Money spent for being known as a good corporate citizen cannot be regarded as being wholly outside the ambit of the business concerns of the company.

T. C. A.Ramanujam

Corporate houses in the private sector have shown an increasing awareness of the responsibility to society which sustains them.

It is not uncommon for large companies to spend on social welfare. They would like to show themselves as good corporate citizens and gain the goodwill of the people. The question often arises whether such expenditure with a social purpose will meet with the approval of the income-tax officer (ITO).

Madras Refinery incurred an expenditure of Rs 15.32 lakh for providing drinking water facilities to the residents of Manali, a Chennai suburb. It also provided aid to the school run for the benefit of the children there. The ITO disallowed the expenditure on the ground that it was not incurred for earning income. But the Madras High Court, in

CIT vs Madras Refinery Ltd (266 ITR 170)

, allowed the expenditure as relating to the business.

A different view

Now comes a dissenting voice from Kerala. The company publishing

Malayala Manorama

, a well-known Malayalam daily, spent Rs 26.94 lakh for the reconstruction of a village devastated by the Lattur earthquake in Maharashtra. The company claimed the amount as business expenditure under Section 37 of the Income-Tax Act, 1961.

The claim was disallowed on the ground that though the purpose was noble, Section 37 will not permit allowance as it was not an expenditure incurred wholly and exclusively for business. The company took up the matter in appeal before the Kerala High Court and argued that reconstruction work helped the earthquake victims in Lattur and, thereby, the paper got wide publicity. The expenditure should be considered as incurred for business promotion.

It was also pointed out that commercial expediency of the company's decision to incur the expenditure could not be tested on the touchstone of strict legal liability to incur such expenditure.

Top government dignitaries had participated in the function held at the time of handing over of the keys of the houses to the recipients and this had contributed to the business promotion of the newspaper. The Revenue pointed out that the company had routed the expenditure as a donation to the Malayala Manorama Charitable Trust and the benefit of deduction under Section 80G was utilised. Section 37 was, therefore, not applicable, it contended.

The Kerala High Court ruled against the company. It noted that the Malayala Manorama Charitable Trust had constituted the Maharastra Earthquake Relief Fund. And the public, along with the company, had contributed to the fund. The total amount collected was around Rs 2.39 crore. The public contributed liberally as the cause was laudable.

According to the High Court, by no stretch of imagination can it be said that the amount contributed by the company to the Trust was spent wholly or exclusively for its business. There was no nexus between the money expended by the company and the purpose for which it was spent. The purpose was not business promotion but charitable and philanthropic.

"We are not prepared to say," said the High Court, "that the construction of the houses for the victims was for business promotion but it was to help the victims of the massive earthquake."

The Kerala High Court chose to dissent from the Madras High Court ruling in the

Madras Refinery Ltd

case. According to the Kerala High Court, the Madras High Court has not properly explained the meaning of the words "wholly and exclusively". Philanthropy by itself would not be sufficient to claim deduction under Section 37. The contribution may be eligible for deduction under Section 80G but not under Section 37

(284 ITR 69 Malayala Manorama Co vs CIT)


Not a static concept

The Madras High Court judgment in the

Madras Refinery

case had pointed out that the concept of business is not static. It has evolved over a period to include within its fold the concrete expression of care and concern for society. Being known as a good corporate citizen brings goodwill of the local community as also with the regulatory agencies, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.

Money 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 company.

A perusal of the Karnataka ruling in

Mysore Kirloskar Ltd (166 ITR 836)

would indicate that there is no conflict between Sections 37 and 80G. Both can be claimed simultaneously.

The Kerala High Court ruling comes as a surprise. Probably the Supreme Court will have the last word on the subject.

(The author is a former Chief Commissioner of Income-Tax.)

(This article was published in the Business Line print edition dated August 5, 2006)
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