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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI LAXMI PRASAD SAHU
Per Laxmi Prasad Sahu, Accountant Member :
This appeal filed by the assessee against the order of National e-Assessment Center (NFAC) dated 13/07/2022 with the following grounds of appeal:- “1. The learned Commissioner of Income Tax (Appeals) is not correct in not accepting the contentions of the appellant with regard to the exercising of jurisdiction under section 154 of Income Tax Act by the assessing officer. 2. The learned Commissioner of Income Tax (Appeals) has failed to understand the fact that the learned Assessing Officer passed the original assessment Order after
examining the books of accounts produced. Assessing Officer never disputed the claim of the assessee at original assessment stage. The issue raised by the AO in proceeding under section 154 of the Act which is highly debatable and which was not raised by the AO in the original assessment proceedings.
The learned Commissioner of Income Tax (Appeals) is not correct in appreciating the fact that the learned Assessing Officer has no power to review his entire assessment order and to make certain additions in the order under section 154 of the Act. The appellant has declared all particulars regarding computation and assessment to be framed under section 143(3) of the Act. When the AO has consciously taken the view to frame regular assessment and made certain additions, AO is not empowered to take contrary view to review entire assessment order already framed. It is against the spirit of provision of section 154 of the Act.
The learned Commissioner of Income Tax (Appeals) has failed to appreciate the fact that the learned Assessing Officer was wrong in passing order U/s. 154 on a debatable and contentious issue.
The learned Commissioner of Income Tax (Appeals) has failed to understand the fact that the learned Assessing Officer was wrong in passing order u/s. 154 on an issue which requires debate and discussion, it cannot become a subject-matter of rectification under section 154 of the Act because under this section only patent and obvious mistakes of law and facts can be rectified. It is not open to the AO to go into the true scope of the relevant provisions of the Act in proceedings under section 154 of the Act.
The learned Commissioner of Income Tax (Appeals) has failed to take into fact that order U/s. 154 can be passed only on an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions.
The learned Commissioner of Income Tax (Appeals) is wrong sustaining the disallowance Rs.11,01,192/- being CSP. Activities expenses without considering the nature of business carried out by the appellant. 8.The learned Commissioner of Income Tax (Appeals) has failed to understand the provisions of Section 37(1). white 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.
The learned Commissioner of Income Tax (Appeals)has failed to understand the fact that Section 37(1), barring the exceptions mentioned therein, "the money paid out or away must be paid out wholly and exclusively for the purpose of the business". The assessee can claim the whole of it for deduction in computing the income chargeable under the head "Profits and gains of business or profession".
The learned Commissioner of Income Tax (Appeals) has sustained the addition on the ground that such expenses are not for the purposes of business. The words "for the purpose of business" used in section 37(1) should not be limited to the
meaning of "earning profit alone". Business expediency or commercial expediency of the assessee also needs to be considered.”
The brief facts of the case are that the assessee filed return of income on 28/09/2013 and assessment u/s 143(3) was completed on 01/02/2016 accepting return of income. Subsequently, the order u/s 154 of the Act was passed by making disallowances of Rs.11,01,192/- in respect of community development expenditure by observing that this expenditure is not related to the business activity of the assessee and is not admissible expenditure under the provision of sec. 37(1) of the Act. The assessee submitted reply and stated that the some facilities were provided to government schools in the form of furnitures so that the assessee will get benefit in regard to passing through the entire pipe lines stretch from Mangalore to Bangalore and details of expenditure were filed as per Annexure – A. The AO was not satisfied and he noted that the supply of bench and desk to government schools cannot be construed as expenditure relating to its nature of business, accordingly he passed order u/s 154 of the Act by disallowing the expenditure u/s 37(1) of the Act on 12/06/2018.
