1970 (4) TMI 47 - HC - Income Tax

Contribution made by the assessee-company to its Employee s welfare fund - expenditure was incurred due to commercial expediency - exemption allowed u/s 10(2)(xv), Indian Income Tax Act, 1922

Summary

Issues Involved:
1. Whether the sum of Rs. 25,000 contributed by the assessee-company to the welfare fund constitutes capital expenditure.
2. Whether the expenditure of Rs. 25,000 is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Capital Expenditure:
The primary issue revolves around whether the contribution of Rs. 25,000 by the assessee-company to the welfare fund is considered capital expenditure. The tax authorities and the Appellate Tribunal held that the expenditure was capital in nature, referencing the case of Atherton v. British Insulated and Helsby Cables Ltd. The Tribunal noted that the fund's existence hinged on the company's contribution, which was the foundation or nucleus of the fund, not the Rs. 581 collected from employees. The Tribunal also highlighted the company's control over the fund, evidenced by its power to nominate trustees and the chairman, who was the managing director. The Tribunal concluded that the expenditure created an enduring asset, thus qualifying as capital expenditure.

2. Deductibility under Section 10(2)(xv):
The assessee-company's advocate argued that the expenditure was for commercial expediency, aimed at benefiting the employees and fostering better relations. The advocate emphasized that the Rs. 25,000 was insufficient to create a lasting asset and was a voluntary contribution, not tied to any existing liability. The scheme of the fund allowed for the corpus to be utilized, suggesting that the expenditure did not create a lasting advantage. The advocate relied on the case of Commissioner of Income-tax v. New India Assurance Co. Ltd., where a similar expenditure was deemed deductible.

In response, the revenue's advocate reiterated the Tribunal's reasoning, asserting that the expenditure aimed to establish a fund offering lasting benefits to employees, thus securing a contented staff. The advocate argued that the expenditure was the nucleus for starting the fund, and the employees' contribution was negligible.

The court examined the fund's scheme, noting that the rules and regulations allowed for the corpus to be spent on various beneficial purposes, not just the income earned. This indicated that the expenditure was not intended to create a lasting asset. The court referenced the New India Assurance case, where a similar contribution was deemed deductible as it was made out of commercial expediency and not to meet any existing liability.

The court found the principles from Atherton's case inapplicable to the present case, as the facts were more aligned with the New India Assurance case. The court concluded that the expenditure was made for commercial expediency and was not capital expenditure. Therefore, the expenditure was deductible under section 10(2)(xv).

Conclusion:
The court answered the question in the negative, ruling that the expenditure of Rs. 25,000 was not capital expenditure and was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Commissioner of Income-tax was ordered to pay costs.