INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Contribution/donation to educational institutions, trust, local bodies - Commercial expediency

'GNFC (assessee-company) was promoted and virtually managed by the Government of Gujarat (GOG). The assessee company claimed certain expenditure incurred under section 37(1) in fulfillment of its Corporate Social Obligation and Responsibility. Assessee stated that the thrust areas under CSR Policy of the Company would be Education--providing quality education as also establishing centers for training and skill development. Assessee thus contributed certain expenses to educational institutions, trust, local bodies. AO disallowed these expenses on the ground that assessee company was not able to prove as to how exactly these contributions were helpful either in promotion of its future business activities or directly connected with business activities of the assessee in the year under consideration. CIT(A) dismissed assessee's appeal. Tribunal, however, allowed the claim of expenditure incurred towards the corporate social responsibility.Held: It is not necessary that the businessman alone would incur any furtherance of his business pursuits. Even if an expense was incurred voluntarily it may still be construed as 'wholly and exclusively'. The expression 'wholly and exclusively' does not mean 'necessarily'. It was for the assessee to decide whether any expenditure should be incurred in the course of its business. The amendment in the scheme of section 37(1) was not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1-4-2015. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act, 2013, and there is thus, now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. There was no dispute that the expenses in question were not incurred under the aforesaid statutory obligation. Disabling provision of Explanation 2 to section 37(1) does not apply on the facts of this case. The assessee-company was engaged in the business of manufacturing chemicals and chemical products. Assessee-company was a polluting company. The assessee-company was conscious of its social obligations towards the society at large. The assessee-company was a Government undertaking and, therefore, was obliged to ensure all the protective principles of State policy as enshrined in the Constitution of India. The moneys had been incurred for various purposes as enumerated above cannot be regarded as outside the ambit of the business concerns of the assessee. The correct test should be of commercial expediency and not whether the payment was compulsory for the assessee to make or not. The order passed by the Tribunal was just and proper and needs no interference in the present appeal at court's end.

Relied:S.A. Builders Ltd. v. CIT(A) & Anr. (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC), CIT v. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) : 1966 TaxPub(DT) 0371 (SC), CIT v. Dhanrajgirji Raja Narasingirji, (1973) 91 ITR 544 (SC) : 1973 TaxPub(DT) 0452 (SC), Sassoon J. David and Co. (P) Ltd. v. CIT, (1979) 118 ITR 261 (SC) : 1979 TaxPub(DT) 1025 (SC), Mysore Kirloskar Ltd. v. CIT (1987) 166 ITR 836 (Karn-HC) : 1987 TaxPub(DT) 0784 (Karn-HC), Shri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101 (SC), CIT v. Madras Refineries Ltd. (2004) 266 ITR 170 (Mad) : 2004 TaxPub(DT) 1059 (Mad-HC), CIT v. Cheran Transport Corporation Ltd. (1996) 219 ITR 203 (Mad) : 1996 TaxPub(DT) 374 (Mad-HC), CIT v. Chemicals and Plastics India Ltd. (2007) 292 ITR 115 (Mad) : 2007 TaxPub(DT) 1031 (Mad-HC), CIT v. Vatika Township (P) Ltd. (2014) 367 ITR 466 (SC) : 2014 TaxPub(DT) 3934 (SC), Asstt. CIT v. Jindal Power Ltd. (2016) 70 Taxmann.com 389 (Raipur-Trib) : 2016 TaxPub(DT) 3082 (Rai-Trib) and CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) : 1964 TaxPub(DT) 320 (SC). Applied:Radhasoami Satsang Soami Bagh, Agra v. CIT (1992) 193 ITR 321 : 1992 TaxPub(DT) 858 (SC), Director of Income Tax (Exemption) v. Apparel Export Promotion Council 244 ITR 734 (Del) : 2000 TaxPub(DT) 1369 (Del-HC), CIT v. Neo Polypack (2000) 245 ITR 492 (Del) : 2000 TaxPub(DT) 1348 (Del-HC), CIT v. Allied Finance (P) Ltd. (2005) 195 CTR 528 (Del) : 2005 TaxPub(DT) 1339 (Del-HC), Parshuram Pottery Works Co. Ltd. v. ITO (1977) 106 ITR 01 (SC) : 1977 TaxPub(DT) 725 (SC) and Berger Paints (India) Ltd. v. CIT (2004) 266 ITR 99 (SC) : 2004 TaxPub(DT) 1388 (SC).

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