1982 (12) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of contributions to the Andhra Pradesh Welfare Fund as business expenditure under Section 37(1) of the Income-tax Act, 1961.
2. Whether such contributions are opposed to public policy.
3. The nature of the contributions: voluntary or compulsory.

Detailed Analysis:

1. Deductibility of Contributions to the Welfare Fund:
The assessees, dealers in paddy, rice, and broken rice, claimed deductions for amounts paid to the Andhra Pradesh Welfare Fund as business expenditure under Section 37(1) of the Income-tax Act, 1961. They argued that these payments were necessary for obtaining export permits for boiled rice to Kerala. The Income Tax Officer (ITO) disallowed the deduction, stating that the payments were discretionary, not mandatory or statutory, and the Welfare Fund was not approved under Section 80G of the Act. The Appellate Assistant Commissioner (AAC) upheld this view, citing that the contributions were voluntary and not a pre-condition for obtaining permits. The Income-tax Appellate Tribunal (ITAT) had conflicting views on the matter, leading to the formation of a Full Bench, which concluded that the contributions were deductible as business expenditure.

2. Public Policy Consideration:
The Department contended that if the contributions were voluntary, there was no nexus with the business, and if compulsory, they were opposed to public policy and could not be allowed as business expenditure. The Tribunal had earlier found that the contributions were made to gain an advantage and were thus opposed to public policy. The High Court affirmed that the contributions were compulsory payments exacted by the District Collector as a pre-condition for granting export permits. The Court held that such payments, even if made under business expediency, could not be recognized under Section 37 if they were opposed to public policy. The Court emphasized that allowing such deductions would encourage similar practices, detrimental to public interest and good administration.

3. Nature of Contributions:
The AAC and the Tribunal had differing views on whether the contributions were voluntary or compulsory. The High Court found that the contributions were indeed compulsory, based on letters from the District Collector stating that contributions were collected for all permits issued. The High Court rejected the Tribunal's finding that the contributions were voluntary, terming it perverse and not based on relevant material. The Court noted that the assessees consistently contended that the payments were compulsory, and the evidence supported this claim.

Conclusion:
The High Court concluded that the contributions to the Welfare Fund were compulsory payments and opposed to public policy. Consequently, these payments could not be allowed as business expenditure under Section 37(1) of the Income-tax Act, 1961. The questions referred were answered in favor of the Department and against the assessees. The Court certified the case as fit for appeal to the Supreme Court under Section 261 of the Income-tax Act.