Against the order of the AO, the assessee filed appeal before the CIT(A), who confirmed action of the AO by holding as under:- “5.4 It is noticed that the assessment u/s 143(3) was competed at the returned income. However, assessee appellant has not at the single stage (in reply to 154 notice or during appellate stage) adduced any evidence that specific query regarding community development expense (CDE) was raised in the assessment proceedings or the some was discussed. When the issue of CDE was not discussed, it cannot be held to be debatable. Case laws relied by assessee are distinguishable on the facts of case. I further notice that in annexure 'A' to reply dated 12.06.2022, the appellant submits a ledger account of CSR Activities Expenses totalling Rs. 11,01,192/-. CSR activities in any case are not deductible expenses. Appellant claims that the same are for the awareness of villagers and are thus allowable u/s 37(1). It is also admitted that after introduction of 135 companies Act, 2013 appellant has not claimed these CSR activities as business expenditure under income tax. AO in the order u/s 154 has held that the supply of benches and desks to schools cannot be construed to be relating to its business. It is noted that the company's pipelines runs to 363KM. How can one school students help it business activity. There
is no data to prove that they are miscreants or they have offered their services to safe guard the pipelines of the company. Thus, the explanation furnished by the appellant is not justifiable or reasonable. Under Section 37(1), the allowable business expenses should be wholly and exclusively for the purpose of the business. This is not proved by the appellant. Hence, the action of the AO u/s 154 is held to be justifiable. Grounds of appeal 1to 10 are dismissed.”
Aggrieved from the above order, the assessee filled appeal before the ITAT.
The ld.AR reiterated the submission made before the lower authorizes and submitted that these expenses were incurred before the amendments in sec. 37(1) of the Income-tax Act and “CSR” (Corporate Social Responsibility) is allowable as business expenditure incurred by the company, which is in the nature of the business expenditure of the company and he also submitted that the AO while passing the assessment order, the entire financial statements and other documents as required by him was made available before him and again on the same documents, it amounts to review of his own order, which is not permissible under the provisions of the Income-tax Act and he also relied on the judgment of Hon’ble Apex Court in the case of TS Balaram ITO Vs. Volkart Brothers [1971] 82 ITR 50 [SC]. He further relied on the decision of the coordinate bench of this Tribunal at para 47 in the case of Bosch Ltd., in ITA No.1629/Bang/2018 vide dated 01.09.2022.
On the other hand, the ld.DR relied on the orders of the lower authorities and he submitted that the expenditure incurred by the assessee is not wholly and exclusively for the purpose of business. The assessee’s business expenditure incurred towards supply of bench and desk to the school is not related to his activity and the assessee also unable to demonstrate how the assessee company will get the benefits towards
supply of these items to the schools where the companies pipe lines runs to 363 kms and in what way it will improve the business of the assessee.
We have heard the rival submissions and perused the material on record and also the orders of the authorizes below and we note that the assessee’s case was completed u/s 143(3) of the Act and later on, the AO noted that the community development expenditure incurred by the assessee of Rs.11,01,192/- has been added back by the AO by passing rectification u/s 154 of the Act by holding that the expenditure is not wholly and exclusively for the purpose of business of the assessee and the CIT(A) has also confirmed the same. The ld.AR argued his case on legal points as well on merits of the case. He also strongly relied on the recent decision of the coordinate bench of the Tribunal in the case of Bosch Ltd., cites supra. The similar issue has been decided at para No.47 of this order, which is reproduced as under:- “47. During the year under consideration, the assessee incurred an expenditure of Rs.1,17,49,470 towards Corporate Social Responsibility (CSR) activities and the same has been claimed as revenue expenditure. The assessee submitted before the AO that as a good corporate citizen and as a measure of gaining goodwill of the people living around its area of operation and helping the Govt., the assessee has incurred expenditure to promote the interest of under-privileged and impaired sections of the society through social work carried through monetary contributions for social work carried out by charitable institutions. The AO rejected the submissions of the assessee and disallowed the expenditure u/s. 37 by stating that the same is not incurred wholly and exclusively for business purposes.
