1 IN HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS 31ST DAY OF JULY, 2019 PRESENT HON BLE MR. JUSTICE ARAVIND KUMAR AND HON BLE MR. JUSTICE BELLUNKE A.S. I.T.A.No.100016/2018 c/w I.T.A.No.100017/2018 IN I.T.A.No.100016/2018 BETWEEN: M/S. KANHAIYALAL DUDHERIA, OPP. BHANWAR KUNJ, NEAR NEW KSRTC BUS STAND, SADUR-583119, REP. BY ITS PARTNER, SRI.NAVRATANMAL BACHHAWAT.APPELLANT (BY SRI. M.V.SESHACHALA, SR.COUNSEL FOR SRI H.R.KAMBIYAVAR, ADVOCATE) AND: 1. JOINT COMMISSIONER OF INCOME TAX, BELLARY RANGE, AAYAKAR BHAVAN, FORT, BALLARI-583102. 2 2. COMMISSIONER OF INCOME TAX, C.R. BUILDING, NAVANAGAR, HUBBALLI-580025. ...RESPONDENTS (BY SRI.Y.V.RAVIRAJ, ADVOCATE) THIS APPEAL IS FILED UNDER SECTION 260A OF INCOME TAX ACT, 1961, PRAYING TO FORMULATE SUBSTANTIAL QUESTION OF LAW AS STATED ABOVE AND ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN ITA No.872/BANG/2016 DATED 17.05.2017 CONFIRMING ORDER PASSED BY APPELLATE COMMISSIONER, GULBARGA IN ITA No.122/CIT(A)/HBL/2014-15 DATED 29.01.2016 WHICH HAD CONFIRMED ORDER PASSED BY JOINT COMMISSIONER OF INCOME TAX, BELLARY RANGE, BELLARY DATED 26.03.2014 FOR ASSESSMENT YEAR 2011-12 AND ETC., IN I.T.A.No.100017/2018 BETWEEN: M/S. KANHAIYALAL DUDHERIA, OPP. BHANWAR KUNJ, NEAR NEW KSRTC BUS STAND, SADUR-583119, REP. BY ITS PARTNER, SRI.NAVRATANMAL BACHHAWAT. ... APPELLANT (BY SRI. M.V.SESHACHALA, SR.COUNSEL FOR SRI H.R.KAMBIYAVAR, ADVOCATE) 3 AND: 1. JOINT COMMISSIONER OF INCOME TAX, BELLARY RANGE, AAYAKAR BHAVAN, FORT, BALLARI-583102. 2. COMMISSIONER OF INCOME TAX, C.R. BUILDING, NAVANAGAR, HUBBALLI-580025. ...RESPONDENTS (BY SRI. Y.V.RAVIRAJ, ADVOCATE) THIS APPEAL IS FILED UNDER SECTION 260A OF INCOME TAX ACT, 1961, PRAYING TO FORMULATE SUBSTANTIAL QUESTION OF LAW AS STATED ABOVE AND ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN ITA No.1495/BANG/2016 DATED 17.05.2017 CONFIRMING ORDER PASSED BY APPELLATE COMMISSIONER, GULBARGA IN ITA No.202/CIT(A)/KLB/2014-15 DATED 29.01.2016 WHICH HAD CONFIRMED ORDER PASSED BY JOINT COMMISSIONER OF INCOME TAX, BELLARY RANGE, BELLARY DATED 16.02.2015 FOR ASSESSMENT YEAR 2012-13 AND ETC., THESE APPEALS HAVING BEEN HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT OF JUDGMENT THIS DAY, ARAVIND KUMAR J., DELIVERED FOLLOWING: 4 JUDGMENT Having heard learned Advocates appearing for parties on 05.07.2019, we have admitted above appeals to consider following substantial question of law: Whether authorities below were justified in disallowing sum of Rs.1,61,30,480/- incurred towards construction of 169 houses for villagers who had lost their homes due to natural calamity on ground that it was not expenditure allowable under Section 37 of Income Tax Act, 1961, despite MOU dated 02.07.2010 having been entered by petitioner with jurisdictional Deputy Commissioner, Government of Karnataka? BRIEF BACKGROUND OF CASE: 2, appellant-assessee is carrying on business of extraction of iron ore and also trading in iron ore. For assessment years 2011-12 and 2012-13 return of income came to be filed by assessee, was processed under Section 143(1) of Income Tax Act, 1961 5 (for short Act ). assessing officer disallowed amount claimed by assessee as social welfare expenses in sum of ` 1,61,30,480/- and ` 55,90,080/- for respective assessment years on ground that it was not gained/incurred in course of business but for philanthropic purposes by separate assessment orders dated 26.03.2004 and 16.02.2015 respectively. 3. Being aggrieved by said orders, assessee filed appeals before CIT(A) in ITA Nos.122 & 20/CIT(A)/HBA/2014-15. Said appeals came to be dismissed by order dated 29.01.2016 by upholding assessment orders. Further appeal to Income Tax Appellate Tribunal in ITA No.782 & 1495/BANG/2016 also came to be dismissed by affirming orders of assessing officer and appellate authority. Hence, this appeal. 4. We have heard arguments of Sri M.V.Seshchala, learned Senior Counsel appearing for 6 appellants and Sri.Y.V.Raviraj, learned Standing Counsel appearing for respondent/Income Tax Department. 5. It is contention of Sri.Seshachala that Government of Karnataka had requested assessee in question and similarly placed persons to help poor and needy people by providing houses, who had lost same owing to natural calamity that occurred in north interior Karnataka during last week of September and first week of October 2009 and in furtherance of it, assessee had entered into MOU with Karnataka State Government, whereby assessee was required to construct houses and deliver same to Government and accordingly, assessee had constructed 169 houses in villages Gundi Ganur in Siriguppa Taluk and handed over possession of same to Government of Karnataka, for which assessee had incurred expenditure to tune of `1,61,30,480/- during financial year 2010-11 and `55,90,080/- during financial 2011-12. It is his contention that authorities below had committed serious error in