Karnataka High Court

The Pr. Commissioner Of Income Tax vs M/S. The Sandur Manganese And Iron Ore ... on 12 December, 2023

Author: S.Sunil Dutt Yadav

Bench: S.Sunil Dutt Yadav

                                             1


                    IN THE HIGH COURT OF KARNATAKA, DHARWAD BENCH
                          DATED THIS THE 12TH DAY OF DECEMBER, 2023
                                          PRESENT
                        THE HON'BLE MR JUSTICE S.SUNIL DUTT YADAV
                                            AND
                        THE HON'BLE MR JUSTICE VIJAYKUMAR A.PATIL
                                     ITA.NO. 100014/2022
                   BETWEEN:
                   1.   THE PR COMMISSIONER OF INCOME TAX,
                        NAVANAGAR, HUBLI.
Digitally signed
by VINAYAKA B
V
                   2.   THE JOINT COMMISSIONER OF INCOME TAX,
Date:                   BALLARI RANGE, BELLARY.
2023.12.20
15:01:08 +0530                                           -    APPELLANTS
                   (BY SRI. Y.V. RAVIRAJ, ADVOCATE)

                   AND:

                   M/S. THE SANDUR MANGANESE & IRON ORE LTD.,
                   SANDUR HOUSE, LAXMIPURA,
                   TQ: SANDUR, DIST: BALLARI.
                   PAN: AAACT 7495 D.
                                                        -     RESPONDENT
                   (BY:Ms. TANMAYEE RAJKUMAR AND
                       SRI. H.R. KAMBIYAVAR, ADVOCATES)

                          THIS ITA IS FILED UNDER SECTION 260A OF THE
                   INCOME-TAX ACT, 1961 PRAYING TO, I. FORMULATE THE
                   SUBSTANTIAL QUESTION OF LAW AS STATED ABOVE. II.
                   ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY
                   THE INCOME TAX APPELLATE TRIBUNAL, B-BENCH BENGALORE
                   IN 1516/BANG/2015, DATED 06.10.2021 OF THE A/Y 2010-11
                   MARKED AS ANNEXURE-A AND CONFIRM THE ORDER DATED
                   19.03.2013 PASSED BY THE JOINT COMMISSIONER OF INCOME
                   TAX OFFICER, BALLARY-RANGE, BALLARY FOR THE A.Y. 2010-
                   11 ENCLOSED AND MARKED AS ANNEXURE-C.
                                 2


     THIS ITA HAVING BEEN HEARD AND RESERVED ON
28.11.2023    AND    COMING    ON   FOR    PRONOUNCEMENT     OF
JUDGMENT, THIS DAY S. SUNIL DUTT YADAV, J., DELIVERED
THE FOLLOWING:

                             JUDGMENT

The present appeal is by the Revenue calling in

question the correctness of the order passed by the

Income Tax Appellate Tribunal, 'B' Bench, Bengaluru

[ITAT] in Appeal No.1516/Bang/2015 dated

06.10.2021 for the Assessment Year 2010-11 marked

as Annexure-'A' and seeking for confirmation of the

order at Annexure-'C' dated 19.03.2013 passed by the

Joint Commissioner of Income Tax, Bellary Range,

Bellary.

2. The brief facts are that the Assessing

Officer had passed the Assessment Order at

Annexure-'C' dated 19.03.2023 disallowing the

expenditure claimed under Section 37 of the Income

Tax Act, 1961 [for short, 'I.T. Act'] being the sum paid

to the Bellary Agenda Task Force (hereinafter referred

to as 'BATF') on the ground that the said expenditure

was not incurred wholly and exclusively for the

purpose of business.

3. It is stated that the assessee had preferred

an appeal before the Commissioner of Income Tax,

who upheld the disallowance made by the Assessing

Officer on the ground that the expenditure was

incurred for Corporate Social Responsibility (CSR)

activities and not for the purpose of business and

accordingly, the expenditure could not be allowed as a

deduction under Section 37 of the I.T. Act.

4. Aggrieved by such order, the assessee had

preferred an Appeal before ITAT, Bangalore, which by

its order dated 06.10.2021 at Annexure-'A' set aside

the disallowance on the ground that the same is an

allowable expenditure under Section 37 of the I.T. Act.

Being aggrieved by such order of ITAT, the Revenue is

in appeal before this Court.

