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Commissioner of Income-tax Vs. Elphinstone Spinning and Weaving Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 34 of 1965
Judge
Reported in[1975]100ITR139(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentElphinstone Spinning and Weaving Mills Co. Ltd.
Appellant AdvocateR.M. Hajarnavis, Adv.
Respondent AdvocateDilip Dwarkadas, Adv.
Excerpt:
.....of association - expenses incurred in changing article of association was solely for purpose of business as company should continue to function in accordance with law - held, expenses to be allowable as deduction. (ii) political donation - whether amount donated for political purpose allowable as revenue expenditure - no direct nexus between amount donated and profits - donation not solely for earning profits within meaning of section 10 (2) (15) - held, deduction not allowable. (iii) wealth-tax - whether wealth tax debited to profit and loss account is allowable as deductible expenditure under section 10 (1) or section 10 (2) (15) - said deduction was contrary to provisions of section 4 - held, deduction cannot be allowed claimed. - - 46,641 claimed by the assessee on account..........in making changes in its memorandum and article of association, the amount donated by the assessee-company to the bombay provincial congress committee and the amount paid by the assessee-company on account of wealth-tax debited to the profit and loss account for the year ending december 31, 1957. these claims for deduction relate to the assessment year 1958-59 for which the corresponding previous year is calendar year 1957. during the previous year a sum of rs. 2,426 was incurred as expenditure by the assess-company in altering its memorandum and articles of association. such alteration became necessary in view of compliance with the provisions of the companies act, 1956. a donation of rs. 21,000 was made to the bombay provincial congress committee. the memorandum of association.....
Judgment:

Kantawala, C.J.

1. This reference relates to claims for deduction of the amount of expenses incurred by the assessee-company in making changes in its memorandum and article of association, the amount donated by the assessee-company to the Bombay Provincial Congress Committee and the amount paid by the assessee-company on account of wealth-tax debited to the profit and loss account for the year ending December 31, 1957. These claims for deduction relate to the assessment year 1958-59 for which the corresponding previous year is calendar year 1957. During the previous year a sum of Rs. 2,426 was incurred as expenditure by the assess-company in altering its memorandum and articles of association. Such alteration became necessary in view of compliance with the provisions of the Companies Act, 1956. A donation of Rs. 21,000 was made to the bombay Provincial Congress Committee. The memorandum of association of the company authorised such donation or contribution to be made for political purposes. The third amount relates to the sum of Rs. 46,641 on account of wealth-tax liability for the year 1957. As the Tribunal partly accepted the contention urged on behalf of the assessee-company and partly the contention urged on behalf of the revenue, a consolidated reference has been made on the application of both the revenue and the assessee-company referring the following questions for our determination :

'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,426 representing the expenses incurred by the assessee-company in making changes in its memorandum and articles of association is an allowable deduction in computing the income of the company

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 21,000 donated by the assessee to the Bombay Provincial Congress Committee could be allowed as a revenue expenditure either under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act

3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 46,641 claimed by the assessee on account of wealth-tax debited to the profit and loss account of the year ending December 31, 1957, is allowable as a trading liability an deductible expenditure either under section 10(1) or section 10(2)(xv) of the Act ?'

2. The matter in controversy covered by each one of these three questions has been covered by the decision of one or the other High Court though none of the decisions is of this court, but it is a well-settled practice that the case of an all-India statute like the Income-tax Act, in order to preserve uniformity in law, if a decision is given by one High Court pertaining to a question then such decision is normally followed by the other High Courts unless he High Court is clearly persuaded to take a view that the decision has been patently erroneous.

