K.S Radhakrishnan, J.:— Whether the contribution made by the assessee to a trust which undertook the work of rehabilitation of the victims of Lathur earthquake could be regarded as an allowable deduction under section 37(1) of the Income-tax Act, 1961, is the question that has come up for consideration in this case.
2. This appeal is preferred by the assessee under section 260A of the Income-tax Act, 1961 aggrieved by the order of the Income-tax Appellate Tribunal (hereafter called “the Tribunal”) declining relief under section 37(1) of the Income-tax Act on the ground that the donation made by the assessee to the Malayala Manorama Charitable Trust is not a reasonable expenditure laid out or expended wholly and exclusively for the purposes of business by the assessee chargeable under the head “Profits and gains of business or profession”. The appellant-Malayala Manorama Company Ltd. is engaged in the business of printing and publishing of newspapers and periodicals and is an assessee on the files of the Additional Commissioner of Income-tax (Assessment), Special Range, Kottayam. The company submitted its return on November 30, 1994, for the assessment year 1994–95 declaring a total income of Rs. 1,82,42,750. In terms of the proviso to section 143(2) of the Income-tax Act, the case was selected for scrutiny by issue of a notice under section 143(2). Details were called for with regard to deduction of Rs. 26,94,000. Reply was sent stating that deduction relates to the amounts spent for reconstruction of Banegaon Village in Lathur District, Maharashtra, under section 37(1) of the Income-tax Act which was originally claimed as deduction under section 80G of the Income-tax Act. The assessee-company had originally claimed a deduction of Rs. 9,60,144 under section 80G on the qualifying amount of Rs. 26,94,000. Later the assessee through its counsel submitted a letter dated June 27, 1996, stating that even though the deduction was claimed under section 80G, it was really allowable under section 37 of the Act. The assessing authority did not accept that plea stating that the assessee-company had misinterpreted the provisions of section 37(1) of the Income-tax Act, vis-a-vis the provisions of section 80G of the Act. The assessing authority noticed that the project of rehabilitation and reconstruction of Banegaon Village was undertaken by the Malayala Manorama Charitable Trust with the help of substantial funds, out of which the assessee-company themselves had contributed to the tune of Rs. 26,94,000. The contribution as such, it was pointed out by the assessing authority would not make the Malayala Manorama Co. Ltd. and the Malayala Manorama Charitable Trust one and the same person to be treated alike under the Income-tax Act. The assessing authority took the view that the provisions of sections 37(1) and 80G are not mutually exclusive. The assessee's contention was rejected and the assessing authority proceeded to allow deduction only under section 80G and not under section 37(1) of the Income-tax Act.
3. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals). The appellate authority took the view that the initiative taken by the assessee-company constituting a fund accepting contribution from the public and making its own contribution is done voluntarily and this has resulted in the enhancement of the business of the assessee to a greater extent. The Commissioner also took the view that the contribution made by the assessee to a public fund which results in the benefit of the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Income-tax Act. The Commissioner also disagreed with the view of the Assessing Officer that the provisions of sections 37(1) and 80G are not mutually exclusive. The Revenue took up the matter in appeal before the Tribunal. The Revenue took up a contention that the work undertaken by the Malayala Manorama Charitable Trust for the purpose of rehabilitation and reconstruction of Banegaon Village devastated by earthquake, after constituting a fund by name Maharashtra Earthquake Relief Fund and making contribution to that fund is in no way connected with the business activities of the company. It was also pointed out that the expenditure incurred for the completion of the noble work undertaken at the behest of the trust, even if it has helped the assessee to get wide publicity would not bring the expenditure within the ambit of section 37(1) since that is not an expenditure incurred wholly and exclusively for business purposes. An appeal preferred by the Revenue was accordingly allowed and the order of the Commissioner was set aside. The assessee is aggrieved by the order of the Tribunal and has filed this appeal.
4. Sri M. Pathrose Mathai, senior counsel appearing for the assessee, submitted that the expenditure incurred by the assessee was for a noble cause which resulted in the trust undertaking the work of reconstruction and rehabilitation of the earthquake victims in the Banegaon Village of Lathur District in Maharashtra which helped the assessee to get wide publicity. Hence the expenditure made is liable for deduction under section 37(1) of the Income-tax Act. Counsel also submitted, the efforts made by the assessee paved the way for its business promotion since it gave wide publicity in the media which enhanced the prestige of its publication in the media and elsewhere. Counsel also submitted, the commercial expediency of the assessee's decision to incur the expenditure cannot be tested on the touch stone of strict legal liability to incur such an expenditure and the participation of high dignitaries like the Prime Minister of India and the Governor of Maharashtra at the time of handing over of the keys of the houses to the recipients has also contributed to the business promotion of the petitioner. In support of his contention counsel placed reliance on the decision of the Madras High Court in CIT v. Madras Refineries Ltd., [2004] 266 ITR 170 and submitted that the concept of business is not static and it has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular, and thus created an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Counsel also referred to a judgment of the Kar-nataka High Court in Mysore Kirloskar Ltd. v. CIT, [1987] 166 ITR 836. Reference was also made to the judgment of this court in P. Balakrishnan, CIT v. Travancore Cochin Chemicals Ltd., [2000] 243 ITR 284.
