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Hira Ferro Alloys Ltd. v. Deputy Commissioner Of Income-Tax (Assessment)
Structured Summary of the Opinion (Dhirendra Mishra, J.)
Factual and Procedural Background
The appellant is a company engaged in the manufacture and sale of ferro manganese and silico manganese used in steel production. For the assessment year 1992-93 the appellant filed a return showing income of Rs. 13,35,910, but assessment was made at a total income of Rs. 15,79,780. The appellant claimed a deduction of Rs. 9,097 for expenditure on Puja during the financial year, which included Rs. 6,181 for Vishwakarma Puja. The Assessing Officer (AO) disallowed this expenditure on the ground that a company cannot profess any religion and the expenditure might be personal expenses of a director rather than a business need.
The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal and deleted the disallowance. On further appeal by Revenue, the Income Tax Appellate Tribunal (Tribunal) restored the AO's order and maintained the disallowance of Rs. 9,097. The appeal to the High Court under section 260A of the Income Tax Act, 1961 was admitted on the substantial question of law whether the appellant/company is entitled to the deduction under Section 37 of the Income Tax Act, 1961.
Legal Issues Presented
- Whether, in the facts and circumstances of the case, the appellant/company is entitled to the benefit/deduction under Section 37 of the Income Tax Act, 1961 for expenditure incurred on Puja (including Vishwakarma Puja)?
Arguments of the Parties
Appellant's Arguments (as presented)
- Vishwakarma Puja is customarily performed by workers/labourers in industrial houses and the expenditure was in respect of labour welfare.
- The AO erred in reasoning that a company cannot profess religion; the company is run by management and labourers, and such Puja expenditure acts as a moral booster for employees and is thus associated with the business.
- The expenditure was not connected with any director's personal expenses and therefore is deductible under Section 37 as it was incurred wholly and exclusively for business.
- Reliance was placed on authorities (e.g., CIT v. Chandulal Keshavlal & Co., Brijraman Das & Sons, Atlas Cycle Industries Ltd.) supporting deductions where expenditure was for commercial expediency or where religious/recreational activities were connected to employee welfare and business interest.
Revenue's Arguments (as presented)
- Puja is an act performed by followers of a particular religion; a company, being a juristic person, cannot profess, practise or follow any religion or faith and therefore cannot claim such expenditure as business expenditure.
- The contention that expenditure towards Vishwakarma Puja is a welfare measure aiding employee satisfaction is farfetched and cannot be treated as wholly and exclusively for the purpose of business or profession under Section 37(1).
- Reliance was placed on Sanghameshwar Coffee Estates Ltd. and Kolhapur Sugar Mills Ltd. to support the position that Puja expenditure by a company is not deductible.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| CIT v. Chandulal Keshavlal & Co., (1960) 38 ITR 601 (SC) | Deduction justified if sum was given up for reasons of commercial expediency; expenditure incurred for assessee's benefit may be deductible. | The court recited the principle that expenditure incurred for commercial expediency can be deductible; it discussed the authority in relation to the appellant's contention but did not ultimately allow the deduction on the facts of this case. |
| CIT v. Malayalam Plantations Ltd., (1964) 53 ITR 140 (SC) | Interpretation of "for the purpose of business" — wide in scope but limited to expenditure incurred by the assessee in capacity as person carrying on business; cannot include sums spent as agent of a third party. | The court reproduced and relied upon this interpretation to assess whether the Puja expenditure could be considered incurred "for the purpose of business" and referenced the limits stated by the Supreme Court when evaluating the claim. |
| Brijraman Das & Sons v. CIT, (1983) 142 ITR 509 (All) | Ganesh Puja expenses customarily incurred by Hindu traders at Mahurat/Diwali were held to be expenditure laid out wholly and exclusively for business and allowable under Section 37(1). | The court noted this authority but treated it as distinguishable on facts because that case involved Hindu traders (natural persons) performing customary Puja, whereas the present case involved a company incorporated under the Companies Act. |
| Atlas Cycle Industries Ltd. v. CIT, (1982) 134 ITR 458 (P&H) | Assessee has discretion to provide recreation which best advances business interests; if a religious activity has direct nexus with welfare of a class of workers, it can qualify. | The court recorded that the CIT(A) relied on this decision to allow the deduction, but ultimately the High Court did not accept the CIT(A)/Atlas approach for the facts of this company and restored the Tribunal/AO position denying the deduction. |
