PETITIONER: M/S SRI VENKATA SATYANARAYNARICE MILL CONTRACTORS CO. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,ANDHRA PRADESH II DATE OF JUDGMENT: 25/10/1996 BENCH: J.S.VERMA, B.N. KIRPAL ACT: HEADNOTE: JUDGMENT:
W I T H
CIVIL APPEAL NOS. 5625, 5626-27, 5628-29,
5630,56-31, 5633, 5635, 5636,
5637 and 5637A OF 1983
J U D G M E N T
KIRPAL, J.
In respect of the assessment years 1971-72 and 1972-73
the appellant filed its return of income and claimed
deduction for the amounts paid by it to the Andhra Pradesh
Welfare Fund, West Godavari (Branch Eluru) as a business
expenditure under Section 37 (1) of the Income-tax Act, 1961
(for short ‘the Act’).
The case of the appellant was that it was carrying on
the business of exporting rice from the State of Andhra
Pradesh. This rice could not be exported without the
appellant’s obtaining a permit from the District Collector.
The permits were given only if payment was made to a welfare
fund which had been established. The Income-Tax Officer,
however, disallowed the deduction by holding that the said
payment was neither mandatory, nor statutory but was only
discretionary. He further observed that the welfare fund had
not been approved by the Commissioner of Income-tax under
Section 80-G of the Act and, therefore, contribution to it
could not be deducted.
The appeals filed by the appellant before the Appellate
Assistant Commissioner met with no success. Thereupon,
second appeals were filed before the Income-tax Tribunal.
The appeals were heard by a Full Bench of the Tribunal
which, while allowing the appeals, came to the conclusion
that thought there was no compulsion on the appellant to
make a contribution to a welfare fund still the
contributions made in pursuance of a scheme which was
evolved by the Rice Millers Association in consultation with
the District Collector would show that an advantage would
ensue on the payment of the contribution and, therefore, the
deduction was allowable under Section 37 (1) of the Act. The
Tribunal further held that such contributions could not be
held to be opposed to public policy. Against the order of
the Tribunal disposing of the appeals the department filed
four applications under Section 256 (1) of the Act whereupon
the following question of law was referred:
“Whether on the facts and in the
circumstances of the case, the
Income-tax Appellate Tribunal was
justified to hold that the
contribution made to the welfare
fund was not opposed to public
policy and that the same was
motivated purely by commercial
consideration, and that the
deduction was allowable under
Section 37 (1)?”
At the instance of the assessee the following question of
law was referred:
“Whether on the facts and in the
circumstances of the case, the
Appellate Tribunal was justified in
law in holding that the sum of
Rs.9,164/- paid by the assessee
towards contribution to the
District Welfare Fund for getting
permits from the Government of
Andhra Pradesh for export of rice,
did not constitute business
expenditure within ‘he meaning of
Section 37 of the Income-tax Act,
1961?”
The High Court answered the question of law in favour
of the respondent. It referred to the establishment of the
welfare fund and the payment of money which used to be made
and came to the conclusion that the contribution to the
welfare fund was a pre condition for the grant of export
permits and, therefore, the appellant was right in
contending that the contribution was a compulsory payment
extracted from it as a price for granting export permits.
High Court, however, disallowed the deduction by coming to
the conclusion that the payment of this amount was opposed
to public policy.
It is contended by Sh. A. Subb Rao, learned counsel for
the appellant that on the facts as found by the Tribunal the
appellant was entitled to deduction under Section 37 (1) of
the Act. He further submitted that the High Court erred in
coming to the conclusion that the contribution which was
made by the millers like the appellant to the welfare fund
could be equated with the giving of a bribe and, therefore,
opposed to public policy, as was sought to be suggested by
the High Court while holding that the said contribution was
contrary to public policy.
