Expenses on cultural events having no nexus with business not allowable

IN THE ITAT JAIPUR BENCH ‘B’

Deputy Commissioner of Income-tax, Circle-6, Jaipur

v/s.

Rajasthan State Mines & Minerals Ltd.

IT APPEAL NO. 975 (JP.) OF 2011

C.O. NO. 3 (JP.) of 2012

[ASSESSMENT YEAR 2008-09]

MARCH 15, 2012

ORDER

Sanjay Arora, Accountant Member

This is an Appeal by the Revenue and Cross objection by the Assessee, directed against the order by the Commissioner of Income-tax (Appeals)-II Jaipur (‘CIT(A)’ for short) dated 10-08-2011 for the assessment year (A.Y.) 2008-09, partly allowing by the assessee’s appeal contesting its assessment vide order u/s. 143(3) of the Income-tax Act, 1961 (‘the Act’ for short) dated 22-12-2010. We shall take up the Revenue’s appeal first, whereby it raised two grounds.

Revenue’s Appeal: ITA No.975/JP/2011

2. At the very outset, it was submitted by the ld. AR, the assessee’s counsel, that both the grounds of the Revenue’s appeal are covered in favour of the assessee by the decision by the Tribunal in assessee’s own case for the AY 2006-07 (in ITA Nos. 740/JP/2009 & 783/JP/2009 dated 31-03-2010/ Paper-Book pages 3 to 12). The ld. DR was questioned on this by the Bench, and who conceded thereto, even as he would submit that the Revenue places reliance on the assessment order under reference. Taking us through the relevant part of the tribunal’s order, the ld. AR continued, the Revenue’s first ground stands covered against it per para 13 of the order in Revenue’s appeal for AY 2006-07 (in ITA No. 783/JP/2009), wherein, following its earlier decision, as in the case of the assessment years 2003-04 and 2004-05, the tribunal allowed the compensation paid to the land owners for using their land for extraction of Gypsum; mining being part of the assessee’s trade, as revenue expenditure on the basis that it is only a part of the cost of the extraction of Gypsum, and did not give rise to any asset or advantage of enduring nature, as against the Revenue’s contention of it being a capital expenditure. Further, the nature of loss in the hands of the payee would be of little consequence in determining the nature of the expenditure in the hands of the payer/person incurring the expenditure. The tribunal has reproduced the relevant part (para 9) of its order for the assessment year 2003-04 (in ITA No. 466/JP/2006 dated 26-06-2009), and the observations wherein also find reproduction in the impugned order. Under the circumstances, we find that the issue is squarely covered in favour of the assessee, i.e., that the impugned expenditure is revenue in nature, as being claimed by the assessee. Accordingly, we find no reason to interfere with the impugned order holding so. We decide accordingly.

3. The Revenue’s second ground is in respect of contribution of Rs. 10.00 lacs by the assessee to a Fund established at the instance of the State Government with the object of providing a safety net for the workers likely to be affected by the restructuring of the State Public Sector Enterprises. The same stood disallowed by the Assessing Officer (AO) on the basis that the same is only an application of income and not a case of diversion of income by overriding title. The ld. AR drew our attention to para 15 of the order by the tribunal in the assessee’s own case in Revenue’s appeal for AY 2006-07 (supra), whereby the disallowance for like amount (Rs. 10.00 lacs) was deleted by the tribunal on the basis that the said fund had been set up solely for the purpose of welfare and benefit of the employees, drawing support from its earlier decision in the case of Rajasthan State Seeds Corpn. Ltd. [IT Appeal No. 233 (JP) of 2009 dated 22-5-2009], wherein the issue was decided by placing reliance on the decision by hon’ble jurisdictional high court, as in the case of Addl. CIT v. Rajasthan Spg. & Wvg. Mills Ltd. [2004] 274 ITR 465 , CIT v. Shri Rajasthan Syntax Ltd. [IT Appeal No. 186 of 2008, dated 12-1-2009], and by distinguishing the decision in the case of CIT v. Jodhpur Co-operative Marketing Society [2004] 275 ITR 372 , wherein the amount was set apart for the shareholders of the society, while in the case on hand, it was provided for the benefit of the employees. The relevant para of the said order stands reproduced as a part of para 15 of the tribunal’s order. Though there is nothing on record to link the quantum of the expenditure with the purpose for which the impugned payment is made; it being trite that the word ‘wholly’ occurring in sec. 37(1) refers to quantum, in view of the consistent stand by the tribunal, particularly for a preceding year in the assessee’s own case, the Revenue’s second ground is covered against it and in favour of the assessee. Accordingly, we confirm the impugned order, deleting the disallowance by placing reliance on the decision by the tribunal in assessee’s own case for an earlier year. We decide accordingly.

