G.P. Singh, C.J.
1. This Is a reference under Section 256(1) of the Income Tax Act, 1961, made by the Income Tax Appellate Tribunal referring to the High Court the following question of laws :
'Whether on the facts and circumstances of this case, the Tribunal was in law justified in allowing deduction of the amount paid by the assessee as contribution to the Chief Minister's Drought Belief Fund by holding it as an admissible deduction under S, 37(1) of the Income Tax Act, 1961?'
2. The assessee, M/s. Kuber Singh Bhagwandas, is a registered partnership firm. The relevant year of assessment is 1969-70 for which the previous year ended on Diwali 1968. The question referred to us relates to the amount of Rs. 26,140/- which was in all paid by the assessee to the Chief Minister's Drought Relief Fund. The Tribunal held that the donations so paid qualified for being allowed under Section 37(1) of the Income Tax Act, 1961, as they were in the nature of expenditure wholly and exclusively for the purpose of the business of the assessee.
3. It is necessary first to refer to the facts found by the Tribunal regarding the nature of donations. In the relevant previous year, twelve districts of Madhya Pradesh were badly hit by famine. The export of foodgrains had to be controlled. The Government of Madhya Pradesh, on 8th June 1967, issued the Madhya Pradesh Gram (Export Control) Order, 1967, under Section 3 of the Essential Commodities Act, 1955. The order extended to the whole of Madhya Pradesh and came into force at once. Clause 3 of the Order, in so far as material, provided as follows:
'No person shall export or attempt to export or abet the export of Gram except under and in accordance with the permit issued by the State Government or by any Officer authorised in that behalf by the State Government.'
4. At the relevant time, the Cabinet consisted of the members of Sanyukta Vidhayak Dal (S. V. D.). The Cabinet was headed by Shri Govind Narain Singh who was the Chief Minister. The Madhya Pradesh Anaj Tilhan Vyapari Maha Sangh of Bhopal, which is an association of the foodgrains merchants of the State, addressed a representation to the Food Minister. It was stated in the representation that the production of pulses and Gulabi Chana was maximum in the State of Madhya Pradesh as compared to other States and that the stock of Gulabi Chana and other pulses was steadily deteriorating in quality because of want of market The representation drew attention of the Government to the hardship of the mercantile community as a result of the ban imposed on the export of Gulabi Chana and other pulses. It appealed to the Government to lift the ban and allow export of the goods outside the State. It also offered to place the services of the mercantile community at the disposal of the Government to relieve the distress of the people of the famine affected areas. On this representation, the Chief Minister addressed a letter dated 5th Sept. 1967 to Shri Basant Kumar, who was the then President of Maha Sangh. In this communication, the Chief Minister stated that after taking into consideration the circumstances explained in the representation, the Government had decided to allow liberally permits for the export of Gulabi Chana and pulses outside the State, and that the Food Department would inform the merchants as to the detailed procedure for export. In the same letter, the Chief Minister brought to the notice of the trading community that the kissans and labourers were undergoing untold hardship on account of drought conditions resulting from the failure of monsoon. It was further stated in that letter that as a result of export permits the merchants were bound to earn rich profits. The Chief Minister in that letter, therefore, appealed to the trading community that out of the profits to be earned by them they should contribute a portion to the Chief Minister's Drought Relief Fund. The Chief Minister assured in the letter that the contributions so received would be utilised for the purpose of relieving the distress of the famine striken people, for production of food-grains 'and for small scale irrigation schemes. The Chief Minister, however, made it clear that there was no question whatsoever of exerting pressure on any one in this matter, although he hoped that as the foodgrain merchants of the State never lagged behind in generosity, his appeal would receive generous response. On 9th Sept. 1967, the Joint Secretary of the Maha Sangh wrote to its constituents asking the merchants to deposit Rs. 30/- per quintal for the export of Gulabi Chana and Rs. 5/- per quintal for the export of pulses. The letter directed that the deposits were to be made into the State Bank of India or the State Bank of Indore. It was further directed in the letter that the deposits were to be made into the head 'Chief Minister's Drought Relief Fund' and duplicate receipts were to be obtained from the bank. It was also directed that the original of such receipts were to be sent along with the duly filled in application forme for permits to the Maha Sangh at Bhopal. The letter then directed that In case any bank refused to issue