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Commissioner of Income-tax, Andhra Pradesh Vs. Kodandarama and Company, - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Reported in[1983]144ITR395(AP)
ActsIncome Tax Act, 1961 - Sections 37, 37(1), 37(10), 80G and 261
AppellantCommissioner of Income-tax, Andhra Pradesh;veera Vengata Satyanarayana
RespondentKodandarama and Company, ;bhupathiraju Gopal Krishanraju, ;c. Surayanrao and Company and ;venkata Sa
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateY.V. Anjaneyulu, ;A. Suryanarayana Murthy, ;T. Raman and ;Sriama Rao, Advs.
(i) direct taxation - deduction - sections 37, 37 (1), 37 (10), 80g and 261 of income tax act, 1961 - assessee claimed deduction of amount paid by them to welfare fund as business expenditure under section 37 - tribunal observed such payment liable to be taxed - assessee alleged expenditure was exclusively incurred in course of business - alleged that unless said payment was made no permits for export were being issued - such payments were voluntary and not mandatory or statutory - held, expenditure not incurred wholly for purpose of business thus liable to be taxed. (ii) exemption - sections 37, 37 (1), 37 (10), 80g and 261 of income tax act, 1961 - tribunal observed payments to welfare fund not opposed to public policy - such payments demanded as pre-condition for grant of export permit.....jeevan reddy, j.1. the assessee in these five referred cases are dealers in paddy, rice, broken rice, etc., in west godawari district. they are millers as well. in their returns filed for the assessment year 1973-74, they claimed deduction of the amounts paid by them to the andhra pradesh welfare fund, west godawari district (branch eluru), as business expenditure, under s. 37(1) of the i. t. act, 1961. the assessee case was that it was an expenditure wholly and exclusively incurred in the course of business and that, unless the said payment to the welfare fund was made no permits for export of boiled rice to the state of kerala would be issued by the district collector. the ito, however disallowed the deduction holding that the said payment was neither mandatory nor statutory, but only.....

Jeevan Reddy, J.

1. The assessee in these five referred cases are dealers in paddy, rice, broken rice, etc., in West Godawari District. They are millers as well. In their returns filed for the assessment year 1973-74, they claimed deduction of the amounts paid by them to the Andhra Pradesh Welfare Fund, West Godawari District (Branch Eluru), as business expenditure, under s. 37(1) of the I. T. Act, 1961. The assessee case was that it was an expenditure wholly and exclusively incurred in the course of business and that, unless the said payment to the welfare fund was made no permits for export of boiled rice to the State of Kerala would be issued by the District Collector. The ITO, however disallowed the deduction holding that the said payment was neither mandatory nor statutory, but only discretionary. He observed that the expenditure could not be said to have been incurred wholly and necessarily for the purpose of the assessees' business. He took note of the fact that the said welfare fund was not approved by the Commissioner of Income-tax under s. 80G of the Act. On appeal. it was again contended by the assessee that the appellants could not be carry on their business without incurring the said expenditure and, therefore, it must be held to be deductible under s. 37(1) of the ACt. The AAC rejected this plea on the basis of the statement made by the chartered accountant for the welfare fund, to the effect that there was no compulsion from the authorities in make any payment to the welfare fund and that it was thoroughly voluntary. He referred to certain instance where permits were granted without the dealers making such contribution to the welfare fund. The AAC further observed that the said contribution were made by the several members of the Rice Millers Association in pursuance of a scheme evolved by them in consultation with the District Collector, accounting to which understanding, each members of the Association was to deposit an amount of 0.50 paise per quintal of rice he proposed to export to Kerala. This deposit had to be made in the Andhra Bank. The application for export permit had to be made3 upon a form evolved by the Association, where in the applicant stated, inter alia, th3e amount of the contribution deposited by him, giving the particulars of the bank, the challan number, and the date. The AAC also relied upon a latter of Collect, which we shall refer to presently, and held, that these payments were voluntary payment, and not compulsory payments. The assessee, thereupon, preferred appeal to the Income-tax Appellate Tribunal.

