Tribunal). It relates to the assessment year 1996-97. The Tribunal declined to allow as deduction from the business income of the appellant u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the expenditure incurred for the business purposes are allowed deductions. Since the contribution for the library for P.C.S. coaching centre as well as contribution to U.P. Government for the construction of Flats has nothing to do for the purposes of the business of the assessee, hence the same shall not be allowed as a deduction from the business income, hence this claim of the assessee is rejected." 4. The appellate authority also took the view that the contributions have been made on the direction of the State Government but the same is not allowable because the appellant is a company incorporated under the Companies Act. The Government should have no say regarding utilization of fund. It appears that against the order of the appellate authority, the tribunal remanded the matter to reconsider the controversy on the ground that the contributions were allowable as deduction out of income derived from the work relating to Scheduled Castes and Schedule Tribes in view of section 14A of the Act. The order of the tribunal dated 11.5.2005 was set aside by this Court in Income Tax Appeal No. 167 of 2005 by judgment and order dated 23.12.2005 and the matter was remanded to the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trol of the Company's affairs vests in the Board. Under Chapter XVII, the Chairman is possessed with supervisory control and under Chapter XVIII, subject to the provisions of the Act and subject also to the control superintendence of the Board, the business and affairs of the Company shall be carried out and managed by the Managing Director for the time being of the Company. For convenience, Chapter XVI Articles 125 and 126 and XVII Articles 129, 130 and Chapter XVIII Article 131 are reproduced as under:- "Article 125:-Subject to the provisions of the Act, the control of the Company's affairs shall be vested in the Board, who shall pay all expenses incurred in promoting and registering the Company, and shall be entitled to exercise all such powers and to do all such acts and things as the Company is authorised to exercise and do: Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by Act or any other Act or by the memorandum of Association of the Company in general meeting ; Provided further that in exercising any such power or doing any such act or thing, the board shall be subject to the provisions contained in that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in individual cases : Provided further that nothing in this Article shall be deemed to effect the right of the Company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified above. (v) To appoint at any time and from time to time by a power of attorney under seal, any person to be the Attorney of the Company for such purposes and with such powers, authorities and discretions (not exceeding those which are delegatable by the Board under the Act or these Articles) and for such period and subject to such conditions as the Board may from time to time think fit, with powers for such Attorney(s) to sub-delegate all or any of the powers, authorities and discretions vested in the Attorney(s) for the time being. (vi) To acquire by lease, mortgage, purchase or exchange or otherwise any property, rights or privilege which the Company is authorised to acquire at such price and generally on such terms and conditions as the Board may think fit. (vii) Subject to the provisions of section 293 of the Act, to sell, let, exchange, or otherwise dispose of absolutely or conditionally any property, rights or privileges and undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims or demand by or against the Company and to appoint Solicitors, Advocates, Counsel and other legal practitioners or advisors for such purposes or for any other purposes and settle and pay their remuneration. (xiv) To act on behalf of the Company in all matters to insolvency in which the Company is interested. (xv) To pay and give gratuities, pensions and allowances to any person or persons including any director, to his widow, children or dependents, that may appear to the Board just or proper whether any such person, widow, children or other dependents have or have not a legal claim upon the Company any whether such person is still in the service of the Company or has any funds and pay premium for the purchase or provision of any such gratuity, pension or allowance. (xvi) To establish, maintain, support and subscribe to any charitable or public object or any institution, society or club which may be for the benefit of the Company or its employees. (xvii) To set aside portions of the profits of the Company to form a fund or funds, before recommending any dividends, for the objects mentioned above. (xviii) To make and alter rules and regulations concerning the time a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor from any cause. Article 131:- Subject to the provisions of the Act and subject also to to the control and superintendence of the Board, the business and affairs of the Company shall be carried out and managed by the Managing Director for the time being of the Company." In view of the aforesaid provision contained in the memorandum of association, all business of affairs should be dealt with by the Board and Managing Director and not by the Government. The power of the Government has been dealt with under Chapter XXXIV Article 202 which is reproduced as under:- "Article 202:- (a)The Governor of Uttar Pradesh in keeping with the statutory requirements of the Companies Acts, may from time to time issue directives to the Company as to the exercise and performance of its functions in matters involving the security of the State or substantial public interest and such other directives as he may consider necessary in regard to the finances and the conduct of business and affairs of the Company and in the like manner may vary and annul any such directive(s). The Company shall give immediate effect to the directive(s) so issued. (b) The Governor of Uttar Pradesh may call for suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution to State Housing Board for constructing tenements for companies workers in spite of the fact that the assessee-company acquired no ownership. The tribunal held that the expenditure was incurred merely with a view to carry on the business of the assessee-company more efficiently by having a contended labour force. The Bombay Dying and Manufacturing case (supra) is not applicable in the present case for the reasons that in that case, a decision was taken by the company itself to meet out the requirements of its workmen. It was company's board of director which applied its mind with regard to business expediency. It was not a decision taken mechanically in pursuance to the direction of the State Government or any other authority. 10. In (1990) 183 ITR 367 Commissioner of Income Tax vs. Mysore Cements Ltd. also the question cropped up whether a expenditure is of the nature of capital expenditure or revenue expenditure, the test of enduring nature applied to the purpose for which a particular expenditure is incurred, it is held that an expenditure attributable to a welfare scheme, resulting in a permanent benefit, under a given set of circumstances, may be a capital expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anically without appreciating the business expediency at its end. The assessee which is a company though bound by the policy decision of the government, but so far as business expediency is concerned, no decision has been taken by the assessee itself, hence conclusive finding recorded by the assessing authority or the three Forums below that expenditure in question is not a business expenditure, does not seem to suffer from any impropriety or illegality. 13. Business expediency is a wide term and includes all those decisions or actions which are taken by the company itself wholly or exclusively for the business purpose. The decision should be taken by the company itself and not by the outsider. 14. The Explanation 37(1) of the Act provides that any expenditure incurred by an assessee, which is prohibited by law shall not be deemed to be business expenditure. For convenience, Section 37 (1) of the Act is reproduced as under:- "37(1) 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 purpose of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and Memorandum of association or in terms of policy decision of the government with regard to expenditure incurred in the capacity of a trader for business expediency, the expenditure made like in the present case on the direction of the government shall not be business expenditure and deduction shall not be allowable. Diversion of fund by the government to meet out the requirement of a government departments seems to be not permissible. 19. In the system of mixed economy, the government establishes companies under Section 617 of the Companies Act as a welfare activity. The companies so established engage themselves under the respective memorandums in business or trade. Subject to statutory provision under the Act or Memorandum of association, no privilege can be accorded to such companies to convert themselves as a personal assets for the authorities of the Government. They have to follow the business norms and rules of the trade. Their decision must be within the four corner of law like other businessmen subject to latitude given by the statute. As observed (supra), no decision was taken by the assessee itself. The order was followed mechanically with regard to contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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