K.K. Desai, J.
1. The question of law referred to this court under section 66(1) of the Indian Income-tax Act, 1922, is as follows :
'Whether, on the facts and in the circumstances of the case, the claim of the applicant to deduct the sum of Rs. 25,000 has been rightly disallowed on the ground that the same represents capital expenditure ?'
2. The applicant assessed is a public limited company. The expenditure of the sum of Rs. 25,000 mentioned in the question was made in the year account ending March 31, 1961, the assessement year being 1961-62.
3. It appears that prior to March 27, 1961, it was decided to create an employees' welfare fund of the name of Hindustan Klockner Switchgear Employees' Welfare Fund. In that connection, the employees had collected Rs. 581. For the purposes of creation of the fund, a draft deed of trust had been also got prepared. The draft is drawn up in a manner that compels and inference that it was prepared by lawyers. Rules and regulations for the administration of the fund prepared in draft formed part of the schedule to the draft deed of trust. Apparently, the directors of the company had been consulted and had agreed to be parties to the deed of trust and the scheme of the welfare fund. On March 27, 1961, the board of directors of the assessee-company passed a resulation in connection with the constitution of the welfare fund as well as the execution of the deed of trust. That resolution in annexure 'A' to the statement of the case. The recitals in the resolution take notice of the facts which we have mentioned above. By the resolution, the board approved of the constitution of the fund and of the draft of the trust deed and the rules and regulations of the fund. The board further nominated the first trustees of the fund, some of the trustees being some of the directors. The board nominated the chairman and the deputy chairman of the board of trustees. The board further resolved that the company shall contribute a sum of Rs. 25,000 to the fund and to hand over that fund to the trustees of the fund. In pursuance of the resolution, the deed of trust dated March 29, 1961, was executed, inter alia, under the seal of the company by two of the directors. It appears from the entries in the books of account of the trust fund that the sum of Rs. 581 being the contribution by the employees of the company and Rs. 25,000 being the special contribution by the company, was received by the trustees of the fund on March 29, 1961. On March 31, 1961, the employees contributed Rs. 60.28 and the company contributed Rs. 180.84 to the Fund.
4. The assessee-company claimed the expenditure of the above sum of Rs. 25,000 as a deduction in the computation of its total income. The tax authorities held that the expenditure was capital expenditure. The Appellate Tribunal by its order dated January 2, 1963, confirmed that finding. In that connection, it referred to the decision in the wellknown case of Atherton v. British Insulated and Helsby Cables Ltd. The Tribunal observed that but for the contribution of Rs. 25,000 by the assessee-company the fund would not have come into existence. This contribution was the foundation or nucleus of the fund and 'not the amount of Rs. 581 which had been voluntarily collected from the employees'. The assessee-company's control of the fund was evidenced by its power to nominate the trustees and the chairman who was its own managing director and by the large powers conferred on the chairman by clause 33 of the rules and regulations. The Tribunal held that the expenditure of Rs. 25,000 had brought into existence an enduring asset and that the expenditure was, therefore, capital expenditure. The expenditure was not a mere gift or donation.
5. Now, this finding of the Tribunal is challenged on behalf of the assessee-company by their learned advocate, Mr. Patil. In his submission, the Tribunal was wrong in holding that by an expenditure of the above amount or Rs. 25,000 the assessee-company had brought into existence an asset. In his submission, the expense of Rs. 25,000 was made for the purpose of commercial expediency by providing for certain expenses of a beneficial amount of Rs. 25,000 as against the number of the employees and the needs of the employees was so small that by that small expenditure no lasting and/or enduring asset could ever by brought into existence. The expenditure was not incurred towards any existing liability of the assessee-company in favour of its employees. This was only a voluntary contribution made so that certain amount of contentment may exist in the employees for continuance of better relations between them and the assessee-company. He mainly relied upon the scheme of the fund in this connection. He pointed out that, under the scheme, the corpus of the fund was liable to be utilised and exhausted and this fact proved that this expenditure could never create any advantages and/or any asset of lasting nature of any kind.