5. Sri P.K Ravindranatha Menon, senior counsel appearing for the Revenue on the other hand, contended that the Tribunal is justified in rejecting the plea of the assessee since contribution made by the assessee though helped the trust in carrying out the noble cause with the expenditure cannot be termed as expenditure incurred wholly or exclusively for the business purpose of the assessee under section 37(1) of the Income-tax Act. Counsel submitted that the assessee and Malayala Manorama Charitable Trust are separate legal entities so far as the Income-tax Act is concerned. The Malayala Manorama Charitable Trust has received large amounts by way of donation from the general public which includes the contribution made by the assessee-company as well. The trust is created wholly for charitable purpose. In order to get the benefit of section 11 of the Act, any voluntary contributions received by it shall be deemed to be income derived from property held under trust wholly for charitable purpose. Counsel submitted, section 80G speaks of deduction in respect of donations to certain specified institutions whereas the provisions of section 37(1) speaks of expenditure laid out or expended wholly and exclusively for the purposes of business. Counsel submitted, the project relating to rehabilitation and reconstruction work is in no way connected with the assessee's business purpose and therefore, the expenditure in question cannot be regarded as an allowable deduction under section 37(1) of the Act. Counsel made reference to the decision of the apex court in Indian Aluminium Co. Ltd. v. CIT, [1972] 84 ITR 735.
6. We are in this case primarily concerned with the question as to whether the assessee is entitled to claim deduction under section 37(1) of the Income-tax Act for the contribution made by it to the Malayala Manorama Charitable Trust. The facts would indicate that Malayala Manorama Charitable Trust was constituted with the support of the assessee with the following objects:
“to grant relief and aid to the persons affected by natural calamities, provisions for shelter, clothing and food to the poor and needy, to render medical aid to the poor, to establish and maintain rooms and other establishments for the relief of the poor and to assist similar establishments.”
7. The trust constituted a fund by name Maharashtra Earthquake Relief Fund. The assessee-company contributed an amount of Rs. 26,94,000 to the relief fund. General public which included the well wishers of the assessee contributed an amount of Rs. 2,39,49,000. Contribution made by the general public along with the contribution made by the assessee were utilised for construction of 163 homes. Besides, they were provided with amenities like panchayat hall, library, temple etc. Insurance coverage was also taken for all the houses against fire and personal accident for the entire villagers for a period of ten years. The assessee's case is that the assessee has made the contribution of Rs. 26,94,000 for promotion of its business by generating goodwill among the general public which helped them to increase circulation of newspapers and periodicals and, therefore, the amount contributed towards the fund is an allowable deduction under section 37(1) of the Income-tax Act.
8. We find it difficult to accept the plea of the assessee on facts as well as on law. The Malayala Manorama Charitable Trust is a separate entity for the purpose of the Income-tax Act. The trust constituted a fund by name Maharashtra Earthquake Relief Fund, the object of which, as we have already indicated, is to grant relief and aid to persons affected by natural calamities, provisions for shelter, clothing and food to the poor and needy to render medical aid to the poor, to establish and maintain rooms and other establishments for the relief of the poor and to assist similar establishments. The assessee-company constituted a trust to which it has contributed an amount of Rs. 26,94,000. The public has also contributed liberally since the cause was laudable. The public contributed an amount of Rs. 2,39,49,000. A major portion of the contribution evidently was from the general public. The general public had contributed not with any business motive but purely for charity and to achieve the object of the trust, that is to grant relief and aid to persons affected by earthquake at Lathur. The assessee-company which had contributed an amount of Rs. 26,94,000 is now taking up the plea that it had incurred the expenditure wholly and exclusively for the purpose of its business so as to get benefit of section 37(1) of the Act. The facts would indicate that the trust which has taken up the project has no case that it has expended the amount for the promotion of the assessee's business. The contention of the assessee is that though the contribution made by the public as such was not spent wholly or exclusively by the trust for business purpose the contribution made by the assessee was wholly and exclusively for business purpose.
