ORDER
Bhavnesh Saini, Judicial Member
1. This appeal by assessee is directed against the order of CIT(A), Indore dated 20.7.2004 for AY I999-00.
2. We have heard ld. representatives of both the parties and gone through the material available on record. During course of hearing, ld. counsel for assessee did not press ground No. 2, therefore, same is dismissed.
3. The only effective ground No. 1 reads as under:
1. Ground No. 1 for addition of Rs. 2,00,000/-
1.1 The assessee had donated a sum of Rs. 200000/- to a Public Trust, registered Under Section 12A of the Act with specific direction that the amount should be utilized for the purpose of library at M.P, High Court, Indore.
1.2 The assessee is a Senior Advocate and derives professional income from practicing at Supreme Courts and High Court. He enjoys high reputation amongst his juniors and other colleagues.
1.3 The ld. CIT(A) has not appreciated the facts properly. The amount of Rs. 200000/- was claimed as business expenditure Under Section 37(1) of the Act. Under no circumstances this expenditure can be treated as capital or personal expenditure.
1.4 the disallowance is uncalled for and the same may kindly be deleted.
4. The assessee before ld. Commissioner of Income Tax (Appeals) contested the disallowance of Rs. 200000/- which was claimed to be deductible Under Section 37(1) of the Act as the impugned sum was donated by the assessee to a public trust registered Under Section 12A of the Act and the amount was set side by the assessee who is Senior Advocate for spending on buying books for library at High Court of MP, it is stated the amount being neither capital nor personal in nature was deductible as business expenditure.
4.1 The facts of the case as per the assessment order are that the assessee is an advocate who claimed deduction of Rs. 200000/- given to MP High Court Bar Association for construction of court library building. However, as the claim for deduction was not supported by relevant details, the AO observed that the assessee has failed to prove that it was incurred wholly and exclusively for his profession which led to its disallowance.
4.2 However, in the course of appellate proceedings before ld. CIT(A), the counsel for assessee in a written submission has claimed that the amount was infact given a donation to Shri A.M. Mathur Charitable Trust, with a specific direction that it should form a corpus which would be invested in a manner so that the interest thereon would be utilized for purchase of books and magazines and to provide other library facilities to the advocates practicing in the Court. It was claimed that the amount was set aside for larger benefit of his junior colleagues, his own reputation and credibility amongst his professional colleagues which has improved further. The assessee has contented that all the ingredients in Section 37 are fulfilled in the case as the expenditure is neither capital nor personal in nature. It had been contented that instead of spending the entire sum in one go, he thought it appropriate to give it to a corpus which could utilize the interest on acquiring latest books and journals. The assessee has also submitted the copy of bye laws of the trust and also a bill showing that the books worth Rs. 10054/- were purchased. He has also placed reliance on various case laws in support of the ground of appeal. Reliance has been placed on CIT v. George Polous , CIT v. Kuber Singh Bhagwandas , Mysore Kirloskar Ltd. v. CIT 166 ITR 836 (Kar), Shri Venkata Satyanarayan Rice Mills Corporation v. CIT (1996) 89 Taxman 922 (SC), CIT v. Hindustan Motors Ltd. , Colourchem Ltd. v. CIT 225 ITR 164 (Bom.).
5. On consideration of above facts, the ld. Commissioner of Income Tax (Appeals) dismissed the appeal of assessee. His findings are reproduced as under:
On careful consideration of the above facts, I do not find any merit in the contention of the appellant as there is not direct nexus between the donation and the profession carried on by the appellant. In fact, it is nothing more than a diversion of income so as to claim higher tax benefits by creating a trust ostensibly for the purposes of purchase of books etc by the Bar library.