6. In this connection, he relied upon the decision of this court in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd.
7. In reply, Mr. Joshi repeated the reasoning contained in the observations in the order of the Appellate Tribunal. His main submission was that the expenditure of Rs. 25,000 would be capital expenditure, because it was made with the object of enabling the assessee-company to establish a fund and offer to its employees benefits as mentioned in regulation 3 and thus to obtain a substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented staff. This expenditure was the nucleus for starting the fund. Rs. 581, which was voluntary contribution of the employees, was negligible and insufficient to create any fund, He relied upon the observations in the case of Atherton v. British Insulated and Helsby Cables Ltd. In this connection, he attempted to distinguish the observations in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd.,
8. Now, in connection with these contentions, it is necessary to notice the scheme of the fund as contained in the rules and regulations which are part of the above deed of trust. By clause 4 of the deed of trust the rules and regulations are 'deemed to have been incorporated' in the deed itself. Regulation 6 provides that the fund would consist of, (i) the voluntary contributions from time to time made by the employees of the company, and (ii) company's contribution made from time to time as laid down in clause 7. Under clause 7, the company's voluntary contribution was agreed to be in each financial year not more that three times of the contribution made by the employes. The maximum amount that the company was liable to contribute was not to exceed Rs. 1,000 per year, but the company was at liberty to contribute during any financial year from time to time an amount which was not to exceed one-fourth of the total emoluments payable to the employees. The purpose for which the fund was established are mentioned in regulation 8 which, inter alia, provides for expending of the fund for, (i) hospital treatment and medical expenses of the employees and the family members of the employees, (ii) completion of the wages and salaries lost by enforced sick leave, (iii) grants-in-aid to personnel resigning or discharged from service on health grounds, (iv) education grants for employees' children, (v) funeral expenses, (vi) shradh ceremonies, (vii) for providing library and sports facilities, (viii) for providing housing facilities to the employees, and (ix) to carry out other welfare objects and purposes which are conducive to or beneficial to the employees of the company.
9. The regulations 24 and 25 relate to the powers of the trustees to make payments from the fund and thereunder the trustees are authorised to dispose of all applications for payments and to make payments and/or to give loans to the employees of the company. Now, there is nothing in the rules and regulations direction the trustees to make expenses of the fund from the income earned by the trustees. On the contrary, the scheme of the fund is to authorise the trustees to expend the corpus of the fund towards the beneficial objects mentioned in regulation 8. For this very reason, provision is made for receiving from time to time voluntary contributions from the employees and the company so that the trust and the fund may not altogether cease to exist by exhaustion of its corpus. This scheme of the fund goes to support the submission made by Mr. Patil on the basis of the small amount of expenditure of Rs. 25,000 made for the creation of the fund. Apparently, this amount was entirely insufficient to meet with the necessities of the employees of the company in respect of the purposes mentioned in regulation 8. Apparently, the terms of employment of the employees had not created any liability as against the company to expend for the necessities of its employees as mentioned in regulation 8. The expenditure was not made by way of capital expenditure or otherwise to meet with and/or discharge the agreed liabilities of the company in favour of the employees. The expenditure was made for the purposes mentioned in regulation 8 which was in no manner connected with the terms of employment of the employees. This kind of expenditure has been held by this court in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd. mentioned above as deductible revenue expenditure. The finding was made in spite of the fact that the revenue had in that case also relied upon, amongst others, the decision in the case of Atherton v. British Insulated and Helsby Cables Ltd. The question in that case related to Mutual Benefit Society, started by the company. This society was started with the contribution of the above sum of Rs. 1,00,000 in July, 1952. The object of the society was, inter alia, to secure the welfare and interest of the permanent and retired employees, their families and dependants of the deceased employees of the assurance company. The fund of the society was to be administered through a committee consisting of a chairman and tow members appointed by the assurance company and