High Court Of Rajasthan
Additional Commissioner Of Income Tax vs. Rajasthan Spinning & Weaving Mills Ltd.
Sections 37(1)
Asst. Year 1987-88
Rajesh Balia & Sunil Kumar Garg, JJ.
IT Appeal No. 15 of 1999
15th October, 2003
Counsel Appeared
Sandeep Bhandawat, for the Appellant : Vineet Kothari, for the Respondent
JUDGMENT
Rajesh Balia, J. :
We have heard learned counsel for the parties.
2. The appellant, Addl. CIT, Udaipur has filed this appeal under s. 260A of the IT Act, 1961, against the order dt. 9th Nov., 1998 passed by the Tribunal, Jaipur Bench, Jaipur stating that the following substantial question of law arises for consideration in this appeal :
“Whether in the facts and circumstances of the case, the Tribunal was right in allowing the claim of expenditure to the tune of Rs. 15 lacs as covered under s. 37(1) of the Act when the contribution was clearly hit overriding s. 40A(9) of the Act.”
3. In the question referred to above, reference to s. 40A(9) has apparently been made under misapprehension. Sec. 40A(9) applies only in such cases when the question arises about any sum paid by the assessee as an employer towards setting up or formation of or contribution to any fund, trust, company, AOP, BOI, society registered under the Societies Registration Act, 1860, or other institution.
4. Apparently, sub-s. (9) of s. 40A can only be pressed when such sum is paid by any assessee in his capacity as an employer which means that the expenses are incurred on the basis of relationship of employer and employee and for the welfare of its employees.
5. It cannot be said that the claim to deduction which is subject-matter of question framed in this case has anything to do with the object of the assessee as an employer towards Export Promotion Fund. The contribution towards Export Promotion Fund is made in his capacity as a manufacturer and trader to further his business interest by serving its export activities and are not made in his status as an employer of the works.
6. In these circumstances, in our opinion, the substantial question of law as framed above does not arise in this case, but the question of law, which can be said to arise, is as under : “Whether the contribution made to Bhilwara Export Fund amounting to Rs. 15 lacs by the assessee could be termed as expenditure laid out or expended wholly and exclusively for the purposes of the business, while the Bhilwara Export Fund has only charitable objects without having business purpose and the Tribunal is justified in allowing the deductions of Rs. 15 lacs under s. 37(1) of the Act ?”
7. The dispute relates to the claim of the assessee to deduction of Rs. 15 lacs of contribution made to the Bhilwara Export Development Fund. The AO has initially allowed the claim of assessee by way of deduction as expenses wholly and exclusively incurred for the purpose of assessee’s business. However, the CIT exercising his powers under s. 263 opined that the assessing authority has committed an error prejudicial to the interest of Revenue in allowing the aforesaid expenses by holding that the expenses cannot be said to be wholly and exclusively incurred for the purpose of assessee’s business because the objects of Export Promotion Fund are all charitable and do not relate exclusively for the benefits of the assessee.
8. However, the Tribunal found the contribution to the Export Promotion Fund to be wholly and exclusively for the purpose of assessee’s business. The Tribunal considered that participating companies were required to contribute such percentage of domestic sales as may be decided by the trustees from time to time. The trust deed also stipulated receiving of subsidy by the participating companies based on export percentage of the companies as per the criteria decided by the trustees. In pursuance of this stipulation, the assessee-company contributed a sum of Rs. 15 lacs to the fund. The Tribunal also found that during the asst. yrs. 1988-89 to 1991-92, the assessee-company has received different amounts by way of subsidy on the basis of its export sales. In these circumstances, the Tribunal found that in order to augment its own export sales and give competitive edge to its marketing, the assessee-company has contributed to the fund in its own business expediency, firstly, with the objects of increasing opportunity of exports of goods manufactured by it and secondly, to earn the subsidy. The assessee has been successful in its objects, which led to the participation in the fund. In view thereof, the Tribunal did not agree with the finding of the CIT that the expenses incurred by the assessee were not wholly or exclusively for its business purpose.
9. The Tribunal also referred to the decision of Supreme Court in Sasoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC) wherein the Court had said that the expression “wholly or exclusively” cannot be equated with “necessarily”. It is not the dire necessity of the business in which expenses incurred can only be considered wholly or exclusively for the purpose of business. The augmentation of expenses does not fall within the purview of expression “wholly or exclusively” spent for the purpose of assessee’s business.