The district welfare fund had been established pursuant
to a scheme which had been evolved by the rice millers
association with the District Collector. According to this
each member of the association was to deposit an amount of
fifty paise per quintal of rice if he proposed to export the
same from Andhra Pradesh. This deposit was to be made in the
Andhra Bank. The application for the export permit was
required too be made in a form wherein the applicant had to
state the amount of contribution deposited by him, giving`
the particulars of the bank, the challan number and the
date. The High Court referred to the Letter written to the
Appellate Assistant Collector by the Collector in which it
was stated as follows:
“With reference to the
representation of the Secretary the
West Godavari District Rice Millers
Association, Tadepallingudem, I am
to inform you that Welfare Fund at
Rs.0.50 paise per quintal is being
collected in respect of all rice
and broken rice permits issued on
trade to trade accounts.”
A similar letter had also been written to the Income-tax
Officer at the time of assessment. From the aforesaid facts
the High Court came to the conclusion that the contribution
was a compulsory one and was being collected from all the
exporters of rice from the state of Andhra but the
contribution so made, which was linked with the obtaining of
permits, was opposed to public policy and, on this ground,
could not be allowed as a deduction under Section 37 (1) of
the Act.
The principles for determining whether such a payment
can be regarded as being allowable as a business expense
are, in our opinion, well settled, As long ago as in the
case of Atherton Vs. British Insulated & Helsby Cables Ltd.
(10 TC 155 191 (HL) it was observed that “A sum of money
expended, not of necessity and with a view to a direct and
immediate benefit to the trade, but voluntarily and on the
grounds of commercial expediency and in order indirectly to
facilitate the carrying on of the business, may yet be
expended wholly and exclusively for the purposes of trade.”
The aforesaid observation was quoted with approval by this
Court in Eastern Investments Ltd. Vs. Commissioner of Income
Tax, West Bengal ([1951] SCR 594). Again in the case of The
Commissioner of Income-tax, Bombay Vs. Chandulal Keshavlal
and Co., Petlad (1960 [3] SCR 38) a similar question arose
for consideration. The assessee who was managing agent was
entitled to commission. It, however relinquished part of the
commission which was receivable from the managing company,
inter alia, for the reason that the financial condition of
the managing company was unsatisfactory. The question arose
whether the amount relinquished was deductable as an
expenditure or not. While upholding the claim for reduction
this Court observed at page 50 that “Thus in cases like the
present one in order to justify deduction the same must be
given up for reasons of commercial expediency; it may be
voluntary, but so long as it is incurred for the assessee’s
benefit the deduction would be claimable.” What, therefore,
is to be seen is not whether it was compulsory for the
assessee to make the payment or not but the correct test is
that of commercial expediency. As long as the payment which
is made is for the purpose of the business, and the payment
made is not by way of penalty for infraction of any law, the
same would be allowable as a deduction.
The Court in the case of Commissioner of Income-tax,
Gujarat Vs. S.C. Kothari ([1971] 82 ITR 794) was considering
a case where the assessee had suffered loss in an illegal
transaction and the question arose whether the same could be
set off under Section 24 of the Income-tax Act, 1922 against
the profits and gains of speculative transaction. While
allowing the set off it was observed that if a business is
illegal, neither the profits earned nor the losses incurred
would be enforceable in law but that does not take the
profits out of the taxing statute. Similarly the taint of
illegality of the business cannot detract from the losses
being taken into account for computation of the amounts
which can be subjected to tax under Section 10 (1) of the
1922 Act. The tax collector, it was observed, cannot be
heard to say that he will bring the gross receipts to tax
without deducting losses and the legitimate expenses of the
business.
Again in the case of Commissioner of Income tax Vs.
Piara Singh ([1980] 124 ITR 40) a question arose with regard
to the loss sustained by an assessee in the carrying on of
an illegal business. The respondent therein carried on
smuggling activities and was apprehended by the Indian
police while crossing the border into Pakistan and
Rs.65,000/- in currency notes were recovered from him. This
money was being taken to Pakistan for the purposes of
purchasing gold which was to be smuggled into India. This
amount was confiscated. Thereupon the income-tax authorities
came to the conclusion that the assessee, who was carrying
on the business of smuggling, was liable to income tax and
he was accordingly assessed to tax. The assessed claimed
deduction under Section 10 of the 1922 Act of the loss of
Rs. 65,000/- which had been confiscated by the customs
authorities. While allowing this deduction it was held that
the carriage of the currency notes across the border was an
essential part of the smuggling operation and detection by
the customs authorities and consequent confiscation was a
necessary incident of the said business and constituted a
normal feature of such an operation. The confiscation of the
currency notes was a loss which sprang directly from the
carrying on of the business and was allowable as a deduction
under Section 10 of the 1922 Act.
