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

24. Kanhaiyalal Dudheria vs. JCIT; [2019] 418 ITR 410 (Karn.) Date of order: 31^st 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 1^st 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.’