10. Undoubtedly, participation in any trade, association or fund set up for advancement of business, which is also carried on by the assessee, interest is primarily for advancing the assessee’s own business and not for philanthropic purposes. Essentially the finding, whether the expenses have been incurred wholly or exclusively for the purpose of assessee’s business, is a finding of fact. The fact that by becoming member of such association or contributing to such fund, such other participant or contributor is also benefited does not mean that the assessee has not spent sum exclusively and wholly for his business. The concept or “wholly and exclusively” is not that nobody else is to be benefited by making like expenses. Question is why the assessee makes such contribution. If his contribution is motivated by his own interest and there is nexus between the expense incurred and his business interest he has spent the money for his own business exclusively and wholly. The fact that recipient of such contribution viz., the association or fund exist for benefit for other persons also is not relevant.
11. It is well-settled that expression “wholly and exclusively” does not denote “necessarily”. The word “wholly” refers to quantum of expenditure. The word “exclusively” refers to motive, objective or purpose with which the particular expense has been incurred. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenses can be incurred voluntarily and without necessity. If it is incurred for promoting the business and to earn the profits, the assessee can claim the deduction. Reference in this connection may be made to Sasoon J. David & Co. (P) Ltd. vs. CIT (supra) wherein the apex Court even considered the circumstance that as a matter of fact the word “necessarily” found place in the Income-tax Bill, 1961, but was dropped by legislature in favour of expression “wholly and exclusively”.
12. In Atherton vs. British Insulated & Helsby Cables Ltd. (1926) 10 Tax Cases 155 (HL) it was observed by Viscount Cave L.C. as under : “A sum of money expended not of necessity and with a view of direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of trade”. The principle was quoted with approval by the Supreme Court in Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC) and CIT vs. Chandulal Keshav Lal & Co. Petlad AIR 1960 SC 738. In Eastern Investments Ltd. vs. CIT (supra) Supreme Court quoted with approval principle stated by Viscount Cave L.C. in Atherton’s case and further said : “It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned”.
13. The Supreme Court again explained in CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 756 (SC) that the true test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that if it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going on, and making it pay and not in any other capacity than that of a trader.
14. In this connection Calcutta High Court in Andrew Yule & Co. Ltd. vs. CIT (1963) 49 ITR 57 (Cal) succinctly stated the enquiry to be pursued : “The manner to apply the test is to ask the question : Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration? If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be. When the assessee places all the facts and circumstances before the Revenue authorities, the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency.”
15. Applying the aforesaid test to voluntary contribution to charitable fund or organisation it is also wellestablished 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 s. 37(1). Such a donation, whether voluntary or at the instance of the authorities concerned, when made to relief fund or a welfare fund 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 such circumstances 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 s. 37(1).
16. In Addl. CIT vs. Kuber Singh Bhagwandas (1979) 9 CTR (MP)(FB) 94 : (1979) 118 ITR 379 (MP)(FB) a question arose whether contribution made to Chief Minister’s Draught Relief Fund in order to avail permit for exporting Gulabi Chana or pulses out of State can be allowed as revenue expenditure under s. 37(1). The assessee has claimed deduction of such contribution to Chief Minister’s Draught Relief Fund as revenue expense laid out wholly and exclusively for its business. The AO disallowed the claim under s. 37 by treating it to be a donation. The Tribunal allowed the claim of the assessee by holding that such voluntary donation was in the business expediency for the advancement of assessee’s business interest, hence entire contribution was allowable under s. 37(1) of the IT Act. A Full Bench of the Madhya Pradesh High Court held that in the case before it the donations, which were made by the traders, did not contravene any law nor were the donations made as a penalty for infraction of any law. The merchants had made donations to the Chief Minister’s Draught Relief Fund as matter of commercial expediency to facilitate the obtaining of permits which were necessary for carrying on the export trade. The nature of expenditure was such that benefit to third party or charity had resulted but that did not disqualify it from being an expenditure incurred wholly and exclusively for the purposes of business. It was allowable under s. 37(1) of the IT Act.
In this connection we may notice a recent decision of Supreme Court in Sri Venkata Satyanarayan Rice Mills Contractor Co. vs. CIT (1997) 137 CTR (SC) 267 : (1997) 223 ITR 101 (SC). The case has arisen in like circumstances. A public welfare fund viz., District Welfare Fund was evolved by rice millers in association with District Collector. Each member proposing to export rice was required to deposit a stated amount in the specified bank. He was required to make application for seeking export permit disclosing the amount deposited by him. On such application Andhra Pradesh Government will give the applicant permit. Such contributions were disallowed by the assessing authority as well as by the appellate authorities including Tribunal. High Court too on a reference held such contribution to be against public policy. Reversing the judgment of Andhra Pradesh High Court, the Supreme Court approved the Full Bench decision of Madhya Pradesh High Court in Kuber Singh’s case (supra) and held that it correctly spells out the principle relating to allowability of such an expense which has been incurred with a view to the promotion of assessee’s business. In coming to this conclusion, the Supreme Court applied the principle laid down by the House of Lords in Atherton’s case (supra) and approved by the Supreme Court as discussed above. Keeping in view the aforesaid principle, if we have a close look at the grounds on which the contribution to Export Promotion Fund is denied to the assessee as stated in the order of CIT under s. 263 it reveals that because no part of trust property or its income shall be applied for purposes other than charitable purposes, the objects do not indicate at all that any one of them is directly connected with the business activities of the assessee and that trust is open to anyone so it cannot be said that contribution made to Export Promotion Fund is wholly and exclusively for the business of the assessee. In nutshell charitable purpose of the fund, non- availability of direct benefit, and even third party being beneficiary takes the contribution made to it out of purview of wholly and exclusively for the purposes of business of assessee because benefit of fund is shared by others.