The CIT(Appeals) confirmed the disallowance. 49. Before us, the ld. AR reiterated the submissions made before the lower authorities. Further, he submitted that the amendment brought to section 37(1) by Finance Act 2014, inserting Explanation 2 was brought prospectively from 1.4.2015 and prior to 1.4.2015 the expenditure incurred towards CSR is allowable u/s. 37(1) of the Act. The ld. AR in this regard relied on the decision of the Gujarat High Court in the case of PCIT v. Gujarat Narmada Vallely Fertilizers & Chemicals Ltd. [2020] 121 taxmann.com 82 (Guj). Further, the ld. AR submitted that the nature of expenditure is not in dispute and
considering that the expenditure is incurred prior to the insertion of Explanation 2 to section 37(1), the CSR expenditure is allowable. 50. We have heard the rival submissions and perused the material on record. We notice that the Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers & Chemicals Ltd. (supra) has dealt with the similar issue and held that – “8. We are of the view that as long as the expenses are incurred wholly and exclusively for the purpose of earning the income from the business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that the businessman alone would incur any furtherance of his business pursuits. We find guidance from a passage from the judgment of the House of Lords in the case of Atheron v. British Insulated & Helsbey Cables Ltd. [1925] 10 Tax Cases 155, referred to with approval by the Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601, which reads as follows : "It was made clear in the above cited cases of Usher's Wilshire Brewery v. Bruce (supra) and Smith v. Incorporated Council of Law Reporting [1914] 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet to be expended wholly and exclusively for the purpose of trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible thus in effect, though not in terms, negativing the Crowns contentions, I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply." 8.1 Thus, the aforesaid makes it clear that even if an expense is incurred voluntarily it may still be construed as "wholly and exclusively". Explaining this principle, the Hon'ble Supreme Court has, in the case of Sassoon J. David & Co. (P.) Ltd. (supra) inter alia observed that : 'It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its 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 under s. 10(2) (xv) of the Act even though there was no compelling necessity to incur such expenditure. It is I.T.A. No. 99/BLPR/2012 Assessment year: 2008-09 relevant to
refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read "any expenditure.. laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law.' 8.2 The words used in section 37(1) of the Act are "wholly and exclusively for the purpose of business". In normal legal parlance the word "wholly" would mean entirely and the word "exclusively" would mean solely. Thus, it gives an impression or it could be argued that any element of expenditure not laid out entirely and solely for the purpose of profession or business would not be covered by section 37(1) of the Act. One needs to examine this from the perspective of the assessee who does make the expenditure. However, as explained by the Supreme Court the expression "wholly and exclusively" does not mean "necessarily". It is for the assessee to decide whether any expenditure should be incurred in the course of its business. 8.3 We have noticed that Section 57(iii) of the Act contains similar phrases "wholly and exclusively for the purpose". Section 57 of the Act is with regard to the deductions. Section 57(iii) reads as under : "Section 57(iii) :- any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." 8.4 Section 37 talks about the expenditure wholly and exclusively for the purposes of the business whereas, Section 57(iii) talks about the expenditure wholly and exclusively for the purpose of making or earning such income. 8.5 In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the Supreme Court observed that "the expression 'for the purpose for the business' is wider in scope than the expression 'for the purpose of earning profits'". Similar observation has also been made in CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 (SC), where the Supreme Court expressed the view that the expression 'for the purpose of the business' is essentially wider than the expression "for the purpose of earning profits". The decision in Malayalam Plantations has been freely drawn upon by courts for laying down that the provisions of s. 37(1) and similar provisions of s. 10(2)(xv) of the 1922 Act in which the expression "for the purposes of the business" is used, have wider implication than the provisions of s. 10(2) of the 1922 Act which used the words "for the purpose of earning such.... profits" and the provisions of s. 57(iii) in which the expression "for the purpose of making or earning such income" is used. (See for example, Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 (Guj.).
