Addressing Arguments On Question No.(1), Learned Counsel Forthe Assessee Relying Upon Decisions Of Delhi, Madras And Rajasthan Highcourts 1Ncit v. After Hearing Learned Counsel For The Parties, We Do Not Findany Merit In The Submissions Of Learned Counsel For The Assessee

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH M/s Nahar Spinning Mills Limited ITA No.69 of 2008Date of decision: 2&.7.2014 Vs, .-...- Appe The Commissioner of Income Tax, Ludhiana ..... Respond CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTALHON’ BLE MR. JUSTICE JASPAL SINGH Present: Mr. Sanjay Bansal, Sr. Advocatewith Ms. Rajni Pal, Advocate for the appellant, Mr. Rajesh Katoch, Advocate for the respondent. Ajay Kumar Mittal,J, iThis appeal has been preferred by the assessee under Section260A of the Income Tax Act, 1961 (in short, “‘the Act’) against the ordedated 14.9.2007, Annexure P.1 passed by Income Tax Appellate Tribunal,Bench, °“A’ Chandigarh (in short, “the Tribunal’), claiming followingsubstantial questions of law:- 1) Whether on the facts and in the circumstances of the case,the Tribunal was legally correct in holding that the amount of|3,95,425/- paid to the Municipal Corporation, Ludhiana forlegalizing the construction of its building was not an allowablebusiness expenditure under section 37 of the Income Tax Act,1961? 11) Whether on the facts and circumstances of the case, the Tribunal without adverting to and reversing the findingsrecorded by CIT(A) was legally correct in negating the claimof the appellant under section 80-G of the Act in respect ofdonation made by it towards Prime Ministers Relief Fund forGujarat Earth Quake Relief Fund at the call given by(government authorities 111) Whether on the facts and in the circumstances of the case,the appellate Tribunal was justified in law in holding that thesum of v24,89,000/- being the value of goods sent to thePrime Ministers Relief Fund for Gujarat Earth quake relietwas eligible for deduction under section 37 of the Income TaxAct, 1961? iv) Whether on a correct interpretation of the provisions ofSection SOIA of the Income Tax Act, 1961, was the Tribunallegally correct in upholding the order passed by the Assessingofficer whereby the latter had held that the receipt from licenseincome to the tune of48,33,885/- and export incentives onDEPB ofLy1,08,62,906/- could not be treated to be the profitsand gains derived by the assessee from its business for thepurposes of computing the relief of deduction under the saidprovision? |A few facts relevant for the decision of the controversyinvolved as narrated in the appeal may be noticed. The assessee company 1sa manutacturer and exporter of cotton yarn, woollen and cotton hosierygoods and garments. Return of income declaring total income of —=14,68,78,870/- was filed on 31.10.2001 which was processed under section143(1) of the Act on 26.3.2002. Notice dated 29.5.2002 under section 143 (2) of the Act was served on the assessee on 30.5.2002. In the assessment finalized by the Assessing officer vide order dated 9.5.2003, Annexure P.3under section 143(3) of the Act, the income determined wasL ITA No.69 of 2008 18,95,14,560/-. Aggrieved by the order, the assessee filed appeal before theCommissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated22.2.2005, Annexure P.2, the CIT(A) partly allowed the appeal. TheRevenue filed appeal whereas the assessee filed cross objections before theTribunal. Vide order dated 14.9.2007, Annexure P.1, the Tribunal partlyallowed both the appeal and the cross objections. Hence the instant appealby the assessee. 3.Addressing arguments on Question No.(1), learned counsel forthe assessee relying upon decisions of Delhi, Madras and Rajasthan HighCourts 1nCIT vs. Loke Nath and Company (Construction),(1984) 147 ITR624 (Del.),Usha Micro Process Controls Limited vs. Commissioner ofIncome tax,(2013) 37 Taxman.com 324 (Del.)—CIT ys. Parthasarathy(NM)(1995) 212 ITR 105 (Mad.) and.Jaswant Trading Company vs. CIT(1995) 212 ITR 293 (Raj.) respectively submitted that it 1s not penalty forinfraction of law. Any amount paid to municipality as compensation forcondoning deviations from original sanction and accepting revised plan ofconstruction 1s deductible as business expenditure. 3.Addressing arguments on Question No.(1), learned counsel forthe assessee relying upon decisions of Delhi, Madras and Rajasthan HighCourts 1nCIT vs. Loke Nath and Company (Construction),(1984) 147 ITR624 (Del.),Usha Micro Process Controls Limited vs. Commissioner ofIncome tax,(2013) 37 Taxman.com 324 (Del.)