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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

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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

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    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.

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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

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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

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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

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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

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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.