Assessee’s C.O.: 03/JP/2012

4. The brief facts are that the assessee’s accounts reveal a debit to the profit and loss account in the sum of Rs. 445.20 lacs under the account head ‘Donation’, of which Rs. 444.00 lacs was by way of donation to the Chief Minister’s Relief Fund, eligible for deduction u/s. 80G @ 100%, duly claimed per the return of income. No claim for balance expenditure of Rs. 1.20 lacs was made. On being questioned for verification of the claim u/s. 80G, the assessee per its reply, while justifying its claim u/s. 80G, also requested for grant of deduction u/s. 37(1) in respect of the unclaimed balance expenditure of Rs. 1.20 lacs. The AO disallowed the assessee’s claim on the legal ground of being untenable, having not been preferred per the original or the revised return, but by way of a letter, relying on the decision by the hon’ble apex court in the case of Goetz (India) Ltd. v. CIT [2006] 284 ITR 323 . Even on merits, he was of the view that expenditure is in the nature of donation, being only for cultural activities and not ‘business promotion expenses’, as claimed. In appeal, the ld. CIT(A) opined in favour of the assessee on the legal ground in view of the decision by the tribunal (Mumbai Bench) in the case of Oglivy & Mather (P.) Ltd. v. Addl. CIT [IT Appeal No. 925 (Mum.) of 2009, dated 30-12-2010]; the tribunal holding that even as clarified by the hon’ble apex court in the case of Goetze (India) Ltd. (supra), the said decision does not effect the power of the appellate authority as the appellate tribunal as clarified in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). Reliance was also placed in the case of CIT v. Ramco International [2011] 332 ITR 306 . On merits, however, he found that the assessee’s case was covered against it, placing reliance on the decisions in the case of Voltas Ltd. v. CIT [1994] 207 ITR 47 ; Standard Mills Co. Ltd. v. CIT [1994] 209 ITR 85 ; and Jaswant Trading Co. v. CIT [1995] 212 ITR 24.

5. Before us, the ld. AR would submit that no doubt the expenditure on each of three contributions made by the assessee were for cultural events, so however, the same qualified the test of expenditure, placing reliance on the decision in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101/[1996] 89 Taxman 92 (SC); CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 139/[1987] 35 Taxman 294 (AP); Asstt. CIT v. Ranbaxy Laboratories [2012] 20 taxmann.com 334 (Delhi). Similar contribution/s by the assessee came up for adjudication in the assessee’s own case by the tribunal for the assessment year 2006-07 (in ITA No. 740/JP/2009 dated 31-03-2010) wherein vide para 9 of its order, the tribunal allowed the assessee’s claim for Rs. 14,650/- made in respect of contribution for organizing two days workshops on Human Rights for Police Officers and Rs. 10,000/- for organizing a competition by the Wild Life Development Samiti, which celebrated the Wild Life Week in the firs week of October every year by organizing such competition amongst school students. Such events enable the company to maintain good relations with the District Administration. The assessee’s claim was allowed placing reliance on the decision in the case of CIT v. Madras Refinery Ltd. [2004] 266 ITR 170/138 Taxman 261 (Mad.), and CIT v. Velumanickam Lodge [2009] 317 ITR 338 (Mad.).

5.1 The ld. DR, on the other hand, placed reliance on the orders by the authorities below, i.e., to the extent favourable to the Revenue, stating the same to be in accordance with law.

