M/S
Sri Venkata Satyanarayna Rice Mill Contractors Co. Vs. The Commissioner of
Income-Tax, Andhra Pradesh [1996] INSC 1333 (25 October 1996)
J.S.
Verma, B.N. Kirpal Kirpal, J.
ACT:
HEAD NOTE:
WITH
CIVIL APPEAL NOS. 5625, 5626-27, 5628-29, 5630,56-31, 5633, 5635, 5636, 5637
and 5637A OF 1983
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 (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 Tax, West Bengal ([1951] SCR 594).
Again in the case of The 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, 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.
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 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 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 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
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 (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 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. 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.
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