2. In some of the appeals filed by the assessee, the Tribunal took the view that the contribution made to the welfare fund was a permissible deduction, while in some other appeals it took a contrary view. R. C. No. 166/1978 arises from one such decision of the Tribunal in I. T. A. No. 124 6/Hyd/74-75, in which the Tribunal held that the contribution made to the welfare fund could not be allowed as a business deduction, because the contribution was made with the object of gaining an advantage, and was thus opposed to public policy. When certain other appeals preferred by the assessees came up for hearing before the assessee later, they were heard by a FUll Bench consisting of these members, which was constituted in view of the conflict between the two Benches the Tribunal. The Full Bench of the Tribunal held that, (i) there was no compulsion upon the assessee to make contribution to the welfare fund : (ii) the contributions were made in pursuance of a scheme evolved by the Rice Millers Association, in consultation with the District Collector; '.... the nexus between the payment could be linked with successful fulfillment of the Association scheme and consequently the members would get an added advantage and, therefore, viewed from that angle the importance e and image of the Associations goes up and the payment satisfies the tests laid down in section 37(1) '; and (iii) that such contributions cannot be held to be opposed to policy, inasmuch as the benefit which was expected by the members of the Association, wa only because of, and thought the Association role in the organisation of the Scheme,. R. Cs. Nos 20/979, 73/1979, 74/1979 and 85/1979 arise from the orders of the Full Bench holding that the contribution are deductible an business expenditure

3. The question, referred to us in R. Cs. Nos., 20,73,74 and 85 of 1979, at 5th case, the reference is at the instance of th

'whether, on the facts and in the circumstance of the case, the Income-tax |appellate Tribunal, was justified to hold that the contribution made to the welfare fund was not apposed to public policy and that the same was motivated purely by commercial consideration, and that the deduction was shoe allowable under section 37(1)?'

4. While the question referred in R. C. No. 166/1978, at the instance of the assessee, is :

'|Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the sum of Rs. 9,164 paid by the assessee towards contributions to the District Welfare Fund for getting permits form the Government of Andhra Pradesh for export of rice, did not constitute business expenditure within the meaning of section 37 of the Income-tax Act, 1961 ?'

hus,. the question referred in all these referred cases, are identical, though in the first four cases the reference is made at the instance of Department while in 5th case, e reference is at the instance of the assessee.

5. Mr. M suruyanarayana Murthy, the learned standing counsel for the Revenue, contended that, if the contributions to the welfare fund are treated as voluntary, as held by the Full Bench of the Tribunal, then of would be a case where there is no nexus between the contribution made and the business of the business. if, on the other had, s, the contribution is held to be compulsory and, therefore, expedient in e interest of the assessee business, it must be held to be opposed to public policy and cannot, therefore be allowed as business expenditure under s. 37. He submitted that the assessee contributed to the welfare fund only with a view to assure themselves of the export permits,. The latter of the collector, learned counsel submitted, makes it clear that all those who wanted export permits were required to contributes to the welfare fund and at those oho did nto contribute did not stand the chance of getting export permits except, perhaps, a couple of co-operative societies which, on account of their by decision in Addl. CIT v. Badrinarayan Shrinarayan Akodiya : [1975]101ITR817(MP) , as representing the correct statement of law on the subject, notwithstanding the fact that the said decision has been disapproved by a subsequent Full Bench of e same count in Addl. CIT v. Kuber Sings Bhagwandas : [1979]118ITR379(MP) . Reliance was also placed by him upon e decision in : (i) Delhi Cloth & general Mills Co. Ltd v. CIT : [1980]125ITR96(Delhi) , (ii) Southern and Rajamani Transports (P.) Ltd. v. CIT : [1977]107ITR470(Mad) , (iii) Indian Steel and Wire Products Ltd. v. : [1968]69ITR379(Cal) and (iv) Indian Iron & Steel Co. Ltd. In re [1957] 27 Comp Case 361 (cal).

6. On the other hands, it is contended by Sri Y. V. Anjaneyulu, who led the argument on behalf of the assessee, firstly, that these payment were compulsory exactions; unless these payments were made, the District Collectors refused to issue the 4export permit. An person intending to export boiled rice to Kerala was obliged to contribute 0.50 paise per quintal to the welfare fund, and mention the and only on being satisfied of such payments, wee export, permits issued. He submitted that these payments must, therefore, be held to be made in the interest of the assessee business, and are deductible as such under s. 37. Secondly and alternately, the counsel that the payment were voluntary, as found by the Tribunal and inasmuch as these payments though not necessary, were warranted by business expediency, they are entitled to be deducted as such. He contended that once the assessee establish that a particular expenditure incurred by them wa actuated by business expediency, it is liable to be deducted as such, and no further question arises whether such payment is opposed to any law, or is opposed to public policy. He submitted that the argument that the said contribution were opposed to public policy was brought in for the first time at the stage of Tribunal and that the particular ground of public policy, which is said to have been violated, had not been specified either by the Department, or by the Tribunal, in cases where it held such payments as opposed to public policy. Learned counsel stressed that there was no material before the Tribunal nor before this court, upon which the question whether the contributions are opposed to public policy or not can be decided properly and fully. |Counsel, also submitted that the Fund was sponsored by the District Collector, and the assessee were under a bona fide impression that it was a lawful one, having been sponsored by e governmental authorities and, accordingly, they made the contributions to the Fund under the impression that they were making payments to a bona-fide Fund. They were not aware, at the time they made the contribution, that these contribution, wee opposed public policy. In such circumstances, counsel contended, holding such payment as opposed public policy would cause the assessee irreparable prejudice. Counsel, indeed, puts use on notice this question is fraught with gave consequences because, he submitted, formation of such funds by various political and administrative s authorities is the order of the day where citizens are simply forced to make the contributions, Counsel submitted that such collections have become inseparable from e present day national life.

