TMI Blog2017 (9) TMI 1700X X X X Extracts X X X X X X X X Extracts X X X X ..... y are decided by this common judgment. 2. By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee. 3. This court while admitting the appeals framed the following questions of law:- 1. D.B. Income Tax Appeal No. 234 / 2012 Whether in the facts in the circumstances of the case the ITAT was justified in law in deleting the additions made by the Assessing Officer by way of disallowance of ₹ 8967327/- contributed to the trust registered u/s. 12AA and holding the said amount to be business expenditure? 2. D.B. Income Tax Appeal No. 3/ 2016 Whether the ITAT was justified in law in deleting the additions made by the Assessing Officer by way of disallowance of ₹ 85,66,157/- contributed to the trust registered u/s. 12AA and holding the said amount to be business expenditure? 3. D.B. Income Tax Appeal No. 122/ 2016 Whether in the facts and circumstances of the case the ITAT was justified in law in deleting the additions made by the Assessing Officer by way of disallowance of ₹ 11407817/- paid as contribution to Sparsh trush registered u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out various programs in the field of animal productivity enhancement. Accordingly the appellant had contributed amount of ₹ 89,67,327/- to this trust during the year under consideration. After careful consideration of the facts, I am not inclined to agree with the contentions of the appellant. The contribution made by the appellant to a trust which is registered U/s 12AA and also granted a certificate U/s 80G is not an expenditure within the meaning of section 37(1) of the IT Act. The fact remains that the assessee has not incurred any expenditure itself on healthcare of milch animals, improvement of breed, supply of nutritional supplements etc. and amount is in the nature of contribution/donation to a trust. The decision of Sri Venkata Satyanarayan Rice mills Contractor Co (233 ITR 101) relied upon by the appellant was rendered in different context since in the cited case, the contribution to Andhra Pradesh Welfare Fund was precondition for grant of export permits and without it, the assessee could not have been in a position to carry its business. In the case of Mysore Kirloskar Ltd (166 ITR 836), the tribunal had disallowed the expenditure to an educational trust o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed under the general provisions of section 37(1) of the Act. If a particular amount of expenditure falls within the category of donation, then the deduction as provided under section 80G alone is applicable. For the purpose of claiming the benefit under section 37(1), it has to be proved that the expenditure was wholly and exclusively for the purpose of business. There may be a circumstance where an expenditure falls within the category of wholly and exclusively for the purpose of business or profession and also under section 80G. In that case the option remains with the assessee to claim the expenditure under either of the aforesaid sections. But where there is no direct nexus to prove that it is wholly and exclusively for the purpose of business or profession, then it cannot be claimed under section 37(1). A future hope for advantage is in the nature of an expectation. The requirement of the section is that there must be a business in existence and the expenditure is wholly and exclusively for the purpose of business. In the cited case, the assessee, who claimed to be a prominent businessman of a locality, made donations to various institutions like the Rotary Club, a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dairy farmers from the threat of private mild vendors, the assessee gave incentives to village level mild animal owners/societies to become its member. For this purpose, it gave incentives @ ₹ 90 per person and ₹ 5000/- per society who got registered with it. During the year, the assessee had incurred expenditure of ₹ 3,23,670/- for this purpose by debiting it under the head Vikas Yojna Fund. The AO disallowed the same by observing that the assessee had not detailed as to what activities were carried on by it by making payment to Vikas Yojna Fund and therefore it couldn t be said to be incidental to the business of the assessee. It was argued that the expenditure claimed under Vikas Yojna Fund was not any contribution but actual expenditure incurred for registering the members and the societies at the village level for which certain incentives/subsidies were given to ensure the regular procurement of the milk from these persons/societies. This was evident from the expenditure vouchers. Thus the expenditure was incurred wholly and exclusively for the purpose of the business and allowable U/s 37(1). It was also pointed out that as a part of the overall develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is on the assessee. The assessee had failed to prove that the expenditure incurred by it was exclusively for the purpose of business. 7. Besides the above, the provisions of Section 37 are general in nature and the provisions of Section 80G are specific. Applying the maxim generalia specialibus non derogant if an amount is liable for deduction under Section 80G it cannot be claimed under the general provisions of Section 37(1). Section 80G provides that in computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, an amount equal to fifty per cent of the aggregate of the sums specified in Sub-section (2). If a particular amount of expenditure falls within the category of donation, then the deduction as provided under Section 80G alone is applicable. For the purpose of claiming the benefit under Section 37(1), it has to be proved that the expenditure was wholly and exclusively for the purpose of business. The words wholly and exclusively eliminate other considerations and there should not be any dispute with regard to the expenditure that the object of it was for the necessity of business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 80G of the Income Tax Act. 7. In the present case, the Tribunal following the decision of the Andhra Pradesh High Court in the case of Hyderabad Race Club v. Addl. CIT [1979]120ITR185(AP) , held that the ceiling laid down by Sub-section (4) was applicable not to the aggregate amount in respect of which the deduction was claimed but to the amount deductible under Sub-section (1) of Section 80G. However, this court in the case of CIT v. New Shorrock Spg. and Mfg. Co. Ltd. [1995]212ITR355(Bom) has disagreed with the decision of the Andhra Pradesh High Court in the case of Hyderabad Race Club [1979]120ITR185(AP) and held that the ceiling specified in Sub-section (4) applies to the aggregate of the sums in respect of which deduction is claimed and not to the amount of deduction allowed under Sub-section (1) which has to be computed in the manner specified therein. In this view of the matter, we answer question No. 3 in the negative and in favour of the Revenue. Malayala Manorama Co. Ltd. vs. Commissioner of Income Tax (13.12.2005 KERHC), [2006] 284 ITR 69 (Ker) 13. We are of the view the abovementioned decisions are not applicable to the facts of this case and to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of its employees and hence was an allowable deduction under Section 37(1) of the Act. Facts of this case stand on a different footing and the decisions cited by the assessee are, therefore, not. applicable to the facts of this case. We are, therefore, of the view that the contribution made by the assessee would, be an allowable deduction under Section 80G of the IT Act and not under Section 37(1) of the Act. We, therefore, fully concur with the view of the Tribunal on that point. 15. Counsel for the assessee submitted that the finding of the Tribunal that the claim under Sections 80-I and 80-IA for deduction in respect of new undertakings of the assessee at Trivandrum and Palakkad stands covered against the assessee, is not correct especially in view of the decision of this Court in Malaysia Manorama Co. Ltd. v. CIT (2002) 257 HE. 633 . In that case assessee claimed allowance of deduction with respect to its share of income from advertisement for the asst. yrs. 1990- 91 and 1991-92. This Court took the view that the assessee is entitled to special deduction under Section 80-I of the Act. 16. Counsel submitted, though this decision was specifically pointed out before the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Question No. 3 - Whether the expenditure allowed by the impugned order of the Tribunal was justified in respect of the donations made by the assessee and claimed as business expenses under Section-37 (1)? The assessee had claimed expenditure on account of donations under section 80G of the Act in its returns. It had submitted that donations were given to various organizations which were laid out or expanded exclusively for business purposes. These donations were mostly made for the purpose of promoting education and had special relevance since the assessee had units in townships or places where access to school was extremely limited. The general object of educational welfare being undoubtedly charitable, and linked with the well being of the assessee's employees, the expenditure was correctly allowed under section 37(1). The AO and the CIT had disallowed the claim originally made under section 80G. The reasoning of these two lower authorities was that the claim was unsupported by any documentary proof with regard to the permissibility of the deduction and such being the case, relief of larger deduction as business expenditure could not be granted. 14. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. The danger in promoting such expenditure as having been laid out exclusively for business purposes is that it can well degenerate into an exercise of unregulated activity for which the Revenue would perforce defer to the assessee's decision on the basis of no discernable principle. Parliament having chosen one method of dealing with donations i.e. as in the case of section 80G, the adoption of another route as business expenditure would not be permissible. 16. For the above reasons, the Revenue's appeals have to succeed on this point. The amounts claimed as business expenditure for the relevant assessment years have to be added back and brought to tax. 6. Counsel for the respondent drew over attention to the observations made by the Tribunal which reads as under:- 7. After considering the submissions, orders of the authorities below, we find that assessee deserves to succeed in its ground raised. It is noticed that before creating SPARSH, the assessee was doing all these expenditure itself. Just for betterment of administrative services, the assessee created the Trust through whom these expenses are incurred. The Profit Loss account of the Trust is maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see are in support of the case of the assessee. We are not going into detail in respect to those cases as they have already been mentioned in the written submissions which are reproduced herein above. In view of these facts and circumstances, we hold that the expenditure/contribution made by assessee is allowable as business expenditure. Accordingly, the addition made and confirmed by the lower authorities is deleted. 12. After considering the orders of the AO and ld. CIT (A) and written submissions, we find that the assessee deserves to succeed in this ground also. It is seen that expenditure claimed under the head Vikas Yojna Fund is not any contribution but actual expenditure incurred for registering the members and the societies at the village level for which certain incentive/subsidy is given to ensure the regular procurement of milk from these persons/societies. It is further seen that for the purpose of over-all development of the dairy in the State assessee has received grant for revival of the societies from the Apex Society i.e. Rajasthan Co-operative Dairy Federation Limited at ₹ 22,91,920/- which has been offered for taxation by the assessee. The expenditure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. 