disallowing amount expended by assessee towards construction of 7 169 houses and said expenditure would come within definition of Commercial Expediency . He would also submit that said expenditure was legitimate business expenditure and had been incurred for philanthropic cause and on account of call given by Hon ble Chief Minister, Government of Karnataka. He would also submit that said expenditure was on account of business compulsion and assessee had entered into MOU with Government of Karnataka and as such said expenditure was incurred for purposes of earning goodwill of villagers and Government of Karnataka, which would in- turn permit smooth conduct of petitioner s business without any hindrance. In support of his submission he relies upon following judgments: (1) (1959) 37 ITR 66 (SC): INDIAN MOLASSES CO. (P) LTD. vs. CIT (2) (1966) 62 ITR 638 (SC): CIT vs. NAINITAL BANK LTD. (3) (1986) 158 ITR 486 (GUJ): C.J.PATEL & CO. vs. CIT (4) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT 8 (5) (1964) 53 ITR 140 (SC): CIT vs. MALAYALAM PLANATION LTD. (6) (1982) 133 ITR 756 (SC): CIT vs. DELHI SAFE DEPOSIT CO. LTD. (7) (1976) 103 ITR 66 (SC): CIT vs. PANIPAT WOOLLEN & GENERAL MILLS CO. LTD. (8) (1977) 108 ITR 358 (SC): SHAHZADA NAND & SONS vs. CIT (9) (1979) 118 ITR 261 (SC): SASSOON J. DAVID & CO. (P) LTD. vs. CIT (10) (1997) 223 ITR 101 (SC): SRI. VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. vs. CIT (11) (1979) 118 ITR 379 (MP): ADDL. CIT VS. KUBER SINGH BHAGAWANDAS (12) (2007) 288 ITR 1 (SC): S.A.BUILDERS LTD. vs. CIT (APPEALS & ORS. (13) (2004) 266 ITR 170 (MAD): CIT vs. MADRAS REFINERIES LTD. (14) (2007) 292 ITR 115 (MAD): CIT vs. CHEMICALS & PLASTICS INDIA LTD. (15) (2009) 317 ITR 338 (MAD): CIT vs. VELUMANICKAM LODGE (16) ITA NO.603/2004: CIT vs. M/S. KONKAN MARINE AGENCIES 9 Hence, he prays for allowing appeals by answering substantial question of law in favour of assessee. 6. Per contra, Sri Y.V.Raviraj, learned Standing counsel appearing for revenue would support orders under challenge and would elaborate his submission by contending that if at all assessee was inclined to donate, they should have paid said amount to Government of Karnataka and sought exemption under Section 80G of Act. He would contend when said exercise was not undertaken by assessee and on other hand amount is spent for construction of houses, such expenditure cannot be allowed as expenditure under Section 37 of Act. He would also contend that expenditure to be eligible for allowance under Section 37(1) of Act, it should not be expenditure of nature described in Sections 30 to 36 not being capital expenditure or personal expenses but laid out or expended wholly and exclusively for purposes of business of assessee. He would also further contend that earning good will with local 10 administration as claimed by assessee does not become part of business expenditure under Section 37(1) as claimed by assessee. Hence, relying upon judgment of High Court of Rajasthan in matter of JASWANT TRADING COMPANY vs. COMMISSIONER OF INCOME TAX reported in (1995)212 ITR 24 , he prays for dismissal of appeals. ANSWER TO SUBSTANTIAL QUESTION OF LAW: 7. pivotal issue which arises for our consideration in these appeals relates to disallowance of sum of Rs.1,61,30,480/- and Rs.55,90,080/- for assessment years 2011-12 and 2012-13 which has been incurred by appellant-assessee for construction of 169 houses for villagers who had lost their homes due to natural calamity. 8. It is not in dispute that MOU came to be entered into between appellants and Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, copy of which has been made available for our perusal. It would clearly indicate on 11 account of unprecedented floods and abnormal rain which severely ravaged North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing undaunted task of rehabilitating persons who were in destitute and to restore normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, appeal came to be made by then Hon ble Chief Minister to all to lend their hands for restoring normalcy. 9. It is in this background, Hon ble Chief Minister of Karnataka had made fervent appeal to all philanthropist, industrial and commercial enterprises to extend their wholehearted support in all possible manner to achieve gigantic task of restoring normalcy and bringing hopes to lives of more than 5.41 lakh persons. 