5. The appeal came to be admitted for

consideration of the following substantial question of

law:-

"Whether on facts and circumstances of the case and in law, the Income Tax Appellate Tribunal is right in holding that, the amount of contribution of Rs.11,60,00,000/- made by the respondent to BATF is allowable as 'business expenditure' u/s 37(1) of the IT Act, 1961?

6. The Revenue had contended that the

contribution made by assessee to BATF had no nexus

with the business carried on by the assessee, that the

Tribunal did not appreciate that the contribution made

by the assessee to BATF was to be spent on

infrastructure and other development activities not

related to business of the assessee, and that the

decision of this Court in Kanhaiyalal Dudheria v.

Joint Commissioner of Income-tax

[Kanhaiyalal]1 does not lay down the correct law, as

[2020] 113 taxmann.com 217 (Karnataka)

the same could not be taken up before the Apex Court

in light of "low tax effect specified by CBDT".

7. The assessee however has sought for

affirmation of the order of the Tribunal, while

contending that the contribution made to the BATF

was pursuant to the meeting convened by the Deputy

Commissioner and was intended to be used for the

purpose of maintenance and improvement of road

infrastructure which would eventually contribute

towards business as the roads are used for the

purpose of transporting iron ore. It was further

contended that the decision in Kanhaiyalal (supra)

lays down the correct legal position in an identical

factual matrix, that expenditure is in the context of

commercial expediency which would fall within the

ambit of an allowable deduction under Section 37 of

the I.T. Act and in support of such contention reliance

is placed on judgment of the Apex Court in S.A.

Builders Ltd. v. Commissioner of Income-tax

(Appeals), Chandigarh2 [S.A.Builders].

8. Heard Sri Y.V.Raviraj, learned counsel

appearing through video conferencing on behalf of

Revenue and Ms.Tanmayee Rajkumar appearing on

behalf of the assessee on the substantial question of

law framed at the time of admission.

9. The substantial question of law framed is

as hereunder:-

"Whether on facts and circumstances of the case and in law, the Income Tax Appellate Tribunal is right in holding that, the amount of contribution of Rs.11,60,00,000/- made by the respondent to BATF is allowable as 'business expenditure' U/s Sec. 37(1) of the IT Act, 1961?"

10. Section 37(1) of the I.T. Act reads as

follows:-

"37. General.--(1) Any expenditure (not being expenditure of the nature described in

(2007) 158 Taxman 74 (SC)

Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

11. Perused the compilation of records before

the ITAT filed in the form of paper book before this

Court.

12. It must be noted that BATF was set up by

the order of the Deputy Commissioner dated

17.06.2004 pursuant to order of the Government

dated 18.06.2004 authorising the Deputy

Commissioner to constitute the BATF including

appointment of its Members.

13. The order dated 17.06.2004 of the Deputy

Commissioner details the objectives of the constitution

of the BATF which includes -

(a) Improvement of infrastructure relating to roads particularly in light of protests by the public and Associations;

(b) To develop infrastructure facilities in partnership with private entities through the BATF;

14. The Deputy Commissioner as President of

BATF convened a meeting on 24.02.2009 in the

presence of various Members which included

Executive Director of the assessee as is evident from

the Minutes published on 28.02.2009. Para-4 of the

said Minutes is extracted as below:-

"4) The Dy. Commissioner said in his speech that every work taken by the BATF will be transparent as per Karnataka Transferance Act. Amount of Rs.10.00 Crores which is given by the MML will used for the development of roads. Out of Rs.2.00 Crores contributed by the Obalapuram Mines, Rs. 1.00 Crore by BMM and Rs.1.00 crore by Deccan Mining Co. for roads in Bellary Town, Rs.3.00 crores will be used by Bellary Rural and Kampli rural Rs.2.00 crore each and for Siruguppa, Hadagali, Hagaribommanahalli and Vi jayanagar (Hospet) Assembly constituencies Rs.1.00 crore each. The Amount of Rs.1.40 crores given by SMIORE will be preserved with us and after

discussion it will be used for the development works in Sandur Taluk. The meeting of BATF will be conducted once again on 7.3.09 in the presidentship of District Incharge Minister.""

15. The contribution made by the assessee is

reflected in the communication made to the Deputy

Commissioner, Ballari, on 29.09.2009 which reads as

follows:-

"29th September 2009 Deputy Commissioner Bellary

Dear Sir, Sub: Contribution for BATF - Development works in Bellary District.