6. We have heard the parties, and perused the material on record.

6.1 The primary facts of the case are undisputed; the impugned payments being for and toward the following (ref. written submissions by the assessee):

6.2 We may begin to discuss the issue on merits. The first thing that strikes us is the untenability in law of the assessee’s claim, having not been raised before the assessing authority either per the original or the revised return of income, i.e., the procedure prescribed therefor under the Act, as clarified by the hon’ble apex court in the case of Goetze (India) Ltd. (supra), which decision is squarely applicable in the facts and circumstances of the case. It is not the case of the assessee that the facts of its case were not known to it or that there was any change in law or otherwise there were supervening circumstance/s, preventing it in preferring the impugned claim/s in the regular manner, i.e., per the procedure prescribed under law. The assessee was completely aware of the facts of its case, yet chose to neither claim the same per the original nor, assuming an inadvertent error or omission on its part in its respect, per the revised return. It is thus difficult to see, merits apart, as to how its claim could be said to have been, i.e., in law, validly made; the decision by the apex court in Goetze (India) Ltd. (supra) settling this issue, approving the decision by the tribunal and the high court confirming the action of the AO in not entertaining the claim made before him through a letter, as in the instant case. In fact, as we see it, the assessee’s decision not to do so, i.e., not to press the claim per the return, was a conscious and deliberate one; the expenditure under reference, debited to the account head ‘Donation’ forming part of its Profit & Loss Account for the year, being disallowed suo motu in the computation of income, claiming the part thereof (Rs. 444 lacs, to the ‘Chief Minister’s Relief Fund’), forming part of the same account, per the return of income, u/s. 80G of the Act. The decision in the case of National Thermal Power Co. Ltd. (supra) or Jute Corpn. of India v. CIT [1991] 187 ITR 688/[1990] 53 Taxman 85 (SC), to which the former refers and, in fact, applies, have no application in the instant case, which come into play where a claim stands made before an appellate authority for the first time, being under the facts and circumstances of the case unable to be made earlier, and toward which, therefore, the satisfaction of the said authority, of course to be arrived at judicially, is relevant and paramount. This is an important and crucial difference which the ld. CIT(A) has failed to observe in the instant case while applying the decision in the case of National Thermal Power Co. Ltd. (supra) or others following it. In fact, the two sets of decisions, i.e., Goetze (India) Ltd. (supra) and Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 (SC) (though there is some difference in the fact-setting for the application of the two decisions as well), on one hand, and National Thermal Power Co. Ltd.’s case (supra) and Jute Corpn. of India’s case (supra), on the other, operate in different fields, even as explained in the said judgments itself. In Jute Corpn. of India (supra), it stands explained that the decision in the case of Gurjargravures (P.) Ltd. (supra) does not rule out a case where the claim under reference could not be made by the assessee at the stage when the return of income was filed or before the assessment order was made, in which event, as was the case in that case, so that the (first) appellate authority would be justified in entertaining the assessee’s claim for the first time. There could be several factors justifying the raising of the new plea in appeal, and each case, therefore, had to be considered on its facts. Clearly, needless to add, the non-raising of the claim before the assessing authority should be bona fide, else the same is ousted for consideration by the appellate authority, even as also clarified by the hon’ble jurisdictional high court in Santlal Kalyani & Co. v. CIT [1995] 213 ITR 273 (Raj.). The decision by the apex court in Gurjargravures (P.) Ltd. (supra), thus, in a way, gets explained and approved by its subsequent three-member bench decision in the case of Jute Corpn. of India (supra). Similarly, the decision in the case of National Thermal Power Co. Ltd. (supra), applying Jute Corpn. of India (supra), stands distinguished on facts in Goetze (India) Ltd. (supra), on the former being pleaded before it during hearing. There is thus no dichotomy between the two cases, or set of cases; the same applying under different and defined set of conditions/circumstances. In the instant case, the ld. CIT(A) has not specified a single reason as to why a part of the claim qua expenditure qua donation could not be raised by the assessee before the AO, for the decision in the case of National Thermal Power Co. Ltd. (supra) or Jute Corpn. of India (supra) to apply, nor has the assessee advanced any, either before him or even before us. Under the circumstances, we find the decision in the case of Goetze (India) Ltd. (supra) as having been rightly applied by the AO. The decision by the tribunal in the case of Kerala State Co-operative Agricultural Rural Development Bank Ltd. v. Asstt. CIT [2011] 10 taxmann.com 145 (Coch. – ITAT) is also relevant in this regard. As regards the decision in the case of Ramco International (supra), the same nowhere discusses or even refers to the decision in the case of Goetze (India) Ltd. (supra), which we have found as squarely applicable in the facts and circumstances, including inferential findings, of the case. We decide accordingly.

