Zeenath Transport Company Vs ACIT (Karnataka High Court)
Summary: M/s. Zeenath Transport Company, engaged in extraction and trading of iron ore, filed its return for AY 2012-13 claiming deduction in respect of expenditure incurred for construction of houses for flood victims in North Karnataka pursuant to directions of the State Government. The Assessing Officer rejected the claim on the view that the expenditure could not be allowed under Section 37(1) of the Income-tax Act, 1961 and that no application under Section 80G had been filed. The first appellate authority confirmed the assessment order. The assessee thereafter approached the ITAT, which partly allowed the appeal and remitted the matter to the Assessing Officer for reconsideration. The assessee challenged the resulting orders before the Karnataka High Court, Dharwad Bench. The substantial question of law concerned whether the Tribunal was correct in remanding the claim for consideration under Section 80G when the High Court had already held in M/s. Kanhaiyalal Dudheria Vs Joint Commissioner of Income Tax and Another, ITA No. 100016/2019, that expenditure incurred in similar circumstances for construction of houses for the State Government could be allowable as business expenditure under Section 37 of the Income-tax Act. The High Court examined the earlier Division Bench judgment reported in (2019) 310 CTR 0617 (Kar), which held that contribution towards a public welfare cause could be directly connected with the assessee’s business and that expenditure incurred under an arrangement with the Government, where business nexus and benefit were established, could fall within the realm of business expenditure. The earlier judgment also relied upon the principle that a payment for a charitable or public cause does not become opposed to public policy merely because it may secure Government patronage or benefit for the assessee. In the present case, the High Court found that the orders of the Assessing Officer, first appellate authority and ITAT were contrary to the binding judgment in Kanhaiyalal Dudheria. It held that expenditure incurred by the appellant for construction of houses for flood victims in North Karnataka, pursuant to State Government directions, would be entitled for consideration as a deduction under Section 37(1), rather than being confined to a claim under Section 80G. At the same time, the Court preserved the Assessing Officer’s duty to examine the claim in accordance with law and the principles stated in the earlier judgment. The Court accordingly answered the substantial question of law in favour of the appellant, allowed the appeal, set aside the impugned orders dated 18.08.2021, 22.03.2018 and 11.03.2015, and remitted the matter to the Assessing Officer for fresh reconsideration bearing in mind the observations in the judgment and the earlier Division Bench decision. Thus, the ruling supports examination of the expenditure under the business-deduction framework of Section 37(1), while leaving factual verification and determination by the Assessing Officer on remand. The decision therefore does not dispense with the requirement of establishing the expenditure and its nexus with the assessee’s business; rather, it directs the Assessing Officer to reconsider the claim in accordance with those principles. The judgment is significant because the Court treated the nature and business nexus of the expenditure as the controlling issue, notwithstanding that the expenditure was incurred for a public welfare purpose. The reasoning adopted in Kanhaiyalal Dudheria, as reproduced in the judgment, recognises that an assessee may incur expenditure as a prudent business decision where interaction with Government authorities, permits, licences and the resulting goodwill or business benefit form part of the surrounding circumstances. However, the Assessing Officer must not accept the claim mechanically: the expenditure must actually have been incurred and a nexus with the work undertaken by the assessee must be established before deduction under Section 37(1) is allowed.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal is directed against the impugned order dated 18.08.2021 passed by the Income Tax Appellate Tribunal, Bengaluru (For short, ‘the ITAT’) which confirmed the order dated 22.03.2018 passed by the Appellate Commissioner, who in turn had confirmed the order of the Assessing Officer dated 11.03.2015 in relation to the appellant-Assessee for the assessment year 2012-13.
2. Heard learned senior counsel sri M.V.Seshachala, for Sri Gangadhar J.M., appearing for appellant and learned counsel Sri Y.V.Raviraj appearing for respondents.