7. From the above narration of fact, it is clear that the assessee have all the while been contending uniformly that said contribution was a compulsory exaction and that export permits were not given unless they contributes to the welfare fund. This plea has been rejected by the three authorities, on there different grounds, as would be evident from a perusal of their order in R. |C. No. 20/1979. The ITO rejected the plea on the ground that the it was neither a mandatory, nor a statutory payment and that, therefore, it was a discretionary payments ; and ad out by Mr. Anjaneyulu an expenditure, for being admissible as a 'business expenditure 'under s. 37(1), need neither be mandatory nor statutory and that, even a voluntary payment, so long as it is made in the interest of e assessee business, is entitled to the deducted as a business expenditure. Thus, the ground given by the ITO is ex facie unsustainable.

8. Now coming to the order of the AC, he rejected the assess argument on an equality unsustainiable ground, not put forward either by the assessee or by the Department. The AAC was of the opinion that the scheme in pursuance of which the contribution were made by the assessee was evolved by the Rice Millers Association, though in consultation with the District Collector,; and that the contribution were made in accordance with, and through such Association. he came to this conclusion notwithstanding the latter of the Collector addressed to him, which stated that such collections were made in respect of all export permits issued by him. The later of the Collectors reads as follows :

With reference to the representation of the Secretary, the West Godavari District Rice Millers Association, Tadepalligudem., I am to inform you that the 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 account.'

9. We may also refer to similar letter written by the Collector to the ITO, Palakole, Tanuku, wherein he stated :

'We are, collecting Welfare Fund at 0.50 paise per quintal in respect of all rice and broken rice permits issued on trade-to trade basis from out district to other districts.'

10. Now, it may be notice that it was nobody's case that the Welfare Fund was organised by the Rice MIllers Association. It was a Fund organised by the District Collector. Similarly, it was not the assessee or the Department case that the contribution were made because of the Association decision. The letters of the Collector make it abundantly clear that the contribution was a compulsory one, and was being collected from all. Indeed, Mr. Anjaneyulu complained hat the few instances where the export permits for rice were issued by the District Collector without collecting such contributions, were gathered by the AAC behind the back of the assessee and that, had an o[opportunity been given to the assessee, they would have established that the persons to whom permits have thus been issued, at two co-operative societies which could not make such a contribution in view of their bye-laws. The order of the AAC also makes it clear that his reasoning in this behalf is based upon the representations made by the chartered accountant from the Welfare Fund; and Mr. Anjaneyulu's complaint is that the said representation was received and considered behind the back of the assessee. be that as it may, it is clear that the AAC was nto justified in evolving a third theory altogether, not put forward wither by the assessee, or by the department.

