Case Law Details

Case Name : The Surat Electricity Co. Ltd. Vs ACIT (ITAT Ahmedabad)
Appeal Number : ITA No. 2152/Ahd/2004
Date of Judgement/Order : 30/06/2008
Related Assessment Year : 2001- 02
Courts : All ITAT (5515) ITAT Ahmedabad (386)


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).”

From the above case law of Hon’ble Karnataka High Court, it is clear that the expenditure claimed therein need not be ‘necessarily’ spent by the assessee. It might be incurred ‘voluntarily’ and without any ‘necessity’, but it must be for promoting the business. In other words, if the expenditure have been incurred by the assessee voluntarily, even without necessity, but it is for the promotion of business, the deduction would be permissible u/s.37(1) of the Act.

10. Further the Ld Counsel for the assessee also relied on the case law of Hon’ble Apex Court in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC), wherein the Hon’ble Apex Court has held as under:-

It is no doubt true that the letter addressed by the Under Secretary to the Government of Gujarat to the assessee- company had no legally binding effect but one has to look at things from practical point of view. [See : R.B. Jodha Mai Kuthiala vs. CIT (supra)]. The assessee- company, being a licensee, could not ignore the direction of the State Government which was couched in the form of an advice, whereby the assessee-company was asked to maintain the status quo for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during this period. Before the expiry of the period of six months the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee- company was taken over by the Government of Gujarat under the Defence of India Rules, 1971 and subsequently it was transferred to the Gujarat State Electricity Board and, as a result, the assessee- company was not in a position to take steps to recover the enhanced charges. 8. The High Court has observed that the subsequent suit that was filed on 16th May, 1969 related to recovery of enhanced charges for the period subsequent to 31st March, 1969 and not prior thereto. We have, however, perused the judgment of the Joint Judge (Junior Division), Godhra dt. 20th June, 1974 in the said suit which was annexed as Annexure SD’ to the statement of the case. The said judgment does not show that the suit was confined to the period subsequent to 31st March, 1969. On the other hand, it shows that the plaintiffs in that suit were challenging the enhancement in charges made in 1963 and had sought a declaration that the assessee- company was not entitled to recover more than 31 paise per unit for light and fans and 20 paise per unit for motive power and the thai Court, while decreeing the said suit had given a declaration in these terms. The said declaration is not confined to the period subsequent to 31st March, 1969. The question whether there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realization in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was hght in deleting the said addition made by the ITO and the Tribunal had rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary enthes were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee- company during the relevant previous years. The High Court, in our opinion was in error in upsetting the said view of the Tribunal.

11. In view of the above facts of the case, the case laws of Hon’ble Apex Court as well as of Hon’ble High Courts relied on both the sides and after considering the arguments, it is seen that one should not take abstract or academic view of what is proper expenditure laid out or expanded wholly and exclusively for the purposes of one’s business. One has got to take into consideration the question of commercial expediency and the principle of ordinary commercial trading and the main consideration that has got to way with the authority is whether the expenditure was a part of the process of profit making. The expenditure must be incidental to the business and must be necessitated or justified by the commercial expediency. It must be directly and intimately connected with the business and there must be as directed and intimated connection between the business and the expenditure. An expenditure made by businessman by way of commercial expediency must be an expenditure which has been incurred in the expectation that such payment should directly or indirectly benefit the business of the assessee or facilitate the carrying on the assessee’s business. A man’s business may be benefited in a number of ways. One of them may be promoting of business relations with this whom he has to deal with in the course of his business. In the present case, before us the facts are very clear and taking into consideration the peculiarity of the assessee’s business the impugned expenditure which the assessee has admittedly incurred in response to an appeal of the GOG, imminently pass through the tests of commercial expediency and having been incurred for the purpose of business, it is to be allowed u/s.37(1) of the Act. Accordingly, we are of the view that this allowable expenditure and we allow the same. The orders of the lower authorities are reversed and the appeal of the assessee is allowed.


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