—CIT ys. Parthasarathy(NM)(1995) 212 ITR 105 (Mad.) and.Jaswant Trading Company vs. CIT(1995) 212 ITR 293 (Raj.) respectively submitted that it 1s not penalty forinfraction of law. Any amount paid to municipality as compensation forcondoning deviations from original sanction and accepting revised plan ofconstruction 1s deductible as business expenditure. 4On the other hand, learned counsel for the revenue supportedthe impugned order and relied upon judgment of Full Bench of this Court inJamna Auto Industries vs. Commissioner ofIncome Tax,(2008) 299 ITR92 and judgment of Karnataka High Court 1nCIT vs. Mamta Enterprises,(2004) 266 ITR 356. 4]After hearing learned counsel for the parties, we do not findany merit in the submissions of learned counsel for the assessee. 6_The Full bench of this Court 1n |Jamna Auto Industries'sCase ITA No.69 of 2008 (supra) had held that any payment made by an assessee on account ofintraction of law would not be admissible deduction under Section 37 of theAct. However, any damages paid by the assessee for breach of contract onits part were deductible. In the present case, the assessee had paid thecompounding fee as compensation for condoning deviations from originalsanctioned plan. In substance, the payment was in the nature of the amountpaid on account of infraction of law as there was violation in the buildingplan of the assessee. ‘|.Further, Finance (No.2) Act, 1998 had _ incorporated Explanation to Section 37(1) of the Act which was made retrospectivelywith effect from 1.4.1962. The Explanation reads thus:- “Explanation -|For the removal of doubts, it is hereby declaredthat any expenditure incurred by an assessee for any purposewhich is an offence or which 1s prohibited by law shall not bedeemed to have been incurred for the purpose of business orprofession and no deduction or allowance shall be made inrespect of such expenditure.” According to the explanation, expenditure incurred for any purpose which 1s an offence or which is prohibited by law, 1s not entitled for deduction. Thus,the amount paid on account of compounding fee as compensation forcondoning deviations from original sanctioned plan in view of theExplanation to Section 37(1) of the Act would not be admissible. TheKarnataka High Court in Mamta Enterprises's—case (supra) distinguishedthe judgment of the Delhi High Court inLoke Nath and Company(Construction) 'case (supra) in the following terms:- *8. In our view the above observation made by Delhi HighCourt cannot be of any assistance to the learned counsel for the According to the explanation, expenditure incurred for any purpose which 1s an offence or which is prohibited by law, 1s not entitled for deduction. Thus,the amount paid on account of compounding fee as compensation forcondoning deviations from original sanctioned plan in view of theExplanation to Section 37(1) of the Act would not be admissible. TheKarnataka High Court in Mamta Enterprises's—case (supra) distinguishedthe judgment of the Delhi High Court inLoke Nath and Company(Construction) 'case (supra) in the following terms:- *8. In our view the above observation made by Delhi HighCourt cannot be of any assistance to the learned counsel for the respondent to support his case as the said decision wasrendered prior to amendment to section 37 of the Act byincorporating the explanation referred to above by means ofFinance Act 2/998 which is made retrospective effect witheffect from 1-4-1962. When the section itself declares theexpenditure incurred by an assessee for any purpose which isan offence or which is prohibited by law shall not be deemedto have been incurred for the purpose of business or professionand no deduction or allowance shall be made in respect of suchexpenditure, it is not possible to take the view that theexpenditure incurred for compounding of the offence should beallowed. When the section is clear and unambiguous, it is notpermissible for the Courts to stretch the meaning attached tothe provision of law to extend the benefit to a person whoviolates the law or the Regulations/Rules made by theCorporation or the Municipal Authorities with impunity. Underthese circumstances, the expenditure incurred to pay thepenalty cannot be treated as loss in business to get the benefit.In our view, the penalty paid has enured to the benefit of theassessee to save the additional construction put up in violationof the provisions of the Act and the By-laws framed thereunderand also the consequences