That this view is justified is amply borne out by the different approaches adopted in two decisions of the Supreme Court in relation to a claim for deduction in respect of the same item of expenditure. In T.S. Krishna v. CIT [1973] 87 ITR 429 (SC), a claim for deduction in respect of wealth-tax paid on shares held by the assessee was held to be not a permissible deduction under s. 57(iii) even apart from or irrespective of the provisions of s. 58(1A). As against this, we have the decision in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), wherein wealth-tax paid by the assessee, which was a trading company, on assets held by it for the purpose of its business, was held to be deductible as a business expense under s. 10(2)(xv). These two decisions illustrate that different approaches are necessary when the same item of expenditure has to be judged from the standpoint of s. 37(1) on the one hand and s. 57(iii) on the other and that the scope of the provisions is not the same. Reference may also be made in this connection to the decision of this court in Commissioner of Expenditure Tax v. Mrs. Manorama Sarabhai [1966] 59 ITR 262 (Guj.). In that case, it was pointed out that the words "for the purpose of" were used in s. 5(a) of the Expenditure-tax Act, 1957, in connection with the words "the business, profession, vocation or occupation" and also in conjunction with the words "earning income from any other source" and it was observed that (p. 266) : "The legislature has thus provided disjunctively for different categories of expenditure and it is not right that the concept underlying one category should be imported into the other." These observations, though they are made in a different context, are apposite in judging the relative scope of ss. 37(1) and 57(iii). Even apart from authority, on a comparison of the language of s. 37(1) and s. 57(iii), it becomes clear that the scope of the former section is essentially wider than that of the latter. The word "business" used in s. 37(1) in association with the expression "for the purposes of" is a word of wide connotation. As observed by the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765: "The word 'business' connotes some real substantial and systematic or organized course of activity or conduct with asset purpose." 8.6 In the context of a taxing statute, the word "business" would signify an organized and continuous course of commercial activity, which is carried on with the end in view of making or earning profits. Under s. 37(1), therefore, the connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such object. As against this, s. 57(iii) use the expression "for the purpose of" in conjunction with the words "making or earning of income" from "other sources". The nexus thereunder must, therefore, be between the expenditure incurred and the income earned and not between the expenditure incurred and the activity which is the source of the income. [See Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj.)]. 8.7 We may refer to a decision of the Karnataka High Court in the case of Mysore Kirloskar Ltd. (supra). The Court observed : "While 'the basic requirements for invoking sections 37(1) and 80G are quite different', 'but nonetheless the two sections are not mutually exclusive'. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of
donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), 'promoted by altruistic motives', it does not cease to be an expenditure deductible under section 37(1)." 8.8 In Mysore Kirloskar Ltd.'s case (supra), the Hon'ble Court proceeded to observe : "Even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon'ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 : " …... 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 section 37(1) of the Act when such payment had been made for the purpose of assessee's business." 8.9 In the case of CIT v. Madras Refineries Ltd. (supra), the Madras High Court upheld the deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. While doing so, Their Lordships observed as follows : "The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill …...." 8.10 We have also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts
an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to section 37(1) does not apply on the facts of this case.” 51. In assessee’s case has incurred expenditure to promote the interest of underprivileged and impaired section of society and to gain goodwill of the people living in the area of operation of the assessee. Therefore respectfully following the decision of the Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers & Chemicals Ltd. (supra), we hold that Explanation 2 to section 37(1) is not applicable to the assessee’s case and therefore the expenses incurred voluntarily by the assessee towards CSR expenditure is allowable u/s 37(1). The addition made in this regard is deleted.”
Respectfully following the above decision, we also allow the appeal of the assessee. 9. In the result, both the appeal of the assessee is allowed. Order pronounced in court on 28th day of November, 2022 Sd/- Sd/- (George George K) (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated, 28th November, 2022 / vms /
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.