The sole condition precedent for claiming deduction Under Section 37 is the existence of nexus with the purposes of business or profession as the case may be. The expenditure must be incurred with a view to bring profit or monetary advantage and to promote assessee’s business interest. It should not be merely for altruistic consideration or in order to win public applause at the cost of the exchequer. In the present case, the purpose is stated to generate goodwill of junior advocates. It is not understandable how such goodwill can be considered to be beneficial to the profession of the appellant considering the fact that he has claimed to be a senior lawyer in his own right. The Hon’ble Supreme Court in the case of CIT v. Chandulal Keshavlal and Co. has observed that if the expense is incurred for fostering the business of another only or is made by way of distribution of profit or is wholly gratuitous or for some improper or oblique purposes outside of business, then the expense is not deductible. A donation made to a charitable trust may make an assessee entitled relief Under Section 80G of the Act, subject to fulfillment of requirements of the said section but he cannot get deduction Under Section 37(1) without proving any direct nexus or the business expediency as onus in this respect lies on him. The donation in my opinion the purpose appears to be not more than for altruistic consideration, apart from reducing the tax liability. Over and above these facts, it appears that there is contradiction in the stand taken by the appellant in the matter as the AO has narrated the purpose for making such donation for the purposes of constructing library building while the appellant has been claiming a different cause altogether. Even the terms of the trust deed reveal that purchase of journals and books for the Bar Association is only one of the several charitable purposes for creation of the trust to which the corpus money was donated, such as medical relief, scientific research, relief to the poor, education and advancement of any other object of general public utility. Thus, in the light of these facts also, it cannot be concluded that the amount was donated only for the help of the junior advocates, as is being made out by the learned AR. The appellant has relied on several citations basically in support of the contention that the expense was incurred wholly and exclusively for business purposes. But the citations are no help to him as he has utterly failed to establish the nexus between the donation and his profession. Even in the case reported in 89 Taxman 92 (supra), the Hon’ble Supreme Court had allowed the claim where there was a direct nexus with the contribution made and the public welfare fund as the said contribution was directly in the business interest of the assessee, which is not the case here.
In the light of the above facts and the position of law, the contention of the appellant does not prove that the said donation was made for and in the interest of his profession and has failed to discharge the onus in the matter. Accordingly, the disallowance made is upheld.
6. The assessee filed application for admission of additional evidences. Ld. Counsel for assessee submitted that the income tax return and audited accounts for the AYs 2002-03 to 2005-06 were not before the CIT(A) and that further additional evidences which are filed for the first time before the Tribunal are copies of trust deed of “Anand Mohan Mathur Subscription” dated 6.7.1997, balance sheet of the trust as on 31.3,99. income and expenditure account ending 31,3.99 of the trust, exemption certificate of the trust Under Section 80G of the IT Act and certificate from the trust for the donation received from the assessee. Ld. Counsel for assessee submitted that the same documents may be admitted to justify the claim of the assessee and to show the proper utilization of the amount donated by the assessee. Ld. counsel for assessee reiterated the submissions made before authorities below and submitted that assessee has given donation to the above trust with a specific direction that it should form corpus which would be invested in a manner so that the interest thereon could be utilized for purchase of books and magazines and to provide other library facilities to the advocates practising in the court. Ld. counsel for assessee referred to PB 122 which is balance sheet of the trust to show Rs. 2,00,000/- is added to the corpus of the trust ending 31.3.99. He has also referred to PB 125 which is a certificate from the trust certifying therein that the assessee has given donation of Rs. 2,00,000/- to the above trust through two cheques of Rs. 1 lakh each. Ld. counsel for assessee referred to PB 5 which is unsigned letter of the assessee to the President, MP High Court Bar Association, Indore in which it was written that Rs. 2 lakh would be available to him as well as his colleagues at the Bar and requested the President of the Bar to use Rs. 2 lakh which he proposed to spend for this purpose and books will be kept at Bar Association Library. The payment shall be made through the good office of the above charitable trust. Ld. counsel for assessee accordingly submitted that the donation had a direct nexus with the business of the assessee and the expenditure is incurred for commercial expediency. He has submitted that in view of the above facts even the donation could be in the nature of expenditure laid out or expended wholly and exclusively for the purpose of the business, therefore, assessee is entitled for deduction Under Section 37 of the IT Act. In support of his contention, he has relied upon following decisions:
1. Decision of Hon’ble MP High Court in the case of Addl. CIT v. Kuber Singh Bhagwandas 118 ITR 379.
2. Decision of Hon’ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractor Co. v. CIT 223 ITR 101.
3. Decision of Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT 166 ITR 836.
4. Decision of Hon’ble Supreme Court in the case of CIT v. Chandulal Keshavlal and Co. 38 ITR 601.
Ld. counsel for assessee also filed statement of gross professional receipts of the assessee for subsequent year to show that gross receipts of the assessee have enhanced considerably.
