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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI ANIL CHATURVEDI & SHRI NARENDER KUMAR CHOUDHRY
O R D E R PER N.K. CHOUDHRY, JM:
The instant appeal has been preferred by the Revenue against the order dated 12.12.2017 impugned herein , passed by the Ld. Commissioner of Income tax (Appeals)- 10, New Delhi, (in short “Ld. Commissioner”) u/s 250(6) of the Income Tax Act, 1961 (in short “the Act”), pertaining to the assessment year 2013-14.
The Assessee being Cooperative Society is engaged in the trading/marketing of various types of fertilizer, manufactured by IFFCO at various places in India. As per annexure I to form 3CD, the nature of business of the society has been defined as under: i. Society is registered as Multi State Cooperative Society and is engaged in the development of Farm Forestry and other Social Welfare Projects and carrying on the business of development of Farm Forestry and other social welfare activities. ii. Trading of fertilizer through various societies/agencies.
The Assessing Officer from the Profit & Loss account submitted by the Assessee, noted that the Assessee has claimed expenses to the tune of Rs. 6,28,66,118/- under the head expenses on “Social & Rural Development Programme”, which the Assessee was claiming under the head Project Development in earlier years. Therefore, vide note sheet dated 9.12.2016, the Assessee was asked to explain social & Rural Development Programmes (Project Development) and to file the necessary evidence in support of these expenses being claimed as Revenue Expenses in nature in the return.
The Assessee filed its reply dated 13.12.2016, which was not found acceptable by the AO, who by perusing/reproducing the provisions of section 37(1) of the Act held that the project expenses of 6,28,66,118/- does not fulfill the condition of Section 37(1) and cannot be treated as revenue expenditure by concluding as under:
“The other issue in the case is as to whether the expenditure is laid out wholly and exclusively for the purpose of business. The word “exclusively” refers to the motive, objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenditure may be incurred voluntarily and without any necessity, and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction therefore under section 37(1) even though there was no compelling necessity to incur such expenditure.
The manner to apply the test is to ask the question: “Has the expense been incurred with the sole object or furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration? If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business Consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be.”
The case of assessee can be examined on these lines. There is no business expediency the expenditure. The assessee has incurred the project expenses in implementing various schemes for social uplifting of farmers and weaker section of society. The expenditure is in fact in the nature of donation but not covered U/s 80G of the Income-tax Act, 1961. Accordingly, it is an item to be considered below the line and is not an admissible deduction since not laid out wholly and exclusively for the purpose of business. In the earlier years i.e. A.Y. 2008-09, 2009-10 and 2010-11, this issue was examined in details and after detailed discussion in both A.Y.s, the claim of assessee in respect of project expenses was not treated as revenue expenditure and same was disallowed u/s 37(1) of the Income Tax Act, 1961. The Ld. CIT Appeal has deleted the addition made on account of treating project expenses as capital expenses in A.Y.2008-09 & 2009-10. The department has already filed appeal before the Hon’ble ITAT in both the A.Y.S, and decision on the appeals filed are still pending.
In view of the above facts and circumstances, I hold that, the project expenses of Rs.6,28,66,118/- does not fulfill the condition of section 37(1) and cannot be treated as Revenue Expenditure. The expenses should be claimed by assessee below the lone and should not be charged to P&L A/c. Accordingly, the expenses of Rs.6,28,66,118/- is disallowed and will be added in the income of assessee U/s 37(1) of the Income-tax Act, 1961.”
The Assessee being aggrieved, also challenged this addition before learned Commissioner.