12 10. assessee who is carrying on business of extraction of iron ore and trading in iron ore thus entered into Memorandum of Understanding with Government of Karnataka on 01.12.2009, whereunder assessee agreed to construct 256 houses at Honnarahalli and subsequently, on mutual understanding, constructed 169 houses at Gundiganur village, Siraguppa taluk for providing shelter to flood affected persons who had lost their roof over their head and for purpose of construction of houses, assessee spent amount of Rs.1,61,30,480/- during assessment year 2011-12 and Rs.55,90,080 during assessment year 2012-13. amount so spent by assessee was reflected in Profit and Loss Account by debiting said amount under head Social Welfare (CM Relief Fund) . Hence, assessing officer called upon assessee to explain nature of expenditure which had been debited to Profit and Loss Account. same was replied to by assessee by bringing it to notice of assessing officer that said amount was spent towards construction of 169 houses and said expenditure was 13 claimed as allowable business expenditure under Section 37 of Income Tax Act. 11. above expenditure having been disallowed as already noticed herein above by assessing officer is now subject matter of this appeal and substantial question of law framed herein above is being adjudicated. Hence, it would be necessary to extract Section 37 of Act which has been pressed into service by assessee to claim said expenditure is to be allowed as business expenditure. It reads: 37. 1) Any expenditure (not being expenditure of nature described in sections 30 to 36, 21[* * *] and not being in nature of capital expenditure or personal expenses of assessee), laid out or expended wholly and exclusively for purposes of business or profession shall be allowed in computing income chargeable under head "Profits and gains of business or profession". [Explanation.1 For removal of doubts, it is hereby declared that any expenditure incurred by assessee for any purpose which is offence or which is prohibited by law shall not be deemed to have been incurred for purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] 14 Explanation.2-For removal of doubts, it is hereby declared that for purposes of sub- section (1), any expenditure incurred by assessee on activities relating to corporate social responsibility referred to in section 135 of Companies Act, 2013 (18 of 2013) shall not be deemed to be expenditure incurred by assessee for purposes of business or profession. (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by assessee on advertisement in any souvenir, brochure, tract, pamphlet or like published by political party.] 12. plain reading of Section 37 would indicate that such expenditure not being expenditure of nature described in Sections 30 to 36 or capital expenditure or personal expenses of assessee would be expenditure under this Section or in other words, any expenditure laid out or expended wholly and exclusively for purposes of business would be allowable in computing income chargeable under head Profit and gains of business or profession under this Section. 13. plain reading of Section 37 would also indicate that emphasis is on expression wholly and exclusively for purposes of business or 15 profession . These two expressions namely, wholly and exclusively being adverb, has reference to object or motive of act behind expenditure. If expenditure so incurred is for promoting business, it would pass test for qualifying to be claimed as expenditure under Section 37 of Act. What is to be seen in such circumstances is, what is motive and object in mind of two individuals namely, person who spend and person who receives said amount. Thus, purpose and intent must be sole purpose of expending amount as business expenditure. If activity be undertaken with object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as business expenditure, solely on ground that activity involved for such expenditure is not directly connected to business activity. In other words, issue of commercial expediency would also arise. 16 14. Hon ble Apex Court in case of INDIAN MOLASSES COMPANY vs CIT reported in (1959)37 ITR 66 (SC) has held that expenditure what is paid out or away and is something which is gone irretrievably would be deductible for purpose of income tax. It has been held: Expenditure is equal to expense and expense is money laid out by calculation and intention though in many uses of word this element may not be present. But idea of spending in sense of paying out or away money is primary meaning Expenditure is thus what is paid out or away and is something which is gone irretrievably. Expenditure which is deductible for income-tax purposes is one which is towards liability actually existing at time, but putting aside of money which may become expenditure on happening of event is not expenditure. 15. In matter of CIT vs NAINITAL BANK LIMITED reported in (1966)62 ITR 638 (SC) it came to be held that mere liability to satisfy obligation by assessee is undoubtedly not expenditure, it is only when assessee satisfies obligation by delivery of cash or property or by settlement of accounts that there is expenditure. 