7. On the other hand, Id, DR relied upon orders of authorities below and submitted that PB 5 is unsigned letter/draft letter of the assessee which cannot be taken into consideration. Ld. DR submitted that assessee has given simple donation to the charitable trust and cannot put any condition for use of the interest on such donation. Ld. DR submitted that there is nothing on record to establish that donation made by the assessee to the charitable trust was directly connected or…related to the carrying on of the business and profession of the assessee. Ld. DR submitted that issue is squarely covered against the assessee by the order of ITAT, Ahmedabad Bench in the case of Himson Textiles Engg. Ind. Ltd. v. DCIT reported in 82 ITD 362 in which all the decisions relied upon ld. counsel for assessee have been considered. ld. DR further submitted that in the year under consideration 50% deduction was allowable on the donation Under Section 80G of the IT Act if the conditions of the Section 80G are satisfied. Ld. DR submitted that assessee in order to get 100% deduction has tried to change the colour of the transaction which is not permitted under the law. Ld. DR submitted that additional evidences are filed for the first time before the Tribunal and no justification is given for not producing the same before the authorities below.
8. We have considered rival submissions and material on record. The assessee in the application for admission of addl. evidences prayed that the same may be admitted to show the proper utilization of the amount donated by him. These are balance sheets and income and expenditure account of the assessee and the trust and the certificates of the trust. Since these certificates of the trust and others are related to the matter in issue therefore in our opinion the same shall have to be admitted for substantial cause and to enable the Tribunal to pass appropriate order in the matter. We accordingly admit these additional evidences and take into consideration same for the purpose of disposal of the appeal. The revenue is supplied copies of the same and have also been given opportunity to address the arguments on the same.
9. The assessee claimed before the AO that donation of Rs. 2 lakh was given to MP High Court Bar Association for construction of Court Library Building which is claimed at deduction Under Section 37(1). However, in the absence of any details or evidence, the AO made the addition of the same in the assessment order. The assessee before ld. CIT(A) claimed that infact he has given donation to charitable trust mainly “A.M. Mathur Subscriptions” with direction that it should form a corpus which would be invested in a manner so that interest thereon would be utilized for purchase of books and magazines and to provide other library facilities to the advocates practising in the court. The certificates of the trust dt. 11.6.2007 is filed in the paper book at page 125 in which it is certified that the assessee has given donation of Rs. 2 lakh through two cheques of Rs. 1 lakh each to the trust. The same amount is also shown in the balance sheet of the trust ending 31.3.99 and added to the corpus of the trust. The moment assessee has donated the amount of Rs. 2 lakh to the charitable trust, the assessee has no right or control over the money and as such cannot issue any direction to the trust for utilization of the donated amount further because the charitable trust shall have to use the funds of the trust only for the purposes of achieving its aims and objects. The funds of the trust cannot be used at the dictate of others. Ld. counsel for assessee pointed out object no, B of the charitable trust connected with this issue which provides the object “to subscribe journals and books for libraries and to needy persons and render service in the field of legal profession for advancement of education.” It is nowhere provided in the said object of the trust to construct a library for the MP High Court Bar Association as was claimed before the AO. It is also not provided to utilize the interest on the donation for purchase of books and magazines and to provide other library facilities to the advocates practising in the court. The assessee has also not been able to explain as to how the donation given to the trust was having direct nexus with his business and profession. There is nothing on record to establish that donation given by the assessee to the trust was directly connected and related to his carrying on of the business and profession. Section 37 (1) of the IT Act provides that any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of expenditure or personal expenses of assessee) laid out or expended wholly and exclusively for the purpose of business and profession shall be allowed in computing the income chargeable under the head profit and gains of business and profession. Assessee has not brought any evidence or material to prove that what purpose of the business and profession was served by giving donation to the trust. It is also not clarified as to how the donation was wholly and exclusively related to the profession of the assessee. Assessee has failed to prove any direct nexus between the donation and the profession carried on by him. It therefore appears that the assessee made donations for personal and gratuitous purposes. The ld. CIT(A) has also correctly recorded finding of fact that there was a contradiction in the stand of the assessee before the authorities below.
10. Ld. counsel for assessee relied upon following decisions in which the grant of permit/license on payment of the donation was held to be having direct nexus with the business of the assessee and for commercial expediency.
