1971 (8) TMI 55 - HC - Income Tax

Payment made to the Vanaspati Manufacturers Association of India - amount represented the assessee s share of propaganda expenses incurred by the association - expenditure was wholly and exclusively for the purpose of assessee s business expenditure have a clear nexus with assessee s trade - allowable for deduction

Summary

Issues Involved:
1. Admissibility of the payment of Rs. 22,851 to the Vanaspati Manufacturers' Association of India as a revenue deduction.
2. Interpretation of the term "wholly and exclusively laid out for the purposes of the company's trade" under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Admissibility of the Payment as a Revenue Deduction:

The core issue in this case was whether the payment of Rs. 22,851 made by the assessee to the Vanaspati Manufacturers' Association of India could be considered a revenue deduction against the income of the previous year. The Tribunal initially disallowed this claim, reasoning that the expenditure was not incurred by the assessee itself on scientific research and that the Association was not an approved entity for such purposes under section 10(2)(xii) of the Income-tax Act, 1922. The Tribunal also concluded that the expenditure did not fall under sub-sections (2)(xii), (2)(xiii), and (2)(xiv) of section 10, which deal with scientific research.

Upon appeal, the Appellate Assistant Commissioner maintained this disallowance, stating that the propaganda expenses were not for the preservation of the assessee's assets or business but were aimed at countering public and parliamentary inquiries regarding the health implications of vanaspati ghee. The Tribunal, upon further appeal, supported this view, asserting that the propaganda was not necessary to prevent the winding-up of the assessee's vanaspati business.

2. Interpretation of "Wholly and Exclusively Laid Out for the Purposes of the Company's Trade":

The High Court critically examined the Tribunal's interpretation of relevant case law, including the House of Lords' decision in Morgan v. Tate & Lyle Ltd. and other precedents. The court noted that the Tribunal misinterpreted these cases, which did not require a threat of business extinction for expenses to be considered "wholly and exclusively laid out for the purposes of the company's trade." The court highlighted that in Morgan v. Tate & Lyle Ltd., expenses incurred to oppose nationalization were deemed deductible as they were aimed at preserving the company's trade.

The court also referenced several cases, such as Mitchell v. B.W. Noble Ltd., Southern v. Borax Consolidated Ltd., and Usher's Wiltshire Brewery Ltd. v. Bruce, to illustrate that expenditures aimed at preserving the status and reputation of a company, even if not directly resulting in profit, could be deductible. The court emphasized that expenditures made on commercial expediency grounds to facilitate business operations indirectly could qualify as deductions under section 10(2)(xv).

In this case, the court found that the propaganda expenses incurred by the assessee were aimed at countering a legislative threat that could have severely impacted the vanaspati industry. The court noted that a bill introduced in the Constituent Assembly sought to prohibit the manufacture and import of hydrogenated vegetable oils, which could have led to the industry's closure. The propaganda campaign by the Vanaspati Manufacturers' Association, of which the assessee was a member, was therefore deemed necessary to preserve the industry's status and reputation.

Conclusion:

The High Court concluded that the expenditure of Rs. 22,851 was indeed "wholly and exclusively laid out for the purposes of the company's trade." The court held that the expenses were aimed at preserving the status and reputation of the vanaspati industry and facilitating the assessee's business operations. Consequently, the payment was considered a revenue deduction against the income of the previous year. The question was answered in favor of the assessee, and the assessee was awarded costs, including counsel's fee of Rs. 300.