11. SO far as the Tribunal is concerned, it too arrived at e finding that the contribution were voluntary, only on the basis of the material - mainly the fact-that two co-operative societies too got such permits, without making the contribution referred top by the AAC in his order. Indeed, the finding of the Tribunal is rather ambergris. While holding that there wa no compulsion in the part of the District Collector, the Tribunal holds that the contributions were made in pursuance of the scheme evolved by the Rice Miller's Association' and then observes that, by making such contribution, the member would get an added advantage, inasmuch as such payment would enhance the importance and image of the Association. WE find this theory-which we must again reiterate was not sponsored by either the assesses or the Department-wholly unacceptable. We find that the assessee were right in contending that these payments were compulsory payments and that, unless these payments were made, the District Collector was not issuing export permits to them. Though this finding of ours is at variance with the finding of the Tribunal, we considered it necessary to identify the factual situation correctly. We are of the opinion that the Tribunal finding, for the reasons stated above, is liable to be termed perverse and not based on relevant material. The Tribunal misread the letter of the Collector and also relied upon a representation of the chartered accountant of the welfare fund, made behind the back of the assessees; it must be remembered that the welfare fund was not a party to these proceedings at any stage. It is indeed difficult to believe, in the facts and circumstances of this case, that the contribution to the welfare fund were voluntary. They were made by the assesses only because they were told that they would not get the export permits unless they made the contribution. Accordingly, they made th contribution, precisely at the rate of 0.50 paise per quintal, on the quantity applied for by them and obtained permits. From the point of the assesses, it was immaterial to who, they were asked to make the payment. Since they were told that the said contribution is a pre-condition for obtaining export permits, they would have made the payments to who, soever they were deircted be it a welfare fund, or any other or authoirty, as the case may be. the regulairy and the sustemeitci manner in which these contibution were made shows that the contgribution to the welfare fund was a pre-condition for the grant of export permits. The assesses were, m therefore, right in contending throughout that the ocnctibution was a compulsory payment exeacted from them as a price of rgratning export permits. WE may observe that the assessee cannot complin of this finding of ours, since we are only upholding and aifrming their plea, consistently urged by them before all the authorities as well as before us.

12. We shall now examine the question, on the above basis, whether these contributions are opposed to public policy, and whether, on that account, they should be opposed to public policy, and whether, on that account, they should be disallowed as business expenditure under s. 37 of the ACt. The grant of these permits is governed by the Southern States (REgulation of Export of Rice) order, 1964, issued under s. 3 of the Essential Commodities ACt, m 1955, and/or by the Southern States (Regulation of Export of Rice) Order, 1971, issued under the Defence of India Rules. It is really unnecessary for us to investigate under which particular control order these export permits are issued. It would be sufficient for our purposes to notice that the grant of permits has to be made by the Collector on a reasonable and fair basis, having regards to the relevant facts and circumstances of the District and the State as the case may be. It is not open to the District Collector, or any other authority for that matter, to impose a condition like the present one, that the grant of permits shall be conditional upon making a particular contribution to a particular fund, society, organisation, or individual as the case may be; nor is it open to an authority to say that whoever makes such contribution at the prescribed rate, will be entitled to export permit in the appropriate quantity. If this were permitted, each and every authority would be entitled to constitute his won fund by whatever name it is called m and insists upon the citizen making payments into such a fund as a condition for the discharge of their official duties. There can be little doubt that the person paying would be in a definitely advantageous position as against those who do not, or cannot pay. The person so paying would be assure of favorable orders-permits in this case whereas the others may, or any not get such favorable treatment., In effect, there will but two classes, a favored one and the other, inevitably, the not favoured. In such a situation, it goes without saying that the official concerned would not pass orders on the merits of a given case. This would certainly be subversive of public interest and good administration. If demanding such 'contribution' is bad, paying it is equally bad and cannot be encouraged even if the payment is made involuntarily. Both are privies to a wrong. It is immaterial that such collections are made openly, for in such cases, the payer is not really worried about the nature or the objects of the fund into which he is making the payment, nor is he concerned to see how the fund is ultimately applied. (Indeed, the judgment in R. C. No. 48/1978 (Andhra Pradesh Welfare Fund v. CIt- : [1983]143ITR82(AP) , shows that this fund was in no way connected with the A. P. Social Welfare Fund established by the Govt. of A. P. and further that because of misapplication of a part of the funds of this fund, its income was held not entitled to exemption, and was brought to taxed in full measure-which action was upheld by this court. All that he is concerned with, is to obtain the permit'; and since the contribution is a pre-condition, he feels obliged to comply with the same because he thinks, and rightly that there is no other way of obtaining the permit and to carry on his business. This is not different from paying bribes-the difference, if any may only be one of degree. It is true that, from the point of view of the assessee, such a payment is warranted by his business expendiency; but we are not prepared to agree with Mr. Anjaneyulu that every payment which is expedient in the interests of the assessee's business must be deducted under s. 37. Any payment which is either opposed to say law, or is opposed to public policy, cannot be recognized, because it is well settled that infraction o flaw is not a normal incident of business. Similarly, payments which are opposed to public policy, being in the nature of unlawful consideration for discharging an official duty otherwise than according to law and merits i.e., otherwise than on merits, cannot equally be recognized. Mr. Anjaneyulu argued that this court cannot import moral or ethical standards into income-tax law and that the assessee cannot be compelled, more so in the present day circumstances to strictly abide by law and public policy while doing their business. We are afraid, we cannot countenance such an argument. The businessman are citizens of this country and the business they carry on affects the citizens of this country. Any illegal payment made by them is ultimately passed on to the consumer public. Allowing the growth of such mushroom funds, organisation or societies is not in the interests of the nation or its citizens. We cannot leave it open to every official high or law, to organize or create his own fund or organisation, and compel the citizens to contribute to such fund/organisation as a price for discharging his official duties/. Such a course would vitiate the national life beyond redemption. It would be short-sighted and myopic to hold that businessmen are entitled to conduct their business even contrary to law and that, so long as the payments made by them are justified by their business expediency, they should be allowed as business deductions, notwithstanding the fact that such payments are illegal, or opposed to public policy, or have pernicious consequences to the nation's life as a whole. It is not open to a businessmen to bribe a public official and say that the bribe was necessary or expedient in his business interest and, therefore, the amount paid by way of bride ought to be deducted as a business expenditure under s. 37. Section 23 of the Contract Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law; and we see no qualitative difference in both. If at all, as observed by us earlier, the difference is only a matter of degree. By not recognizing such payments, we would indeed be discouraging the formation of such funds by person exercising public authority. We are not persuaded that such a course would in any manner, interfere with the course of business or trade.