10.1 Hon’ble High Court of MP(Full Bench) in the case of Addl. CIT v. Kubersingh Bhagwandas held as under
It is true that the donations were voluntary, in the sense that under the law it was not necessary to make any donation to the Chief Minister’s Fund for obtaining permits for export of gram. The question, however, is not whether it was necessary for the assessee to incur the expenditure but, whether, having regard to commercial expediency, the expenditure was for carrying on the business. In the light of the facts found by the Tribunal, it is clear that the Government announced to grant the permits only when the Maha Sangh, speaking for the trading community, offered its services for the benefit of the public. The procedure which was followed in obtaining the permits was that the donations had to be deposited with the State Bank and the original receipt of the same had to be attached with the application for getting the permits. The quantity of food grains for which the permit was applied for and granted was directly related to the amount of donation paid by the merchant. It is clear that any normal trader would have realized that there was greater prospect of getting a permit for carrying on the export business in case he made the donations as requested by the Chief Minister. The merchants made the donations as a matter of commercial expediency to facilitate the obtaining of permits which were necessary for carrying on the export trade. The expenditure had direct connection with the permits. The receipt of donations were attached with the application for permits. Permits were granted in proportion to the donations made. The mere fact that the donations were voluntary and that some members got permits even without making donations is not crucial for determining whether the donations constituted business expenditure allowable under Section 37(1), The expression “commercial expediency” is not limited to an existing practice prevailing in any particular trade or business. Even if the incurring of a particular expenditure may not be supported by any prevailing practice, yet if at the time when the expenditure is incurred, commercial expediency justifies it, the expenditure would be taken to be for the purposes of the business.- Delhi Cloth & General Mills Co. Ltd. v. CIT , Morgan v. Tate & Lyle Ltd. (1954) 2 All ER 413 : (1954) 26 ITR 195 (HL), CIT v. Chandulal Keshavlal & Co. , Usher’s Wiltshire Brewery Ltd. v. Bruce (1915) AC 433 (HL) and Ambala Bus Syndicate(P) Ltd. v. CIT followed; Haji Aziz & Abdul Shakoor Bros. v. CIT distinguished; Addl. CIT v. Badrinarayan Shrinarayan Akodiya – overruled.
Conclusion
Donation to Chief Minister’s Drought Relief Fund having a direct nexus with the object of obtaining permits for export of foodgrain by foodgrain merchants, was 10.2 allowable business expenditure.
10.2 Hon’ble Supreme Court of India in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT 223 ITR 101 (SC) held as:
What is to be seen is hot whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. In the present case the contribution which was made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. This is not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the district welfare fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which fund was being used for public benefit cannot be regarded as being opposed to public policy. Requiring payment to be made for a just cause which would entitle a businessman to obtain a licence or permit cannot be regarded as being against: the public policy. Any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under Section 37(1). Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) when such payment had been made for the purpose of assessee’s business.- Atherton v. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), CIT v. Chandulal Keshavlal & Co. and Eastern Investments Ltd. v. CIT relied on; Addl. CIT v. Kubersingh Bhagwandas approved
Conclusion
Assessee doing business of export of rice and contributing 50 paise per quintal to District Welfare Fund maintained by the District Collector without which contribution he would not get permit, the payment is directly connected with assessee’s carrying on of business, is not against public policy, and is 10.5 allowable under Section 37(1).
10.3 Hon’ble High Court of Karnataka in the case of Mysore Kirloskar Ltd. v. CIT 166 ITR 836 (KAR) held as
The basic requirement for invoking Sections 37(1) and 80G are quite different, but nonetheless, the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified under Section 80G, but if it could also be termed as an expenditure of the category failing under Section 37(1), then the right of the assessee to claim the whole of it as allowance under Section 37(1) cannot be denied. But such money must be “laid out or expended wholly and exclusively for the purpose of business”. The word “wholly” refers to the quantum of expenditure and the word “exclusively” refers to the motive, object or purpose of the expenditure. There is yet one more thing to be remembered while applying Section 37(1). The expenditure claimed therein need not be “necessarily” spent by the assessee. It must be incurred “voluntarily” and without any “necessity”, but it must be for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is promoting the business, the deduction would be permissible under Section 37(1). Again the words “for the purpose of business” used in Section 37(1) should not be limited to the meaning of “earning profit alone” Business expediency or commercial expediency may require providing facilities like schools, hospitals for the employees or their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit if it satisfies the other requirements, must be allowed as deduction under Section 37(1). The fact that somebody other than the assessee is also benefited or incidentally taken advantage of by the provision made should not come in the way of the expenditure being allowed as a deduction under Section 37(1). But nevertheless, it must be an ‘expenditure’ allowable for deduction under the Act.
