1972 (6) TMI 19 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the donation of cloth of the value of Rs. 6,834 given by the assessee-company was eligible for exemption under section 88 of the Income-tax Act, 1961 - one has to look to the substance of the transaction and the purpose underlying section 88(1) of the Act and if that is done, we have no doubt that the assessee is entitled to the deduction of the sum of Rs. 6,834 which represents the value of the cloth donated to various charitable institutions

Summary

Issues:
- Eligibility of cloth donation for exemption under section 88 of the Income-tax Act, 1961.

Detailed Analysis:

The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, regarding the eligibility of a cloth donation for exemption under section 88 of the Act. The assessee, a public limited company engaged in the manufacture and sale of fabrics, donated cloth to charitable institutions during the relevant accounting year. The donation was in kind, not cash. The Income-tax Officer disallowed the claim for exemption, but the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed it, citing a decision of the Bombay High Court. The department argued that section 88 only applies to cash donations, not donations in kind. The department relied on a circular issued by the Central Board of Direct Taxes in 1964, canceling an earlier circular supporting donations in kind. However, the court noted that the literal interpretation of section 88 would cause undue hardship to businesses donating goods at the request of charitable institutions. The court emphasized the need to consider the substance of the transaction and the purpose of the provision.

The court highlighted that the decision in the Associated Cement Company's case, supporting donations in kind, had been in force for years without challenge in the Supreme Court. The court reasoned that if the assessee had given a cheque for the donation amount and simultaneously prepared a bill of sale, they would have been eligible for the exemption. The court emphasized that the substance of the transaction and the underlying purpose of section 88 must be considered. Referring to the decision of the Bombay High Court, the court concluded that the assessee was entitled to the deduction for the cloth donation to charitable institutions. Consequently, the court answered the question in the affirmative, in favor of the assessee, who was also awarded costs and advocate's fee.

In conclusion, the judgment clarifies that donations in kind, such as cloth donated by a fabric manufacturing company to charitable institutions, are eligible for exemption under section 88 of the Income-tax Act, 1961. The court emphasized the importance of considering the substance of the transaction and the purpose of the provision in determining the eligibility for such exemptions.