20. Deduction which are allowed while computing business income have been laid down in section 30 to 36. section 37 is a residuary section extending the allowance of expenses to items of expenditure not covered by Section 30 to 36, the list of allowances enumerated in sections 30 to 36 being not exhaustive. An item of expenditure, which is wholly or exclusively for the purpose of business may be allowed to be deducted in computing the profits and gains according to the ordinary principles even if it does not fall under any of the above sections.
21. Section 37 start with negative conditions. After the negative conditions are satisfied, the section lays down a positive condition. It is only when both the negative and positive conditions are satisfied that an expenditure can be considered and allowed under this Section. The negative conditions are ;
(i) that the expenditure should not be of the nature described- (a) u/s 30 to Section 36;
(b) that the expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee. If the expenditure satisfies these negative test, then it has to satisfy the positive test, namely, that it is laid out wholly and exclusively for the purpose of assessee’s business.
22. Thus, the essential and positive condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business. Therefore, the expenses which are permitted as deduction are such as are made for the purpose of carrying on the business i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profit of the business, but that must also be for the purpose of earning profits of the business and reference can be made to the decision of Hon’ble Supreme Court in the case of Haji Aziz and Abdul Shakoor Brothers vs. CIT 41 ITR 350 (SC).
23. It has to be remembered that the words “wholly and exclusively” ‘ both refer to the expenses incurred by the assessee for the purpose of his business. While determining as to whether the deduction claimed has been wholly and exclusively spent on such business, it is permissible to find out whether the amount has really gone for the purpose of business or not.
24. The word “business” used in Section 37(1) connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose which is carried on with the end in view of making or earning profit. Thus, in order to be deductible u/s 37(1) the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment.
25. !n view of the above discussion, the grants given by the assessee even though they are in accordance with the objects stated in the Act and even if they are made or disbursed as per directions of Central Government and in the public interest, but the same does not fulfill the criteria as laid down in the Section 37 to come within the purview of allow ability as the same cannot be said to be an expenditure incurred wholly and exclusively for the purpose of business. Therefore, the claim of the assessee that these grants should be allowed u/s 37(1) cannot be accepted and is liable to be rejected- Accordingly rejected.
30. It has already been held that grants given by the assessee to various entities and royalty of Rs. 18.83 crores given to State Government in A.Y. 2004-05 (hereinafter referred to as “royalty”) though are made as per the objects stated in the relevant Act, but the same cannot be allowed as these grants does not fulfill the criteria or conditions laid down in Section 37(1) of the Act. Section 36(1)(xii) was inserted on the statute for a specific purpose and it has been explained in the above mentioned Circular No.7 of 2003 that this clause is introduced so as to provide that any expenditure “not being capital expenditure” incurred by a corporation or body corporate by whatever name called, constituted or established by Center or State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head “Profits and gains of business or profession.” It is also mentioned in the said Circular that such entities which are created under an Act of Parliament have the basic object and function of carrying on of developing activities in the areas as specified in these Acts. By Finance Act, 2001 and Finance Act, 2002 tax exemption of certified bodies set up through an Act of Parliament was withdrawn. Subsequent to removal of tax shield a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such development activities may not be allowed as a deduction while computing the income under the head “profit and gains of business or profession.” To cover up such situation, Section 36(1)(xii) has been inserted in the Income-tax Act. Here the Board is constituted by an Act of Parliament and there is no dispute to that extent. It disbursed certain grants and royalty which relates to development activities in the field of oil and the genuineness of making grants and royalty is not in doubt as these grants are disbursed on the directions and with the permission of Central Government. Such grants and royalty, even though cannot be allowed as deduction under the head ‘Profits and gains of business or profession’, but these should be allowed, if these are made as per the objects and purposes authorized by the Act. In other words, if the expenditure has been incurred by the Board for the objects and purposes authorized by the Act, these expenditure will be allowable u/s 36 (1)(vi) provided such expenditure are not in the nature of “capital expenditure. ” The only objection of the AO and CIT (A) is that these expenses does not relate to business and, therefore, cannot be allowed as business expenditure. It has already been described that if such expenditures are incurred in accordance with the objects and purposes authorized by the Act, they can be allowed while computing income under the head ‘profits and gains of business or profession’ even if there is no profit motive in making such grants and royalty and such position has been explained in the Circular No. 7 of 2003 reproduced in the above part of this order. Now what remained to be decided is whether such grants can be called to be “capital expenditure” so as to exclude these expenditure from the ambit of Section 36 (1)(xii).
31. According to well established law, capital expenditure is an expenditure which is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the assessee. Thus, the primary condition to bring such “grants” to be termed as “capital expenditure” is that it should be made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business of the assessee and reference in this regard can be made to the decision of full Bench of Hon’ble Andhra Pradesh High Court in the case of Praga Tools Ltd. vs. CIT 123 ITR 773 (AP) (FB).
32. In the present case the grants and royalty paid to State Government and claimed under the head “Expenses on direct operations/grants cannot be said to be for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business of the assessee as by making such grants assessee has not acquired any asset and such grants have not brought any advantage of enduring benefit to the assessee. Therefore, these grants and payment of royalty cannot be called to be “capital expenditure” incurred by the assessee.
33. In view of the above discussion it has to be held that these grants and payment of royalty are allowable u/s 36(1)(xii) as assessee has fulfilled all the conditions specified in that Section.
34. To conclude, it is held that these grants and payment of royalty claimed under the head “expenses on direct operations/grants are not allowable u/s 37(1), but they are allowable u/s 36(1)(xii).