बाग बगैंचा @ Office & Tax Deductibility

Meaning of Pollution Control Expenses

Provision of the Law

Section 17 of the Income Tax Act, 2058 provides the following provision relating to “Pollution Control Expenses”:
17(1) For the purposes of computing the income earned by any person from any business in any income year, such person may deduct the pollution control expenses to the extent incurred in the operation of that business in that year.
17(2) Notwithstanding anything contained in sub-section (1), in computing the limit of expenses deductible under that sub-section in any income year, it shall not exceed fifty percent of the adjustable taxable income of all businesses operated by such a person.
(3) Any excess expense or part thereof which is not deductible in excess of the limit referred to in sub-section (2) may be capitalized and depreciated pursuant to Schedule-2 in the beginning of the upcoming income year.
Explanation: For purposes of this Section, “pollution control expenses” means the expenses incurred by any person related with  any process for the purpose of controlling pollution or protecting or conserving the environment in other manner. 

Generality of Section 13 compared with Section 17

Section 17 of the law outlines the concept of “pollution control expenses” for the purpose of computing income earned by any person from a business in any income year. 

Under Section 13, general deduction of the law requires that for any expense to be deducted from income by a person, it must be made in that income year by that person which should be related to earning such income. The term “related to earning such income” provides for the deduction of expenses that are incurred in production of income – any other expenses that don’t fulfill this generally do not qualify for the deduction as income. 

However, Section 14 to Section 20 in a sense override the provision of general deduction under Section 13 by either granting a deduction that would be denied by the general deduction or denying a deduction otherwise deductible under Section 13 of the Act. So it seems the intention of the law for the deduction of the Pollution Control Expenses under Section 17 would seem to cover those expenses that are not covered within the general definition of the deductible expenses under Section 13. 

What it includes and what it does not

Since the definition of the law on Pollution Control Expenses refers to the expenses incurred by any person related to any process for the purpose of controlling pollution or protecting or conserving the environment in some other manner, in my opinion this would include the expenses of the following nature, (that which are not directly deductible under Section 13 of the Act but perfectly fits the definition of Pollution Control Expenses): 
1. Installation and Maintenance of Pollution Control Equipment: Costs associated with the purchase, installation, and maintenance of pollution control equipment, such as air filters, wastewater treatment facilities, or emission control systems.
2. Research and Development for Pollution Control Technologies: Expenditures on research and development aimed at creating or improving technologies for pollution control.
3. Training Programs for Environmental Compliance: Expenses related to training programs for employees to ensure compliance with environmental regulations and to promote environmentally friendly practices.
4. Environmental Impact Assessments: Costs incurred for conducting environmental impact assessments to evaluate and minimize the potential adverse effects of business activities on the environment.
5. Waste Management Expenses: Costs associated with the proper disposal, recycling, or treatment of waste generated during the business operations.
6. Consulting / Legal Fees for Environmental Compliance: Fees paid for legal and consulting services related to ensuring compliance with environmental laws and regulations.
7. Monitoring and Testing Expenses: Costs of monitoring and testing activities to assess the impact of business operations on the environment and to ensure compliance with pollution control standards.
8. Energy Efficiency Improvements: Expenses related to initiatives aimed at improving energy efficiency to reduce the overall environmental impact of the business.
9. Green Building Initiatives: Costs associated with constructing or retrofitting buildings to meet environmentally friendly standards and reduce environmental impact.

It’s important to note that these examples are illustrative, and the specific nature of pollution control expenses may vary depending on the type of business and its operations. For example some industries are mandatorily required to establish some pollution control plants as part of the environment law regime – in that case it would be more fitting to treat such expenses as a general deduction under Section 13 or Capitalization under appropriate pool of assets. That is something that could be entity specific. 

Does an office garden qualify? And Why?

The contribution of a garden at the office could potentially be considered a pollution control expense if the primary purpose of the garden is to control pollution, protect, or conserve the environment in some manner. However, it’s important to assess the specific details and intentions behind creating the garden to determine if it aligns with the definition provided in the law. 

So my view is that it’s important to assess the specific details and intentions behind creating the office garden to determine if it aligns with the definition provided in the law. If the garden serves environmental purposes such as:
1. Air Quality Improvement: The plants in the garden contribute to improving air quality by absorbing pollutants and releasing oxygen.
2. Erosion Control: The garden is designed to prevent soil erosion, which can be a form of environmental protection.
3. Biodiversity Conservation: The garden promotes biodiversity, supporting local flora and fauna.

Then it could be treated as a pollution control expense. While not explicitly mentioned in the law, if the garden is created with the primary goal of enhancing the aesthetic appeal of the office environment and does not have a clear connection to pollution control or environmental protection, it may not qualify as a pollution control expense but rather may qualify as general deduction under Section 13 as a part of expense fitting under “commercial expediency test”. It’s crucial to document the specific aspects of the garden project that contribute to pollution control or environmental protection and to ensure that these aspects align with the legal definition provided to ensure that it qualifies as a pollution control expense. 

Why are we discussing Office Garden?

In the decision from Supreme Court in the case of ठूला करदाता कार्यालय विरुद्ध गोल्डस्टार नेपाल इण्डष्ट्रिज Case Number 066-CR-0051 the decision supports the assertion that garden expenses qualify as pollution control expenses, citing Section 17(1) of the Income Tax Act, 2058. According to the court, the law allows the deduction of pollution control expenses for the purpose of calculating income from a business, and the clarification section explicitly includes expenses related to any process aimed at controlling pollution or protecting the environment. Therefore, the court concludes that garden expenses can be reasonably deducted as part of pollution control expenses.

However, let’s set a critical disagreement with the court’s view arguing that while a garden may contribute to environmental aesthetics and potentially offer some ecological benefits, it might not inherently align with the explicit purpose of controlling pollution. The primary purpose of pollution control expenses, as outlined in the law, is to address and mitigate pollution. If the garden is primarily for aesthetic enhancement and does not have a direct, measurable impact on pollution control, there may be grounds for challenging its classification as pollution control expenses. Having said that it could be expendable under the general deduction provision under Section 13 of the Act under the “commercial expediency test”. 

In my opinion, the deductibility of garden expenses could be argued under the general deduction provision in Section 13 of the law, utilizing the “commercial expediency test.” According to this test, expenses incurred should be allowed as deductions if they are deemed commercially expedient for the purpose of the business. In this context, it could be contended that maintaining a garden at the office contributes to the overall well-being and productivity of employees, potentially enhancing the business environment, client relationships, and employee morale. The garden, seen as a measure to create a positive and conducive workspace, might be justified as a commercially expedient expense. While not explicitly falling under pollution control, it could be argued that the garden serves a business purpose by creating a more attractive and pleasant working environment, thus meeting the criteria for general deductibility under the commercial expediency test outlined in Section 13 of the law.