The learned Commissioner by relying upon various orders passed by its predecessor, as well as by the Hon’ble Tribunal in Assessee’s own cases for A.Y. 2008-09 & 2009-10, allowed the claim of the Assessee by considering the amount of Rs. 6,28,66,118/- as “revenue in nature” by holding as under:
5.2a It is gathered from the appellant’s submissions at para 4 above that it’s object is to carry out the business of social development activities for the benefit of the rural poor by way of forestry development, water harvesting, employment (job opportunities) creation, SHGs for inculcating domestic savings, family planning projects, etc. Basically, it undertakes the programme implementation work of NGOs, Central and State Governments aimed at benefiting rural poor for fee. In fact, it is observed from the appellant’s relevant Annual Report submitted during the course of appellate as well as during assessment proceedings. The work undertaken is therefore akin to any business activity - the only difference being in the return - while in business it is the sales / commission whereas in this particular endeavor it is the fee from the implementor. Therefore, the appellant’s contention that ...By terming the activities to be falling under NGO or for social development of the poor people of the villages it cannot be denied that the expenditure incurred by the said societies are not related to its activities and therefore all the expenditure incurred and claimed are to be assessed u/s 28 to 43 of the Income Tax Act...’’appears plausible.
5.2b It is also observed from the copies of the appellate orders in its own case by the first and the second appellate authority, relied upon by the appellant, that the nature of the activities as well as their foci is similar - all aimed at rural development. Yet, it is observed from the impugned order that confusion has continued over the years as regards the nature of the appellant’s activities vis-a-vis business perse. The difference between the project expenses undertaken by a project implementor and that undertaken by an agency separate therefrom, appears to have become blurred. It is necessary to discern between the two. Further, it is not the end result in such circumstances that will determine the nature of activity but the activity itself. Also, it is gathered from the appellant’s submissions that capital expenses have been reimbursed - the appellant has not incurred such expenditure but has incurred only revenue expenses - it has been clarified in the Annexure - 4 to Form 3CD that "No capital expenditure / receipts has been debited / credited to the Profit and Loss Account'. Again, the appellant’s contention that "Expenses reimbursed have been deducted from project expenditure to the extent the same have been actually reimbursed by the sponsors of the projects.” is borne out from available records.
5.2c From the copies of the following orders relied upon by the appellant - - IT AT Delhi’s order in AY 2008-09 (ITA No.1700/Del/2012) and in AY 2009-10 (ITA No.4796/Del/2012) dated 26/07/2016 - CIT (A)’s order for AY 2008-09 (Appeal No. 152/10-11) dated 22/12/2011 - CIT (A)’s order for AY 2012-13 (Appeal No. 67/15-16) dated 28/10/2016 it is observed that the disallowance made on this issue in the relevant AYs has been deleted. Further, it is observed that the facts of the case therein are similar to those of the present case. In fact, the ITAT has upheld the order of the CIT(A) for AY 2008-09 on two grounds - no capital expenses where claimed as deduction by the appellant and such expenditures were accepted in earlier years. It is mentioned, inter alia, “...On above consideration, we find that the Assessing Officer has treated the claimed expenditure as capital in nature keeping in mind that the purpose of business of the assessee society is trading of fertilizers, which is not correct rather the assets created namely forest on waste land, check dams, ponds etc. became the property of the villages managed through village community and the assessee society only provided expertise and funding to them. Considering material aspects of the case, we are of the view that the Ld. CIT(A) has rightly hold that the Assessing Officer was not correct in holding that expenditure were not incurred wholly and exclusively for the purpose of the business and that alternatively it was capital in nature. We thus do not find infirmity in the first appellate order on the issue also because in earlier assessmenf years 2004-05 to 2007-08 when assessments were framed under sec. 143(3) of the similar expenditure have been accepted. S/'m/'/ar are the facts of the case in the assessment ye 2009-10. The finding of the Learned C/TfAppea/s) is thus upheld. The ground No. 1 of the appeal: accord/ng/y rejected... ”
5.2d Thus, in view of the contents of the preceding sub-paras as well as the fact that the activities undertaken by the appellant were accepted in earlier years, albeit there being no res judicata on assessments, I am in agreement with the appellant’s contention regarding its business. Accordingly, in due deference to the abovementioned order of the ITAT Delhi as well as my predecessors, the disallowance made in the impugned order on this issue (Rs.6,28,66,118/-) is deleted. The ground at (c) above, is allowed.