13. We may, in this connection, refer to the decision of a Bench of this court in R. C. No. 73 of 1977, dated November 26, 1982 (CIT v. Maddi Venkataratnam & Co.- : [1983]144ITR373(AP) ), to which one of us (Jeevan Reddy J.) wa a party wherein this court, applying the principle of the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) , CIT v. S. C. Kothari : [1971]82ITR794(SC) and CIT v. Piara Singh : [1980]124ITR40(SC) pointed out the distinction between a lawful business and an inherently unlawful business,. It was pointed out that where the business is lawful, and illegal payment, or a payment made with a view to further an illegal activity cannot be allowed as a business deduction, whereas in the case of on inherently unlawful business even the illegal payments have to be deducted the business itself being inherently illegal. This court also pointed out the raison d' etre underlying the said distinction'; we think it unnecessary to repeat the reasoning here. We, therefore, reject the theory that a businessman in this county has a right to do business in any manner he liked, without regard, to law, or public policy, with the sole criterion of earning profits. We see no reason to create a privileged class of businessmen for whom the law, public policy or the nation's interest does not count.

14. Mr. Anjaneyulu then argued that the ground of public policy is an 'unruly horse' and cited before us some decision disclosing reluctance on the part of some judge to mount it for the fear of being unable to dismount. He also submitted that the ground of public policy is not a static one, and is liable to change with the changing times. We can do no better than answer this contention in the words of Subba Rao J. (as he then was), in Gherulal Parakh v. Mahadeodas Maiya : AIR1959SC781 . The learned judge said (p. 795) :

'The doctrine of public policy may be summarized thus : public policy or the policy of the law is an illusive concept; it has been described as untrust-worthy guide', 'variable quality', uncertain one', unruly house' etc., the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy; for want of better word Lord Atkin describes that some thing done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a breach of common law, and just like any other breach of common law, is is governed by precedents; the principles have been crystallized under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public; though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing in world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days.'

15. We are acutely conscious of the fact that public policy should not depend upon 'the idiosyncratic inferences of few judicial minds' and that moral indignation must not be mistaken for public policy :, but, at the same time, this should not be mistaken for 'public policy' but at the same time, this should not deter us from puttying the clear public interest above the business expendiency of businessmen since, buy failing to do so, we would become a party to, and acquiesce in a public wrong. We may recall in this connection the observations of Lord Denning in Enderby Town Football Club Ltd. v. Football Association Ltd. [1970] 3 WLR 1021 where he said (p. 1026) :

'I know that over three hundred years ago Hobart C.J. said the public policy is an unruly horse.' It has often been repeated since. So unruly is the horse, it is said (per Burrough J. in Richardson v,. Mellish [1924] 2 Bing 229), that to judge should ever try mount it lest it ran away with him. I disagree. With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. It can leap the fences put up by fictions and come down on the side of justice as indeed was down in Nagle v. Feilden [1966] 2 QB 633.'

16. A thought discussion of this subject is found in the decision of this court in Ratanchand Hirachand c. Askar Nawaz Jung : AIR1976AP112 , rendered by Chinnappa Reddy J., to which one of us (Punnayya J.) was a party. After reviewing the law on the subject the learned judges observed (p. 120 of AIR) :

'In our view, an agreement, the object of which is to use the influence of a person with Ministers of the Government to obtain favorable decision, is destructive of all sound and good administration. It discloses a tendency to corrupt or to influence public servants to decide and determine matters otherwise than upon their own merits, a tendency most injurious to the public interest. We do not have the slightest doubt that such an agreement is contrary to public policy. We also with to empha size that is it irrelevant that the person proposed to be influenced are incorruptible and are person 'whose' ability, honesty and patriotism are beyond all question as in the case of Montefiore vc. Menday motor Components Co. Ltd. [1918] 2 KB 241. It is the very tendency of the agreement that makes it contrary to public policy.'