Even though this Court has in the cases of Piara Singh
and S.C. Kothari (supra) held that loss suffered while
carrying on illegal business is allowable as a deduction, in
the present case we find that the contribution which was
made by the appellant could under no circumstances be
regarded as illegal payments or payments which were opposed
to public policy. This is not a case where the assessee was
paying any bribe to any person nor is this a case where
money was being contributed to any private fund or for the
benefit of an individual which could be regarded as a form
on illegal gratification. By a voluntary scheme, with which
the District Collector was associated, the district welfare
found had been established for the benefit of the general
public. The payment to such a found which was openly made by
all the millers and which fund was being used for public
benefit cannot be regarded as being opposed to public
policy. Requiring payment to be made for a just cause which
would entitle a businessman to obtain a licence or permit
cannot be regarded as being against the public policy.
A case similar to the present one came up for
consideration before the Madhya Pradesh High Court in the
case of Additional Commissioner of Income tax vs. Kuber
Singh Bhagwandas ([1979] 118 ITR 379). In this case the
Government of Madhya Pradesh had under the Essential
Commodities Act, 1955 passed an order which, inter alia,
prohibited any person from exporting gram from Madhya
Pradesh except under and in accordance with the permit
issued by the State Government. The Madhya Pradesh Anaj
Vyapari Maha Sangh, the association of food grain merchants
of the state, addressed a representation to the Food
Minister to the effect that the stock of gulabi chana and
other pulses was steadily deteriorating in quality because
of want of market. The Chief Minister of Madhya Pradesh
thereupon informed the President of the Maha Sangh that the
Government had decided to allow liberally permits for the
export of gulabi chana and pulses outside the State., In the
same letter the Chief Minister brought to the notice of the
trading community that the kisans and labourers were
undergoing untold hardship on account of drought conditions
resulting from the failure of the monsoon and, as the
merchants were bound to earn rich profits, he appealed to
the trading community that they should contribute a portion
of such profits to the Chief Minister’s Drought Relief Fund.
This was followed by a letter written by the Joint Secretary
to the Maha Sangh asking the merchants to deposit Rs. 30/-
per quintal for the export of gulabi chana and Rs. 5/- per
quintal for the export of pulses into the State Bank of
India or the State Bank of Indore to the credit of the Chief
Minister’s Drought Relief Fund and to obtain duplicate
receipt from the bank. It was further directed that the
originals of such receipts were to be sent along with the
duly filled in application forms for permits to the Maha
Sangh at Bhopal. Members were also required to send fifty
paise per quintal for meeting the administrative expenses of
the said Maha Sangh. On the application being received in
accordance with the aforesaid documents the Maha Sangh
forwarded the same, including the application of the
assessee, to the relevant authorities of the Food Department
whereupon permits for export of gulabi chana or pulses, as
mentioned in the application, were issued to the merchants.
In his income tax return the assessee claimed a deduction on
the contribution so made to the Chief Minister’s Drought
Relief Fund. The contention of the assessee was that permit
for exporting gulabi chana could not be obtained without the
making of such a contribution and, therefore, making of the
said donation should be allowed as a deduction under Section
37 (1) of the Act. The Income-tax Tribunal upheld the
contention and at the instance of the Revenue reference was
made to the High Court under Section 256 (1) of the Act. An
earlier reference, on the same issue, had been decided by a
Division Bench of the Madhya Pradesh High Court in the case
of Additional Commissioner of Income-tax Vs. Badrinarayan
Shrinarayan Akodiya ( [1975]) 101 ITR 817 (MP) ). As the
correctness of the same was challenged, the Division Bench
referred Kuber Singh’s case to a Full Bench. While holding
that the decision in Akodiya’s case was not correctly
decided the Full Bench held that any normal trader would
have realised that there was greater prospect of getting a
permit for carrying on the export business in case he made a
donation as requested by the Chief Minister. The merchants
had made the donations as a matter of commercial expediency
to facilitate the obtaining of permits which were necessary
for carrying on the export trade. The nature of the
expenditure was such that benefit to a third party or
charity had resulted but that did not disqualify it from
being an expenditure incurred wholly and exclusively for
purposes of business. The Full Bench distinguished this
Court’s decision in Haji Aziz and Abdul Shakoor Bros. Vs.