If the sum claimed by way of deduction even if it is a donation, could be considered as an expenditure failing under Section 37, the assessee could claim it as an allowance in its entirety. The establishment of the school was primarily to provide facilities for the education of the children of the employees and ex-employees of the assessee. Any expenditure incurred in connection therewith could be claimed as deduction. Merely because some children other than those of the employees and ex-employees are also admitted to the school, the expenditure incurred in connection with the activities of the school cannot be disallowed under Section 37(1). Therefore, the tribunal is directed to dispose of the appeal in accordance with law and in the light of the observation made.
Conclusion
Where money is spent by the assessee in connection with running of a school for the benefit of children of employees, ex-employees and the members of the public, the same can be allowed as business deduction under Section 37(1).
10.4 Hon’ble Supreme Court of India in the case of CIT v. Chandulal Keshavlal & Co. 38 ITR-601 (SC) held as
It is a question of fact in each case whether the amount which is claimed as a deductible allowance under Section 10(2)(xv) of the IT Act, 1922, was laid out wholly and exclusively for the purpose of such business and if the fact-finding Tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such question is for the Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion. The Tribunal has found in favour of the managing agent that the amount was expended for reasons of commercial expediency, it was not given as a bounty but to strengthen the managed-company and if the financial position of the managed-company became strong the managing agent would benefit thereby. That finding is one of fact.
Conclusion
Question whether the amount waived by the assessee for the reason of commercial expediency is an allowable 10.5 business expenditure is a question of fact.
10.5 The above decisions are rendered in their own facts in which assessee was able to prove that donation had a direct nexus with the business of the assessee and even though expenditure was incurred was supported by commercial expediency. Therefore, these decisions are clearly distinguishable on facts and would not support the case of the assessee.
11. Ld. DR on the other hand relied upon the order of ITAT, Ahmedabad Bench in the case of Himson Textiles Engg. Ltd. (supra) in which the decision cited by ld. counsel for assessee are considered and distinguished on facts in which it was held:
Payment of Rs. 5 lakhs has been made to a public trust which has been carrying on charitable activities for the welfare of the citizens. There is nothing on record to indicate as to whether this trust is in any manner connected with P. Ltd. The assessee has claimed deduction under Section 37(1) in respect of donation made to the charitable trust merely on the strength of letter of P Ltd. requesting for such donation. Where the payment has been made by the assessee to a charitable trust, it may be entitled to get relief under Section 80G if the requirements of that section are fulfilled. It cannot get deduction under Section 37(1) in respect of the said payment simply by contending that as a prudent businessman such deduction in his opinion might help the business in the long run. The mere opinion of the businessman is not binding on the IT authorities. For the purpose of claiming benefit under Section 37(1) it has to be proved that expenditure was wholly and exclusively for the purpose of business. In that view of the matter where there was no direct nexus established between the expenditure by way of donation and the business of the assessee such expenditure would not be allowable under Section 37(1). Merely because donation has been made by the assessee in the light of the request made by a customer would not by itself establish the nexus between the donation and the business of the assessee. This is particularly so since the donee-trust is a public trust and could not conceivably have a business connection with P which is a joint venture of Govt. of India as well as the co-operative institutions. The donation has, therefore, been made due to altruistic considerations and not for the purposes of assessee’s business. For the aforesaid reasons disallowance of the entire donations of Rs. 5,65,569 including the donation of Rs. 5 lakhs to the Charitable Foundation has been rightly disallowed by the AO under Section 37(1). Addl. CIT v. Kubersingh Bhagwandas and Shri Venkat Satyanarayan Rice Mill v. CIT .
12. For the purpose of claiming deduction Under Section 37 of the IT Act, the assessee shall have to prove that expenditure was wholly and exclusively incurred for the purpose of business and profession. The assessee in this case has not brought any evidence or material on record to prove as to what business purpose is served in the matter by making the donation. No commercial expediency is also established by assessee. Since no direct nexus has been established between the expenditure by way of donation and the profession of the assessee, such expenditure cannot be allowed deduction Under Section 37 of the IT Act. As noted above, it was a simple donation made by assessee to the trust for which assessee would have been allowed deduction @50% if the conditions of Section 80G are satisfied. It therefore appears that it is a case of ill advice to the assessee to claim deduction Under Section 37 (1) of the IT Act instead of 80G of the IT Act. The decisions cited by Id, DR is therefore directly applicable to the case against the assessee.
13. Considering the above discussion, we do not find any infirmity in the order of the ld. CIT(A). We confirm the same and dismiss this ground of the appeal of the assessee.
14. As a result, appeal of the assessee is dismissed.
Order pronounced in the open Court on 17th August, 2007.