Allowable social welfare expenses at the workplace and in nearby villages

Facts and issues of the case

The assessee is a company engaged in the business of manufacture and trading of Agro chemicals and pesticides with the manufacturing plants in Srikakulam and Ethakota areas. They have filed their return of income for the assessment year 2016-17 on 16-10-2016 declaring an income of ₹ 10, 59,83,375/-before set off of brought forward losses and book profit under section 115 JB of the Income Tax Act, 1961 (for short “the Act”) at ₹ 10,85, 79,910/-. By order dated 27-12-2018, passed under section 143(3) of the Act, learned Assessing Officer made an addition of ₹ 1,09,14,682/- because of disallowance under section 35(2AB) of the Act, ₹ 84,28,163/- by disallowing the social welfare expenses and ₹ 9,99,631/- under section 14A of the Act read with Rule 8D of the Income Tax Rules1962 (“the Rules”).

Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the Ld. CIT(A) challenging the disallowance of the social welfare expenditure and disallowance under section 14A of the Act read with Rule 8D of the Rules. According to the learned Assessing Officer the social welfare expenses incurred by the assessee were in the nature of “corporate social responsibility” (CSR), only such expenses which were incurred wholly and exclusively for the purpose of business could be allowed as a direction but not the expenses in the nature of CSR. According to the learned Assessing Officer the expenditure incurred by the assessee is only application of income and has nothing to do with the business of the assessee.

By way of impugned order, Ld. CIT(A) allowed relief to the assessee in respect of the addition made on account of disallowance under section 14A of the Act read with Rule 8D of the Rules, but confirmed the addition of ₹ 84,28,163/- made on account of disallowance of social welfare expenditure. Hence the assessee is before us in this appeal to delete the disallowance of social welfare expenses.

It is the submission of the Ld. AR that in as much as the assessee is running the chemical plants near the villages and dependent upon the participation of the villagers in the activities by engaging them to work in their factories in various capacities it is necessary for them to win the goodwill of the people so as to how the seamless supply of labour everyday and also for smooth functioning of the chemical plants. According to the Ld. AR is not necessary that every expense that could be allowed as a direction should be such as a hard-nosed and perhaps devoid of sense of compassion, businessman alone would incur in furtherance of his business pursuits, as was held by various fora on this aspect. He placed reliance on the addition of a Coordinate Bench of Raipur Tribunal in ACIT Vs. Jindal Power Ltd (2016) 70 taxmann.com 389 (Raipur Trib.).

Per contra, while justifying the findings of the authorities below, Ld. DR, placed reliance on the decisions of the Hon’ble Andhra Pradesh High Court in the case of CIT Vs. Singareni Collieries Co (1997) 90 Taxman 185 (AP), Hon’ble Madras High Court in the case of Ismail and Sethuraman (1977) 107 ITR 470 (Mad), Bangalore Bench of ITAT in the case of Kanhaiyalal Dudheria (2017) 82 taxmann.com 134 and Jaipur Bench of ITAT in the case of DCIT Vs. Rajasthan State Mines & Minerals Ltd. (2012) 25 taxmann.com 11 (JP) to submit that where the assessee fails to prove that the expense is wholly and exclusively for the purpose of business, no deduction under section 37(1) of the Act is allowable.

Observation by the court

In reply, Ld. AR submitted that the decisions relied upon by the Revenue have no application to the facts of the case, inasmuch as in the case of Singareni Collieries Co. (supra) it was not clear whether the assessee was prompted by a business motive in adopting the orphans, because it was done at the appeal of the State Government; in the case of Ismail and Sethuraman (supra) the expense was the donation paid to a political party; in the case of Kanhaiyalal Dudheria (supra) the expenditure was incurred on construction of houses to be handed over to the people affected by the floods; and lastly in the case of Rajasthan State Mines & Minerals Ltd. (supra) the expense was incurred on cultural events which have no nexus with the business. Ld. AR submitted that facts of none of the cases is comparable to the case of the assessee, whereas the facts of the case of assessee are similar to the facts covered by the decision in the case of Jindal Power Ltd (supra).