6 . This Court in the case of Commissioner of Incometax, Gujarat v. S.C. Kothari, [1971]82ITR794(SC) , was considering a case where the assessee had suffered loss in an illegal transaction and the question arose whether the same could be set off under Section 24 of the Income-tax Act, 1922 against the profits and gains of speculative transaction. While allowing the set off it was observed that if a business is illegal, neither the profits earned nor the losses incurred would be enforceable in law but that does not take the profits out of the taxing statute. Similarly the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amounts which can be subjected to tax under Section 10(1) of the 1922 Act. The tax collector, it was observed, cannot be heard to say that he will bring the gross receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title a businessman to obtain a licence or permit cannot be regarded as being against the public policy. 10. From the aforesaid discussion it follows 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 the benefit to the assessee's business has to be regarded as an allowable deduction under Section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other Fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is a co-operative society engaged in the marketing of milk and milk products. It had claimed for deduction, the contribution to Gujarat Rajya Co-operative Education Fund. The Tribunal held that the assessee's said claim, which is covered by the above question No. 1 was allowable and confirmed the order of the Commissioner (Appeals). It is pointed out that this question stands answered by a decision of this court in Mehsana District Co-operative Milk Producers Union Ltd. v. CIT MANU/GJ/0299/1993, in which it was held that as the assessee had to contribute to the Education Fund, since, it declared a dividend of 3 per cent or more, the contribution made to the Education Fund was deductible. This decision was followed in the assessee's own case in CIT v. Kaira District Cooperative Milk Producers' Union Ltd. MANU/GJ/0181/1993, in which it was held by this court that the contribution to the Gujarat Co-operative Education Fund by the assessee was allowable as business expenditure. In view of the ratio of these decisions, question No. 1 stands concluded and is answered against the revenue and in favour of the assessee. 3. The assessee had claimed depreciation in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h all these relevant facts were disclosed before the Tribunal, they have not been properly considered and the Tribunal erroneously rejected its contention that it should be given an opportunity to correlate the loan with depreciable and non-depreciable assets purchased out of it. He stated that, unless this exercise is undertaken, no definite reply can be given to question No. 1. In our opinion, what the assessee contends before us has got substances in it. As indicated by the resolution of 1963, the loan was given for the purpose of setting up the milk drying plant at Mehsana. It would not mean that the loan was given for the purpose of purchasing plant and machinery only. The Tribunal has not at all considered this aspect. The fact that the loan was sanctioned for the project of setting up a milk drying plant at Mehsana also becomes clear if we look at the resolution dated October 5, 1964, passed by the Government, wherein it is stated owing to some reasons, the cost of the projects has risen to ₹ 141 lakhs . Again, in the resolution dated October 11, 1967, it is further stated that 25 per cent of the amount of loan sanctioned to the unions should be treated as subsidy fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s yet one more thin to be remembered while applying section 37(1). The expenditure claimed therein need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity , but it must for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. In Season J. David and Co. P. Ltd. v. CIT [1979]118ITR261(SC) , the Supreme Court observed (at page 275 and 276) : It is relevant to refer at this stage to the legislative history of section 37 of the Income Tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income Tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read 'any expenditure... laid out or expended wholly, necessarily and exclusively for the purpose of the business or profession shall be allowed.... The introduction of the word 'necessarily' in the above section resulted in public protest. Consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the Income Tax law does not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in present and a liability in present and a liability de futuro which, for the time being, is only contingent. The Former is deductible but not the latter . 20. In the light of these principles, we may again revert to the reasons given by the Tribunal for rejecting the claim of the assessee. The first reason given by the Tribunal is that section 80G is a special provision and if it applies to the assessee's case, then section 37, which is a general provision, stands excluded. This reason appears to be to sound. We have stated that section 80G and section 37 are not mutually exclusive. If the sum claimed by way of deduction even if it a donation, could be considered as an expenditure falling under section 37, the assessee could claim it as an allowance in its entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in the course of its or his business. Such expenses can be incurred voluntarily and without necessity. If it is incurred for promoting the business and to earn the profits, the assessee can claim the deduction. Reference in this connection may be made to Sasoon J. David Co. (P) Ltd. v. CIT (supra) wherein the apex Court even considered the circumstance that as a matter of fact the word necessarily found place in the Income Tax Bill, 1961, but was dropped by legislature in favour of expression wholly and exclusively . 15. Applying the aforesaid test to voluntary contribution to charitable fund or organisation it is also well-established 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 Section 37(1). Such a donation, whether voluntary or at the instance of the authorities concerned, when made to relief fund or a welfare fund or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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