| Sanghameshwar Coffee Estates Ltd. v. State of Karnataka, (1986) 160 ITR 203 (Kar) | Authority used to support the proposition that a company cannot profess religion and Puja expenses by a company are not deductible as business expenditure. | The court expressly stated its respectful agreement with the law laid down in Sanghameshwar and held the facts of the present case were almost similar; this authority was followed in denying the deduction. |
| Kolhapur Sugar Mills Ltd. v. CIT, (1979) 119 ITR 387 (Bom) | Similar proposition to Sanghameshwar: Puja performed by a company not deductible as business expenditure. | The court aligned with the Bombay High Court decision and relied upon it alongside Sanghameshwar to deny the deduction in the present case. |
| Patrakar Prakashan (P) Ltd., ITA No. 490/Nag/1997 (Nagpur Bench of Tribunal) | Tribunal decision that performance of Puja cannot be considered expenditure related to conduct of business. | The Tribunal in the present appeal relied upon this decision to restore the AO's disallowance; the High Court noted that reliance and affirmed the Tribunal's conclusion for the present facts. |
| CIT & Ors. v. Saravana Spinning Mills (P) Ltd., (2007) 7 SCC 298 | Enumerated criteria for deduction under Section 37: (i) not falling within Sections 30–36, (ii) incurred in the accounting year, (iii) in respect of a business carried on by the assessee, (iv) not on personal account, (v) not capital expenditure, and (vi) spent wholly and exclusively for business. | The court cited these criteria as the applicable legal test for assessing a Section 37 claim and applied this framework when testing whether the Puja expenditure satisfied the necessary conditions. |
Court's Reasoning and Analysis
The court proceeded by framing the short question: whether a limited company can claim deduction for expenditure on Puja functions (including Vishwakarma Puja performed in factory premises) under Section 37(1).
The factual and procedural posture was recapitulated: AO disallowed the deduction on the basis that a company cannot profess religion and expenditure might be personal to a director; CIT(A) allowed the deduction relying on authorities such as Atlas Cycle Industries; the Tribunal restored the AO's disallowance relying on a prior Tribunal decision (Patrakar Prakashan).
The court reviewed relevant authorities cited by both parties:
- It set out the principle from Chandulal Keshavlal & Co. that deductions are permissible where sums are given up for commercial expediency and incurred for the assessee's benefit.
- It reproduced the Supreme Court's interpretation in Malayalam Plantations that "for the purpose of business" is wide but limited; expenditure must be incurred in the capacity of a person carrying on business and cannot cover sums spent as agent for a third party.
- It noted Brijraman Das & Sons where a Hindu trader's customary Ganesh Puja was held deductible, but treated that decision as factually distinguishable because it involved individual traders rather than a company.
- It acknowledged Atlas Cycle Industries (and the CIT(A)'s reliance on it) which allows religious/recreational activities as deductible if directly connected to worker welfare, but observed that this view was not determinative for the present facts.
- It referred to Saravana Spinning Mills for the specific checklist of conditions that must be satisfied for a Section 37 deduction.
Applying these principles to the present facts, the court found the facts "almost similar" to Sanghameshwar Coffee Estates Ltd. and agreed with Sanghameshwar and Kolhapur Sugar Mills. The court concluded that a company, being a juristic person created by law, cannot claim to profess religion and, therefore, expenditure incurred in Puja/Vishwakarma Puja by a company cannot be treated as expenditure laid out wholly and exclusively for the purposes of its business under Section 37(1). The court found no illegality or infirmity in the Tribunal's order restoring the AO's disallowance.
Holding and Implications
Holding: The appeal is DISMISSED. The High Court held that expenditure incurred by a company on Puja (including Vishwakarma Puja) is not deductible under Section 37(1) of the Income Tax Act, 1961.
Implications:
- Direct effect: The disallowance of Rs. 9,097 by the AO (as restored by the Tribunal) is upheld; the appellant company is denied the Section 37 deduction for the Puja expenditure.
- Broader implications: The court expressly aligned with Karnataka High Court (Sanghameshwar) and Bombay High Court (Kolhapur Sugar Mills) authorities and applied the principles to deny the deduction on the present facts. The opinion does not state that it is creating a new legal principle; it applies existing authorities and declines the appellant's claim on the facts before it.
This summary is limited strictly to the content and reasoning contained in the provided opinion text. No outside facts or inferences beyond the opinion have been introduced.
Dhirendra Mishra, J.
1. This Income Tax appeal under section 260a of the it act, 1961 (for brevity "the act") has been admitted on the following substantial question of law :
Whether in the facts and circumstances of the case, appellant/company is entitled for the benefit/deduction of Section 37 of IT Act, 1961 ?