duplicate receipts, a draft of the amount should be obtained in the name of the Chief Minister's Drought Relief Fund and that the application for permit with the draft should be sent to the Maha Sangh at Bhopal. The letter also asked the members to send Re. 0.50 per quintal for meeting the administrative expenses of the Maha Sangh. The Maha Sangh received applications in accordance with the directions contained in the aforesaid letter from various merchants including the assessee in this case. These applications were forwarded to the relevant authorities of the Food Department. On these applications, permits for export of Gulabi Chana or pulses, as mentioned in the applications, were issued to the merchants. The Tribunal held that having regard to the communication of the Chief Minister, the payments were voluntary. The Tribunal, however, also held that the circumstances, namely, that the permits for exporting Gulabi Chana or pulses, as the case may be, had been issued within a just a few days of the making of an application accompanied by the original receipt issued by the bank, that the amount of contribution was calculated with mathematical accuracy in accordance with the quantity of goods exported; and that the application so made had been acted upon by the officials of the Food Department, went to show that in order to export the goods outside the State payment into the Chief Minister's Drought Relief Fund was necessary. The Tribunal further held that the amount so paid had a direct bearing and nexus with the business of the assessee and until and unless these amounts were deposited the assessee could not export either the Gulabi Chana or pulses outside the State. The Tribunal also referred to the statement of the Joint Secretary of the Maha Sangh that the rates of donation were fixed as Rs. 30/- per quintal for export of Gulabi Chana and Rs. 5/- per quintal for the export of pulses in an oral discussion with the representatives of the State Government.
5. The appeal in this case was heard along with five other appeals by the Tribunal and was decided by a common judgment, on 28th August, 1972. In one of the appeals, a reference earlier came to this Court and was decided in favour of the Revenue by a Division Bench. The judgment in that case, namely, Additional Commr. of Income-tax, M. P. v. Badrinarayan Shrinarayan Akodiya : 101ITR817(MP) ) has since been reported. When the present reference came before a Division Bench, the learned counsel for the assessee challenged the correctness of the decision in Akodiya's case. The Division Bench, therefore, referred this case to a larger Bench. This is how the reference has come up before this Full Bench.
6. Section 80G of the Act provides for deduction in respect of donations to certain funds, charitable institutions, etc. The section applies also in respect of donations to the Government or any local authority, to be utilised for any charitable purpose. The donations made by the assessee to the Chief Minister's Drought Relief Fund were covered by Section 80G. The section, however, allows only a certain percentage of the donations as admissible deduction. There is no dispute that the assessee would be entitled to the benefit of Section 80G in case it is held that the donations cannot be allowed as expenses under Section 37(1) of the Act. Section 37(1), with which we are concerned, reads as follows :
'37(1). Any expenditure, (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head, 'Profits and gains of business or profession'.'
7. The donations to the Chief Minister's Drought Relief Fund do not fall within Sections 30 to 36 and are not in the nature of capital expenditure or personal expenses of the assessee. Therefore, if it is held that the donations were in the nature of expenditure 'laid out or expended wholly and exclusively for the purposes of the business', it will have to be held that the Tribunal was right in allowing them in computing the income chargeable of the assessee. It is clear from a reading of Section 37(1) that it is not necessary for an expenditure to fall within it that it should have been incurred 'necessarily'. In the Income-tax Bill of 1961, the language of Section 37(1) ran: 'Any expenditure.........laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed......' The inclusion of the word 'necessarily' raised a storm of protest from the public and the various chambers of commerce all over India. The result was that the Select Committee deleted the word 'necessarily'. The legal position, therefore, is that a business expenditure can be allowed under Section 37(1) if it fulfils the necessary conditions even though it is incurred voluntarily and without any necessity; (See Iyengar's Income-tax. Vol. 2, Sixth Edition, p, 959). It has also to be noted that the expression 'for the purposes of the business' as it occurs in the section is wider in scope than the expression 'for the purposes of earning profits.' It may take in not only the day to day running of a business but also many other acts incidental to the carrying on a business: (See Commr. of I.T., Kerala v. Malayalam Plantations Ltd. : 53ITR140(SC) .