17 16. In order to understand and appreciate expression commercial expediency , it would not be out of context to ascertain meaning of business expense . In Black s Law Dictionary, 9th edition, said expression has been defined as: business expense. (1858) expense incurred to operate and promote business; esp., expenditure made to further business in taxable year in which expense is incurred. . Most business expenses unlike personal expenses are tax deductible. Whereas, extraordinary expense is defined as under: Extra-ordinary expense unusual and unfrequent expense, such as right/off of goodwill or large judgment. As used in Constitutional provision authorizing State to incur extra-ordinary expenses, term denotes expense for general welfare compelled by unforeseen condition such as natural disaster or war also termed as extra-ordinary item. Likewise, expression expediency has been defined as: Expediency. word of large import, comprehending whatever is suitable and appropriate in reason for accomplishment of specified object. As supplied to public welfare legislation, term involves utility, and has reference to matters which are wholly for legislative cognizance. 18 term is said to be nearly synonymous with necessity where that term is used in sense not importing absolute necessity, as in case of governmental interference with private property when necessary for public good, and has been distinguished from emergency see 29 C.J.S. p 762 note 38, and reasonableness . 17. Hon ble Apex Court in case of CIT vs DELHI SAFE DEPOSIT COMPANY LIMITED reported in (1982)133 ITR 756 (SC) has held sum of money expended, not of necessity and with view to direct and immediate benefit to trade, but voluntarily and on grounds of commercial expediency, and in order indirectly to facilitate carrying on business, may be expended wholly and exclusively for purpose of trade. As to what would be test of commercial expediency was subject matter of consideration by Hon ble Apex Court in case of CIT vs PANIPAT WOOLLEN AND GENERAL MILLS COMPANY LIMITED reported in (1976)103 ITR 66 and held: 19 8. Great stress was laid xxx share losses. test of commercial expediency cannot be reduced in shape of ritualistic formula, nor can it be put in water-tight compartment so as to be confined in strait- jacket. test merely means that Court will place itself in position of businessman and find out whether expenses incurred could be said to have been laid out for purpose of business or transaction was merely subterfuge for purpose of sharing or dividing profits ascertained in particular manner. It seems to us that in ultimate analysis matter would depend on intention of parties as spelt out from terms of agreement or surrounding circumstances, nature or character of trade or venture, purpose for which expenses are incurred and object which it sought to be achieved for incurring those expenses. If expenses incurred amount to profit of enduring nature they may be treated as capital expenditure, whereas if expenses merely serve to promote or increase commercial activity they may amount to expenditure which is incurred for purpose of business. 18. circumstances in which expenditure incurred and claimed as allowable under Section 37 of Act would have to be examined on 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 20 undertaking. It varies from one business to another, expediency depends on nature of business, motive and purport of business carried on to earn profit are also factors which will have to be considered, determined and answered in facts obtained in each case. In other words, commercial expediency varies from one assessee to another. By precise mathematical formula, it cannot be defined as to what can be commercial expediency in given case nor it can be put in water tight compartment. To put it differently, revenue authorities or Courts when faced with such situation, will have to place itself in position of such business men and ascertain whether expenses so incurred can be said to have been expended for purpose of business or transaction was merely camouflage for purpose of reducing tax component by depicting it as expenditure by reducing quantum of profit in profit and loss account. 19. expression wholly and exclusively found in Section 37 of Act cannot be understood in 21 narrowed manner. In other words, it has to be given interpretation so as to achieve object of Act. Thus, where amount is expended and claimed as expenditure allowable under Section 37(1) of Act, it need not be that such disbursement is made in course of, or arises out of, or is connected with trade or is made out of profits of trade. It must be made for purpose of earning profits. 20. In fact, Hon ble Apex Court approving observation of ATHERTON s case - 1926 AC 205 in matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: ..a sum of money expended, non of necessity and with view to direct and immediate benefit to trade, but voluntarily on grounds of commercial expediency, and in order indirectly to facilitate carrying on of business, may yet be expended wholly and exclusively for purposes of trade , can be adopted as best interpretation of crucial words of Section 10(2)(xv). imprudence of expenditure 22 and its depressing effect on taxable profits would not deflect applicability of section. acid test, did expenditure fall on assessee in this character as trader and was it for purpose of business . 