M/S HOTHUR TRADERS ,BALLARI vs. JOINT COMMISSIONER OF INCOME TAX , BALLARI

The A.O. after considering relevant submissions of the assessee and also taken note of MOU between the assessee and Government of Karnataka dated 2.5.2010 observed that the amount incurred by the assessee towards construction of houses for flood victims is nothing but a donation to Chief Minister Relief Fund and which is eligible for exemption u/s 80G of the Act, if such donation is covered under the provisions of section 80G of the Act, but the same cannot be claimed as expenditure incurred wholly and exclusively for the purpose of business and it is having a nexus between business carried on by the assessee, therefore, he opined that amount claimed under the head social welfare expenditure is not allowable as deduction u/s 37(1) of the Act. Accordingly, disallowed a sum of Rs.1,79,91,250/- claimed under the head social welfare expenses and added back to the total income.

Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has reiterated its arguments made before the A.O. The assessee further submitted that M/s. Hothur Traders, Bellary Page 5 of 11 expenditure incurred under the head “Social Welfare Expenditure” is having direct nexus between business activity of the assessee and also there is an element of commercial expediency and hence the same cannot be considered as donations given to Chief Minister relief Fund. The assessee further submitted that since the amount incurred for construction of houses for flood victims is not covered for exemption u/s 80G of the Act, it has claimed deduction u/s 37(1) of the Act as expenditure incurred for the purpose of business and hence the same cannot be disallowed as not incurred for the purpose of business of the assessee.

The ld. D.R. on the other hand strongly supporting order of the A.O. as well as CIT(A) submitted that the lower authorities have brought out clear facts in the light of various evidences filed by the assessee including the copy of MOU between the Government of Karnataka to come to the conclusion that expenditure incurred is in the nature of donation given to Chief Minister Relief Fund but not in the nature of expenditure incurred wholly and exclusively for the purpose of business, which can be allowed u/s 37(1) of the Act. Therefore, there is no reason to deviate from findings recorded by the lower authorities.

We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. The facts borne out from the records clearly indicates that the assessee has incurred social welfare expenditure for construction of houses to rehabilitate flood victims in the area of Bellary as per MOU, entered into between Government of Karnataka. The said expenditure has been incurred on the basis of MOU, as per which the amount incurred for construction of houses to flood victims is in the nature of donations given to Chief Minister Relief Fund and assessee can claim the benefit of taxes under the Income Tax Act. The A.O. was of the opinion that expenditure incurred for social welfare expenditure is in the nature of donation given to Chief Minister Relief Fund but not in the nature

Keeping the above principles in mind, when the facts on hand are examined, it would clearly indicate that assessee has incurred the expenditure towards construction of 169 houses for the villagers who had lost their home due to natural calamity. In order to cater to the needs of those destitute persons who had lost the roof over their head on account of natural calamity, assessee constructed the houses by expending the amount. However, assessing officer and the authorities have held that it was not incurred for the purpose of business. One glaring factor which cannot go unnoticed is, that a MOU came to be entered into by the appellant on 01.12.2009 with the Government of Karnataka, as already noticed herein above, whereunder assessee agreed to construct houses to rehabilitate the flood victims at the earliest possible time and for undertaking the said task, the appropriate Government provided the assessee the land free from 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. In fact, it was agreed to between the parties that the donor himself would incur financial liability, maintain high

Tribunal has rejected the contention of the assessee that expenditure incurred for the purpose of business and the onus being on the assessee has not been discharged. It is also further held that no factual condition was laid by the assessee to establish the expenditure so incurred was for business purpose nor any attempt was made before the lower authorities. It further held that assessee has made a bald assertion.

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 Satyanarayana Rice Mill Contractors company's case 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 further held making of a donation for charitable or public cause or in the 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 has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. In fact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy.

In the facts on hand, it requires to be noticed that assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the assessee in its wisdom and as prudent business decision has entered into MOU with the Government of Karnataka and incurred the expenditure

However, it requires to be noticed that while examining the claim for deduction under Section 37(1) of the Act the assessing officer would not blindly or only on the say of the assessee accept the claim. In other words, assessing officer would be required to scrutinise 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.

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.

In this case, on perusal of facts available on record, the facts of the present case are pari materia with the facts considered by the Hon’ble High Court in the above case. Therefore, by respectfully following the decision of Hon’ble High Court of Karnataka, we are of the considered view that expenditure incurred under the head Social Welfare Expenditure for construction of houses to flood victims is in the nature of expenditure incurred wholly and exclusively for the purpose of business and deductible u/s 37(1) of the Act. Hence, we direct the A.O. to delete additions made towards disallowance of social welfare expenditure.

In the result, the appeal filed by the assessee is allowed.