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Saturday, Jun 12, 2004

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Does good business mix with water?

K. Srinivasan

K. Srinivasan on a case of corporate charity

THE maximum number of court rulings probably pertain to the deductibility of claims for expenses in the determination of the total taxable income of assessees. Part of the trouble in dealing with the claims is that they can always be varied and so presented that they do not appear to fall within the purview of the existing case law.

A second difficulty is that the statutory law itself goes on changing from year to year with the result that the application of the law governing assessments in any particular year requires up-to-date knowledge of not merely court rulings but also amendments.

A third major problem is that the assessees may not be in a position to establish the genuineness of their claims for lack of evidence. Here is one about judicial activism, even at the level of the Tribunal.

The Madras Refineries Ltd, a public limited company, claimed that it had incurred expenditure to the extent of Rs. 15,32,000 in the previous year for its assessment for 1992-93 in providing drinking water facilities to residents in the vicinity of the refinery and running a school for the benefit of the children of the local residents. The claim was disallowed in the assessment since the expenditure in question had not been incurred for earning the income returned. The Commissioner (Appeals) held, for reasons which he did not evidently think it worthwhile to record, that only a sum of Rs 5 lakh out of the total amount claimed could be allowed as deduction. The Appellate Tribunal, which should strictly have confined itself to findings of fact and interpretation of the law (other than the constitutional law, being a creature of a statute), went out of the way to be generous at the cost of the Revenue.

But the High Court has now ruled that the Tribunal was right in law in allowing the deduction of the entire expenditure of Rs 15,32,000 as business expenditure. The following is the rationale of the ruling in the court's own words:

"The concept of business is not static. 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. Being known as a good corporate citizen brings goodwill of the local community as also with regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.

"Monies spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business 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."

It is not easy to go along with the court in this ratiocination. The public are certainly happy with corporate `charities' whatever their motives and fiscal implications may be. Even charity which is statutorily blessed by the Government in the sense that the court has provided tax subsidies to them is required to pay some tax on the amount so contributed for approved purposes.

Is it proper under the law to allow the assessee to choose his own cause outside the prescribed purpose and avoid tax altogether on the amount spent for that cause? That is, what will happen if the money spent by the assessee is fully debited as revenue expenditure. The Supreme Court has repeatedly emphasised that even a statutory incentive has to be literally construed and no benefit can be derived by an assessee which is not admissible under the letter of the law.

Should the law be allowed to be bent by any person in business because he can secure the otherwise illusive goodwill of the regulatory authorities and the public by providing drinking water and educational facilities? What has industrial pollution to do with an industrialist's taking unfair advantage of the law?

The cost of air and water pollution control equipment is permitted to be fully written off in the very year in which they are acquired by prescribing for their depreciation at 100 per cent.

Separate statutory authorities have been constituted in the different States to deal with industrial pollution. It is not so much the revenue implications in a particular case as the principles established by the court's ruling in a matter of this nature that cause concern to students of law. Will it solve the problem if a clarificatory provision is made in the Act that no claim for deduction of any expense of the nature of charity as defined in the Act will be entertained unless the claim is made under the specific provisions governing charity in the Act?

(By arrangement with Corporate Law Adviser, New Delhi.)

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