8. In British Insulated and Halsby Cables Ltd. v. Atherton, 1926 AC 205, Viscount Cave L. C., in dealing with the word 'money wholly and exclusively laid out or expended for the purposes of the trade', observed that 'a sum of money expended, not of necessity and with a view to a direct and immediate benefit of the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.' The House of Lords reaffirmed these observations in Morgan v. Tate & Lyle, Ltd., (1954) 2 All ER 413 and the Court of Appeal applied them recently in Heather v. P. E. Consulting Group Ltd., (1972) 3 WLR 833. These observations were also quoted with approval by the Supreme Court in Eastern Investments Ltd. v. Commr. of I.-T. : 20ITR1(SC) and Commr. of I.-T., Bombay, North v. Chandulal Keshavlal & Co. : 38ITR601(SC) , So in deciding whether a payment of money or incurring of expenditure is for the purposes of the business and an allowable expenditure, the test applied is of commercial expediency and principles of ordinary commercial trading. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party: (See Commr. of I.-T., Bombay North v. Chandulal Keshavlal & Co. (supra). In other words, if the sole object is business promotion, the expenditure would still be wholly and exclusively for the purposes of the assessee's business even though some other object necessarily results, being inherent in the nature and quality of the expenditure : (See lyengar's Income-tax, Vol. 2, Sixth Edn., p. 958). In Travancore Titanium Product Ltd. v. Commr. of I.-T., Kerala, : 60ITR277(SC) : the Supreme Court, after referring to earlier cases, summarised the position thus : 'The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, te., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business.' The test laid down in Travancore Titanium Product's case was modified in Indian Aluminium Co. Ltd. v. Commr. of I.-T., West Bengal : 84ITR735(SC) to the extent that 'if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.' In Shahzada Nand and Sons v. Commr. of I.-T., Patiala : 108ITR358(SC) , the Supreme Court observed that the requirement of commercial expediency must be judged in the context of current socio-economic thinking,
9. The question referred to us must be considered in the light of the above principles. It is true that the donations were voluntary, in the sense that under the law it was not necessary to make any donation to the Chief Minister's Drought Relief Fund for obtaining permits for export of gram. The question, however, is not whether it was necessary for the assessee to incur the expenditure but, whether, having regard to commercial expediency, the expenditure was for carrying on the business. Now, in the light of the facts found by the Tribunal, it is clear that the Government announced to grant the permits only when the Maha Sangh speaking for the trading community, offered its services for the benefit of the public. The procedure which was followed in obtaining the permits was that the donations had to be deposited with the State Bank and original receipt of the same had to be attached with the applications for getting the permits. The quantity of foodgrains for which the permit was applied for and granted was directly related to the amount of donation paid by the merchant. Placing ourselves in the position of a trader, it is clear that any normal trader would have realised that there was greater prospect of getting a permit for carrying on the export business in case he made the donations as requested by the Chief Minister, This is so even on the assumption that legally it was not necessary to make the donation for getting the permit and that, in fact, permits were even granted in a few cases to merchants who had not made the donations. The merchants made the donations as a matter of commercial expediency to facilitate the obtaining of permits which were necessary for carrying on the export trade. The expenditure had direct connection with the permit. The receipts of donations were attached with the applications for permits. Permits were granted in proportion to the donations made. The Tribunal, in our opinion was right in holding that there was a direct nexus between the assessee's business and the donations and that the donations were allowable under Section 37(1) as expenditure incurred wholly and exclusively for purposes of assessee's business.