17. This judgment is also an authority for the proportion that, even though such a ground is not expressly raised by the parties, ' : it is the duty of the judge to take the objection whether parties take or waives the objection if it comes to his notice that the agreement is contrary to public policy.'

18. Before we refer to the decision on this point, we would like to deal with Mr, Anjaneuyulu's argument that there is no proper material before this court to go into this question of public policy and that this court should therefore, refuse to go into, or answer, the question to that extent. We are of the opinion that no further material is called for in this case than what is already on record. The letter s of the Collector, referred to above, and the facts found by the authorities below-nay the very plea of the assesses0-are sufficient to hold that the payments were opposed to public policy,. It is clear that all these traders who made contribution to the welfare fund, automatically formed a separate class who were assured of export permits to the extent of their contribution to the welfare fund (ar the rate of 0.50 paise per quintal), while those who did not contribute, formed a separate class, who may to may not have obtained such permits. Merely because the Collector demanded such payment as a per-condition for grant of export permits, the assesses should not have acceded to the same and, in any event, they cannot claim such payment as a business deduction. By dint of the same logic, all illegal and corrupt payments would also qualify as business deductions under s. 37 a prospect which we shudder to contemplates.

19. In this country, where social controls over trade and industry are wide and varied, commercial men feel for reason good or bad, that their existence and prosperity depend upon Governmental graces. This felling is not unreasonable. Since power of money is well known to commercial men and ounce they know best to exploit that power, large scale contribution to political party funds may at times be considered to be commercially expedient. Since commercial men are best experienced in commercial expendiency, we are prepared to proceed on the basis that some contribution to some political funds sometimes pay and prove to be expedient.

20. But, although this is so, we are not prepare to proceed on the assumption that all contribution to all political funds must always be presumed to be commercially expedient. There may be some contribution made no in commercial interest or expediency but in order to save a commercial company from the consequences of unlawful acts, say, for example, to hush up a company law investigation o r proceeding for breach of Foreign Exchange REgulations. Such contributions many also be made to satisfy a political fad or a political prejudice of the directorate of a company. Each case must, therefore be decided on its own facts.'

21. The same question was considered by the same court earlier in Indian Iron and Steel Co. Ltd. in re [1957] 27 Comp Cas 361 (Cal). It was pointed out (p. 364) :

'To the cynic it appears to be a plea of the company to have a legal sanction to bride the Government of the day to induce policies that will help the company in its business. A company's policy should be determined by its shareholders who subscribe to its capital carried out by its board of directors, who manage the company. Such policy should therefore, stand on it sown merits and on the conviction and conscience of its share holders. To include the Government of the day by contributing money to the political funds of political parties, is to adopt the most sinister principle fraught with grave dangers to commercial as well as public standards of administration. The object is stated plainly to be to contribute to the funds of political parties which will advance policies conducive to the interest of the company.' Persuasion by contribution of money lowers the standard of administration even in a welfare state or democracy. To convert convictions and conscience by money is to prevent both democracy and administration. Its dangers are manifold....... it will induce the most unwholesome completion between business companies by introducing the race, who could more to the political funds of political parties. In that competition business interest is bound to suffer in the long run....... The man who pays the piper will then call the tune....... That will be bad both for business and for politics. It will be alike bad for public life as well as commercial life.'

22. WE feel that the concern underlying the above observation, applies with equal force to contribution to funds set up by Government officials as well.

23. MR. Anjaneyulu cited the decision in J. W. Smith v. Incorporated Council of Law REporting for England and Wales [1914] TC 447 and Usher's Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 in support of his proposition that, for qualifying for deduction as a business expenditure, the expenditure need not necessarily be obligatory; that it can be voluntary as well and that so, long as the expenditure is in the interest of the business, it has to be allowed. There can be little quarrel with this proposition. This is indeed a well accepted p[principle of income-tax law in this country too' and Mr. Anjaneyulu is right in saying that the decision of the Madhaya Pradesh High Court in Addl. CIT v. Badrinarayan Shrinaryan Akodiya : [1975]101ITR817(MP) , relied upon for the Department, in so far as it holds that voluntary donations cannot be allowed as business deduction under s. 37 cannot be correct Mr. Anjaneyulu then relied upon the decision of the House of LOrds in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. [1954] 26 ITR 195 where the expenditure incurred by a sugar refining company in a propaganda campaign to oppose the threatened a nationalization of the industry was held to be an expenditure wholly and exclusively laid out for th purposes of the company's trade for the reason that it was laid out to preserve the assets of the company form seizure, and to enable it to carry on the business and earn profits. But carrying on a propaganda against a proposed legislative or executive measure is different from paying a certain specified amount of money as a condition for the discharge of official duties.