21. co-ordinate Bench in matter of CIT & ANOTHER vs INFOSYS TECHNOLOGIES LIMITED reported in (2014)360 ITR 174(Kar) while examining claim of assessee to treat expenditure incurred by it for installing traffic signals as business expenditure under Section 37(1) of Act, had held for purpose of business used in Section 37(1) of Act should not be limited to meaning of earning profit alone and it includes providing facility to its employees also for efficient working . It came to be held: 24. As is clear from case of Mysore Kirloskar Ltd, expenditure claimed need not be necessarily spent by assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting business. fact that somebody other than assessee is also benefited by expenditure should not come in way of expenditure being allowed by way of deduction under Section 23 37(1) of Act, if it satisfies otherwise tests laid down by law. Similarly, words 'for purpose of business' used in Section 37(1) of Act, should not be limited to meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for employees or their children or for children of ex- employees. employees of today may become ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied other requirements, must be allowed as deduction under Section 37(1) of Act. Expenditure primarily denotes idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of unascertained liability of future. Expenditure in this sense is equal to disbursement which, to use homely phrase means something which comes out of traders pocket. 22. requirement of commercial expediency would be judged in context of prevailing socio economic conditions and such thinking which places general interest of community above personal interest of individual and beliefs that business or undertaking is product of combined efforts of all, then, such expenditure incurred by business undertaking may partake character of commercial expediency. Such expenditure depends upon terrain in which it travels. 24 23. In matter of SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS COMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by District Collector would be against public policy or is expenditure allowable under Section 37(1) of Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of Act. It was also held any contribution made by assessee to public welfare fund which is directly connected or related with carrying on assessee s business or which results in benefit of assessee s business has to be regarded as allowable deduction under Section 37(1) . In facts obtained in said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to district welfare fund maintained by District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly 25 connected with assessee s carrying on business. It is further held: 10. From abovesaid discussion it follows that any contribution made by assessee to public welfare fund which is directly connected or related with carrying on of assessee s business or which results in benefit to assessee s business has to be regarded as allowable deduction under s. 37(1) of Act. Such donation, whether voluntary or at instance of authorities concerned, when made to Chief Minister s Drought Relief Fund or District Welfare Fund established by District Collector or any business, cannot be regarded as payment opposed to public policy. It is not as if payment in present case had been made as illegal gratification. There is no law which prohibits making of such donation. mere fact that making of donation for charitable or public cause or in public interest results in Government giving patronage or benefit can be no ground to deny assessee deduction of that amount under s.37(1) of Act when such payment had been made for purpose of assessee s business. 24. In case of S.A.BUILDERS LIMITED vs CIT(APPEALS) AND OTHERS reported in (2007) 288 ITR 1 (SC), it has been held by Hon ble Apex Court that expression for purpose of business includes expenditure incurred voluntarily for commercial 26 expediency, and it is immaterial if third party also benefits thereby. It is further held: In our opinion, decisions relating to Section 37 of Act will also be applicable to Section 36(1)(iii) because in Section 37 also expression used is "for purpose of business". It has been consistently held in decisions relating to Section 37 that expression "for purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if third party also benefits thereby. expression "commercial expediency" is expression of wide import and includes such expenditure as prudent businessman incurs for purpose of business. expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. 