9. The question that is posed is whether contribution made by the assessee was wholly and exclusively for its business purpose. We may point out, the assessee had originally claimed deduction of Rs. 9,60,144 under section 80G on the qualifying amount of Rs. 26,94,000. Subsequently by letter dated June 27, 1996, they raised a plea that even though deduction was claimed under section 80G it is really allowable under section 37(1) of the Act. Let us examine the scope of section 37(1) of the Income-tax Act as amended. The said provision is extracted below for easy reference:
“37. General.—(1) Any expenditure (not being expenditure of the nature described in 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’.”
10. Expenditure laid out or expended wholly and exclusively for the purpose of business or profession alone shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. In order to be deductible under this section, expenditure should be incurred for the purpose of business which is carried on in the accounting year. The section requires that the expenditure should be wholly and exclusively laid out for the purpose of business. The contribution effected should be expended entirely and completely for the purpose of the business. The amount of Rs. 26,94,000 expended by the assessee was not utilised wholly or exclusively for its business purpose. On the other hand, the amount contributed by the assessee along with public contribution of Rs. 2,39,49,000 was utilised for construction of 163 houses of 350 sq. ft. at Banegaon Village of Lathur District. The people of that district who have suffered massive earthquake were provided with amenities like panchayat hall, library, temple, etc. Insurance coverage was also taken for all the houses against fire and personal accident for the entire villagers for a period of 10 years and the balance amount is kept in fixed deposit, the interest of which is provided for upkeep and annual maintenance of this village. By no stretch of imagination can it be said that the amount contributed by the assessee to the trust was spent wholly or exclusively for its business. There must be some nexus between the money expended by the assessee and the purpose for which it was spent, the purpose was not business promotion, but charitable and philanthropic. The construction of houses for the victims who have suffered massive earthquake, construction of panchayat hall, library, temple, providing insurance coverage to all the houses etc. are the works, undertaken by the trust and not by the assessee for its business promotion nor the contribution of Rs. 26,94,000 made by the assessee was spent for its business promotion. We are not prepared to say the construction of houses for the victims was for business promotion but it was to help the victims of the massive earthquake.
11. The trust is registered as a charitable trust within the meaning of the Income-tax Act and hence, the trust is entitled to get all the benefits of section 11 of the Income-tax Act. The funds have to be invested as per section 11(5) of the Act. Every person in receipt of income derived from property held under trust has to give a return of income under section 139(4A). The procedure for registration is provided under section 12AA of the Income-tax Act. The contribution made to the trust by the assessee or general public is also entitled to get the benefit of section 80G since it is a contribution for charitable purposes. Section 2(15) defines “charitable purposes”. The assessee's contribution of Rs. 26,94,000 would qualify for exemption under section 80G. In fact a deduction of Rs. 9,60,144 was granted under section 80G on the qualifying amount of Rs. 26,94,000. We are of the view that that would be the only benefit which the assessee is entitled to get and not the benefit under section 37(1) of the Income-tax Act.
12. Counsel for the assessee placed considerable reliance on the decision in Madras Refineries' case, [2004] 266 ITR 170 (Mad). That was a case where the Madras Refineries Ltd. provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. The company incurred an expenditure of Rs. 15,32,000 for that purpose. The Assessing Officer declined to allow that expenditure on the ground that it was not an item of expenditure incurred by the assessee for its business. The Commissioner (Appeals) however took the view that the activity can be regarded as an activity for the promotion of its business. On appeal, the Tribunal also took the view, winning the goodwill of the people of the locality, helps in boosting the business in many ways and consequently it allowed the entire amount claimed as a deduction. The Revenue took the matter in appeal before the Madras High Court. The Madras High Court took the view, that moneys spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business undertaking is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry.
13. Counsel also made reference to the decision in Mysore Kirloskar Ltd.'s case, [1987] 166 ITR 836 (Karn). That was a case where the assessee started a school for education of children of its employees. Donation made to the school by the assessee was claimed as business expenditure under section 37(1). The Tribunal took the view that the assessee is entitled to the benefit only under section 80G and not under section 37(1) on the ground that the expenditure was not incurred wholly or exclusively for the purpose of business of the assessee. The Karnataka High Court allowed the appeal and remitted the matter back to the Tribunal after noticing that the Tribunal had not recorded a finding as to whether the donation made by the assessee to the trust could be considered as “expenditure”. Counsel also made reference to the decision of this court in Travancore Cochin Chemicals, [2000] 243 ITR 284. That was a case where the company had made contribution to the school in which children of its employees were studying. The Tribunal took the view that the assessee's contribution to the school was for the assessee's business purpose and allowed deduction thereof. On the facts the court took the view that the expenditure made by the assessee for the school was wholly and exclusively for the welfare of its employees as their children were studying in that school and therefore, took the view that the amount spent by the assessee was an allowable deduction under section 37(1) of the Act.