We observe that identical issue was dealt by the Hon’ble Tribunal in Assessee’s own case for A.Y. 2008-09 & 2009-10, wherein the Hon’ble tribunal allowed the claim of the Assessee by treating the same expenditure as the “revenue in nature” instead of “capital in nature” as held by the AO. The said orders of the Hon’ble Tribunal were challenged by the Revenue/Department before the Hon’ble High Court of Delhi. The Hon’ble High Court vide order dated 31.10.2018 [2019] 101 taxmann.com 169 (Delhi) in the case of PCIT V. Indian Farm Forestry Development, approved the view of the Hon’ble Tribunal, by dismissing the appeal of the Revenue, by concluding as under:
“12. Sri Venkata Satyanarayana Rice Mill Contractors Co. {supra) had held that contributions made by the assessee to public welfare fund could be allowed as allowable expenditure under Section 37 of the Act where they were directly connected or related to the business of the assessee or had resulted in benefit to the business. It would not matter whether the said expenditure is in the nature of donation, charity, for public cause or results in public benefit, for this would not be good reason to deny the assessee deduction under section 37 of the Act when the payment is for the purpose of the assessee's business.
In the facts of the present case, the object and purpose of the respondent- assessee is to engage and work for social and economic upliftment of the rural poor, construct water reservoirs etc. It is established for this purpose and receives grants and donations from third parties with the said objective and purpose. M/s. Indian Farmers Fertilizer Co-operative Ltd. had sold and supplied fertilizer that was marketed/sold by the respondent- assessee to earn profit/income, because the respondent-assessee was engaged in social and economic development activities. Association and business relationship with M/s. Indian Farmers Fertilizer Cooperative Ltd. was predicated and connected on the respondent-assessee performing and undertaking the social-welfare economic activities. Grants received from government and foreign agencies were to be utilized for the specific purpose i.e. the object and purpose of social and economic upliftment etc. If the respondent assessee was not engaged in and had not undertaken the aforesaid activities, it would not have received the grants and would not have undertaken sale and marketing of fertilizers. The respondent-assessee was therefore required to incur the said expenditure, in order to ran, operate and continue its business.
We perceive that there is a degree of contradiction in the plea raised by the Revenue, when they claim that the respondent-assessee was not engaged in 'business' or the expenditure incurred was not on account of business expediency. Income earned by the respondent-assessee has been treated and taxed under the head profits and gains of business and profession. In the given facts, it would be incongruous for the Revenue to urge that the purpose and goal behind the activities undertaken by the respondent-assessee was not commercial but charity as the intent and motive behind them was not to earn profit. The expenditure incurred to carry out social and economic development would in this background constitute a 'business' or 'commercial' activity undertaken by the respondent-assessee. It would be a contradiction in terms, if we hold that the expenditure would be non-deductible expenditure or expenditure without business expediency. Under section 37 of the Act it does not matter whether or not the expenditure was in the nature of donation or Section 80G of the Act was not attracted. The conditions stated in Section 37 of the Act matter and constitute the test. Expenditure incurred in furtherance of and connected with the business and commercial activities for which the respondent-assessee was established cannot be disallowed as expenditure not relatable and incurred for 'business' purposes.
On the question of capital expenditure, the assessing officer did not refer to or examine whether the capital assets created were for third party villagers. The respondent-assessee was not the owner of the assets created and developed. The assets created were not capital assets in the hands of the respondent- assessee. The respondent-assessee had contributed, developed, financed and created assets which belonged to third persons. The expenditure incurred therefore would not be 'capital' in nature in the hands of the respondent assessee.”
We further observe that Hon’ble Tribunal in the Assessee’s own case for A.Ys. 2010-11, 2011-12 & 2012-13 in 573/Del/2016 & 112/Del/2017 also came across with the identical issue and dismissed the appeals of the Revenue/Department, wherein also the Department challenged the learned CIT(A)’s orders, whereby the learned CIT(A) held the similar expenditure as “revenue in nature”.
On the aforesaid facts and circumstances, we observe that no distinguishable facts or features are neither available on record nor brought to our knowledge by the Revenue Department, to contradict the findings of the authorities who have passed the orders in favour of the Assessee by holding the said expenditure as revenue in nature. Hence we are inclined not to interfere in the order passed by the learned Commissioner, as the same does not suffer from any perversity or impropriety or illegality
In the result, the appeal filed by the revenue department stands dismissed.
Order pronounced in open court on 16/03/2023.