24. Mr. Anjaneyulu then relied upon the decision of the Supreme Court in Sassoon J. David and Co. P. Ltd. v. CIt : [1979]118ITR261(SC) , to contend that, ordinarily, is is for the assessee to decide whether any expenpenditure should be incurred in the course of his or its business, that such expenditure should be incurred in the course of his or its business, that such expenditure can be incurred voluntarily and that, so long as it is incurred for promoting the business and to earn profits the assessee is entitled to claim deduction of that amount, though there was no compelling necessity to incur such expenditure. While the said principle is unexceptionable, a lime must be drawn where the expenditure is for a purpose which is forbidden by law, or is opposed to public policy. In this case, the Supreme Court has no occasion to consider this aspect'; and, therefore we fail to see how this decision advances the assesses case.

25. Strong reliance is placed by Mr. Anjaneyulu upon the Full Bench decision of the Madhya Praaesh High Court in Addl. CIT v. Kuber Singh Bhagwandas [1970] 118 ITR 379. Counsel submitted that facts of that case are almost identical with the facts herein and, therefore, the principle of that decision should govern the present case as well. It is, therefore, necessary to briefly notice the facts of that case,. In 1967, the Govt. of Madhy pradesh issued the Madhya Pradesh Grtam (Export Control) Order, 1967, under s. 3 of the Essential Commodities ACt. Under this Order, export of gram was prohibited expect under and in accordance with a permit issued by the State Government, or the authorities specified by it in that behalf. The traders in Madhya Pardesh has accumulated large stocks of pulses and gulabi chana. Their association made a representation to the Chief Minister to allow that export of the said items outside the State, by lifting the ban. It also offered to place the services of the mercantile community at the disposal of the Government to to relive the distress of the people of the famine affected areas raging in 12 districts that year. Thereupon, the Chief Minister addressed a letter to the president of the association, stating that the Government has decided to allow liberally permits for the export of gulabi chana and pulses outside the State, and also bringing to the notice of the trading community that the Kisans and labourers were undergoing untold hardship on account of drought condition in a part of the State. He observed that since the merchants were bound to earn enormous profits as a result of allowing them to export the said goods outside the State, they may contribute a portion of such profits to the Chief Minister's Drought Relief Fund to be used for relieving the distress of the famine stricken people. Accordingly, the association decided to deposit Rs. 30 per quintal of Gulabi Chana and Rs. 5 per quintal for the export of pulses into the bank to the credit of the Chief Minister's Drought Re; life Fund, and to enclose the supplicate receipts obtained from the bank, to the applications for export permits. The Tribunal found that, though the payments were voluntary, yet the regularity and the mathematical accuracy between the amount of contribution and the quantity of goods for which the export permits were granted showed that such payment was a pre-condition for the grant of export permits. It also held that the amount so paid has a direct bearing and nexus with the business of the assessee nd that until and unless the said amounts were deposited, d the assessee could not export with gulabi chana or pulses, outside the State. The Tribunal held that, for the above, reasons, the payments were liable to be allowed as business deduction under s. 37(1). The full Bench of the Madhya Pradesh High Court held that though there was a direct connection between the amount of contribution made and the quantity for which the export permit was granted and also that the object behind the donations was to obtain permits which were not otherwise forthcoming, yet the expenditure having been incurred in the interest of the assessee; s business it was eligible for deduction under s. 37. The court further observed that, in making the conditions, the assessee did not contravene any law, nor were the donation as penalty for infraction of law. The court also held that the mere fact that the donations were voluntary and that some members got permits even without making donation was not crucial for determining whether the donations constituted business expenditure allowable under s. 37(1). It is significant to notice that the question whether the payments made were opposed to public policy was not raised or considered in the said decision. The only point considered was whether, such payment violated any law and it was found that no law as such was violated. The question referred to us in these referred cases is not whether the payments contravened any law but the public policy. We are, therefore, unable to se the relevance of the said decision of the question referred to us.