2. Briefly stated, facts of the case are that the appellant/company is engaged in the business of manufacture and sale of ferro manganese and silico manganese utilized for production of various grades of steel by the steel plants. The appellant filed return for the asst. yr. 1992-93 showing income of Rs. 13,35,910. However, assessment was made at a total income of Rs. 15,79,780. Claim of the appellant of Rs. 9,097 as expenditure incurred towards performing Puja during the financial year including expenditure of Rs. 6,181 incurred towards Vishwakarma Puja, was disallowed by the AO on the ground that the appellant being a company cannot profess any religion and therefore, performance of Puja cannot be said to be need of the business; the expenditure might be the personal expenses of the director.
3. The Commissioner of Income Tax (Appeals) [in short "CIT{A)"] allowed the appeal of the assessee and deleted the disallowance of Rs. 9,097. However, on appeal by the respondent/Revenue, the Income Tax Appellate Tribunal (for brevity "Tribunal") restored the order of AO and maintained the disallowance of Rs. 9,097.
4. Mr. Neelabh Dubey, learned Counsel appearing for the appellant submitted that it is common knowledge that Vishwakarma Puja is performed by the workers/labourers of every industrial house; the expenditure was, in fact, in respect of labours' welfare; the AO was not correct in holding that the assessee was a company and therefore, not a real person and as such, cannot profess any religion and performance of Puja cannot be said to be need of the business of the company. The company is run by the management and labourers-skilled or unskilled; the expenditure on Puja acts as a moral booster for the employees and labourers associated with the company and thus, it is clearly associated with the assessee's business. The Puja expenditure was not directly or indirectly connected with the personal expenditure of the director and the same was purely connected with the business of the company and as such, deductible under Section 37 of the Act.
5. Reliance is placed on the judgment in the matter of CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) wherein the Hon'ble Supreme Court while dealing with the deductible allowances under Section 10(2)(xv) of the IT Act, 1922 has held thus :
(i) that in cases such as this case, in order to justify deduction the sum must be given up for reasons of commercial expediency : it might not be voluntary, but so long as it was incurred for the assessee's benefit the deduction was allowable;
(ii) that as the Tribunal had found that the amount was expended for reasons of commercial expediency, and was not given as a bounty but to strengthen the managed company so that if the financial position of the managed company became strong the assessee would benefit thereby, the Tribunal rightly came to the conclusion that it was a deductible expense under Section 10(2)(xv).
6. Reliance is placed on the judgment in the matter of CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) wherein the Hon'ble Supreme Court interpreting the expression "for the purpose of business" occurring in Section 10(2)(xv) of the IT Act, 1922, has held thus :
The expression 'for the purpose of business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business." However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.
7. Reliance is also placed on the judgment in the matter of Brijraman Das & Sons v. CIT (1982) 31 CTR (All) 224 : (1983) 142 ITR 509 (All) in which the High Court of Allahabad held that Ganeshji ki Puja expenses, which Hindu traders in a customary way at the time of Mahurat or opening of their account books on the auspicious occasion of Diwali, incur, are to be treated as expenditure laid out wholly and exclusively for the purposes of assessee's business. Such expenses are generally of the nature of advertisement with a view to securing new business and are incurred in the interests of business. Therefore, it is an expenditure which is allowable under Section 37(1) of the IT Act, 1961.
8. Further, reliance is placed on the judgment in the matter of Atlas Cycle Industries Ltd. v. CIT (1981) 21 CTR (P&H) 123 : (1982) 134 ITR 458 (P&H) in which it was held that
"no curbs can be placed on the discretion of the assessee to provide the type of recreation, which, according to it, would best advance the interests of its business. If the recreation provided, even if it is in the nature of a religious activity, has a direct nexus with the welfare of a class of workers engaged by the assessee, it is wholly immaterial if the recreation provided is directly or indirectly connected with the religious tenets of a section of the society."
9. On the other hand, Mr. S. Rajeshwara Rao, learned junior standing counsel for the respondent/Revenue, relying upon the judgments in the matters of Sanghameshwar Coffee Estates Ltd. v. State of Karnataka (1986) 55 CTR (Kar) 232 : (1986) 160 ITR 203 (Kar) and Kolhapur Sugar Mills Ltd. v. CIT (1979) 119 ITR 387 (Bom) argued that Puja is performed by the followers of a particular religion or faith. A company, which is only a juristic person, cannot claim to profess, practise or follow any religion or faith. The argument that the expenditure towards Vishwakarma Puja is a welfare measure and helps in keeping the employees/workers satisfied is farfetched argument and the same cannot be treated as expenditure incurred wholly and exclusively for the purpose of business or profession of the company under Section 37(1) of the Act.
