Voltas Ltd. vs Commissioner of Income Tax

DR. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the assessee, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, the payment of Rs. 75,000 made by the assessee to Tata Refugee Relief Project is an admissible expenditure u/s 37(1) of the Income Tax Act, 1961 ?"

The facts are very brief. During the accounting period relevant to the assessment year 1973-74, the assessee paid a sum of Rs. 75,000 to the Tata Refugee Relief Project and this amount was claimed before the Income Tax Officer as an expenditure allowable as a deduction u/s 37(1) of the Income Tax Act, 1961 ("the Act"). The contention of the assessee was that the Refugee Relief Project was set up by the Tata companies at Kishanganj, Patna in Bihar, to assist in the alleviation of human suffering and preserving private and public property from the Bihar floods. It was also contended that the company had necessarily to participate in the said project by making the abovementioned payment. It was further contended that the assessee had a branch office in Patna in Jamshedpur and the total sales for the year under consideration of the Patna branch amounted to Rs. 827.30 lakhs which was about 13.8 per cent. of the total sales of the company. The gross profits earned by the said branch for the corresponding period amounted to Rs. 103.98 lakhs. It was, therefore, contended that, for such a high business, it was necessary for the assessee to participate in the Bihar flood relief by contributing the above referred amount to keep good relations. The Income Tax Officer did not accept the claim of the assessee and this action of the Income Tax Officer was confirmed by the Appellate Assistant Commissioner of Income Tax in appeal. The Appellate Assistant Commissioner observed that the object for which the assessee-company had contributed to the project might no doubt be laudable but it did not in any way after the character of the payment which was clearly in the nature of donation. The Appellate Assistant Commissioner further observed that the provision of relief to the persons affected by floods in Bihar was not in the course of carrying on of the business and so the expenditure incurred for this purpose could not be considered as a legitimate business outgoing. The Appellate Assistant Commissioner also noted that a Refugee Relief Fund had been floated by the State/Central Government to provide aid to the people affected by the floods and donations to such fund were exempt u/s 80G of the Act. So, undertaking refugee relief work separately, by the Tata group of companies was merely a charitable activity and the contribution made to it by the assessee-company would certainly be in the nature of donation. On second appeal by the assessee, the Income Tax Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner holding that the said expenditure had not been incurred wholly and exclusively for carrying on the business of the assessee and, as such, the same was not allowable as a deduction u/s 37 of the Act. Aggrieved by the finding of all the authorities including the Tribunal, the assessee applied for reference u/s 256(1) of the Act and the Tribunal, as its instance, has referred the question set out above to this court for opinion.

We have heard learned counsel for the assessee. The submission of counsel for the assessee is that the expenditure referred to u/s 37 of the Act has to be interpreted very widely and the question whether it was an expenditure for the purpose of business or profession should be examined from the point of view of a prudent businessman. According to him, the assessee is the best judge to decide what is in the interest of his business and to incur expenditure accordingly. The Income Tax Officer cannot refuse to allow deduction in respect of such expenditure incurred by the assessee by way of donation to the Tata Refugee Relief Project on the ground that it was donation and not business expenditure. In other words, the submission on behalf of the assessee is that the assessee-company being a company with a huge turnover and substantial profits, it was necessary for the assessee to see that the people affected by the floods get due relief. In that view of the matter, according to counsel for the assessee, it was an expenditure incurred wholly and exclusively for the purpose of the business of the assessee. In support of these submissions, reliance is placed on the decisions of the Supreme Court in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., and Sassoon J. David and Co. Pvt. Ltd., Bombay Vs. Commissioner of Income Tax , Bombay, and the decision of the Full Bench of the Madhya Pradesh High Court in The Additional Commissioner of Income Tax, M.P. Vs. Kuber Singh Bhagwandas, and of the Karnataka High Court in Mysore Kirloskar Ltd. Vs. Commissioner of Income Tax, . The submission of learned counsel for the Revenue, on the other hand, is that the amount paid by the assessee to Tata Refugee Relief Project is a donation simpliciter for public welfare and, by no stretch of imagination, it can be held to be expenditure incurred "wholly and exclusively for the purpose of the business".

We have carefully considered the rival submissions. We have perused the provisions of sub-section (1) of section 37 of the Act which read as follows :

"S. 37. General. - (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession''."

From a bare reading of section 37(1) of the Act, it is clear that, to be an allowable expenditure under this sub-section, it must be laid out or expended wholly and exclusively for the purposes of the business. The scope and ambit of the expression "for the purpose of the business" is no more res integra. It is wider in scope than the expression "for the purpose of earning profits" as was held long back by the Supreme Court in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., . In the words of the Supreme Court (headnote) :

"The expression ''for the purpose of the business'' is wider in scope than the expression ''for the purpose of earning profits''. Its range is wide ; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business."

While giving the wide meaning to the expression, the Supreme Court in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., also hastened to point out the limitations in the following words (headnote) :

"However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business."

