Facts of the Case

The assessee, M/s Mohan Meakin Ltd., had been incurring expenditure on Puja, Havan, Kirtan and similar activities as a welfare measure for its employees and staff members across its various units located at Solan, Ghaziabad, Lucknow, Gram and Kasauli. Such expenditure was regularly recorded in its books of account.

No disallowance of these expenses was made up to Assessment Year 1975-76. Although attempts were subsequently made by the Revenue to disallow such expenditure, the appellate authorities deleted the disallowances. For Assessment Years 1984-85 to 1989-90, the Income Tax Appellate Tribunal allowed the expenditure and those orders attained finality.

However, for Assessment Years 1990-91 to 2001-02, the Assessing Officer disallowed the expenditure on the ground that expenses incurred on Puja, Havan and Kirtan could not be regarded as having been incurred wholly and exclusively for the purposes of business. The Assessing Officer also observed that there was no material to establish that such activities were conducted within the factory premises.

The Commissioner of Income Tax (Appeals) deleted the disallowance, and the Income Tax Appellate Tribunal upheld the relief granted to the assessee.

Issues Involved

  1. Whether expenditure incurred on Puja, Havan, Kirtan and similar activities for employees and staff members qualifies as business expenditure under Section 37(1) of the Income-tax Act, 1961.
  2. Whether such expenditure can be disallowed on the ground that it was not incurred wholly and exclusively for business purposes.
  3. Whether the principle of consistency applies where similar expenditure had been allowed in earlier and subsequent assessment years.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that expenditure incurred on Puja, Havan, Kirtan and similar religious activities could not be treated as business expenditure.
  • It was argued that the assessee failed to establish that such expenditure was incurred wholly and exclusively for the purposes of business.
  • Reliance was placed on the decision of the Bombay High Court in Kolhapur Sugar Mills Ltd. v. CIT (119 ITR 387) to justify the disallowance.
  • The Revenue submitted that the assessee had not produced adequate evidence to prove that the expenditure was incurred for employee welfare and business purposes.

Respondent’s Arguments (Assessee)

  • The assessee submitted that the expenditure had consistently been treated as employee welfare expenditure and allowed in earlier assessment years.
  • It was pointed out that for Assessment Years 1984-85 to 1989-90, the Tribunal had already held such expenditure to be allowable as business expenditure and those findings had attained finality.
  • The assessee further highlighted that the Revenue itself had accepted similar claims from Assessment Year 2002-03 onwards.
  • It was argued that the principle of consistency required the Revenue to maintain the same approach in the absence of any change in facts.
  • The expenditure was incurred for the welfare and morale of employees and therefore qualified as business expenditure.

Court Findings

  • The Delhi High Court noted that similar expenditure had been allowed in earlier assessment years and the Tribunal’s orders had attained finality.
  • The Court observed that the Revenue itself had accepted such expenditure in subsequent assessment years.
  • The Court found that the expenditure had consistently been regarded as employee welfare expenditure and treated as business expenditure.
  • The Court held that there was no material dispute regarding the nature of the expenditure and its connection with employee welfare.
  • The principle of consistency supported the assessee’s claim, particularly when identical facts prevailed across different assessment years.

Court Order

The Delhi High Court held that no substantial question of law arose for consideration. Consequently, all the appeals filed by the Revenue were dismissed and the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal allowing the expenditure were upheld.

Important Clarification

  • Expenditure incurred on Puja, Havan, Kirtan and similar activities may be allowable under Section 37(1) where it is incurred as an employee welfare measure and bears a nexus with business purposes.
  • Consistent treatment of identical expenditure in earlier and subsequent assessment years is a significant factor while determining allowability.
  • In the absence of any distinguishing facts, the Revenue cannot arbitrarily adopt a contrary stand for intervening assessment years.
  • The Court reaffirmed the relevance of the principle of consistency in income-tax proceedings.

Sections Involved

  • Section 37(1) of the Income-tax Act, 1961

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:13430-DB/AKS15102009ITA9922009_122950.pdf

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