of penal provision provided underthe Corporation or the Municipal Law. The view we havetaken above is fully supported by the decision of the HonbleSupreme Court in the case of Haji Aziz & Abdul ShakoorBros. (supra), wherein the Supreme Court has observed asfollows : ",.. Ifa sum is paid by an assessee conducting his business,because in conducting it he has acted in a manner which hasrendered him lable to penalty, it cannot be claimed as adeductible expense. It must be a commercial loss and in itsnature must be contemplable as such. Such penalties which areincurred by an assessee in proceedings launched against himfor an infraction of the law cannot be called commercial lossesincurred by an assessee in carrying on his business. In fraction of the law is not a normal incident of business and, therefore,only such disbursements can be deducted as are reallyincidental to the business itself. They cannot be deducted ifthey fall on the assessee in some character other than that of atrader. Therefore, where a penalty is incurred for thecontravention of any specific statutory provisions, it cannot beSaid to be a commercial loss failing on the assessee as a traderthe test being that the expenses which are for the purpose ofenabling a person to carry on trade for making profits in thebusiness are permitted but not if they are merely connectedwith the business. ",.. IN our opinion, no expense which is paid by way of penaltyf or a breach of the law can be said to be an amount wholly andexclusively laid for the purpose of the business. The distinctionsought to be drawn between a personal liability and a liabilityof the kind now before us is not sustainable because anythingdone which jis an infraction of the law and is visited with penalty cannot on grounds of public policy be said to be acommercial expense for the purpose of a business or adisbursement made for the purposes of earning the profits ofsuch business." (p. 359) Further, a similar view is taken by the Honble Supreme Courtin the case of Maddi Venkataraman & Co. (P) Ltd. (supra). TheHonble Supreme Court has observed thus : ",.. IN our opinion, no expense which is paid by way of penaltyf or a breach of the law can be said to be an amount wholly andexclusively laid for the purpose of the business. The distinctionsought to be drawn between a personal liability and a liabilityof the kind now before us is not sustainable because anythingdone which jis an infraction of the law and is visited with penalty cannot on grounds of public policy be said to be acommercial expense for the purpose of a business or adisbursement made for the purposes of earning the profits ofsuch business." (p. 359) Further, a similar view is taken by the Honble Supreme Courtin the case of Maddi Venkataraman & Co. (P) Ltd. (supra). TheHonble Supreme Court has observed thus : "In the instant case, the assessee had indulged in transactionsin violation of the provisions of the Foreign Exchange(Regulation) Act. The assessees plea is that unless it enteredinto such a transaction, it would have been unable to dispose ofthe unsold stock of inferior quality of tobacco. In other words,the assessee would have incurred a loss. Spur of loss cannot bea justification for contravention of law. The assessee wasengaged in tobacco business. The assessee was expected tocarry on the business in accordance with law. If the assesseecontravenes the provisions of the FERA to cut down its losses or to make larger profits while carrying on the business, it wasonly to be expected that proceedings will be taken against theassessee for violation of the Act. The expenditure incurred forevading the provisions of the Act and also the. penalty leviedfor such evasion cannot be allowed as deduction. As was laiddown by Lord Sterndale in the case of Alexander von Glehn &Co. Ltd. (1920) 12 TC 232 (CA), it was not enough that thedisbursement was made in the course of trade. It must be forthe purpose of the trade. The purpose must be a lawtulpurpose.” |Further, the judgments of Madras and Rajasthan High Courts inParthasarathy (NM)andJaswant Trading Company'scases (supra) reliedupon by he learned counsel for the assessee were prior to the insertion of theExplanation to Section 37(1) of the Act and would, therefore, not help theassessee 1n any manner. Still further, with regard to judgment inUshaMicro Process Controls Limited'S case (supra) on which reliance has alsobeen placed by the learned counsel for the assessee, therein, on facts, 1t wasrecorded that the assessee importer had paid redemption fine in lieu ofconfiscation of re-exported goods which was compensatory in nature andnot penal and was, therefore, an allowable deduction under Section 37(1) ofthe Act. The case being different on facts, the assessee cannot take anyadvantage from the same. In view of binding judgment of Full Bench ofthis Court In Jamna Auto Industries'scase (supra) and also Explanation toSection 37(1) inserted retrospectively w.e.f 1.4.1962, question No.