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TMI Blog1996 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... as only discretionary. He further observed that the welfare fund had not been approved by the Commissioner of Income-tax under section 80G of the Act and, therefore, contribution to it could not be deducted. The appeals filed by the appellant before the Appellate Assistant Commissioner met with no success. Thereupon, second appeals were filed before the Income-tax Tribunal. The appeals were heard by a Full Bench of the Tribunal which, while allowing the appeals, came to the conclusion that though there was no compulsion on the appellant to make a contribution to a welfare fund still the contributions made in pursuance of a scheme which was evolved by the Rice Millers' Association in consultation with the District Collector would show that an advantage would ensue on the payment of the contribution and, therefore, the deduction was allowable under section 37(1) of the Act. The Tribunal further held that such contributions could not be held to be opposed to public policy. Against the order of the Tribunal disposing of the appeals, the Department filed four applications under section 256(1) of the Act whereupon the following question of law was referred : "Whether, on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate the amount of contribution deposited by him, giving the particulars of the bank, the challan number and the date. The High Court referred to the letter written to the Appellate Assistant Commissioner by the Collector in which it was stated as follows : "With reference to the representation of the Secretary, the West Godavari District Rice Millers' Association, Tadepalligudem, I am to inform you that welfare fund at Rs. 0.50 paise per quintal is being collected in respect of all rice and broken rice permits issued on trade to trade accounts." A similar letter had also been written to the Income-tax Officer at the time of assessment. From the aforesaid facts, the High Court came to the conclusion that the contribution was a compulsory one and was being collected from all the exporters of rice from the State of Andhra but the contribution so made, which was linked with the obtaining of permits, was opposed to public policy and, on this ground, could not be allowed as a deduction under section 37(1) of the Act. The principles for determining whether such a payment can be regarded as being allowable as a business expense are, in our opinion, well-settled. As long ago as in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts which can be subjected to tax under section 10(1) of the 1922 Act. The tax collector, it was observed, cannot be heard to say that he will bring the gross receipts to tax without deducting losses and the legitimate expenses of the business. Again in the case of CIT v. Piara Singh [1980] 124 ITR 40 (SC), a question arose with regard to the loss sustained by an assessee in the carrying on of an illegal business. The respondent therein carried on smuggling activities and was apprehended by the Indian police while crossing the border into Pakistan and Rs. 65,000 in currency notes were recovered from him. This money was being taken to Pakistan for the purposes of purchasing gold which was to be smuggled into India. This amount was confiscated. Thereupon the income-tax authorities came to the conclusion that the assessee, who was carrying on the business of smuggling, was liable to income-tax and he was accordingly assessed to tax. The assessee claimed deduction under section 10 of the 1922 Act of the loss of Rs. 65,000 which had been confiscated by the customs authorities. While allowing this deduction it was held that the carriage of the currency notes across the border was an esse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hana and pulses outside the State. In the same letter, the Chief Minister brought to the notice of the trading community that the kisans and labourers were undergoing untold hardship on account of drought conditions resulting from the failure of the monsoon and, as the merchants were bound to earn rich profits, he appealed to the trading community that they should contribute a portion of such profits to the Chief Minister's Drought Relief Fund. This was followed by a letter written by the joint Secretary of the Maha Sangh asking the merchants to deposit Rs. 30 per quintal for the export of gulabi chana and Rs. 5 per quintal for the export of pulses into the State Bank of India or the State Bank of Indore to the credit of the Chief Minister's Drought Relief Fund and to obtain duplicate receipt from the bank. It was further directed that the originals of such receipts were to be sent along with the duly filled in application forms for permits to the Maha Sangh at Bhopal. Members were also required to send fifty paise per quintal for meeting the administrative expenses of the said Maha Sangh. On the application being received in accordance with the aforesaid documents the Maha Sangh f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee's business. In our opinion, the decision in Kuber Singh's case [1979] 118 ITR 379 (MP) [FB] correctly spells out the principle relating to the allowability of such an expense which has been incurred with a view to the promotion of an assessee's business. The same principle as was followed in Kuber Singh's case [1979] 118 ITR 379 (MP) [FB] has been applied, in somewhat different circumstances, by other High Courts and the same has been approved by this court. In CIT v. Middle East Construction Equipments [1979] 117 ITR 382, the Orissa High Court had to deal with a case where the assessee carried on the business of supplying machines to the Government Departments. The State Government decided to give preferential treatment in the matter of placing of orders for supply of materials to parties holding State Government Loan Bonds. The assessee borrowed money for purchase of Government Loan Bonds and claimed deduction of interest paid on such borrowed money. The Tribunal found that the bonds had been purchased in order to boost the sales of the assessee and that the Bonds, which were sold within a year, had not been held as investment and had allowed the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal, the Madras High Court observed "subscribing to Government loans as in the present case is not, in our opinion, opposed to public policy, and we are of the opinion that the Tribunal has rightly found that the assessee was obliged to sell the bonds before they became ripe for payment only to stop incurring further loss as the money with which the subscription for the Government bonds had been made had been borrowed by the assessee from a bank at ten per cent. interest while the bonds carried interest only at 4.5 per cent." A similar question again arose for consideration before the Madras High Court in CIT v. Dhandayuthapani Foundry (Private) Ltd. [1980] 123 ITR 709. In that case, as a result of the persuasion of the sales tax authorities who were making assessments on the assessee and who also had the control over Form No. XX which are delivery notes to be issued by them for the despatch of goods, the assessee was obliged to subscribe to certain Government securities. However, instead of directly purchasing these securities and then selling them, the assessee paid certain margin money to the brokers which represented the difference between the issue price and the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of such bonds or securities was allowable as a business loss." From the aforesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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