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Income Tax Appellate Tribunal, ‘B’ BENCH, BENGALURU
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
These are appeals filed by the assessee-firm directed against the common order of the CIT(A), Gulbarga, dated 29/01/2016 for the assessment years 2011-12 and 2012-13. Since common issue is involved in both the appeals, we proceed to dispose of the same by this common order.
& 1495/Bang/2016 Page 2 of 8 2. For the sake of clarity and convenience, facts relevant to assessment year 2011-12 ( ) are stated herein. The assessee raised the following grounds of appeal.
3. Briefly facts of the case are that the assessee is a partnership firm engaged in the business of extraction and trading of iron ore. Return of income for the assessment year 2011-12 was filed vide electronic mode on 30/9/2011 declaring income of Rs.84,57,630/-. After processing said return of income u/s 143(1) of the Income-tax Act,1961 [‘the Act’ for short] the case was selected for scrutiny assessment by issuing notice u/s 143(2) dated 18/9/2013 and the assessment was finally completed at total income of Rs.18,45,98,940/-. The disparity between the assessed income and the returned income is on account of additions of the following two items: i. disallowance of expenditure incurred in construction of house meant for flood victims called ‘Social Welfare Expenditure’ of Rs.1,61,30,480/- and & 1495/Bang/2016 Page 3 of 8 ii. penalty of Rs.10,823/-.
Brief facts leading to the addition are as under: It is stated that during the previous year relevant to assessment year 2011-12, owing to floods many people were rendered homeless. The Govt. of Karnataka requested the appellant to help the poor and the needy by providing houses to the affected people. The appellant readily agreed to do same and entered MOU with the Govt. of Karnataka in terms of which the appellant was required to construct houses and deliver same to the Government. Accordingly, the appellant constructed houses and handed 169 houses to the Government. During the previous year relevant to assessment year under consideration, an expenditure of Rs.1,61,30,48/- was incurred towards construction of 169 houses in Gundiganur village in Siriguppa Taluk and handed over same to the Government of Karnataka. The appellant debited said expenditure to P&L Account and claimed as business expenditure u/s 37(1) of the Act. It is claimed that the said expenditure was incurred to yield benefit in the form of goodwill and therefore the same was allowable as business expenditure. The Assessing Officer (AO) after quoting relevant columns of the MOU had come to conclusion that said expenditure was not incurred wholly and exclusively for the purpose of business and therefore held that not allowable as deduction u/s 37(1) of the Act. Accordingly, he disallowed the same. The AO disallowed a & 1495/Bang/2016 Page 4 of 8 sum of Rs.1,61,30,480/- incurred in construction of said houses. The AO also disallowed Rs.10,823/- being penalty paid and debited to P&L Account.
Being aggrieved, an appeal was preferred before the CIT(A), who, vide impugned order confirmed the order of the AO. Being aggrieved, the assessee is in appeal before us in the present appeal.
Learned counsel for assessee submitted that merely because expenditure is allowable u/s 80G, it does not debar the assessee to claim same as business deduction u/s 37(1). The provisions of section 80G and 37(1) are not mutually exclusive. He further submitted that for the purpose of deciding allowability of expenditure u/s 37(1) what is required to be established is that expenditure was incurred wholly and exclusively for purpose of business. He further submitted that on account of incurring of expenditure, goodwill is created in the people in the surrounding villages which would help in carrying out business. Thus, it was submitted that same should be allowed as deduction. Reliance was placed on the co-ordinate bench decision in the case of ACIT vs. Jindal Power Ltd. (70 taxmann.com 389) and the decision of the Hon’ble High Court of Karnataka in the case of CIT vs.Infosys Technologies Ltd. (360 ITR 714). On the other hand, learned Standing Counsel for Revenue submitted that the expenditure cannot be allowed as deduction & 1495/Bang/2016 Page 5 of 8 u/s 37(1) as the expenditure was towards charity. It is nothing but application of income and reliance in this regard was placed on the decision of the Hon’ble MP High Court in the case of Addl.CIT vs. Badrinarayan Shrinarayan Akodiya (101 ITR 817).
We heard rival submissions and perused the material on record. The issue in appeal is whether the expenditure incurred in constructing houses in order to help people who were rendered homeless on account of unprecedented floods in Siriguppa Taluk and handed over to the Government of Karnataka is allowable as deduction u/s 37(1) of the Act or not. It is not disputed fact that this expenditure was incurred by the assessee voluntarily. In order to claim deduction u/s 37(1) the conditions to be satisfied are that a item of expenditure should not be an item of expenditure described in sections 30 to 36 and should not be described as capital expenditure or personal expenses of the assessee. It should be laid out or expended wholly and exclusively for the purpose of business or profession. Needless to mention, all the three conditions should be cumulatively satisfied. There is no dispute as to satisfaction of the first two conditions mentioned supra. The only dispute is regarding satisfaction of the condition that the expenditure was laid out and expended wholly and exclusively for the purpose of business. In order to claim deduction u/s 37(1), it is not necessary to establish the necessity of incurring of such expenditure. It is only if it is for promoting business, as held by & 1495/Bang/2016 Page 6 of 8 the Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. vs. CIT (118 ITR 261) wherein it has been held as under:
"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. Consequently, when section 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 section 10(2)(xv) of the Act if it satisfied otherwise the tests laid down by law". Again, 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 may require providing facilities like school, hospital, etc., for the employees of 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. It may also be stated, as observed by the Supreme Court in the aforesaid case, that the fact that somebody other than the assessee is also benefited or incidentally takes advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. But, nevertheless, it must be an "expenditure" allowable as deduction under the Act.” But the onus lies on the assessee to prove that the expenditure was incurred for the purpose of business. Once the assessee discharges this onus, assessee would be entitled to deduction u/s 37(1). In the present case, no factual condition was laid by the assessee to establish that this expenditure was incurred for & 1495/Bang/2016 Page 7 of 8 business purpose nor any attempt is discernible before the lower authorities. Mere bald assertion that the expenditure was incurred for promoting business cannot be accepted without establishing the nexus between expenditure and business. Therefore, it amounts to application of income voluntarily towards charity which cannot be allowed as a deduction.
Further an important aspect to be noted here is that the assessee has handed over constructed houses to the Government of Karnataka in terms of MoU. It is not the case of the assessee that the assessee was granted mining license in consideration of expenditure incurred by the assessee. Needless to mention, these kind of contracts are opposed to public policy and void under the provisions of section 23 of the Contract Act. Therefore, it cannot be said that the appellant had incurred this expenditure wholly and exclusively for the purpose of business. The grounds of appeal filed by the assessee in this regard are dismissed.
The next ground of appeal
relates to penalty. The AO disallowed same noticing that the sum of Rs.10,000/-has been debited to P&L Account on account of penalty. Nothing has been brought on record to show that this penalty was not paid for breach of any provisions of law. In the circumstances, we confirm the addition. & 1495/Bang/2016 Page 8 of 8
9. In the result, the appeals filed by the assessee are dismissed.