The Hindu Business Line : A solid case on essential liquid

TAX LAW is comprehensive enough to take in its ambit various concepts such as public policy, welfare, corporate citizenship, charities, and the like. Courts were taking a rather strict view when claims were made for deduction of welfare expenditure which did not relate to workers and the public at large.

In the Voltas Ltd case, the company made a handsome donation to Tata Refugee Relief Project, which was set up to help flood-affected people. The donation was considered not allowable as business expenditure by the Bombay High Court (1994 207 ITR 47 Bombay). The court, however, suggested that the company may get deduction under Section 80 G of the Income-Tax Act, 1961 if the requirements of that section were fulfilled.

A similar view was taken by the Allahabad High Court in Simbholi Sugar Mills Ltd vs CIT (1962 45 ITR 125), an old case involving contribution to a school. The view was that there was no nexus between the earning of the profits and making of the donation.

There has been a perceptible change in the judicial view with regard to such claims. Donation made to Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector was considered admissible deduction under Section 37(1) of the ITR Act 1961 by the Supreme Court in the Sri Venkata Satyanarayan Rice Mill Contractors Co (223 ITR 101 SC) case.

Contribution made by the company to the panchayat for the upgradation of the elementary school into a high school was held to be an admissible deduction in CIT vs India Radiators Ltd (1988 149 CTR Madras).

The Madras Refineries case

In this case (266 ITR 170), Madras Refineries Ltd, a public sector undertaking in Chennai, to gain the goodwill of the people living in and around its unit, which, to some extent was polluting, provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. It incurred an expenditure of Rs 15,32,000 for that purpose.

The assessing officer (AO) declined to allow that expenditure on the ground that it was not an item of expenditure incurred by the assessee for earning the income earned by it in that year.

On appeal, the Tribunal allowed the expenditure as claimed, holding that winning the goodwill of the people of the locality helped in boosting business in many ways.

The Revenue took up the matter in appeal before the Madras High Court contending that incurring an expenditure of Rs 15.32 lakh was not necessary for earning the income in that year. Dismissing the appeal, the Madras High Court observed:

"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 the 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 business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry."

The court has made significant observations for policymakers to take note of. A polluting industry should be made to pay ecological tax on the basis of "let the polluter pay" principle. India has not enacted any such legislation.

Polluting industries themselves, at times, feel the moral responsibility to compensate the public, at least to some extent, for the ecological loss caused by their units.

The welfare programmes launched are often made to look esoteric, though there is the tax advantage attached to them. With cities such as Chennai in the grip of acute water shortage, the example of the Madras Refineries can be followed by several other industries to bring respite to harassed citizens. They can also put up drinking water facilities and claim tax subsidy from the I-T Department.

The Madras High Court judgment in the CIT vs Madras Refineries Ltd case comes at an opportune time and should provide inspiration for other corporate houses to do their best for public welfare.

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

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