3. So far as question No. 1 is concerned, it relates to a claim for deduction in respect of the sum of Rs. 2,426 expended for making alterations in the memorandum and articles of association of the company in order to bring its provisions in conformity with the Companies Act, 1956. Such a question arose for consideration before the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning and Weaving Mills Co. Ltd. In this case a sum of Rs. 3,000 was paid to a lawyer for advising on amendments in the articles of association and for drafting a special resolution. Such amendments of the articles of association was required in order to bring them into accord with the changes brought about in the law relating to companies. The Allahabad High Court took the view that such expenditure was incurred by the assessee solely and exclusively for the purpose of its business. It was incurred in order that the company should continue to function in accordance with the law. The ratio of this decision is clearly applicable so far as question No. 1 is concerned, but Mr. Hajarnavis has reserved his right to contend that this decision is erroneous in case the matter is considered by a higher court. Thus, our answer to question No. 1 is in the affirmative.

4. Question No. 2 relates to a donation of a sum of Rs. 21,000 by the assessee-company to the Bombay Provincial Congress Committee. The object clause of the assessee-company permitted contributions to be made by the assessee-company for political purposes. Whether such contribution can be allowed as business expenditure has been considered in more than one decision of the different High Courts and as uniform view has been taken by all the High Courts which had occasion to decide this question, to preserve uniformity in law, we prefer to follow the same course. In J. K. Cotton Spg. & Wvg. Mills Co. Ltd. v. Commissioner of Income-tax the assessee-company paid a sum of Rs. 56,000 to the Congress Parliamentary Board for its expenditure in the general elections and claimed it as a business expenditure on the ground that, with the charging pattern of the economic structure of society, it was in the interest of the company to keep the ruling party in power. The Allahabad High Court took the view that as there was no direct nexus between the business of the company and the contribution, the amount of Rs. 56,000 paid to the Congress Parliamentary Board was not allowable as business expenditure. A similar view has been taken by the Calcutta High Court in Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax. In that case also the assessee had claimed deduction in respect of a sum of Rs. 1,50,000 paid to the Indian National Congress. The Calcutta High Court took the view that the contribution to the Indian national Congress was not an expenditure incurred solely or exclusively for earning the profits within the meaning of section 10(2)(xv) of the Act and was not an allowable deduction. It was further held that assuming that there was some connection between this kind of expenditure and the earning of profits, the connection was too remote. Such was the view taken even on the assumption that the memorandum of association of the company permitted the company to make such donation to a political party. A similar vie is taken by the Delhi High Court in Orissa Cement Ltd. v. Commissioner of Income-tax. Following these decisions we answer question No. 2 referred to us in the negative.

5. The third question relates to a claim for deduction in respect of a sum of Rs. 46,641 paid on account of wealth-tax debited to the profit and loss account of the year ending December 31, 1957. In more than one decision the Supreme Court took the view that the wealth-tax paid by a trading company on its assets held for the purpose of its business was deductible as a business expenses in computing the assessee's income from business. Such a view was taken by the Supreme court in Indian Aluminium Co. Ltd. v. Commissioner of Income-tax and in Commissioner of Income-tax v. Standard Vacuum Oil Co. Ltd. Normally, if the legislature had not intervened, the decisions of the Supreme Court would have been clearly applicable. But the provisions of the Income-tax Act were amended by the Income-tax (Amendment) Act, 1972 (No. 41 of 1972), which received the assent of the President on August 28, 1972. By this amending Act it was provided that in section 40 of the Income-tax Act, 1961, after the sub-clause (ii) of clause (a) the following sub-clause shall be, and shall be deemed always to have been inserted, namely :- '(iia) any sum paid on account of wealth-tax.' The provisions of sub-clause (iia) shall apply for the purpose of computing the income chargeable to tax under the head 'Profits and gains of business or profession.' So far as the position under the Indian Income-tax Act, 1922, was concerned, this specific provision was made in section 4 of the amending Act. Section 4 of the amending Act provides that :

'Nothing contained in the Indian Income-tax Act, 1922, shall be deemed to authorise or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head 'Profits and gains of business, profession or vocation' of 'Income from other sources' for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax......' In view of this provision the law has been alternated and question No. 3 has to be answered in the negative.

6. Both Mr. Hajarnavis on behalf of the revenue and Mr. Dilip Dwarkadas on behalf of the assessee have reserved the right to argue to the contrary in case the matter is considered by any higher court. Each party will bear its own costs of the reference.


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