Case Law Details
RELEVANT PARAGRAPH
8. But now, we have to consider the alternative claim of the assessee, whether the assessee is entitled for deduction u/s.37(1) of the Act, of donation made in lieu of appeal made by the GOG as the above mentioned amount was paid because Gujarat State was reeling under severe drought and one of the most important assets of the poor people of Gujarat i.e., cattle would be lost which would result in permanent loss to a large number of farmers and others, whose dependence on cattle were substantial. The company made payment to suppliers, who gave fodder directly to various cattle camps as directed by the GOG. The assessee- company paid this amount on the direction of GOG for keeping smooth relation with the government as enlightened industrialists. Whether this expenditure made on the direction of GOG can be considered as expenditure for business expediency and allowable u/s.37(1) of the Act or not. For this, now we have to go through the case law referred by both the sides. The case law referred by the Ld. Counsel for the assessee in the case of Mysore Kirloskar Ltd. v. OIT 166 ITR 836 (1987) (Kar.) where the Hon’ble High Court has held as under:- “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 schools, hospitals, etc., for the employees or 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 satisfies 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.
The question that, however, still remains is whether the donation claimed by the assessee for deduction can be said to be an “expenditure” as contemplated under section 37(1) of the Act. “Expenditure” primarily denotes the idea of “spending” or “paying out or away”. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. Some of these principles have been explained by the Supreme Court in Indian Molases Co.(Private) Ltd., v. CIT [1959] 37 ITR 66, wherein it has been observed (at pages 75 and 76);
The income-tax law does not allow as expenses all the deductions- a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader’s pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax law does not take every such allowance as legitimate for purpose of tax. A distinction is made between an actual liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.”
In the light of these principles, we may again revert to the reasons given by the Tribunal for rejecting the claim of the assessee. The first reason given by the Tribunal is that section 80G is a special provision and if it applies to the assessee’s case, then section 37, which is a general provision, stands excluded. This reason appears to be not sound. We have stated that section 80G and section 37 are not mutually exclusive. If the sum claimed by way of deduction even if it is a donation, could be considered as an expenditure falling under section 37, the assessee could claim it as an allowance in its entirety. The second reason given by the Tribunal is equally untenable. The establishment of the school was primahly to provide facilities for the education of the children of the employees and ex-employees of the assessee. Any expenditure incurred in connection therewith could be claimed as deduction. Merely because some children other than those of the employees and ex-employees are also admitted to the school, the expenditure incurred in connection with the activities of the school cannot be disallowed under section 37(1).”
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