26. Mr. Anjaneyulu then relied upon the decision CIt v. Coimbatore Salem Transport (P.) Ltd. : [1966]61ITR480(Mad) where the Tribunal found that the tips' and mamools paid to the transport official were 'grease to run the bus business smoothly and that they must be allowed as business deduction. The Madras High Court held that though tips Tribunal that the said expenditure was inevitable if the assessee has to carry on its business and did not pertain to anything illegal or improper the deduction was rightly allowed. Another decision of the Madras High Court to the similar effect is in CIT v. Arumugham Chettiar [1980] 125 ITR 753 where the court held that the 'commission' : or mamools paid to the crew of th ship to obtain 'no damage certificate' : from the captain of the ship for obtaining payment of the bills, was not illegal. It was that the payments were in the nature of general business expenditure and were inevitable in the circumstances.

27. The next decision of the Madras High Court relied upon is in CIt v. Ramakrishan Mills (Coimbatore) Ltd. : [1974]93ITR49(Mad) and another decision in Cit v. Sree Rajendra Mills ltd. reported in the same volume at page 122, where it was held that even a payment made to the managing agent contrary to s. 348 of the Companies Act was eligible for deduction under s. 10(2) (xv) of the 1922 Act, so long as it was warranted by business expendiency. So far as the last two cases are concerned, a bench of this court has refused to follow the same in R. C. No. 73/1977, dated November, 26, 1982 (CIT v. Maddi Venkataratnam & Co. (P.) Ltd. : [1983]144ITR373(AP) ), referred to above. Similarly, if the first two decision are understood as laying down the proposition that even an illegal payment is entitled to be deducted under s. 37, we must express out respectful dissent therefrom.

28. Lastly, reliance is place upon the decision of the Supreme Court in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 227. The decision lays down the general principles applicable; e under s. 10(2) (xv) of 1922 Act (corresponding to s. 37(1) foe the present tACt). But even, this decision says (see at p. 282, where they refer to the earlier decisions of the court) that whether the expenditure is admissible or not, will depend upon whether it can be said to arise out of the carrying on if the business, and be incidental to it. In that same vein, the court observed, the expenditure should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying open the of the business, and the assessee should incur in in his capital as a person carrying on the business. Now, as already pointed out by us hereinbefore in Haji Aziz Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) , the Supreme Court said that infraction of law is not a normal incident of business, and in carrying on any such illegal activity, the trader must be deemed to be acting in a capacity other than that of trader. The same principal is applicable where the expenditure is incurred for a purpose which is opposed to public policy.

29. We are of the opinion that even if we take finding of the Tribunal with respect to the nature of the contribution as correct, even then the result would be no different. If the payment is purely voluntary, then it cannot be said that is is an expenditure wholly and exclusively laid out for the purpose of the business. This is not case where an employee or a a tenant, is sought, to be kept in good humor in the interest of business. Mr. Anjaneyulu contended that even the Government officials have to be kept in good humor. If keeping in good humor means contributing compulsorily to the funds, organisations, societies or individuals, specified by the officials, we must say that we cannot recognize any such proportion. The public officials are expected to discharge their duties dispassionately, and decide on the merits of each case; and not because somebody keeps them in good humour. In other words, either the contribution is a philanthropic one, or constitutes either a reason or consideration for the discharge of official duties. In the first eventuality, it cannot be said to be an expenditure laid out wholly and exclusively for the purpose of the business; and in the second case, it would be disqualified as being opposed to public policy.

30. Mr. Anjaneyulu Contended that 'where an assessee incurs expenditure in order to promote and advance the interest of the business and shares his prosperity with the society, courts should give up a doctrinaire approach and take a liberal attitude in directing deduction. ' WE have said enough on this aspect in the preceding paragraph of our judgment If 'doctrinaire approach' means adherence to law, we are happy to be doctrinaire; and if the expression 'liberal attitude' means ignoring the law and public interest we would rather shun such a misguided 'liberal approach.'

31. For the above, reason the question refers to us in R. Cs. Nos. 20, 73, 74, and 85 of 1979, is answers in the negative i, e, in favour of the Department and against the assessee. For the same reason, the questions referred in R. C. NO. 166/1978, is answered in the affirmative, i., e., m in favour of the Department and against the assessees. No costs.

32. Oral S. C. L. P.

33. Mr. Anjaneyulu, the learned counsel for the assesses, makes an oral request for certifying this case to be a fit one for appeal to Supreme Court under s. 261 of the I. T. ACt. We are of the opinion that this is a fit case for apple to Supreme Court and accordingly we certify the same.

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