Please find enclosed a cheque No. 435390 drawn on SBM, Sandur, dated 29th September 2009 in favour of Bellary Agenda Task Force (BATF) for Rs 5.00 crore towards our contribution for developmental works in Bellary District. We have earlier, by cheque No. 970284 dated 17th January 2009, contributed Rs 1.40 crore, making it now a total of Rs 6.4 crore. For the years 2007-08 and 2008-09, on production and sales of 26 lakh tons of iron ore (11.50 lakh tons in 2007-08 and 14.50 lakh tons in 2008-09) our total contribution, as decided by BAFT (sic), comes to Rs. 13 crore. We will try to pay the balance of Rs 6.60 crore by end of November '09.

As suggested at the meeting, we request you to kindly take up road works in Sandur, as all the important roads i.e., Taranagar-Sandur, Sandur- Yeshwantnagar, Sandur-Hospet and the Sandur- Kumaraswamy Temple roads are in a very poor state and are almost not motorable. We request that the Sandur - Kumaraswamy Temple road work be taken up on priority in view of the impending "Mahayatra of Sri Kumaraswamy Temple", in which thousands of pilgrims from far and near will participate and the said road is the only way to travel to the hill Temple of Lord Kumaraswamy.

We assure you of our full cooperation in success of BATF, as we are very keen in ensuring improvement of Infrastructure, especially roads in Bellary District at large and Sandur in particular. We also request you to please prevail upon concerned authorities to extend tax exemption for contributions made in this regard..."

16. It is clear from the above that the

contribution made to BATF is for the purpose of BATF

developmental works in Bellary District and more

particularly, the development of road works in Sandur.

17. In light of such facts that are made out from

the records filed before the ITAT, the matter requires

consideration.

18. The Apex Court in S.A.Builders (supra)

while dealing with deductions claimed under Section

37 has dealt with expenditure in the context of

"Commercial Expediency" and observations at para-25

which would be of relevance reads as follows:-

"25. The expression "commercial expediency"

is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency."

19. In the present case, it is clear from the

material referred to above that the Deputy

Commissioner having constituted the BATF which

included development of infrastructure had convened

a meeting of all stakeholders, including the assessee.

As is evident from the Minutes of the meeting

recorded on 28.02.2009, the contribution of the

assessee as is recorded in the Minutes would be

preserved and used for development works in Sandur

Taluk.

20. It is required in terms of Section 37 of the

I.T. Act that the expenditure is "expended wholly and

exclusively for the purpose of the business." It is a

settled position of law that the expenditure that could

be relatable to 'Commercial Expediency' would fall

within the ambit of 'expenditure' under Section 37(1)

I.T. Act. In the present case, the Tribunal has in its

order dated 06.10.2021, allowed the expenditure and

the observations made at para-7.6 are as follows:

"7.6 In the case of Wipro Ltd (supra), the existence of commercial expediency was not proved. In the instant case, the assessee is engaged in mining business and the BATF was formed to create infrastructure facilities in the Bellary district by the District Administration, which was necessity due to large scale mining operations carried there. The mining companies shall contribute to the BATF, which in turn would carry out various development

activities. In this regard, it is relevant to extract relevant minutes of the meeting held on 28-02- 2009:-

"4. The Dy. Commissioner said in his speech that every work taken by the BATF will be transparent as per Karnataka Transference Act. Amount of Rs.10.00 crores which is given by the MML will used for the development of roads. Out of Rs.2.00 crores contributed by obalapuram mines, Rs.1.00 crore by BMM and Rs.1.00 crore by Deccan Mining Co for roads in Bellary Town, Rs.3.00 crores will be used for Bellary Rural and Kampli rural Rs.2.00 crores each and for Siruguppa, Hadagali, Hagaribommanahalli and Vijayanagar (Hospet) Assembly constituencies Rs.1.00 crore each. The Amount of Rs.1.40 crores given by SMIORE** will be preserved with us and after discussion it will be used for the development works in Sandur Taluk.....

