1971 (9) TMI 30 - HC - Income Tax

Payment by the assessee to liquidator of the society for the benefit of members of the society - claim of the assessee was that the money was spent for the welfare of its employees - held that the expenditure was laid out wholly and exclusively for the purpose of assessee s business so entitled to deduction

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the assessee is entitled to deduction of Rs. 76,161.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction of Rs. 76,161:

Facts and Background:
The assessee, a public limited company engaged in manufacturing and dealing in textiles, sought a deduction of Rs. 76,161 paid to the liquidator of the Raipur Mills Employees' Co-operative Credit Society Ltd. (the society). This payment was made under an agreement dated March 1, 1962, to resolve misfeasance proceedings against some members of the society's managing committee. The society had been sponsored by the assessee for the benefit of its employees, and a significant misappropriation of funds had occurred in 1952.

Assessment Proceedings:
The Income-tax Officer rejected the deduction claim, viewing the payment as ex gratia and not deductible under Section 37 of the Income-tax Act, 1961. The Appellate Assistant Commissioner upheld this decision. However, the Tribunal allowed the deduction, concluding that the expenditure was incurred to preserve industrial peace and smooth business operations.

Tribunal's Findings:
The Tribunal found sufficient evidence that the payment was made to maintain peace and ensure smooth factory operations, not out of generosity or for third parties. The Tribunal noted:
- The board's resolution on March 1, 1962, indicated the payment was to pacify workers and restore smooth factory operations.
- The company faced two alternatives: resist demands and risk strikes and production losses, or make the payment to secure worker cooperation.

Legal Precedents:
The court referred to several decisions to elucidate "business expediency":
- Tata Sons Ltd. v. Commissioner of Income-tax: The Bombay High Court held that voluntary payments made for commercial expediency, even if not obligatory, are deductible if they facilitate profit-making.
- J. R. Patel and Sons (P.) Ltd. v. Commissioner of Income-tax: The Gujarat High Court emphasized that payments made on commercial grounds for the ultimate benefit of the business, whether immediate or indirect, are deductible.

Court's Conclusion:
The court agreed with the Tribunal's assessment that the payment was made out of commercial expediency to avoid unrest and ensure smooth factory operations. The court noted:
- The 1956 resolution highlighted significant unrest due to the misappropriation, which threatened strikes and production losses.
- The 1962 payment aimed to maintain industrial peace and good employee relations, essential for the company's operations.

Final Judgment:
The court concluded that the expenditure was wholly and exclusively for the assessee's business purposes. Therefore, the Tribunal was correct in allowing the deduction of Rs. 76,161. The question was answered in the affirmative, and the Commissioner was ordered to pay the costs of the reference to the assessee.