Voluntarily charity not business expenditure u/s 37(1). Mere assertion that it was incurred for business not acceptable – ITAT

Voluntarily charity not business expenditure u/s 37(1). Mere assertion that it was incurred for business cannot be accepted without establishing nexus – ITAT

ABCAUS Case Law Citation:
ABCAUS 1266 (2017) (05) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax  (Appeals) [CIT(A)] confirming the order of the Assesseing Officer (‘AO’) disallowing expenditure claimed as business expenditure u/s 37(1) of the Income Tax Act, 1961 (‘the Act’).

Assessment Year : 2011-12 and 2012-13
Date/Month of Pronouncement: May, 2017

Important Case Laws Cited/relied upon:
Sassoon J. David & Co. Pvt. Ltd. vs. CIT
CIT vs. Infosys Technologies Ltd

Brief Facts of the Case:
The assessee was a partnership firm engaged in the business of extraction and trading of iron ore. The return of income of the firm was processed u/s 143(1) and later the case was selected for scrutiny assessment by issuing notice u/s 143(2).

During the relevant previous year, the State Government had requested the assessee to help the poor and the needy by providing houses to the flood affected people. The appellant readily agreed to do same and entered MOU with the State Govt. in terms of which the appellant constructed 169 houses and handed them to the Government. The appellant debited expenditure of Rs.1,61,30,48/- which was incurred towards construction of 169 houses to P&L Account and claimed them as business expenditure u/s 37(1) of the Act. It was 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 AO after quoting relevant columns of the MOU came to the conclusion that the said expenditure was not incurred wholly and exclusively for the purpose of business and therefore held that not allowable as deduction u/s 37(1) of the Act. Accordingly, he disallowed the same.

Being aggrieved, the assessee preferred an appeal was before the CIT(A), who, confirmed the order of the AO. Being aggrieved, the assessee was in appeal before ITAT.

Observations made by the Tribunal:
The Tribunal observed that In order to claim deduction u/s 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. All the three conditions should be cumulatively satisfied.

It was noted that there was no dispute as to satisfaction of the first two conditions and the only dispute was regarding satisfaction of the condition that the expenditure was laid out and expended wholly and exclusively for the purpose of business.

The Tribunal stated that in order to claim deduction u/s 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 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 u/s 37(1).

It was observed that in the instant 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.

Held:
The appeal filed by the assessee was dismissed.