CIT ( [1961] 41 ITR 350 ) by observing that in the case
before it the donations which were made by the traders did
not contravene any law and nor were the donations made as
penalty for infraction of any law. It, therefore, concluded
that the Tribunal was right in holding that there was a
direct nexus between the assesses business and the donations
made to the Chief Minister’s Drought Relief Fund and that
the donations were allowable under Section 37 (1) of the Act
and as expenditure incurred wholly and exclusively for
purposes of the assessee’s business.
In our opinion the decision in Kuber Singh’s case
correctly spells out the principle relating to the
allowability of such an expense which has been incurred with
a view to the promotion of an assessee’s business.
Same principle as was followed in Kuber Singh’s case
had been applied, in somewhat different circumstances, by
other High Court and the same has been approved by this
Court. In Commissioner of Income-tax, Orissa Vs. Middle
East Construction Equipments ( [1979] 117 ITR 382 ) the
Orissa High Court had to deal with a case where the assessee
carried on the business of supplying machines to Government
Departments. The State Government decided to give
preferential treatment in the matter of placing of orders
for supply of materials to parties holding State Government
Loan Bonds. The assessee borrowed money for purchase of
Government Loan Bonds and claimed deduction of interest paid
on such borrowed money. The Tribunal found that the bonds
had been purchased in order to boost the sales of the
assessee and that the Bonds, which were sold within a year,
had been held as investment and had allowed the claim of the
assessee. On reference being made at the instance of the
Revenue the Orissa High Court allowed the said deduction by
observing that the loan had been taken for purchasing bonds
for the purpose of boosting up of the assessee’s business
and, therefore, the payment of interest was rightly
allowable as a reduction. A similar question once again
arose before the Orissa High Court in the case of
Commissioner of Income-tax Vs. Industry and Commerce
Enterprisers (P) Ltd. The assessee which had purchased
Government Loan Bonds had sold the same and had incurred a
loss. This loss was claimed as a deduction. The Tribunal
held that the assessee had acquired business from the
Government by the purchase of the securities and, although
the relevant correspondence did not speak of any condition
precedent to the grant of the business to the assessee, yet
because of the coincidence of the date of purchase of the
bonds and the business allotted to the assessee which was of
an equal sum, there was a direct nexus between the business
acquired by the assessee and the purchase of the securities.
The Tribunal accordingly allowed the said deduction. On a
reference being made the High Court upheld the decision of
the Tribunal which had allowed the said deduction. Before
the Madras High Court also a similar question arose where an
assessee, carrying on road transport business, subscribed to
Government Bonds carrying 4.5 per cent interest. There
Bonds were purchased at the instance of the Road Transport
Authorities and for this purpose the assessee had borrowed
money at the rate of 10 per cent. This was done, according
to the assessee, with a view to keep the road transport
authority in good humor under the bona fide belief that it
was necessary to do so in order to carry on its business.