(1) 1sanswered against the assessee. ITA No.69 of 2008 light of Explanation 5 to section 80G which was inserted by Finance Act1976 effective from 1.4.1976 that the deduction was admissible. [It would bapt to reproduce Explanation 5 to section 80G of the Act:- “Explanation 9,—For the removal of doubts, it is herebydeclared that no deduction shall be allowed under this sectionin respect of any donation unless such donation is of a sum ofmoney.” In view of the above, the assessee could not claim deduction under Section80G of the Act in respect of donations by way of clothes sent to PrimeMinister Relief Fund tor Gujarat Earthquake relief the same being in kindand not in cash, cheque or draft. The Tribunal was right 1n declining thebenefit under Section SOG of the Act. ITA No.69 of 2008 light of Explanation 5 to section 80G which was inserted by Finance Act1976 effective from 1.4.1976 that the deduction was admissible. [It would bapt to reproduce Explanation 5 to section 80G of the Act:- “Explanation 9,—For the removal of doubts, it is herebydeclared that no deduction shall be allowed under this sectionin respect of any donation unless such donation is of a sum ofmoney.” In view of the above, the assessee could not claim deduction under Section80G of the Act in respect of donations by way of clothes sent to PrimeMinister Relief Fund tor Gujarat Earthquake relief the same being in kindand not in cash, cheque or draft. The Tribunal was right 1n declining thebenefit under Section SOG of the Act. 10.With regard to Question No.(i11), learned counsel placedreliance on judgments in.Sri Venkata Satyanarayana Rice Mill ContractorCo. vs. CIT,(1997) 223 ITR LOI(SC), |Sassoon J. David and Co. (BP) Ltd.vs. Commissioner of Income-Tax(1979) 118 ITR 261(SC) and.ACIT vs,Rajasthan Spinning and Weaving Mills Limited,(2005) 274 ITR 465(Raj.) to submit that the donations being voluntary payments would qualifyfor deduction as the same fell within the scope of “wholly and exclusively”for the purpose of business which was in contra distinction to “wholly andnecessarily’, so that even what is not necessary to be incurred may well beallowable on the ground of commercial expediency and in the larger interestof the business and State, though not having immediate nexus with currentprofits. 114Learned counsel for the revenue supported the order passed bythe Tribunal that there was no commercial expediency. ITA No.69 of 2008 12.After hearing learned counsel for the parties, we do not findany merit in the submissions of learned counsel for the assessee. TheTribunal had observed that the contribution which was made by the assesseein kind to the Prime Minister's Rehef Fund for Gujarat Earthquake reliefwas not on account of any business compulsion which could be termed to befalling within the expression “wholly and exclusively”. It was also noticedthat the expenditure incurred in the form of relief for earthquake victimsalthough was for public good but would not have any impact on thebusiness of the assessee. It was concluded that there being no commercialexpediency in incurring such expenditure, it was not deductible underSection 37 of the Act. The Tribunal in para 19 had recorded as under:- “19. We have carefully considered the rival submissions on thisaspect. In so far as the claim of the assessee for deductionunder section 80G is concerned, the same has been rightlydisallowed by the Assessing officer. The alternative claim ofthe assessee that the impugned expenditure 1s deductible undersection 37(1) shall be examined by us now. The entire case ofthe assessee 1s on the basis of the judgment of the Hon’bleSupreme Court in the case of Sri Venkataya Satyanarayana RiceMills (supra). We have carefully perused the judgment of theHon’ble Supreme Court and find that the ratio of the decision 1sthat any contribution made by an assessee towards publicwelfare which is directly connected or related to the carryingon of the assessee’s business or which results in benefit to theassessee’s business 1s to be regarded as an item of deductionunder