6.3 We may also discuss the impugned claim on merits. This is as the ld. CIT(A) has, after admitting the same, disallowed the same on merits, and whose order is under challenge before us, with our order, holding the said admission as impermissible in law, being also appealable. We find the assessee’s claim, the facts qua which are not disputed, as equally without merit. As explained in the decisions in the case of Voltas Ltd. (supra) and Standard Mills Co. Ltd. (supra), the expression ‘for the purposes of the business’, though wide in scope, yet its limits are implicit therein. The onus to satisfy the taxing authorities that its claim falls within the parameters of sec. 37(1), prescribing the condition of incurring the expenditure wholly and exclusively for the purposes of his business, i.e., for it to be claimed as a business expenditure, is squarely on the assessee [CIT v. Narendra Mohan Palival [2004] 271 ITR 347/140 Taxman 94 (Raj.)]. We need not dwell on the law in the matter at any length, the same being trite, and the case law in the matter, legion, while the assessee has not met any of these decisions, including by the jurisdictional high court in the case of Jaswant Trading Co. (supra), relied upon by the Revenue. Suffice to state the word ‘wholly’ refers to quantum and the word ‘exclusively’ occurring in the qualifying condition of s. 37(1) refers to the motive for incurring the expenditure. The apex court, as far back in The Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC), explained that the words ‘for the purposes of the business’ only meant it to be for the purpose of enabling the carrying on the business and to earn profits therein.

6.4 Adverting to facts, we would think that the expenses under reference could not be strictly called ‘social welfare expenses’, and stood rightly considered as ‘donation’, i.e., as classified per the assessee’s audited accounts. They are in fact toward promotion of activity in specific disciplines, viz. music, flower growing – and that too of a particular variety, et. al., and rather in the nature of extending patronage thereto by sponsoring events (to that extent), showcasing talent therein, of interest and, consequently, visited largely by enthusiasts in those areas/disciplines. Further, even considering the same as one, i.e., as social welfare expenditure, examples of which would be as by way of promoting initiatives in areas of general public concern and welfare, as cleanliness, health, afforestation, wildlife, etc., we do not think any case for deductibility stands made out. There is nothing on record to show any nexus between the events under reference and the assessee’s business, which is of mining and trading in minerals. This is even as, as clarified by the hon’ble court in Jaswant Trading Co. (supra) that a remote relation or a possible advantage is only in the nature of an expectation, and would not qualify the expenditure under reference for deduction u/s. 37. The said decision, in fact, as also emphasized by the ld. CIT(A), is squarely applicable in the facts and circumstances of the case. In the facts of that case, the assessee made donations to various institutions, like the Rotary Club, sewa mandal, a trust, and to the Chief Minister’s Drought and Flood Relief Fund, and claimed deduction of the same as business expenditure under section 37 of the Act, as by making such donations its business was claimed to have increased. The tribunal found that since there was no scheme or provision for relief to the affected employees of the assessee due to the floods, there was no nexus between the donation and the assessee’s business and, hence, the assessee was not entitled to deduction of the expenditure under section 37 of the Act, but was entitled to deduction of 50 per cent of the expenditure as provided in section 80G of the Act. On reference, it was held as under:

“The provisions of section 37 of the Income-tax Act, 1961 are general in nature and the provisions of section 80G are specific. Applying the maxim generalia specialibus non derogant if an amount is liable for deduction under section 80G, it cannot be claimed under the general provisions of section 37(1) of the Act. If a particular amount of expenditure falls within the category of donation, then the deduction as provided under section 80G alone is applicable. For the purpose of claiming the benefit under section 37(1), it has to be proved that the expenditure was wholly and exclusively for the purpose of business. There may be a circumstance where an expenditure falls within the category of “wholly and exclusively for the purpose of business or profession” and also under section 80G. In that case the option remains with the assessee to claim the expenditure under either of the aforesaid sections. But where there is no direct nexus to prove that it is wholly and exclusively for the purpose of business or profession, then it cannot be claimed under section 37(1). A future hope for advantage is in the nature of an expectation. The requirement of the section is that there must be a business in existence and the expenditure is wholly and exclusively for the purpose of business.”