Court had through the record in the light of the submissions made on either side. It could be seen from the record that, it was pleaded by the assessee before the learned Assessing Officer and also before the Ld. CIT(A) that the expenditure incurred by it is in the nature of social welfare activities but not CSR activities. Assessee pleaded that they have incurred the expenses in the form of supply of water to nearby villages, operation and maintenance expenses of RO plants of nearby villages, borewells maintenance expenses, contribution to vidya volunteer scheme, donation of schoolbags and uniforms to local schoolchildren, stipends to students, financial assistance to nearby villages for various welfare activities in the villages etc., and it is necessary for them to incur such expenditure to secure the cooperation of the villages for smooth running of the manufacturing plants it was further submitted that such an expenditure was necessary because the assessee engages the villagers to work and then factory in various capacities and therefore, winning the goodwill is equally important for their business.

On a perusal of the decisions relied upon by the Revenue, Court had inclined to accept the explanation offered by the assessee for the nonapplication of the ratio of these decisions to the facts of the case on hand because the facts of none of the cases is comparable to the facts of the case on hand. In Singareni Collieries Co. (supra) at the request of the State Government, the assessee incurred the expenditure for rehabilitation of the orphan children and the Hon’ble High Court observed that it was not clear as to whether the assessee was prompted by a business motive in adopting the orphans. The case of Ismail and Sethuraman (supra), it could be seen, is a case where the assessee claimed deduction of certain amounts paid by it to a political party is a donation. In the case of Kanhaiyalal Dudheria (supra) the expenditure incurred by the assessee was on the construction of houses to be handed over to the people affected by the floods.

So also in the case of Rajasthan State Mines & Minerals Ltd. (supra) the expenditure was for conducting certain cultural events like Umang Utsav, amounts paid to Rose Society for sponsorship of Rose show, payment to the parishad for sponsorship of 46 Maha Rana Kumbha Sangeet Samaroh etc. It is, therefore, clear that none of the assessee is comparable to the case on hand inasmuch as there is not an iota of contention on behalf of the assessee is therein that the expenditure had any nexus to the business of the assessees.

Now coming to the case on hand, absolutely there is no dispute that the assessee incurred the expenditure in dispute. There is also no dispute that the assessee incurred expenditure in the form of supply of water to nearby villages, operation and maintenance expenses of RO plants of nearby villages, burbles maintenance expenses, contribution to media volunteer scheme, donation of schoolbags and uniforms to local schoolchildren, stipends to students, financial assistance to nearby villages for various welfare activities in the religious etc. As pointed out by the Ld. AR, in the case of Jindal Power Ltd. (supra), the assessee incurred the expenses on construction of school building, Devasthanam/temple, drainage, barbed wire fencing, educational schemes and distribution of cloths etc., voluntarily in the vicinity of the business place.

It was contended in that case also that the incurring of the expenditure was voluntary, not mandatory and not for the purpose of business. It was further contended that such a voluntary expenditure, which is not mandated by any enactment and which the assessee was not statutorily bound to incur, is not admissible for deduction in computation of business income.

The Tribunal, however, turned down such a contention advanced on behalf of the assessee and dealt with the issue in detail more particularly in the light of explanation 2 to section 37(1) of the Act with effect from 01-04-2015. The reasoning of the Tribunal to reach the conclusion that the assessee is entitled to claim the deduction of such an expenditure is strikingly applicable to the facts of this case and court deem it just and necessary, for the sake of completeness, to extract the relevant observations of the Tribunal which are self-explanatory

It is not the case of the Revenue that there is some other purpose for the assessee to incur these expenses nearby their chemical plants other than to win the goodwill of the people in order to secure their cooperation in smooth running of the chemical plants and also to secure their participation by engaging them in their work in different capacities. Such a purpose would definitely be congenial to the working atmosphere of the assessee and cannot be said that it is something foreign to the business purposes of the assessee. It cannot be said that such incurring of the expenditure by the assessee is the application of income and not the expenditure incurred for the purpose of business. As long as expenses are incurred for the purpose of earning the income from business, merely because some of these expenses are incurred voluntarily without there being any legal or contractual obligation to incur the same, such expenses do not cease to be deductible in nature.

In the set of circumstances, court had considered opinion that the expenditure incurred by the assessee is not merely philanthropic, but also has a business angle, which we cannot ignore. For these reasons, court had considered opinion that the social welfare expenses incurred by the assessee at their workplace and nearby villages is an allowable deduction under section 37(1) of the act. With this view of the matter, court allow the grounds of appeal, and direct the learned Assessing Officer to addition of ₹ 84,28,163/-made under section 37(1) of the Act.