TMI Blog2019 (9) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... m encumbrances, upon which the construction of houses came to be commenced, executed and handed over within the time limit agreed to under the MOU. It was the term of the MOU that the donor (assessee) has joined hands with the Government of Karnataka to bring a total relief in the lives of the people who were worst affected by the unprecedented rain and floods and the said project was undisputedly a philanthropic project. As agreed to between the parties that the donor himself would incur financial liability, maintain high standard of quality construction and would construct the houses as per the design offered by the Government of Karnataka, apart from ensuring quality of material used for the construction is of the superior quality. That apart, the work completion certificate has been issued by the Deputy Commissioner, Ballary and it is also certified that a sum been expended by the assessee for construction of 169 Aasare houses at Gundigana village. Thus, it boils down to the fact that construction of houses has been carried out by the assessee as agreed to under the MOU. Tribunal has rejected the contention of the assessee that expenditure incurred for the purpose of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARAVIND KUMAR J., JUDGMENT Having heard the learned Advocates appearing for parties on 05.07.2019, we have admitted the above appeals to consider the following substantial question of law: Whether the authorities below were justified in disallowing a sum of ₹ 1,61,30,480/- incurred towards construction of 169 houses for the villagers who had lost their homes due to natural calamity on the ground that it was not an expenditure allowable under Section 37 of the Income Tax Act, 1961, despite MOU dated 02.07.2010 having been entered by the petitioner with the jurisdictional Deputy Commissioner, Government of Karnataka? BRIEF BACKGROUND OF THE CASE: 2, The appellant-assessee is carrying on the business of extraction of iron ore and also trading in iron ore. For the assessment years 2011-12 and 2012-13 return of income came to be filed by the assessee, was processed under Section 143(1) of Income Tax Act, 1961 (for short Act ). The assessing officer disallowed the amount claimed by the assessee as social welfare expenses in a sum of ₹ 1,61,30,480/- and ₹ 55,90,080/- for the respective assessment years on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would inturn permit smooth conduct of petitioner s business without any hindrance. In support of his submission he relies upon the following judgments: (1) (1959) 37 ITR 66 (SC): INDIAN MOLASSES CO. (P) LTD. vs. CIT (2) (1966) 62 ITR 638 (SC): CIT vs. NAINITAL BANK LTD. (3) (1986) 158 ITR 486 (GUJ): C.J. PATEL CO. vs. CIT (4) (1979) 118 ITR 261 (SC): SASSOON J. DAVID CO. (P) LTD. vs. CIT (5) (1964) 53 ITR 140 (SC): CIT vs. MALAYALAM PLANATION LTD. (6) (1982) 133 ITR 756 (SC): CIT vs. DELHI SAFE DEPOSIT CO. LTD. (7) (1976) 103 ITR 66 (SC): CIT vs. PANIPAT WOOLLEN GENERAL MILLS CO. LTD. (8) (1977) 108 ITR 358 (SC): SHAHZADA NAND SONS vs. CIT (9) (1979) 118 ITR 261 (SC): SASSOON J. DAVID CO. (P) LTD. vs. CIT (10) (1997) 223 ITR 101 (SC): SRI. VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. vs. CIT (11) (1979) 118 ITR 379 (MP): ADDL. CIT VS. KUBER SINGH BHAGAWANDAS (12) (2007) 288 ITR 1 (SC): S.A. BUILDERS LTD. vs. CIT (APPEALS ORS. (13) (2004) 266 ITR 170 (MAD): CIT vs. MADRAS REFINERIES LTD. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon ble Chief Minister to all to lend their hands for restoring normalcy. 9. It is in this background, Hon ble Chief Minister of Karnataka had made fervent appeal to all philanthropist, industrial and commercial enterprises to extend their wholehearted support in all possible manner to achieve the gigantic task of restoring normalcy and bringing hopes to the lives of more than 5.41 lakh persons. 10. The assessee who is carrying on the business of extraction of iron ore and trading in iron ore thus entered into a Memorandum of Understanding with Government of Karnataka on 01.12.2009, whereunder ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] 12. A plain reading of Section 37 would indicate that such expenditure not being expenditure of the nature described in Sections 30 to 36 or capital expenditure or personal expenses of the assessee would be an expenditure under this Section or in other words, any expenditure laid out or expended wholly and exclusively for purposes of the business would be allowable in computing the income chargeable under the head Profit and gains of business or profession under this Section. 13. A plain reading of Section 37 would also indicate that emphasis is on the expression wholly and exclusively for the purposes of the business or profession . These two expressions namely, wholly and exclusively being adverb, has reference to the objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1858) An expense incurred to operate and promote a business; esp., an expenditure made to further the business in the taxable year in which the expense is incurred.. Most business expenses unlike personal expenses are tax deductible. Whereas, the extraordinary expense is defined as under: Extra-ordinary expense an unusual and unfrequent expense, such as a right/off of goodwill or a large judgment. As used in a Constitutional provision authorizing a State to incur extra-ordinary expenses, the term denotes an expense for the general welfare compelled by an unforeseen