The phrase `commercial expediency' is of wide import and may justify all expenditure which a prudent man may incur for the purposes of business. The consideration is not whether it was compulsory for the assessee to make the payment or not but whether it has been incurred by way ofcommercial prudence (expediency). The commercial expediency of a businessman's decision to incur an expenditure cannot be tested on the touchstone of strict legal liability to incur such an expenditure. Such decisions in the very nature of things have to be taken from a business point of view and have to be respected by the authorities no matter that it may appear to the latter that the expenditure incurred was unnecessary or avoidable. There can hardly be any dispute to the proposition that the businessman is the best judge to determine the business expediency and, therefore, when he claims to have incurred a certain expenditure for business expediency, his version should ordinarily be accepted.

This principle, however, does not debar the assessing authorities to enquire and investigate as to whether such expenditure was actually incurred by the businessman, and if incurred, whether the same was incurred wholly and exclusively for business considerations. The doctrine that the businessman is the best judgeof business expediency does not affect the right, nor duty, of the assessing authorities to know whether it was incurred for business purposes and not for other extraneous considerations.

As far as the Companies Act, 1956 is concerned, there is no ambiguity regarding giving of political donations. In 1969, Section 293A was introduced in the Companies Act, 1956 forbidding political contributions by companies on the ground that "such contributions have a tendency to corrupt political life and to adversely affect the healthy growth of democracy in the country. But in 1985, the Parliament conferred legitimacy on political contributions "with a view to permitting the corporate sector to play a legitimate role within the defined norms in the functioning of our democracy." The present position as far as the Companies Act is concerned, is that sub-section (1) of Section 293A excludes two categories of companies from the purview of this section. A government company is prohibited from making any politicalcontribution. Besides, there is also prohibition against political contribution by companies which have been in existence for less than three financial years. The second proviso to section 293A (2) however stipulates that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the board of directors and such resolution shall subject to the other provisions of this section be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.

In the matter of availing tax deductions, under the Income Tax Act, concerning political donations, there had been mixed reactions from the judiciary. Sub-section (2B) of the IT Act, 1961 prohibits allowance of only expenditure made by a taxpayer on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. However the term, `political party' has not been defined in the IT Act. But there is no specificprovision concerning donations simplicitor to such parties, permitting (as in the case of Companies Act) or disallowing such expenditure. In this regard, some guidance can be had from decided cases. Such cases indicate that a `link' or `nexus' has to be established between the incurring of the expenditure and benefit to the business. Failure on the part of the taxpayer to establish such link would result in refusal to accept the position that the expenditure incurred in making contributions to the ruling political party was wholly and exclusively laid out for the purposes of the trade or business (Orissa Cement Ltd vs CIT (1969) 73 ITR 14,18(Delhi). Also see, JK Cotton Spinning & Weaving Mills Co Ltd, v. CIT (1966) 62 ITR 813 (All).

Further, the onus to establish the link or nexus between donations made to political parties and the benefit which the assessee's business received through these is is on the assessee. If the assessee can establish that nexus, the expenditure will be allowable as a deduction inthe computation of his income. In Additional Commissioner of Income Tax vs Kuber Singh Bhagwandas (1979) 118 ITR 379 (MP-FB), the donation made by the assessee to the Chief Minister's Drought Relief Fund was held deductible as the assessee could establish such nexus. Kuber Singh's decision has since been approved by the Supreme Court in its decision in the case of Sri Venkata Satyanarayana Rice Mills vs CIT (1996) 89 Taxman 92 (SC).

In JK Cotton Spinning & Weaving Mills Co Ltd vs CIT (1996) 62 ITR 813 (Allo) and Delhi Cloth and General Mills Co Ltd vs Addl CIT (1986) 160 ITR 857 (Delhi), contributions to political party have been held to be not allowable. In CIT vs Scindia Steam Navigation Co Ltd (1980) 125 ITR 118 (Bom), donations to political party on consideration that continuance of such party in office would be necessary for assessee's business has been held to be not allowable. In Indian Steel and Wire Products Ltd vs CIT (1968) 69 ITR 379(Cal), it has been observed that contributions to politicalparties must not always be presumed to be commercially expedient. In this case, the assessee company contributed a certain sum to the Indian National Congress. It was held that even if there was some connection between this kind of expenditure and the earning of profits, the connection was too remote and the expenditure was not an allowable business deduction even if incurring such an expenditure was within the powers of the company. There are a number of other decisions also where similar views have been expressed.

By and large, the view taken by the courts had been that political donations can not be a charge against the profits of a business. However, if nexus between the payment made and advantage to the business can be established, the claim would be admissible under section 37(1) of the IT Act on the ground of its being incurred wholly and exclusively for business purposes.

The author is a former director of CBDT