Section 37 of Income Tax Act, 1961—Deduction of project expenses—In the instant case, appeal is preferred by revenue against the order passed by ITAT wherein ITAT has uphold the order of CIT and has allowed the deduction under Section 37.

According to AO expenses incurred by the respondent-assessee towards the said activities under the head “project expenses” were not deductible under Section 37.

Held that—In the facts of the present case, the object and purpose of the respondent-assessee is to engage and work for social and economic upliftment of the rural poor, construct water reservoirs etc. It is established for this purpose and receives grants and donations from third parties with the said objective and purpose. M/s Indian Farmers Fertilizer Cooperative Ltd. had sold and supplied fertilizer that was marketed/sold by the respondent-assessee to earn profit/income, because the respondent-assessee was engaged in social and economic development activities.

Under section 37 of the Act it does not matter whether or not the expenditure was in the nature of donation or Section 80G of the Act was not attracted. The conditions stated in Section 37 of the Act matter and constitute the test. Expenditure incurred in furtherance of and connected with the business and commercial activities for which the respondent-assessee was established cannot be disallowed as expenditure not relatable and incurred for ‘business’ purposes.

On the question of capital expenditure, the assessing officer did not refer to or examine whether the capital assets created were for third party villagers. The respondent-assessee was not the owner of the assets created and developed. The assets created were not capital assets in the hands of the respondent-assessee. The respondent-assessee had contributed, developed, financed and created assets which belonged to third persons. The expenditure incurred therefore would not be ‘capital’ in nature in the hands of the respondent assessee.[PR. COMMISSIONER OF INCOME TAX, DELHI-10 VERSUS M/S. INDIAN FARM FORESTRY DEVELOPMENT] [2018] 6 ITCD Online [140][DELHI HIGH COURT]