two members elected by the members of the staff. The claim made by the assurance company for deduction of the above contribution of Rs. 1,00,000 in the computation of the income in the accounting year which was current in July, 1952, was disallowed by a finding that the expenditure was capital expenditure. The Appellate Tribunal reversed these findings on the short ground that the amount was laid out by the company as a matter of commercial expediency and it was settled law that under section 10(2)(xv) any expenditure incurred as a matter of commercial expediency had to be allowed. The finding of the Tribunal was challenged before this court. The court noticed that under section 10(2) (xv) deduction could be allowed on all expenditure which was not 'in the nature of capital expenditure'. After referring to the passages from Atherton's case on which Mr. Joshi for the revenue has relied in this case, at page 790, the court observed :
'None of these circumstances are present in the case before us. The amount transferred by the company was not an amount transferred as a nucleus of a fund nor is it anywhere clear that the amount transferred by the assessee was not to be utilised for payment to employees according to the purposes and objects of the society......... it is an amount of a recurring nature and was intended to be an amount commensurate with the needs of the workers and their dependants....... It seems from the terms indicated from the rules and regulations of the society that the entire fund was to be utilised for the general aims and objects mentioned in rule 2 and the manner in which the society administered the fund was more or less as occasion demanded rather that upon any principle. As and when applications are made by the employees or dependants of the deceased employees, if they are deserving cases, they are considered by the committee and amounts are sanctioned for the reliefs specified to the persons concerned and it is not dependent upon what is the income available for distribution nor even upon what is the amount at the credit of the fund.'
10. The court noticed that the reasoning which had prevailed before the Appellate Assistant Commissioner was 'that by this initial contribution the company was able to divest itself from future liabilities for payment to the employees'. The finding of the court was that this reasoning did not commend to the court. In that connection, the observation was :
'There was, in the first place, no liability upon the company to provide for the welfare and interest of its permanent and retired employees much less of their families and dependants beyond the actual emoluments which by contract has been fixed. No doubt, it would be a proper and perhaps a logical thing to do it, but one cannot say that the company was under a liability to make such a provision. If there was no such liability then the company secured no particular advantage nor got rid of any particular liability by making this contribution.'
11. On these circumstances, the court distinguished the decision in Atherton's case as not applicable to the facts before the court. The revenue had relied upon the decision in Rowntree and Co. Ltd. v. Curtis. That decision was distinguished by the observation :
'In the present case, the amount was not set apart as a nucleus. The income alone was not to be spent but even the amount contributed was to be spent towards the purposes of the fund and there was no liability upon the company which had to be got rid of. It was a pure and simple expenditure on the ground of commercial expediency out of the bounty of the assessee-company.'
12. Now, Mr. Patil is entirely right that each and all of the above observations are wholly applicable to the facts in the present case. It is not appearing from the rules and regulations which we have already referred to above. The principles enunciated in Atherton's case on which reliance had been placed by Mr. Joshi are, having regard to the reasons which appear in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd. not applicable to the facts in the present case. The facts in the present case are so entirely similar to the facts in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd. that we have found it impossible to accept Mr. Joshi's submission that the above observations in Commissioner of Income-tax v. New Assurance Co. Ltd. are not applicable to the present case. Following the decision in the case of Commissioner of Income-tax v. New India Assurance Co. Ltd. we are bound to hold that the expenditure of Rs. 25,000 in this case was made for commercial expediency and was not capital expenditure. This expenditure was, therefore, deductible under section 10(2) (xv) in the computation of the income of the assessee-company in the year of account in question.
13. In arriving at the above findings, we are not called upon to refer to the passages in the case Atherton v. British Insulated and Helsby Cables Ltd. at pages 193 and 199, on which reliance has been placed by Mr. Joshi.
14. In the result, the question is answered in the negative. The Commissioner of Income-tax will pay costs.