Facts of the Case

  1. The assessee, M/s Mohan Meakin Ltd., incurred expenditure on Puja, Havan, Kirtan and similar activities as a welfare measure for its employees and staff members at its various units situated at Solan, Ghaziabad, Lucknow, Gram and Kasauli.
  2. Such expenditure had been debited in the books of account and no disallowance was made up to Assessment Year 1975-76. Thereafter, whenever disallowances were attempted, they were deleted by appellate authorities.
  3. For Assessment Years 1984-85 to 1989-90, the Income Tax Appellate Tribunal had deleted similar disallowances and those orders attained finality.
  4. However, for Assessment Years 1990-91 to 2001-02, the Assessing Officer disallowed the expenditure on the ground that it was not incurred wholly and exclusively for business purposes.
  5. The Commissioner of Income Tax (Appeals) allowed the claim, and the Income Tax Appellate Tribunal affirmed the allowance. Aggrieved, the Revenue preferred appeals before the Delhi High Court.

Issues Involved

  1. Whether expenditure incurred on Puja, Havan, Kirtan and similar activities for employees could be treated as allowable business expenditure under Section 37(1) of the Income-tax Act, 1961.
  2. Whether such expenditure could be regarded as employee welfare expenditure incurred for the purposes of business.
  3. Whether the principle of consistency applied when similar expenditure had been allowed in earlier and subsequent assessment years.
  4. Whether any substantial question of law arose from the Tribunal’s order allowing the deduction.

Petitioner’s (Revenue’s) Arguments

  • The Revenue argued that expenditure incurred on Puja, Havan and Kirtan could not be regarded as expenditure incurred wholly and exclusively for business purposes.
  • It was contended that there was no evidence to establish that such activities were conducted within the factory premises or had a direct nexus with business operations.
  • Reliance was placed upon the decision of the Bombay High Court in Kolhapur Sugar Mills v. CIT (119 ITR 387) to support the disallowance.
  • The Revenue further argued that even if such expenditure was considered employee welfare expenditure, the assessee had failed to adequately establish the claim.

Respondent’s (Assessee’s) Arguments

  • The assessee contended that the expenditure was incurred as a welfare measure for employees and staff members and therefore constituted legitimate business expenditure.
  • It was pointed out that identical expenditure had been allowed by appellate authorities and the Tribunal in earlier assessment years.
  • The assessee also highlighted that the Revenue itself had accepted similar claims from Assessment Year 2002-03 onwards.
  • The principle of consistency required that the Revenue should not take a contrary stand in the absence of any material change in facts.

Court Findings

  • The Delhi High Court noted that the expenditure had consistently been treated as employee welfare expenditure in earlier years.
  • The Court observed that the Tribunal had already accepted the expenditure as having been incurred for the welfare of employees and therefore allowable as business expenditure.
  • The Court found that the Revenue had itself allowed similar claims in subsequent years, thereby strengthening the applicability of the principle of consistency.
  • It was further observed that there was no real dispute regarding the nature of the expenditure before the authorities below.
  • The Court concluded that the findings recorded by the appellate authorities and the Tribunal were factual in nature and did not give rise to any substantial question of law 

Court Order / Decision

The Delhi High Court held that expenditure incurred on Puja, Havan, Kirtan and similar activities for employee welfare was allowable as business expenditure under Section 37(1) of the Income-tax Act, 1961 in the facts of the case. The Court found that no substantial question of law arose for consideration and accordingly dismissed all the appeals filed by the Revenue.

Important Clarification

The Court emphasized that where expenditure has consistently been accepted as employee welfare expenditure and the Revenue itself has adopted the same position in earlier and subsequent assessment years, the principle of consistency assumes significance. In the absence of any distinguishing facts, such expenditure cannot be disallowed merely by taking a different view for particular assessment years.

Sections Involved

  • Section 37(1), Income-tax Act, 1961 – General deduction of business expenditure.
  • Principles relating to business expenditure, employee welfare expenditure, and consistency in tax treatment.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:13434-DB/AKS15102009ITA10282009_123528.pdf

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