Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred by the assessee- company for the purpose of creating the trust necessarily as a welfare measure has to be allowed as a deduction under s. 37(1) of the Act ?

Counsel Appeared

M. Suryanarayanamurthy, for the Revenue : Y. Ratnakar, for the Assessee

B. P. JEEVAN REDDY, J.:

Three questions are referred under s. 256(1) of the IT Act. They are :

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred by the assessee- company for the purpose of creating the trust necessarily as a welfare measure has to be allowed as a deduction under s. 37(1) of the Act ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing that the amount of Rs. 1,65,000 be allowed as a deduction from the total income as expenditure incurred wholly and exclusively for the purpose of the business carried on by the assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that depreciation should be allowed on the expenditure on bore wells and on payment of sales tax on a filtration plant ? “

2. Questions Nos. 1 and 2 go together and may be considered as such. The assessee is Vazir Sultan Tobacco Co. and the assessment year concerned is 1974-75. During the accounting year relevant to this assessment year, the assessee claimed deduction of an amount of Rs. 1,65,000 comprising of two amounts, viz., Rs 1,50,000 and Rs. 15,000 paid to Vazir Sultan Tobacco Company Higher Technical Education Trust, as business expenditure. The assessee formed a trust by the above name under a trust deed dated September 12, 1973, with a corpus of Rs. 1,50,000 for providing financial assistance and affording higher education to the needy children of the employees of the company. An amount of Rs. 15,000 was incurred as expenditure for forming the trust. Thus the total amount claimed by way of deduction was Rs. 1,65,000. The ITO disallowed the claim holding that the expenditure claimed was unrelated to the business of the company and that it was extraneous to its business requirements. He was of the opinion that the connection, if any, between the contribution to the trust and the welfare of the employees is too remote. This view was affirmed in appeal by the AAC. However, on further appeal, the Tribunal took a contrary view. It upheld the assessee’s contention. The reasoning of the Tribunal is, by making of the said provision, the employees would be happier and more satisfied. Since this provision was made for higher education of the children of the employees who are not financially well- disposed, the Tribunal pointed out, it must be said to have been laid out for the purpose of promoting the general welfare of the employees and must be deducted as a business expenditure. The further contention urged by the Revenue that the said outlay is a capital outlay and not a revenue expenditure was also rejected by the Tribunal. Questions Nos, 1 and 2 relate to this aspect.

3. We have seen the trust deed dated September 12, 1973. In the preamble portion it is stated that the settlor, namely, the assessee, is desirous of providing financial assistance and/or affording facilities for higher education to the meritorious and/or deserving or needy children of its employees and that in pursuance of the said desire, it has executed the said deed with a sum of Rs. 1,50,000 as the corpus. The trust is irrevocable. The object of the trust as stated in cl. 3 of para. 3 is as follows: “To award scholarships, freeships and grants by way of loan or otherwise and on such terms and conditions as the trustees may from time to time think fit for the purpose of enabling the meritorious and/or deserving or needy children of the employees of the settlor for undertaking or prosecuting higher technical education be it for a diploma, degree or postgraduation course in the field of medicine, engineering, electronics, technology and the like. “

4. The Tribunal understood the said object of the trust deed as one meant for the higher education of children of the employees who are not financially well-disposed. That this is the object of the trust is also affirmed before us by Sri Y. Ratnakar, learned counsel for the assessee. That is also our understanding of the relevant clause. Since the predominant object of the trust is to provide benefit to the children of needy employees who are deserving and meritorious, it must be said that the expenditure has been laid out for the ultimate business purpose of the assessee. By providing for the said object, the assessee would be keeping its employees, particularly the needy ones, happy and more contented, which is bound to enhance their productivity and is also bound to improve their relations with the employer, all of which go to the good of the assessee. It is true that the company was under no obligation to create such a trust. But it is well-settled by now that all measures taken by the assessee, though voluntary, i.e., not obligatory, which are ultimately designed to further the objects and purposes of the assessee can be treated as business expenditure so long as the connection between the expenditure and the object is real and not remote or illusory. In this case, there is a nexus between the expenditure and the objects and purposes of the company and it cannot be said to be illusory or remote. We are, therefore, of the view, in agreement with the Tribunal, that the said amount should be allowed as a business expenditure.