section 37(1) of the Act. According to the Hon’bleSupreme Court such contribution, whether made voluntarily orat the instance of the authorities concerned would not disentitlethe assessee from claiming deduction under section 37(1) of theAct. Applying the aforesaid reasoning to the facts of the present case, 1n our view, the claim of the assessee 1s not in order. Inthe instant case there 1s no material or evidence to show that thecontribution in question was either directly connected orrelated to the carrying on of assessee’s business or that therewas any benefit resulting to the assessee’s business thereof. Theassessee may be correct in saying that the contribution has beenmade on the appeal by the Government authorities and that thesame was for public good but the tests laid down by theHon’ble Supreme Court, as referred to above, do not appear tohave been fulfilled. Thus, the parity of reasoning enunciated bythe Hon’ble Supreme Court in the case of Sri VenkatayaSatyanarayana Rice Mills (supra) does not help the case of theassessee. Similarly we have perused the decision of theTribunal in the case of Nahar Spinning Mills Limited (supra)and find that the expenditure was held allowable under section37(1) only after noticing that 1t would have an impact on theexport business of the assessee. The Tribunal was satisfied, onfacts that the reasoning enunciated by the Hon’ble SupremeCourt 1n the case of Sri Venkataya Satyanarayana Mills (supra)was applicable. The assessee was found to have made donationtowards an Earthquake Relief fund of USSR. The Tribunalfound that the assessee was also a main exporter to USSR andthus there was a possibility of impacting the business interestsoft the assessee with the USSR Government. Hence thcontribution made by the assessee towards the earthquakeRelief Fund of USSR was held allowable as a deduction undersection 37(1) of the Act. Factually speaking, in the instant casesuch inference cannot be drawn in the absence of any materialor evidence on record. There 1s nothing to show as to how theimpugned expenditure, although incurred for public good,would have an impact on the business of the assessee company.Therefore, the ratio of the decision of the Tribunal in the caseof Nahar Spinning Mills (supra) for assessment year 1989-90does not help the assessee in the present case. In our opinion, the CIT(A) erred in allowing the claim of the assessee on thebasis of the decision of the Hon’ble Supreme Court 1n case ofSri Venkataya Satyanarayana Rice Mills (supra) and of theTribunal in the case of Nahar Spinning Mills Limited (supra).The decision of the Tribunal in the case of Oswal WoollenMills Limited (supra) relied upon by the learned counsel for theassessee, also does not help the claim of the assessee as it wasrendered on facts identical to that of Nahar Spinning MiullLimited (supra), which we have already held to be inapplicablein the instant case because of distinction on facts. Therefore, inconclusion, we hold the assessee as ineligible tor deductionunder section 37(1) of the Act in relation toTL24,89,000/- beingvalue of goods contributed to Gujarat Earthquake Relief. Wetherefore, set aside the order of the CIT(A) on this issue andrestore that of the Assessing Officer. The revenue succeeds onthis ground.” 13.|A clear finding had been recorded by the Tribunal that therewas no commercial expediency which would encompass the value of thegoods sent to Prime Minister Relief Fund for Gujarat Earthquake relief to beadmissible as business expenditure under Section 37 of the Act. Furthermore, the assessee had given the donations in the form of clothes andclaimed deduction under section 37(1) by quantifying the same in monetaryterms. In such circumstances, it could not be said that it was essential for theassessee to have contributed towards the Prime Munister's Relief Fund forcarrying on business activities. No fault 1s found with the findings recordedby the Tribunal on this issue. The same are affirmed. In the light of theaforesaid findings of fact recorded by the Tribunal, the judgments reliedupon by the learned counsel for the assessee do not advance the case of the asscsscce asscsscce 14)In view of the decision of this Court 1n-Liberty India vs. CIT,(2007) 293 ITR 520 (P&H), attirmed by the Apex Court 1n Liberty India vs.CIT;(2009) 317 ITR 218, the issue with regard to question No.(iv) 1sdecided against the assessee. 14)Consequently, the appeal is dismissed. (Ajay Kumar Mittal)Judge July 28, 2014 .4 g (Jaspal Singh)Judge