10. Learned counsel for the Revenue submitted before us that the donations were not exclusively for business and that they were for the dual purpose of business and charity. In our opinion, there is no merit in this submission. The object behind the donations was to obtain permits for business to enable the assessee to earn profits by exporting and selling gram in the neighbouring States where the price of the commodity was double than what it was in this State. The nature of the expenditure was, however, such that benefit to third party or charity resulted. But on the principles noticed earlier, this effect of the expenditure did not disqualify it from being an expenditure wholly and exclusively for purposes of business. In Chandulal Keshavlal & Co's case : 38ITR601(SC) the assessee was entitled to a managing agency commission of Rupees 3,09,114/-, but it agreed to accept, a sum of rupees one lakh only as its commission. It was held that the part of the commission given up was expended for reasons of commercial expediency and that is was not a bounty by the assessee to the managed company. Similarly, in Usher's Wiltshire Brewery v. Bruce, 1915 AC 433, where the taxpayer for the purpose of its business as brewers did the repairs and paid the rates and taxes when the tenants, under their agreements, were bound to repair and pay the rates and taxes, it was held that the expenditure so incurred was not as a matter of charity but of commercial expediency, The same principle applies here.
11. Learned counsel for the Revenue referred to us the case of Haji Aziz and Abdul Shakoor Bros. v. Commr. of I.-T., Bombay : 1983ECR1942D(SC) in which it was held that if a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense, as it cannot be called a commercial loss incurred in carrying on his business. This case has no application here because it was conceded before us that in making the donations the traders did not contravene any law. Further, the donations were not made as a penalty for infraction of any law.
12. Learned counsel for the Revenue also submitted that donations were paid out of profits and hence were inadmissible under Section 37(1). We are unable to agree. The donations were made to obtain permits and to earn profits. The donations were made not subject to any condition that they would be refunded If the merchants did not make any profit. They were made before making the application for permit. It cannot, therefore, be said that the donations wera paid out of profits.
13. A number of cases have been brought to our notice relating to donations. Speaking generally, donations to a political party cannot be allowed as expenses under Section 37(1) for want of nexus between the donation and the business of asseesee. The cases which fall under this category are : J. K. Cotton Spg & Wvg. Mills Co. Ltd. v. C. I. T : 62ITR813(All) ; C. I. T. v. Elphinstone Spg. & Wvg. Mills Co. : 100ITR139(Bom) and Orissa Cement Ltd. v. C. I. T. : 73ITR14(Delhi) . aS in these cases the taxpayer failed to establish a link between the expenditure and the trade, the expenditures were held to be not admissible under Section 37(1). But as observed by Scrutton, J. in Smith v. Incorporated Council of Law Reporting for England and Wales, (1914) 3 KB 674, 'payments for political purposes may conceivably be for purposes of trade.'
14. In contrast, there are cases in which a link was established between contributions and trade and the contributions were allowed as admissible expenses under Section 37(1). In Delhi Cloth and General Mills Co. Ltd. v. C. I. T. : 85ITR261(Delhi) , the facts were that a bill was introduced in the legislature to ban manufacture of vanaspati ghee. The manufacturers formed an association for carrying on a campaign against the bill. The assessee who was a member of the association paid substantial amount for this purpose. It was held that the contribution was with an object of preserving the status and reputation of the article manufactured by the assessee and was allowable as business expenditure. In Morgan v. Tate & Lyle Ltd. (1954) 2 All ER 413 a sugar refining company spent substantial amount on an anti-nationalization campaign and it was held that the amount so spent was wholly and exclusively laid out for purposes of its trade. In Ambala Bus Syndicate Pvt. Ltd. v. C. I. T the Government had issued a notification of its intention to completely nationalize the transport business in the Punjab, where the assessee had a number of permits. The transport operators formed an association for preventing the move of nationalisation. The assessee paid substantial subscription to the association. It was held to be an allowable expenditure. The case before us falls under the second category of cases. Here the link between the donations and the business activity of the assessee is fully established. The donations have therefore, to be allowed as business expenditure under Section 37(1).