The wide meaning given by the Supreme Court to the expression "for the purpose of the business" has thus to be read subject to the limitations indicated above.

Learned counsel for the assessee next referred to the decision of the Supreme Court in Sassoon J. David and Co. Pvt. Ltd., Bombay Vs. Commissioner of Income Tax , Bombay, , more particularly to the following observation (at page 275) :

"..... the expression ''wholly and exclusively''.... does not mean ''necessarily''. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction...... even though there was no compelling necessity to incur such expenditure."

We have considered the above decision. It appears that the observations of the Supreme Court have been quoted out of context. A careful reading of the above decision of the Supreme Court clearly goes to show that the controversy in that case related to the allowability of certain sums paid by the assessee to its employees, managing director and a director by way of compensation for determination of their services. The above observations of the Supreme Court were made in that context. It is clear from the following observations (at page 271) :

"It is also not the case of the Department that the payment was excessive. That there was a substantial reduction in the wage bill in the future years as a consequence of retrenchment was also not disputed. It is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure. Such expenditure would ordinarily fall within the scope of section 10(2)(xv) (Section 37(1) of the 1961 Act) of the Act which authorised the deduction of any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of business or profession or vocation."

Learned counsel next referred to the Full Bench decision of the Madhya Pradesh High Court in The Additional Commissioner of Income Tax, M.P. Vs. Kuber Singh Bhagwandas, , where the High Court explained the test of commercial expediency for the purpose of allowability as business expenditure u/s 37(1) of the Act. We have perused the above decision. It appears that it was rendered in a case where certain donations were made by the assessee to the Chief Minister''s Drought Relief Fund to obtain permits to enable merchants to earn profits by exporting gram to neighbouring States where the price of the commodity was double. The court observed that, if the taxpayer is able to establish a nexus between the donation and the business, as in the case before it, the donation should be held to be for the purposes of the business and allowable u/s 37(1). The facts of the case before us are not similar to those in the Madhya Pradesh case. There is nothing to show any such business expediency in making the payment of Rs. 75,000 to the Tata Refugee Relief Project. The submission that, when the people of Bihar were in trouble, to donate money to a relief project was for long-term benefits of the business of the assessee is too far-fetched. No nexus has been established by the assessee between the donation and its business. Under the circumstances, it is difficult to hold it as a business expenditure falling u/s 37(1) of the Act.

The payment of Rs. 75,000 by the assessee to the Tata Refugee Relief Project in the present case is nothing but a clear donation. As observed by the Appellate Assistant Commissioner, the object for which the assessee-company contributed to the Relief Project was no doubt laudable but that does not justify a finding that it was for the purposes of the business and allowable u/s 37(1) of the Act. Section 80G of the Act gives relief in respect of payments made by an assessee for such laudable purposes. In this view of the matter, we are of the clear opinion that the payment in question does not meet the requirements of section 37(1) of the Act and is not an allowable deduction.

Before parting with this case, we may refer to the decision of the Karnataka High Court in Mysore Kirloskar Ltd. Vs. Commissioner of Income Tax, , on which reliance is placed by counsel for the assessee in support of his contention that donations falling u/s 80G might also fall u/s 37(1) and the following observations therein (at page 842) :

"The basic requirements for invoking sections 37(1) and 80G are..... quite different, but none the less, the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified u/s 80G, but if it could also be termed as an expenditure of the category falling u/s 37(1) then the right of the assessee to claim the whole of it as allowance u/s 37(1) cannot be denied."

We don''t think that the above observations can help the assessee in the present case. If the case of the assessee is that what is given by him, though termed as donation, is not a donation but business expenditure and if he satisfies the authorities in that regard, there is no bar to allowing deduction in respect of such payment u/s 37(1) of the Act even though it is termed as donation. But, in such a case, the onus will be on the assessee to establish that what is apparent is not real. It is for him to lift the veil to show the real nature of the payment. That is not the stand of the assessee in the present case. It is the case of the assessee itself that the payment was made to the Tata Refugee Relief Project to help the flood affected people. This, in fact, is a case of application of income. As the payment has been made by the assessee to a fund established for charitable purpose, it may be entitled to get deduction in respect of such payment u/s 80G of the Act, if the requirements of that section are fulfilled. It cannot get deduction u/s 37(1) of the Act in respect thereof simply by contending that, as a prudent businessman, in its opinion, such donations might help its business in the long run. The opinion of the businessman is not binding on the taxing authorities. In fact, it is the taxing authorities who are to be satisfied that the payment meets the requirements of section 37(1) of the Act or not. While doing so, they should examine the facts from the businessman''s point of view and not from the subjective standard of the Revenue. The theory of "businessman''s point of view" cannot be carried any further.

In view of the foregoing we are of the clear opinion that the payment of Rs. 75,000 made by the assessee in the instant case was not an admissible expenditure u/s 37(1) of the Act. The question referred to us is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee.

No order as to costs.