It was further held that there was no direct nexus established between the expenditure by way of donations and the business of the assessee and, hence, the expenditure was not allowable under section 37(1), but 50 per cent. deduction was allowable under section 80G. Another decision relevant in this regard, clarifying the law in the matter, is in the case of Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836/30 Taxman 467 (Kar.). The question if a particular expenditure stands incurred wholly and exclusively for the purposes of its business is primarily a question of fact, and toward which the assessee has led no evidence at any stage, even as it presses for its claim in appeal. The material on record (PB pgs. 24 to 26), being the internal notes put up before the sanctioning authority, clearly show the payments were made as donations and principally for the reason that the proposal/s was in line with the past.

6.5 As regards the precedents relied upon, we have already noted absence of any factual basis in the assessee’s claim; the facts of each case being different, as well as of the law in the matter being trite, and which has not been met by the assessee. So, however, the assessee having relied upon a decision by the apex court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. (supra), it would be incumbent on us to deal therewith. We have carefully gone through the said decision. In the facts of that case, the assessee, a rice exporter, contributed to a fund [Andhra Pradesh Welfare Fund] formed by the Andhra Pradesh Rice Exporter’s Association under the auspices of the Deputy Collector, at the prescribed amount, calculated with reference to the rice to be exported as sought to be purchased from the State of Andhra Pradesh. Contribution to the said Fund at a defined rate per quintal of rice to be so purchased formed an essential condition for the grant of permit for the export of rice to be issued by the office of the Deputy Collector. On the Revenue taking a stand that the payment to the Fund was not obligatory under any law, so that it was only in the nature of a voluntary payment, it was clarified by the apex court that what was relevant is not whether the payment was made under a binding prescription or was voluntary, but whether it was made for a business purpose. If the commercial expediency in making the payment was shown, which in fact was apparent and not disputed in that case, no adverse view on account of the payment being voluntary could be taken. We extract some of the observations by the apex court toward the same, as under:

“Any contribution made by an assessee to a public welfare fund which is directly connected or related to the carrying on of the assessee’s business or which results in benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1) of the Income-tax Act, 1961. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s 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. The mere fact that making of a donation for a charitable or public cause or in 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 had been made for the purpose of the assessee’s business.”

The controversy (in the said case) in fact arose not on account of absence of business expediency, but for the reason that the hon’ble high court, though negatived the Revenue’s stand, finding the contribution to the welfare fund as a precondition for the grant of export permits, and thus satisfying the test of commercial expediency, had yet disallowed the deduction on the ground that the same was opposed to public policy. It was in this context that the matter travelled to the apex court, which held that contribution to a public fund for being used for public benefit could not be regarded as opposed to public policy. We are unable to understand as to how the said decision is in any manner in conflict with the Revenue’s stand; the assessee’s case being sans any commercial expediency, leave alone a clear and apparent nexus with its business, as was the case the cited decision, or as to how the same is supportive of the assessee’s case. The same is, in our view, on the contrary, clearly supportive of the Revenue’s case, laying down a guiding principle in respect of deductibility of payments to non-trade parties or those made under the circumstance of own violation, as against a legal requirement. In fact, the Revenue’s stand in that case was clearly untenable; most business payments arising only out of conscious business decisions on the part of the Management, whose function and responsibility and, thus, prerogative, it is to decide as to how to conduct the same; the only requirement of law being a clear exhibition of the same being motivated by considerations only of business. Further, it is also not clear if the contributions are to any public fund/s as opposed to a private fund/s. The said reliance would thus, in our view, be of no assistance to the assessee. With regard to the order by the tribunal in the assessee’s case for AY 2006-07, we are unable to see as to how the same could form a binding precedent to be followed. The said decision is firstly sans any discussion on law, while for the current year the Revenue validly supports its case with legal precedents in the matter, including by the jurisdictional high court, with we rather finding it to be supported by the decision by the apex court in Sri Venkata Satyanarayna Rice Mill Contractors Co. (supra). Could we venture a decision contrary to these decisions? Secondly, as afore-stated, the assessee’s case is de hors any factual basis, with we observing the classification of the impugned expenditure as ‘donation’ as apposite. Further, the question of nexus with business is one of fact, so that the said decision is even otherwise of limited applicability for other years. We, accordingly, find the assessee’s claim as not sustainable even on merits.

6.6 In view of the foregoing, we are of the clear view that the assessee’s claim is not maintainable in law as well as on facts. We decide accordingly.

7. In the result, both the Revenue’s appeal and the assessee’s cross objection are dismissed.