25. It has been held under English income-tax that sums paid to employee as pension or gratuity are deductible as money laid out and expended for purposes of trade, profession or avocation in case of SMITH vs INCORPORATED COUNCIL OF LAW REPORTING FOR ENGLAND AND WALES - (1914) 3 KB 574 and it reads thus: 27 respondents, Incorporated Council of Law Reporting for England and Wales, were limited company incorporated under s.23 of Companies Act, 1867, with no power to pay any portion of their earnings to their members by way of profits. In 1911 respondents gave gratuity of 1500/- to one of their reporting staff on his retirement after long service. payment was not made under any contract between respondents and reporter, but it was within powers conferred by respondents memorandum and articles of association, and it was habit of respondents, to give gratuities to reporters on retirement after long service. 1500/- was included in respondents trading accounts for 1911 as item of expenditure, and additional assessment to income tax under Sched. D was in consequence made on respondents of 500l., i.e., one-third of 1500l., in respect of their profits for that year. On appeal by respondents to Commissioners, they held that 1500l was allowable to respondents as business expense in calculating profits of year for income tax purpose. It seems to me that question whether money is wholly and exclusively laid out or expended for purposes of trade is question of fact. Judges of High Court may know, by accident of their previous training, something about particular trade. To take personal instance, I may be assumed to know something about shipping, but there are many trades about which I should know absolutely nothing whatever, and there are equally many trades about which any of my learned Brethren would know nothing whatever except what they were told by 28 Commissioners. In many cases question whether money was wholly or exclusively laid out or expended for purposes of trade must depend upon knowledge of facts of trade, of way in which it is carried on, of effect of payments made in that trade, all of which are questions of fact. There may be cases where it is clear even to Judge who knows nothing about trade, that particular payment could not be wholly or exclusively laid out for purposes of trade. I do not desire to discuss politics, but I take examples which seem to me fairly clear. Payments for political purposes might conceivably be for purposes of trade. It might be that payment by company to Tariff Reform League might be of great advantage to its trade. It might be that payment by company to political party which was supposed to be identified with interests of particular trade might be to advantage of trade; but one can easily imagine cases such as payment by company to National Service League, where it would be impossible to conceive that anybody could find that such money was wholly or exclusively laid out or expended for purposes of trade. There may be cases in which Court would have to say there is no evidence on which any tribunal could find that this sum was laid out or expended for purposes of such trade, but in most cases it appears to me that it depends on facts of trade of which Court has no knowledge, and for which it must depend on findings of Commissioners. 26. Keeping above principles in mind, when facts on hand are examined, it would clearly indicate that 29 assessee has incurred expenditure towards construction of 169 houses for villagers who had lost their home due to natural calamity. In order to cater to needs of those destitute persons who had lost roof over their head on account of natural calamity, assessee constructed houses by expending amount. However, assessing officer and authorities have held that it was not incurred for purpose of business. One glaring factor which cannot go unnoticed is, that MOU came to be entered into by appellant on 01.12.2009 with Government of Karnataka, as already noticed herein above, whereunder assessee agreed to construct houses to rehabilitate flood victims at earliest possible time and for undertaking said task, appropriate Government provided assessee land free from encumbrances, upon which construction of houses came to be commenced, executed and handed over within time limit agreed to under MOU. It was term of MOU that donor (assessee) has joined hands with Government of Karnataka to bring total relief in lives of people who were worst affected by 30 unprecedented rain and floods and said project was undisputedly philanthropic project. In fact, it was agreed to between parties that donor himself would incur financial liability, maintain high standard of quality construction and would construct houses as per design offered by Government of Karnataka, apart from ensuring quality of material used for construction is of superior