24. Kanhaiyalal Dudheria
vs. JCIT; [2019] 418 ITR 410 (Karn.) Date of order: 31st July, 2019
A.Ys.: 2011-12 and 2012-13
Business expenditure –
Section 37 of ITA, 1961 – General principles – Assessee carrying on iron ore
business – Agreement with State Government to construct houses for poor people
affected by floods – Amount spent on construction of house for purposes of
commercial expediency – Amount deductible u/s 37
The assessee was carrying
on the business of extraction and trading of iron ore. On account of
unprecedented floods and abnormal rain which severely ravaged the North
Interior Karnataka during the last week of September and the first week of
October, 2009, it entered into a memorandum of understanding (MOU) on 1st
December, 2009 with the Government of Karnataka, under which the assessee
agreed to construct houses to rehabilitate the flood victims at the earliest
possible time, and for undertaking the task the appropriate Government provided
the assessee the land free from encumbrances, upon which the construction of
houses came to be commenced, executed and handed over within the time limit
agreed to under the MOU. The assessee spent an amount of Rs. 1,61,30,480 on
such construction during the A.Y. 2011-12 and Rs. 55,90,080 during the A.Y.
2012-13. The assessee claimed deduction of said amounts as business expenditure
u/s 37 of the Income-tax Act, 1961. The claim was rejected by the AO and this
was upheld by the Tribunal.
The Karnataka High Court
allowed the appeal filed by the assessee and held as under:
‘i) The expression “wholly and exclusively” found in section 37 of the
Act cannot be understood in a narrow manner. In other words, it has to be given
interpretation so as to achieve the object of the Act. Thus, where the amount
is expended and claimed as an expenditure allowable u/s 37(1) of the Act, it
need not be that such disbursement is made in the course of, or arises out of,
or is connected with the trade, or is made out of the profits of the trade. It
must be made for the purpose of earning the profits. The purpose and intent
must be the sole purpose of expending the amount as a business expenditure. If
the activity be undertaken with the object both of promoting business and also
with some other purpose, such expenditure so incurred would not be disqualified
from being claimed as a business expenditure, solely on the ground that the
activity involved for such expenditure is not directly connected to the
business activity. In other words, the issue of commercial expediency would also
arise. The circumstances in which the expenditure incurred and claimed as
allowable u/s 37 of the Act would have to be examined on the facts obtained in
each case. There cannot be a straitjacket formula in this regard. What might be
commercial expediency to one business enterprise may not be so for another
undertaking.
ii) The assessee was carrying on the business of iron ore and also
trading in iron ore. Thus, day in and day out the assessee would be approaching
the appropriate Government and its authorities for grant of permits, licences
and as such the assessee in its wisdom and as a prudent business decision had
entered into a memorandum of understanding with the Government of Karnataka and
incurred the expenditure towards construction of houses for the needy persons,
not only as a social responsibility but also keeping in mind the goodwill and
benefit it would yield in the long run in earning profit which was the ultimate
object of conducting business and as such, expenditure incurred by the assessee
would be in the realm of “business expenditure”. The amounts were deductible.’
