Onus lies on the assessee to prove that the expenditure was incurred for the purpose of business. Once the assessee discharges this onus, assessee would be entitled to deduction under section 37(1). In the present case, no factual condition was laid by the assessee to establish that this expenditure was incurred for business purpose nor any attempt is discernible before the lower authorities. Mere bald assertion that the expenditure was incurred for promoting business cannot be accepted without establishing the nexus between expenditure and business. Therefore, it amounts to application of income voluntarily towards charity which cannot be allowed as a deduction.
These are appeals filed by the assessee- firm directed against the common order of the Commissioner (Appeals), Gulbarga, dated 29-1-2016 for the assessment years 2011-12 and 2012-13. Since common issue is involved in both the appeals, we proceed to dispose of the same by this common order.
2. For the sake of clarity and convenience, facts relevant to assessment year 2011-12 (ITA No. 782/Bang/2016) are stated herein. The assessee raised the following grounds of appeal :–
“1. The orders of the learned Lower Authorities are bad in law and contrary to the evidences and facts on record.
2. The learned Commissioner (Appeals) has erred in upholding the dis allowance of Rs. 10,823 without appreciating that the expenditure was not prohibited by law or in the nature specified by Explanation under section 37(1).
3. The learned Commissioner (Appeals) erred in not appreciating that social welfare expense of Rs. 1,61,30,480 is a legitimate business expenditure and ought not to have been disallowed by the learned assessing officer.
4. The Appellant craves leave to add any other ground or modify or revise the grounds taken at the time of hearing before the Hon’ble Income Tax Appellate Tribunal, Bangalore.
For these and any other ground that may be urged during the hearing, it is prayed that this appeal may be allowed in the interest of equity and justice.
3. Briefly facts of the case are that the assessee is a partnership firm engaged in the business of extraction and trading of iron ore. Return of income for the assessment year 2011-12 was filed vide electronic mode on 30-9-2011 declaring income of Rs. 84,57,630. After processing said return of income under section 143(1) of the Income Tax Act, 1961 [‘the Act’ for short] the case was selected for scrutiny assessment by issuing notice under section 143(2) dated 18-9-2013 and the assessment was finally completed at total income of Rs. 18,45,98,940. The disparity between the assessed income and the returned income is on account of additions of the following two items :–
“(i) dis allowance of expenditure incurred in construction of house meant for flood victims called ‘Social Welfare Expenditure’ of Rs. 1,61,30,480; and
(ii) penalty of Rs. 10,823.”
4. Brief facts leading to the addition are as under: It is stated that during the previous year relevant to assessment year 2011-12, owing to floods many people were rendered homeless. The Govt. of Karnataka requested the appellant to help the poor and the needy by providing houses to the affected people. The appellant readily agreed to do same and entered MOU with the Govt. of Karnataka in terms of which the appellant was required to construct houses and deliver same to the Government. Accordingly, the appellant constructed houses and handed 169 houses to the Government. During the previous year relevant to assessment year under consideration, an expenditure of Rs. 1,61,30,48 was incurred towards construction of 169 houses in Gundiganur village in Siriguppa Taluk and handed over same to the Government of Karnataka. The appellant debited said expenditure to P&L Account and claimed as business expenditure under section 37(1) of the Act. It is claimed that the said expenditure was incurred to yield benefit in the form of goodwill and therefore the same was allowable as business expenditure. The assessing officer (AO) after quoting relevant columns of the MOU had come to conclusion that said expenditure was not incurred wholly and exclusively for the purpose of business and therefore held that not allowable as deduction under section 37(1) of the Act. Accordingly, he disallowed the same. The assessing officer disallowed a sum of Rs. 1,61,30,480 incurred in construction of said houses. The assessing officer also disallowed Rs. 10,823 being penalty paid and debited to P&L Account.
5. Being aggrieved, an appeal was preferred before the Commissioner (Appeals), who, vide impugned order confirmed the order of the assessing officer. Being aggrieved, the assessee is in appeal before us in the present appeal.