3. The material on record discloses that the appellant-Assessee is engaged in business of extraction of Iron-ore and Trading and filed his income tax returns for the assessment year 2012-13. Under the said returns, the appellant claimed exemption towards expenditure incurred by the appellant towards construction of houses for flood victims in North Karnataka as per the directions of the State Government. However, assessing authority rejected the claim for exemption on the ground that the expenditure claimed by the appellant cannot be allowed under Section 37 of the Income Tax Act, 1961 (for short, ‘the IT Act’) and no application under Section 80G of the IT Act had been filed and as such, expenditure cannot be allowed.
4. In an appeal preferred by the appellant, the appellate authority also confirmed the order of the Assessing authority and dismissed the appeal preferred by the appellant, aggrieved by the same, the appellant filed an appeal before the ITAT, which proceeded to pass the impugned order dated 18.08.2021 partly allowing the appeal and remitting the matter to the Assessing Officer for reconsideration. Aggrieved by the impugned orders passed by the respondent-authorities, appellant is before this Court by way of the present appeal.
5. I have heard Sri M.V.Sheshachala learned senior counsel for the appellants and Sri Y.V.Raviraj, learned counsel for the respondents and perused the material on record.
6. The appeal was admitted to consider the following substantial question of law :
“Whether the Tribunal was correct in remanding the claim made by the assessee to the Assessing Officer that deduction under Section 80G of the I.T. Act should be considered when this Hon’ble Court in M/s.Kanhaiyalal Dhudheria in ITA.No. 100016/2019 (supra) has clearly held under identical circumstances where houses were constructed for the State Government under similar contract should be allowed as a business expenditure under Section 37 of the I.T.Act.”
7. A perusal of the material on record including the impugned orders will indicate that the same are contrary to the Judgment of this Court in the case of M/s.Kanhaiyalal Dudheria vs. Joint Commissioner of Income Tax and Another, reported in (2019) 310 CTR 0617 (Kar), wherein it is held that business expenditure incurred would be entitled for deduction under Section 37(1) of the IT Act. In the said Judgment, it is held as under :
“28. 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 Kamataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon’ble Apex Court in case of SRI VENKATASATHYANARAYANA 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 Kamataka 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. Infact, 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 Kamataka is opposed to public policy.
29. 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 Goverment of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of “business expenditure”. Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside.
30. 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.
31. 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.
Hence, we proceed to pass the following:
ORDER
(i) 1.T.A.Nos.100016/2018 and 100017/2018 are allowed.
(ii) Order dated 17.05.2017 passed by Income Appellate Tribunal, ‘B” Bench, Bengaluru in ITA Nos. 782 & 1495/Bang/2016 for the assessment years 2011-12 and 2012-13 are set aside and appeals filed by the assessee before the Tribunal is allowed.
(iii) Assessment proceedings of the years 2011-12 and 2012-13 are remitted to the assessing officer to examine the claim of the assessee in the light of our observations made herein above.
(iv) No orders as to costs.”
8. As is clear from the aforesaid Judgment of the Division Bench of this Court, the expenditure incurred by the appellant towards construction of the houses for flood victims in the North Karnataka as per directions of the State Government would be entitled for deduction under Section 37(1) of the IT Act and consequently the impugned order passed by the Assessing Officer, first appellate authority and Income Tax Appellate Authority deserve to be set aside and necessary directions are to be issued to the Assessing Officer to examine the claim of the appellant for deduction under Section 37(1) of the IT Act in accordance with law and the substantial question of law referred to above deserves to be answered in favour of the appellant and the present appeal deserves to be disposed of in terms of the Judgment of this Court in Kanhaiyalal’s case (supra). Accordingly, the substantial question of law stands answered in favour of the appellant.
9. In the result, we pass the following :
ORDER
(i) Appeal is hereby allowed and disposed of in terms of the Judgment of the Division Bench of this Court in the case of M/s.Kanhaiyalal Dudheria vs. Joint Commissioner of Income Tax and Another-(2019) 310 CTR 0617 (Kar).
(ii) The impugned orders dated 18.08.2021, 22.03.2018 and 11.03.2015 passed by the respective respondents are hereby set aside;
(iii) The matter is remitted back to the Assessing Officer for reconsideration afresh bearing in mind the observations made in this judgment as well as the Judgment of the Division Bench in the case of Kanhaiyalal’s (supra) as expeditiously as possible