(**assessee herein)

We notice that the amount has been contributed to BATF by all mining companies as per the direction of district administration. The question whether such contribution is allowable as deduction has been examined by the Hon'ble jurisdictional Karnataka High Court in the case of Kanhaiyalal Dudheria (supra). In the case before the Hon'ble High Court, the assessee was carrying on the business of extraction of iron-ore and also trading in iron-ore. The assessee had incurred expenses of Rs.1,61,30,480/- and Rs.55,90,080/-in FY 2010-11 and 2011-12 towards construction of houses in

certain villages as per MOU entered with Government of Karnataka. The assessee's claim of above said expenses were disallowed on the ground that it was not incurred in the course of business but for philanthropic purposes. The Hon'ble High Court, however, held that it is allowable as deduction..."

21. This aspect of the Assessment Order is

common as regards the Assessment Year 2009-10,

2010-11, 2011-12.

22. It is clear that the expenditure made to the

BATF was to be expended for the purpose of road

infrastructure. Such expenditure has a nexus with the

business of the assessee insofar as road infrastructure

is required for the purpose of transportation of iron

ore. It could be stated that the expenditure was

wholly and exclusively for the purpose of business.

23. It is also to be noticed that though there

was no legal obligation to make such contribution,

however, as noticed by the ITAT, the contribution

made at the behest of the Deputy Commissioner

would go a long way towards generating "goodwill and

benefit of it would yield in the long run in earning

profit."

24. It could also be stated that the expenditure

could be related to 'Commercial Expediency', as any

amount contributed to the BATF would generate

goodwill of the local community as well as the

Government Authorities. It must also be emphasised

that the concept of 'Commercial Expediency' is from

the perspective of an assessee and cannot be judged

from the perspective of what the Revenue construes it

to be 'Commercial expediency.'

25. Further, the decision in Kanhaiyalal

(supra) has also dealt with an identical factual matrix

and legal question and observations made at paras-

13, 18, 28, 29 would be of relevance and are

extracted as below:-

"13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the

business or profession". These two expressions namely, "wholly" and "exclusively" being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives the said amount. Thus, 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.

18. The circumstances in which the expenditure incurred and claimed as allowable under Section 37 of the Act would have to be examined on the facts obtained in each case. There cannot be any straight jacket formula in this regard. What might be commercial expediency to one business enterprise may not be so for another

business undertaking. It varies from one business to another, expediency depends on nature of business, the motive and purport of the business carried on to earn profit are also the factors which will have to be considered, determined and answered in the facts obtained in each case. In other words, commercial expediency varies from one assessee to another. By a precise mathematical formula, it cannot be defined as to what can be commercial expediency in a given case nor it can be put in a water tight compartment. To put it differently, the revenue authorities or the Courts when faced with such situation, will have to place itself in the position of such business men and ascertain whether the expenses so incurred can be said to have been expended for the purpose of the business or the transaction was merely camouflage for the purpose of reducing the tax component by depicting it as an expenditure by reducing the quantum of profit in the profit and loss account.

28. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee's business. As to whether such activity undertaken and discharged by the assessee

would benefit to the assessee's business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon'ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY's case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers 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 came to be further held making of a donation for charitable or public cause or in the 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) of the Act, when such payment has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the

clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. Infact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy.

29. In the facts on hand, it requires to be noticed that assessee is carrying of 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, licenses and as such the assessee in its wisdom and as prudent business decision has entered into MOU 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 is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of "business expenditure". Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside."

26. Insofar as the contention of the Revenue

that by virtue of amendment made to Section 37 of

the I.T. Act by insertion of explanation to the effect

that expenditure incurred relating to Corporate Social

Responsibility as referred to under the Companies Act,

2013 shall not be deemed to be an expenditure for the

purposes of Section 37 of the I.T. Act, however it

must be noticed that the said explanation has been

inserted vide Finance Act, 2014 and it is made out

from the said Amendment Act that the amendment

would take effect from 01.04.2015. Further the

Central Board of Direct Taxes has clarified in its

Circular dated 21.01.2015 that "13.4 Applicability:-

This amendment takes effect from 1st April, 2015 and

will, accordingly, apply in relation to assessment year

2015-16 and subsequent years." The same

interpretation regarding prospective application of the

amendment has been considered by the High Court of

Delhi in the case of Principal Commissioner of

Income Tax Vs. P.E.C. Limited3. As the subject

matter of dispute relates to assessment year 2010-11,

it can be stated that the said explanation to Section

37 of the I.T. Act would not apply as regards the

present subject matter of dispute.