All the three grounds independently or cumulatively are not germane for holding the expenses to be wholly and exclusively for the purpose of assessee’s business. It is now well-settled as discussed above that it is not necessary that benefit of expenses should flow to business of assessee directly or immediately. The principle in Atherton’s case (supra), as approved by the Supreme Court in Eastern Investments Ltd. (supra) and other cases lays down this firmly. It is also not necessary to show that expenses were not profitable or no benefit is actually derived. Nor the voluntary nature of expenditure takes it out of purview of s. 37(1) if it had nexus with the advancement of assessee’s business and assessee is motivated to incur expenditure for advancement of such interest. The receipt of actual benefit is also not necessary.
It is not in dispute that the assessee is a manufacturer of textiles. The fund is set up to promote export of textiles and other products, manufactured by Bhilwara group of industry. The export of textiles or other products of the assessee does result in advancement of assessee’s business interest cannot be disputed. Thus, contribution to fund set up for export promotion of products which is also business, the assessee thus has direct nexus to the advancement of the assessee’s business. The fact that the object of Export Promotion Fund is not confined to assessee but is open to all whosoever wants to participate cannot alter the character of expenses incurred by way of contribution to such fund by the assessee from his benefit to other’s benefit. We have noticed that contribution made to even Draught Relief Fund which has nothing to do with assessee’s business and was not a fund of which assessee could at all be said to be beneficiary, was held to be an expense incurred wholly and exclusively for the assessee’s business as it was incurred to deny indirect benefit to feed the requirement of his business by Madhya Pradesh High Court in Kuber Singh’s case (supra) which has been approved by the Supreme Court in Sri Venkata Satyanarayan Rice Mills Contractor Co.’s case (supra) for holding that contribution made to District Export Fund set up by the traders was incurred wholly and exclusively for the purposes of assessee’s business because contribution was motivated to advance assessee’s own business interest notwithstanding that it was open to others also to secure such benefits by making voluntary contribution to the fund.
The principle fully applies to facts of the case. The object of Export Promotion Fund amongst others include following object as noticed by the CIT in his order under s. 263 : (a) to promote exports of textiles, graphite and allied products and of such other products which the trustees may decide from time to time, (b) to give assistance monetary (subsidy) or otherwise as may be decided upon by the trustee from time to time to the manufacturers, processors and exporters of the products approved by the trustees with a view to promote exports of such products, (c) ……….. (d) to send representatives or trade delegations abroad for any work connected with export promotion of approved products and to bear the entire or such proportion and/or as may be determined from time to time by the trustees, (e) to take part in enquiries and to participate in conference in India or abroad which have a bearing on the objects of the trust fund and to incur expenses in connection therewith, (f) to promote and finance research with a view to promoting the exports of approved products, (g) to incur expenses for carrying on propaganda/publicity in India or abroad, (h) to encourage and finance research and technical development of plant, machinery, products and process with a view to promoting exports more particularly in the following areas : (i) Ultra high power graphite electrodes, (ii) Graphite specialities and other allied carbon products. (iii) Knitwears. (iv) Worsted fabrics and/or garments. (v) Mill-made cotton or polyster cotton fabrics.(vi) Such other products of the Bhilwara group as may be decided by the trustees from time to time. (i) …………….. (j) to establish export houses in India and abroad for promotion of approved products, (k) to undertake or promote any other activity incidental or germane to the aforesaid objects. None of the objects can be said to be unrelated to the business activities of assessee or without any nexus to the interest of assessee’s business.
As a result of aforesaid discussion, we are of the opinion that the Tribunal has rightly reached its conclusion that contribution to Export Promotion Fund was made by the assessee in his business expediency for promoting its business interest by augmenting exports. Such expenses are incurred and laid out wholly and exclusively for the purpose of assessee’s business, hence allowable as deduction under s. 37(1) of the IT Act.
The appeal is, accordingly, dismissed.
[Citation : 274 ITR 463]