14. We are of the view the abovementioned decisions are not applicable to the facts of this case and to some extent we differ from the decision in Madras Refineries Ltd.'s case, [2004] 266 ITR 170 (Mad). We have already pointed out on the facts the amount contributed by the assessee to the relief fund was not utilised wholly or exclusively for its business purpose. The mere fact that indirectly the assessee earned goodwill of the victims and the general public does not mean that the expenditure incurred by the assessee was wholly or exclusively for business purpose. Section 37(1) would apply only in a case where expenditure is laid out or expended wholly or exclusively for the purpose of the assessee's business. The amount contributed by the assessee in the present case may bring goodwill or enhance reputation of the assessee among the general public as a good philanthropist and in that process it may boost its business. But that by itself would not be sufficient to claim any deduction under section 37(1). The burden is entirely on the assessee to establish that the amount laid out or expended by the assessee was wholly or exclusively used for the purpose of its business.
15. We have already indicated the object of the trust was not business promotion and the contribution made by the assessee also was not utilised for business promotion. In Madras Refineries' case, [2004] 266 ITR 170 (Mad), with due respect, the court has not properly explained the meaning of the words “wholly and exclusively”. We have no quarrel about the general proposition made by the Madras High Court. But unless and until the expenditure laid out or expended by the assessee is used wholly or exclusively for its business purpose no deduction could be made under section 37(1). The Karnataka High Court was dealing with a case where the assessee started a school for education of children of its employees and claimed deduction of the amount spent by it towards business expenditure. The facts of the Karnataka High Court case are entirely different from the facts indicated in this case. There is no case that by the petitioner making contribution to the trust the assessee's employees were in any way benefited. Travancore Cochin Chemicals' case, [2000] 243 ITR 284 (Ker) is a case where the assessee made contribution to the school in which children of its employees are studying. It is in that context the Division Bench of this court took the view that the contribution made by the assessee was an expenditure wholly and exclusively for the welfare of its employees and hence was an allowable deduction under section 37(1) of the Act. The facts of this case stand on a different footing and the decisions cited by the assessee are therefore not applicable to the facts of this case. We are therefore of the view that the contribution made by the assessee would be an allowable deduction under section 80G of the Income-tax Act and not under section 37(1) of the Act. We therefore fully concur with the view of the Tribunal on that point.
16. Counsel for the assessee submitted that the finding of the Tribunal that the claim under sections 80-I and 80-IA for deduction in respect of new undertakings of the assessee at Trivandrum and Palakkad stands covered against the assessee is not correct especially in view of the decision of this court in Malayala Manorama Co. Ltd. v. Commissioner Of Income-Tax, [2002] 257 ITR 633. In that case the assessee claimed allowance of deduction with respect to its share of income from advertisement for the assessment years 1990–91 and 1991–92. This court took the view that the assessee is entitled to special deduction under section 80-I of the Act. Counsel submitted, though this decision was specifically pointed out before the Tribunal, the Tribunal failed to consider the same. Counsel appearing for the assessee also claimed deduction of the expenditure spent by its executives in the clubs so as to boost the assessee's business. Counsel contended expenditure laid out was exclusively for the purpose of business and hence was an allowable deduction. Counsel also pointed out that the said issue is covered by the decision in Otis Elevator Co. (India) Ltd. v. Commissioner Of Income-Tax., [1992] 195 ITR 682 (Bom). Counsel submitted, that point was also not properly considered by the Tribunal. Counsel therefore submitted that in the light of the abovementioned decisions those claims are liable to be allowed by this court. Learned counsel appearing for the Revenue on the other hand, contended that if it is a case of non-consideration then the matter has to go back to the Tribunal and this court without any factual foundation cannot finally adjudicate those claims. We find force in the contention of counsel for the Revenue. Under such circumstance we are inclined to uphold the order of the Tribunal disallowing the claim of the assessee under section 37(1) of the Income-tax Act. With regard to the claims under sections 80-I, 80-IA and claim for expenditure spent by executives for business promotion the matter has to go back to the Tribunal for fresh consideration.
17. I.T.A is disposed of confirming the order of the Tribunal with regard to the finding under section 37(1) of the Income-tax Act and rest of the issues as directed by this court would be re-considered by the Tribunal. Forward a copy of this judgment to the Tribunal.