5. We may in this connection refer to a few decisions. In Usher’s Wiltshire Brewery Ltd. vs. Bruce (1915) AC 433 : 6 TC 399, a decision of the House of Lords, a brewery company, as a necessary incident of the profitable working of their brewery business, acquired and owned licensed houses which they let to tied tenants, who, in consideration of the tie, paid a rent less than the full annual value. The tenants were under an agreement to repair the houses and to pay rates. However, as a fact, the assessee undertook and paid taxes in order to avoid loss of tenants. The company also paid premiums on insurances against fire and loss of licences and incurred legal expenses in connection with the renewal of the licences. These amounts were claimed by way of business expenditure. It was held by the House of Lords that even though the expenditure incurred by the assessee was not obligatory, still, inasmuch as the said expenditure was incurred for furthering the business interest of the assessee, the said amounts were liable to be deducted as business expenditure. We may also refer to a decision of the Madras High Court in Palani Andavar Mills Ltd. vs. CIT 1977 CTR (Mad) 328:(1977) 110 ITR 742(Mad). There, the assessee, a limited company, spent certain amounts towards construction of an elementary school on land belonging to the Employees’ Housing Co- operative Society and claimed the said expenses as business expenditure. On completion of the building, it was handed over to the municipality to be run as a school for the benefit of the children of the employees of the assessee. Though the Departmental authority did not allow the same, the High Court allowed it holding that it was part of a welfare scheme for the educational facilities of the children of the employees of the assessee and hence it constituted revenue expenditure.

It is unnecessary to multiply authorities on this aspect. It is for this reason only that even in cases where bonus is paid by an employer to its employees over and above the statutory bonus, the Courts have allowed the same by way of deduction. There is another aspect of these two questions which has been urged before us. It is contended that the said outlay constitutes a capital outlay and not a revenue expenditure inasmuch as by creating the trust the assessee has acquired a capital asset of enduring value. Reliance for this purpose is placed on a decision of the Calcutta High Court in CIT vs. India Tobacco Co. Ltd. (1978) 114 ITR 182(Cal). We are unable to agree. In this case, even if it is held that the creation of the trust constitutes a capital asset, it is not the capital asset of the assessee. The assessee has parted with a sum. The trust is no longer under the control of the assessee. It would be controlled by the trustees and the income thereof would be spent on the purposes specified. Now, coming to the Calcutta case which has been relied upon, it is clearly distinguishable. That was a case where in lieu of the obligation of the assessee-company to reimburse the medical cost to its employees (other than those covered by the Employees’ State Insurance Scheme), the company contributed a sum of Rs. 50,000 to the hospital. In consideration thereof, the hospital agreed to treat such non-scheme employees free of charge. While holding that the outlay by itself constitutes expenditure, the Court was of the opinion in that case, that the company not merely incurred the said expenditure for getting rid of the obligation to make recurring annual expenses for meeting the treatment of its workers but also for getting an advantage or a concession which could be considered to be an asset of the assessee for an indefinite period, namely, to have its workers treated with no expenses or at concessional expenditure. In other words, the contribution made was in lieu of an obligation of the company ……… “obligation of a recurring nature “. In the circumstances of that case, it was held that the capital asset so created continued to belong to the assessee and was used for its benefit. But the same cannot be said in the facts of this case. Here, the asset, if any created, is one out of the control of the assessee and vested in the trustees. We are, therefore, of the opinion that the principle of the said decision does not advance the contention of the Revenue. For the above reasons, questions Nos. 1 and 2 are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

So far as the third question is concerned, it is not disputed before us by both counsel that it is concluded against the Revenue by the decisions of this Court in CIT vs. Warner Hindustan Ltd. (1979) 1978 CTR (AP) 228:117 ITR 68 (AP) and CIT vs. Warner Hindustan Ltd. (1985) 48 CTR (AP) 231:(1979) 117 ITR 15 (AP) and also a recent decision in CIT vs. Warner Hindustan Ltd. (1986) 160 ITR 217 (AP) to which one of us (Upendralal Waghray J.) was a party. For the above reasons, question No. 3 is also answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

No costs.

Reference answered accordingly.

[Citation : 169 ITR 139]