6. Learned counsel for assessee submitted that merely because expenditure is allowable under section 80G, it does not debar the assessee to claim same as business deduction under section 37(1). The provisions of section 80G and 37(1) are not mutually exclusive. He further submitted that for the purpose of deciding allow ability of expenditure under section 37(1) what is required to be established is that expenditure was incurred wholly and exclusively for purpose of business. He further submitted that on account of incurring of expenditure, goodwill is created in the people in the surrounding villages which would help in carrying out business. Thus, it was submitted that same should be allowed as deduction. Reliance was placed on the co-ordinate bench decision in the case of Asstt. CIT v. Jindal Power Ltd. (2016) 179 TTJ 736 (Raipur-Trib.) and the decision of the Hon’ble High Court of Karnataka in the case of CIT v. Infosys Technologies Ltd. (2014) 360 ITR 714 (Karn).
On the other hand, learned Standing Counsel for Revenue submitted that the expenditure cannot be allowed as deduction under section 37(1) as the expenditure was towards charity. It is nothing but application of income and reliance in this regard was placed on the decision of the Hon’ble MP High Court in the case of Addl. CIT v. Badrinarayan Shrinarayan Akodiya (1975) 101 ITR 817 (MP).
7. We heard rival submissions and perused the material on record. The issue in appeal is whether the expenditure incurred in constructing houses in order to help people who were rendered homeless on account of unprecedented floods in Siriguppa Taluk and handed over to the Government of Karnataka is allowable as deduction under section 37(1) of the Act or not. It is not disputed fact that this expenditure was incurred by the assessee voluntarily. In order to claim deduction under section 37(1) the conditions to be satisfied are that a item of expenditure should not be an item of expenditure described in sections 30 to 36 and should not be described as capital expenditure or personal expenses of the assessee. It should be laid out or expended wholly and exclusively for the purpose of business or profession. Needless to mention, all the three conditions should be cumulatively satisfied. There is no dispute as to satisfaction of the first two conditions mentioned supra. The only dispute is regarding satisfaction of the condition that the expenditure was laid out and expended wholly and exclusively for the purpose of business. In order to claim deduction under section 37(1), it is not necessary to establish the necessity of incurring of such expenditure. It is only if it is for promoting business, as held by the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT (1979) 118 ITR 261 (SC) wherein it has been held as under :–
‘It is relevant to refer at this stage to the legislative history of section 37 of the Income Tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income Tax Bill of 1961 to lay down the necessity’ of the expenditure as a condition for claiming deduction under section 37 Section 37(1) in the Bill read ‘any expenditure… laid out or expended wholly, necessarily and exclusively for the purpose of the business or profession shall be allowed….” The introduction of the word ‘necessarily’ in the above section resulted in public protest. Consequently, when section 37 was finally enacted into law, the word ‘necessarily’ came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfied otherwise the tests laid down by law”.
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 school, hospital, etc., for the employees of 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 satisfied 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.’
But the onus lies on the assessee to prove that the expenditure was incurred for the purpose of business. Once the assessee discharges this onus, assessee would be entitled to deduction under section 37(1). In the present case, no factual condition was laid by the assessee to establish that this expenditure was incurred for business purpose nor any attempt is discernible before the lower authorities. Mere bald assertion that the expenditure was incurred for promoting business cannot be accepted without establishing the nexus between expenditure and business. Therefore, it amounts to application of income voluntarily towards charity which cannot be allowed as a deduction.
Further an important aspect to be noted here is that the assessee has handed over constructed houses to the Government of Karnataka in terms of MoU. It is not the case of the assessee that the assessee was granted mining license in consideration of expenditure incurred by the assessee. Needless to mention, these kind of contracts are opposed to public policy and void under the provisions of section 23 of the Contract Act. Therefore, it cannot be said that the appellant had incurred this expenditure wholly and exclusively for the purpose of business. The grounds of appeal filed by the assessee in this regard are dismissed.