quality. That apart, work completion certificate has been issued by Deputy Commissioner, Ballary and it is also certified that sum of Rs.2,22,76,162/- has been expended by assessee for construction of 169 Aasare houses at Gundigana village. Thus, it boils down to fact that construction of houses has been carried out by assessee as agreed to under MOU. 27. Tribunal has rejected contention of assessee that expenditure incurred for purpose of business and onus being on assessee has not been discharged. It is also further held that no factual condition was laid by assessee to establish expenditure so 31 incurred was for business purpose nor any attempt was made before lower authorities. It further held that assessee has made bald assertion. 28. In light of analysis of case laws above referred to, it cannot be gain said by revenue that contribution made by assessee to public welfare cause is not directly connected or related with carrying on of assessee s business. As to whether such activity undertaken and discharged by assessee would benefit to assessee s business has to be examined in light of observations made by us herein above. Tribunal committed serious error in arriving at conclusion that MOU entered into between assessee and Government of Karnataka is opposed to public policy and void under Section 23 of 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 donation, whether voluntary or at instance of authorities concerned, when made to Chief Ministers Drought Relief Fund or 32 District Welfare Fund established by District Collector or any other fund for benefit of public and with view to secure benefit to assessee s business cannot be regarded as payment opposed to public policy. It came to be further held making of donation for charitable or public cause or in public interest results in Government giving patronage or benefit can be no ground to deny assessee deduction of that amount under Section 37(1) of Act, when such payment has been made for purposes of assessee s business. In fact, it can be noticed under MOU in question which came to be entered into by assessee with Government of Karnataka was on account of clarion call given by then Chief Minister of Karnataka in hour of crisis to all Philanthropist, industrial and commercial enterprises to extended their whole hearted support and entire logistic support has been extended by Government of Karnataka namely, providing land and design of house to be constructed, approval of layout and to take care of all local problems. Infact, State Government had also agreed to exempt such of those persons who undertake to 33 execute work from purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to appellant also. In this background it cannot be construed that MOU entered into between assessee and Government of Karnataka is opposed to public policy. 29. In 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 assessee would be approaching appropriate Government and its authorities for grant of permits, licenses and as such assessee in its wisdom and as prudent business decision has entered into MOU with Government of Karnataka and incurred expenditure towards construction of houses for needy persons, not only as social responsibility but also keeping in mind goodwill and benefit it would yield in long run in earning profit which is ultimate object of conducting business and as such, expenditure incurred by assessee would be in realm of business expenditure . Hence, orders passed 34 by authorities would not stand test of law and is liable to be set aside. 30. However, it requires to be noticed that while examining claim for deduction under Section 37(1) of Act assessing officer would not blindly or only on say of assessee accept claim. In other words, assessing officer would be required to scrutinise and examine as to whether said deduction claimed for having incurred expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to work undertaken by assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of Act and not otherwise. 31. For reasons aforestated, we are of considered view that substantial question law formulated herein is to be answered in negative i.e., against revenue and in favour of assessee. 35 Hence, we proceed to pass following : ORDER (i) I.T.A.Nos.100016/2018 and 100017/2018 are allowed. (ii) Order dated 17.05.2017 passed by Income Appellate Tribunal, B Bench , Bengaluru in ITA Nos. 782 & 1495/Bang/2016 for assessment years 2011-12 and 2012- 13 are set aside and appeals filed by assessee before Tribunal is allowed. (iii) Assessment proceedings of years 2011-12 and 2012-13 are remitted to assessing officer to examine claim of assessee in light of our observations made herein above. (iv) No orders as to costs. [Sd/-] JUDGE [Sd/-] JUDGE Jm/sp Kanhaiyalal Dudheria v. Joint Commissioner of Income-tax, Bellary Range, Ballari / Commissioner of Income-tax, Hubballi