Subsequently, the assessee sold the bonds at a loss of
Rs.3127/-and claimed this amount as a business loss. This
claim was allowed by the Tribunal who found that the motor
vehicle inspector had handed over the necessary forms to the
assessee for purchasing Government Bonds, that the assessee
was under an obligation to purchase the Bonds for the smooth
running of the transport business especially when the
mandate for purchase of the Bonds came from the inspector
and, therefore, the loss was allowable as deduction. While
upholding the decision of the Tribunal the Madras High Court
observed “subscribing to Government Loans as in the present
case, is not, in our opinion, opposed to public policy, and
we are of the opinion that the Tribunal has rightly found
that the assessee was obliged to sell the Bonds before they
became ripe from payment only to stop incurring further loss
as the money with which the subscription for the Government
Bonds had been made had been borrowed by the assessee from a
bank at 10 per cant interest while the Bonds carried
interest only at 4.5 per cant.” A minor question again
arose for consideration before the Madras High Court in
Commissioners of Income-tax Vs. Dhandayuthapani Foundry
(Private) Ltd. ( [1980] 123 ITR 709 ). In that case, as a
result of the pursuation of the Sales Tax Authorities who
were making assessments on the assessee and who also had the
control over From No.XX which are delivery notes to be
issued by them for the despatch of goods, the assessee was
obliged to subscribe to certain government securities.
However, instead of directly purchasing these securities and
then selling them, the assessee paid certain margin money to
the brokers which represented the difference between the
issue price and the market price for the securities. The
assessee claimed a loss of Rs.1900/-. This claim was upheld
by the Appellate Assistant Commissioner and the Tribunal.
The High Court following its decision in the case of B.M.S.
(P) Ltd. (supra) upheld the decision of the Tribunal to the
effect that these securities were purchased and sold in
order to retain the goodwill of the Sales-tax Authorities
which was necessary and essential for the smooth carrying on
of the business by the assessee.
The aforesaid decisions of the Orissa High Court in
industry and Commerce Enterprisers (P) Ltd. and of the
Madras High Court in B.M.S. (P) Ltd. and Dhandayuthapani
Foundry cases (supra) were cited with approval by this Court
in M/s Patnaik and Co. Ltd. Vs. Commissioner of Income Tax,
Orissa ( [1986] 4 SCC 16 ). In that case the assessee was
told that if he subscribed for the Government loan
preferential treatment would be grated to it in the placing
of orders for motor vehicles required by the various
government departments and the assessee would further
benefit by an advance from the Government upto fifty per
cent of the value of the orders placed. The Tribunal found
that the investment in the purchase of Government Bonds was
made in order to boost its business and as the investment
had been made by way of commercial expediency for the
purpose of carrying on its business, the loss suffered by
the assessee on the sale of the bonds must be regarded as a
Revenue loss. The High Court, however, decided the question
in favour of the Revenue. While reversing the judgment of
the High Court, and upholding the conclusions arrived at by
the Tribunal, this Court held that the investments made by
the assessee were not a capital asset and the loss suffered
by it was allowable as a reduction. It then observed as
follows:
“It was held by the Orissa High
Court in CIT V. Industry and
Commerce Enterprisers (P) Ltd., and
by the Madras High Court in Addl.
CIT Vs. B.M.S. (P) Ltd. and again
in CIT V. Dhandayuthapani Foundry
(P) Ltd. that where government
bonds or securities were purchased
by the assessee with a view to
increasing his business with the
government or with the object of
retaining the goodwill of the
authorities for the purpose of his
business, the loss incurred on the
sale of such bonds or securities
was allowable as a business loss.”
From the aforesaid discussion it follows that any
contribution made by an assessee to a public welfare found
which is directly connected or related with the carrying on
of the assessee’s business or which results in the benefit
to the assessee’s business has to he regarded as an
allowable deduction under Section 37 (1) of the Act. Such a
donation, whether voluntary or at the instance of the
authorities concerned, when made to a Chief Minister’s
Drought Relief Fund or a District Welfare Fund established
by the District Collector or any other Fund for the benefit
of the public and with a view to secure benefit to the
assessee’s business, cannot be regarded as payment opposed
to public policy. It is not as if the payment in the
present case had been made as in illegal gratification.
There is no law which prohibits the making of such a
donation. The mere fact that making of a donation for
charitable or public cause or in public interest results in
the government giving patronage or benefit can be no ground
to deny the assessee a deduction of that amount under
Section 37 (1) of the Act when such payment had been made
for the purpose of assessee’s business.
For the aforesaid reasons we hold that the conclusion
of the High Court arrived at in the present cases was not
correct. The questions of law referred to by the Tribunal
are accordingly answered in favour of the appellants who
will also be entitled to costs.