ASSTT. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(2) , NAGPUR vs. M/S. R.B.SETH SHREERAM NARSINGDAS , NAGPUR

This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)-3, Nagpur [‘the 2 C.O. No.05/NAG/2018 CIT(A)’] dated 28.12.2017 for the assessment year 2014-15. The Cross Objection filed by the assessee against the appeal of the Revenue. ITA No.36/NAG/2018 – By Revenue : 2. Briefly, the facts of the case are that the assessee is a partnership firm engaged in the business of extraction of sale of iron ore and generation of power through windmills etc. The Return of Income for the assessment year 2014-15 was filed on 30.08.2014 disclosing total income of Rs.90,21,38,480/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Central Circle-2(2), Nagpur (‘the Assessing Officer’) vide order dated 26.12.2016 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.95,58,06,074/-. While doing so, the Assessing Officer made addition on account of disallowing additional depreciation of Rs.2,20,02,985/-, disallowing on some ad-hoc by excess of Rs.1,16,64,609/- and also the expenditure incurred on Corporate Social Responsibility of Rs.2,00,00,000/- with which we are concerned. The Assessing Officer had disallowed expenditure incurred on the development of roads, which is said to be Corporate Social Responsibility by holding that the development of road i.e. 3 ITA No.36/NAG/2018 C.O. No.05/NAG/2018 widening of Main Bazar Road from Yadaru Anjaneya Temple to Bellary Road Circle in Hospet City. The said expenditure was said to be incurred in terms of the tripartite agreement between the Commissioner, City Municipal Council, Hospet and the assessee and the contractor, K. Sadasiva Reddy. In terms of the said agreement, the assessee had contributed total consideration of Rs.500 lakhs towards development of the above roads. The Assessing Officer disallowed the same by holding to be a capital expenditure and it is an application of income not a business expenditure incurred wholly and exclusively for the purpose of business. On appeal before the ld. CIT(A), the ld. CIT(A) allowed the expenditure by holding that it is an expenditure incurred wholly and exclusively for the purpose of business, as it was incurred for promoting the business by placing reliance on the decision of the Hon’ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. vs. CIT, 223 ITR 101 (SC). 3. Being aggrieved, the Revenue is in appeal before us in the present appeal. 4. The ld. Sr. DR submits that the expenditure incurred is hit by the Explanation 2 of section 37 of the Act. He further submits that 4 C.O. No.05/NAG/2018 the ld. CIT(A) ought not to have allowed the same as business expenditure without examining the business expediency based on the material on record.

On the other hand, ld. AR submits that the order passed by the ld. CIT(A) requires no interference, inasmuch as, the ld. CIT(A) had granted the relief after examining the legal position applicable to the facts of the case.

We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the allowability of contribution of Rs.2,00,00,000/- made by the assessee towards development of roads i.e. widening of Main Bazar Road from Yadaru Anjaneya Temple to Bellary Road Circle in Hospet City. On perusal of the assessment order, it would be reveal that the assessee never claimed to be business expenditure u/s 37(1) of the Act. The only claim made by the assessee is that it is Corporate Social Responsibility expenditure, thereby that it is not business expenditure, but an application of income based on the submissions made by the Assessing Officer. The Assessing Officer concluded that it is not an expenditure u/s 37(1), but a charity/donation made which means an application of income, which cannot be allowed as deduction u/s 37(1) of the Act. It is only before the ld. CIT(A) that 5 ITA No.36/NAG/2018 C.O. No.05/NAG/2018 that assessee took a plea that it is a business expenditure incurred to buy goodwill of the people of the vicinity of the factory of the assessee and promote the business. No doubt, if an expenditure was incurred by the assessee during the course of carrying on business on the consideration of the business expediency, it is undoubtedly allowable as deduction. But, the business expediency is a question of fact which is required to be proved by lazy factual foundation before the Assessing Officer. In the present case, the assessee had not led any factual foundation before the Assessing Officer on the business expediency, even before the ld. CIT(A). Therefore, we are unable to discern that the assessee had made any factual foundation in support of the business expenditure of the contribution made by the assessee. The ld. CIT(A) without discussing the factual background behind incurring this expenditure, simply placing reliance on the judicial precedents, allowed the claim of the assessee which, in our considered opinion, is unreasonable and against the law. Thus, the order of the ld. CIT(A) is bereft of any factual discussion as to how the expenditure incurred was out of the consideration of business expediency nor the ld. CIT(A) had called for the remand report from the Assessing Officer. Thus, CIT(A) passed order in flagrant violation of the provisions of Rule 46A of