10. We have heard learned Counsel for the respective parties.
11. The short question involved in this appeal is, whether the assessee, a limited company registered under the Companies Act, can claim deduction towards expenditure incurred by the company in Puja functions, including Vishwakarma Puja performed in the factory premises under Section 37(1) of the Act ?
12. The AO relying upon the judgment in the matters of Sanghameshwar Coffee Estates Ltd. (supra) and Kolhapur Sugar Mills Ltd. (supra) held that the company, which is a creation by legal fiction and not a real person made up of flesh and blood, cannot profess any religion and therefore, performance of Puja cannot be said to be need of the business and disallowed the deduction towards Puja expenditure. However, the C1T(A) relying upon the law laid down in Atlas Cycle Industries Ltd. (supra) held that the expenditure incurred in Puja is deductible under Section 37(1) of the Act and accordingly, deleted the disallowance. However, the Tribunal relying upon the decision of Nagpur Bench of the Tribunal in the case of Patrakar Prakashan (P) Ltd. in ITA No. 490/Nag/1997, held that performance of Puja cannot be considered as an expenditure related to the conduct of the business of the assessee.
13. In Chandulal Keshavlal & Co. (supra) the assessee-managing agent was entitled to get a particular sum as commission from the managed company as per agreement between them. However, the assessee agreed to accept a part of the commission due to him, which was credited to his account. The AO as well as the CIT(A) held that the total amount, which accrued as commission to the managing agent, was income of the assessee and deduction was not permissible. However, the Tribunal held that if the managing agent had foregone a part of his commission in the interest of managed company, the same would be allowed as expenditure under Section 10(2)(xv) of the Act. The above finding of the Tribunal was confirmed by the High Court. The finding of fact recorded by the Tribunal and confirmed by the High Court, was subsequently again confirmed by the Hon'ble Supreme Court with the observations as detailed above in para 5.
14. In the case of Malayalam Plantations Ltd. (supra) the assessee debited the amount paid by him towards estate duty, which was payable on the death of certain shareholders, who were not domiciled in India, to Revenue in its accounts in ascertaining the profits and gains of its business for the said year. However, the ITO as also the appellate authority included the said amount in the income of the company. The Tribunal held that the assessee was entitled to deduct the said amount in computing income, and set aside the order of the appellate authority. The High Court confirmed the order of the Tribunal. However, the Hon'ble Supreme Court interpreting the expression "for the purpose of business", as reproduced above in para 6, allowed the appeal of the Revenue and held that the expenditure incurred by the assessee was not allowable under Section 10(2)(xv) of the Act as business expenditure because payments were not for the purpose of business.
15. The case of Brijraman Das & Sons (supra) relates to expenditure incurred by a Hindu trader in Ganeshji ki Puja performed at the time of Mahurat or opening of their account books on the auspicious occasion of Diwali, whereas, in the instant case, the expenditure was incurred by a company incorporated under the Companies Act in Puja and Vishwakarma Puja and as such, the same is distinguishable on facts.
16. The facts of the present case are almost similar to the facts of Sanghameshwar Coffee Estates Ltd. (supra).
17. In the latest judgment in the matter of CIT and Ors. v. Saravana Spinning Mills (P) Ltd. (2007) 211 CTR (SC) 281 : (2007) 7 SCC 298 the Hon'ble Supreme Court while considering the scope of deductions under Section 37 of the Act, has held in para 21 of the judgment that a particular item of expenditure may be deductible if the expenditure does not fall within Sections 30 to 36; that it should have been incurred in the accounting year; that it should be in respect of a business carried on by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business.
18. We are in respectful agreement with the law laid down by the Karnataka High Court in the matter of Sanghameshwar Coffee Estates Ltd. (supra) and the Bombay High Court in Kolhapur Sugar Mills Ltd. (supra) and accordingly, we hold that the expenditure incurred in Puja/ Vishwakarma Puja by a company cannot be treated as expenditure incurred wholly and exclusively for the purposes of business or profession of a company, and the assessee cannot be allowed any deduction under Section 37(1) of the Act towards such expenditure. We find no illegality or infirmity in the order of the Tribunal restoring the order of the AO.
19. In the result, the appeal being devoid of substance deserves to be dismissed and is, accordingly, dismissed.
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