condition such as a natural disaster or war also termed as extra-ordinary item. Likewise, expression expediency has been defined as: Expediency. A word of large import, comprehending whatever is suitable and appropriate in reason for the accomplishment of the specified object. As supplied to public welfare legislation, the term involves utility, and has reference to matters which are wholly for legislative cognizance. The term is said to be nearly synonymous with necessity where that term is used in a sense not importing an absolute necessity, as in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking. It varies from one business to another, expediency depends on nature of business, the motive and purport of the business carried on to earn profit are also the factors which will have to be considered, determined and answered in the facts obtained in each case. In other words, commercial expediency varies from one assessee to another. By a precise mathematical formula, it cannot be defined as to what can be commercial expediency in a given case nor it can be put in a water tight compartment. To put it differently, the revenue authorities or the Courts when faced with such situation, will have to place itself in the position of such business men and ascertain whether the expenses so incurred can be said to have been expended for the purpose of the business or the transaction was merely camouflage for the purpose of reducing the tax component by depicting it as an expenditure by reducing the quantum of profit in the profit and loss account. 19. The expression wholly and exclusively found in Section 37 of the Act cannot be understood in a narrowed manner. In other words, it has to be given interpretation so as to achieve the object of the Act. Thus, where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely phrase means something which comes out of the traders pocket. 22. The requirement of commercial expediency would be judged in the context of prevailing socio economic conditions and such thinking which places the general interest of the community above the personal interest of the individual and beliefs that a business or undertaking is a product of combined efforts of all, then, such expenditure incurred by the business undertaking may partake the character of commercial expediency. Such expenditure depends upon the terr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 1 (SC), it has been held by the Hon ble Apex Court that expression for the purpose of business includes expenditure incurred voluntarily for commercial expediency, and it is immaterial if a third party also benefits thereby. It is further held: In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is for the purpose of business . It has been consistently held in decisions relating to Section 37 that the expression for the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 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 grounds of commercial expediency. 25. It has been held under English income-tax that sums paid to an employee as pension or gratuity are deductible as money laid out and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t desire to discuss politics, but I take examples which seem to me fairly clear. Payments for political purposes might conceivably be for the purposes of trade. It might be that a payment by a company to the Tariff Reform League might be of great advantage to its trade. It might be that a payment by a company to a political party which was supposed to be identified with the interests of a particular trade might be to the advantage of the trade; but one can easily imagine cases such as a payment by a company to the National Service League, where it would be impossible to conceive that anybody could find that such money was wholly or exclusively laid out or expended for the purposes of the trade. There may be cases in which the Court would have to say there is no evidence on which any tribunal could find that this sum was laid out or expended for the purposes of such trade, but in most cases it appears to me that it depends on the facts of the trade of which the Court has no knowledge, and for which it must depend on the findings of the Commissioners. 26. Keeping the above principles in mind, when the facts on hand are examined, it would clearly indicate that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. 28. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee s business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee s business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY s c ase referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers 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 came to be fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of the Act and not otherwise. 31. For the reasons aforestated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee. Hence, we proceed to pass the following : ORDER (i) I.T.A.Nos.100016/2018 and 100017/2018 are allowed. (ii) Order dated 17.05.2017 passed by Income Appellate Tribunal, B Bench, Bengaluru in ITA Nos. 782 1495/Bang/2016 for the assessment years 2011-12 and 2012- 13 are set aside and appeals filed by the assessee before the Tribunal is allowed. (iii) Assessment proceedings of the years 2011-12 and 2012-13 are remitted to the assessing officer to examine the claim of the assessee in the light of our observations made herein above. (iv) No orders a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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