15. We must now advert to the case of Addl. Commr. of I.-T., M. P. v. Badrinarayan Shrinarayan Akodiya, 1976 Tax LR 877 (MP) in which the Division Bench of this Court on the same facts came to a contrary conclusion. The Division Bench observes (at p. 819 of ITR) : (at p. 878 of Tax LR) that the finding of the Tribunal has to be taken to be final and binding that the donations were voluntary, 'although they may have some indirect connection with the export permits of Gulabi Chana.' As we have earlier stated, Akodiya's case was decided by the Tribunal by a common judgment along with five other appeals, including the appeal of the assessee in the case before us and the findings were same in all the cases. The finding of the Tribunal is not that there was only indirect connection between the donations and the export permits. Rather, the finding of the Tribunal is that the donations had 'a direct bearing and nexus with the business of the assessee.' Thus, the Court's observation in Akodiya's case that according to the finding of the Tribunal there was only some indirect connection between the donations and the export permits is clearly incorrect. The Division Bench in that case laid great stress on the fact that the donations were voluntary and that there was material to show that at least some members of the Maha Sangh who did not give donations were also given permits. We have explained above that the mere fact that the donations were voluntary and that some members got permits even without making donations is not crucial for determining whether the donations constituted business expenditure allowable under Section 37(1). The Division Bench further observed that the phrase 'for the purposes of the business' meant that 'the expenditure must be necessary for the purposes of the business or it may have to be incurred on account of the practice prevailing in any particular trade or business' (at page 821 of ITR) : (at page 879 of Tax LR). It was further observed that 'it will not include any voluntary donation made by an assessee for purposes of charity' (at page 821 of ITR) : (at page 879 of Tax LR). Now, we have earlier stated that for an expenditure to fall within Section 37(1), it need not be a necessary expenditure. We have also stated that the test laid down by the Supreme Court is of commercial expediency. The expression 'commercial expediency' is not limited to an existing practice prevailing in any particular trade or business. Even if the incurring of a particular expenditure may not be supported by any prevailing practice; yet if at the time when the expenditure is incurred, commercial expediency justifies it, the expenditure would be taken to be for the purposes of the business. Further, the Division Bench seems to have thought that the donations were made Only as a matter of charity. This, in our opinion, was an erroneous understanding of the facts found by the Tribunal. The Division Bench later formulated a question in the following form : 'Can it be said that giving a donation to some official fund or to some political organization would be a business need or a commercial expediency?' (at p. 823 of ITR): (at page 880 of Tax LR). The Division Bench then answered the question by saying : 'In our opinion, such a donation would be a voluntary one just to earn the goodwill of the Government authorities or the political party and nothing more. It can neither be described to be business necessity nor a commercial expediency' (page 823 of ITR) : (at page 8809 of Tax LR). The answer so given by the Division Bench is very widely worded. If the taxpayer is able to establish a nexus between the donation and the business, the donation would be held to be for the purposes of the business and allowable under Section 37(1), It is, in our opinion, incorrect to say that in every case a donation to an official fund or a political organization would not be an allowable expenditure under Section 37(1). Having given our anxious consideration, we are of opinion that the Division Bench deciding Akodiya's case did not correctly appreciate the findings of the Tribunal and did not apply correct principles in reaching its conclusion. With great respect, we differ from the view taken in that case.
16. For the reasons given above, we answer the question referred to us by the Tribunal in the affirmative. There shall be no order as to costs.