1 to 5. [These paras are not reproduced here as they involve minor issues.] 6. The 5th ground, which is the main ground involved in this appeal, pertains to the contribution of Rs. 5,00,000 made by the assessees to Goetze (India) Ltd. Employees' Welfare Trust. The board of directors of the assessee-company passed the following resolution on 31-12-1976: Copy of Resolution passed by the board of directors of Goetze (India) Ltd. in the meeting held on 31-12-1976: Resolved that an irrevocable trust under the name and style of Goetze (India) Ltd. Employees' Welfare Trust be formed for the purpose of welfare of the employees of the company and the following persons be and are hereby appointed as trustees thereof: Resolved further that consent be and is hereby given for making payments of Rs. 5 lakhs only to the trustees of the said trust for effectuating the deed of declaration of trust-cum-settlement as per draft placed before the meeting and copy kept on record duly signed by the Chairman for the purpose of identification. The said draft has been shown to the said trustees who have consented to the various conditions, rules and regulations stated therein.
Resolved further that consent be and is hereby given for making payment up to Rs. 5 lakhs in the current year to Goetze (India) Ltd. Employees' Welfare Trust, towards corpus. Also resolved that Mr.
Harbans Singh Mehta and Sodhi Kartar Singh, directors of the company be and are hereby authorised to execute the above trust deed for and on behalf of the company who are also authorised to affix company's common seal thereon.
Further resolved that the completion of the necessary formalities in this behalf including engrossing the document on requisite stamp papers, its execution, registration, etc., be entrusted to counsel and further steps be taken as advised by him.
The company wrote a letter dated 31-12-1976 which reads as under and a cheque of Rs. 5,00,000 drawn on Canara Bank, New Delhi, was handed over to the trustees to be held under an irrevocable trust instituted on 31-12-1976 itself for the welfare of the employees of the company:-- As per the Board Resolution passed by our company, we have pleasure in enclosing our cheque No. 621501, dated 31-12-1976 for Rs. 5 lakhs drawn on Canara Bank, New Delhi. This amount is handed over to you absolutely and unconditionally to be held under the irrevocable trust instituted today wholly and exclusively for the welfare of the employees of the company.
The company would like to emphasise that it has no right, title and interest in the aforesaid amount and that the trustees are at full liberty to apply this amount for the welfare of employees. It would not be out of place to mention that the sole purpose of setting up this trust is to enable the company to carry on its business more efficiently by building a harmonious relationship with the employees and inducing them to give the best of their abilities for the good of the company.
7. The trust deed was executed on 31-12-1976 whereby an irrevocable trust called 'Goetze (India) Ltd. Employees' Welfare Trust' was created for the general welfare of the employees of the assessee-company.
Amongst the five trustees, S/Shri Rajan Nanda and Madan Agarwal are the directors of the assessee-company and S/Shri Baldev Raj Kapoor, Om Prakash Khanna and V.S. Subramanian are the employees of the assessee-company. It is provided in the deed that if any of the two directors cease to hold office for any reason, their successors in office will fill in their vacancies. It is further provided that if any of the three employees become incapable of performing his duties effectively on the happening of any of the events mentioned in the deed, then the surviving/remaining trustees shall appoint any other employee of the assessee-company to be trustee. The deed defines the expressions 'employees' 'beneficiaries' and 'dependant members of family of such an employee'. Clauses 4 and 5 of the trust deed enjoin upon the trustees to hold the trust funds and the income therefrom for the benefit of the beneficiaries and apply the trust fund and the income therefrom for the benefit of all or some of the beneficiaries for the purposes specified in Clause 6 of the trust deed. Clause 10 provides for framing of rules and regulations. Rules have also been framed as provided in the deed. The beneficiaries are approximately 2,000 employees of the assessee-company.
8. Before the ITO the assessee claimed that the sum of Rs. 5,00,000 should be allowed as business expenditure. Reliance was placed on the judgments in CIT v. New India Assurance Co. Ltd.  71 ITR 761 (Bom.) and Hindusthan Klockner Switchgear Ltd. v. CIT  81 ITR 20 (Bom.). According to the ITO, these two judgments were distinguishable on facts. The ITO was of the opinion that as stated in the board of directors' resolution, the sum of Rs. 5,00,000 which was to be paid to the trustees was to form a nucleus of the trust fund and that without this contribution the trust may not have come into existence at all. He further expressed the opinion that by making this payment the assessee secured a benefit of lasting advantage because the assessee would be in a position to secure and retain services of contented staff. He referred to the judgment in Atherton (Inspector of Taxes) v. British Insulated and Helsby Cables Ltd.  10 TC 155 (HL), which, according to him, was applicable to the assessee's case. He also referred to the balance sheets of the trust as on 30-6-1977, 30-6-1978 and 30-6-1979 and observed that the contributions made by the assessee had been shown in the accounts of the trust under the head 'Welfare Fund' and that in the first two years there was no expenditure on the welfare activities provided in the trust deed and it was only in the year ending 30-6-1979 that a sum of Rs. 29,080 was disbursed by way of scholarships. He also observed that under Clause 5 of the deed the trustees had discretion to apply the trust funds for the benefit of all or some of the beneficiaries. According to him, the beneficiaries could not be ascertained with reasonable certainty. He was also of the opinion that the judgment in Allahabad Bank Ltd. v. CIT  24 ITR 519 (SC) was applicable to the facts of this case. He, therefore, held that the sum of Rs. 5,00,000 was not an admissible expenditure under Section 37 of the Income-tax Act, 1961 ('the Act').
9. Aggrieved, the assessee filed an appeal to the Commissioner (Appeals) and made written submissions in a letter dated 7-6-1981. It was first submitted that the judgments in Atherton's case (supra) and Allahabad Bank Ltd. 's case (supra) were not applicable to the facts of this case. For the meaning of the expression 'wholly and exclusively for the purposes of the business'. reference was made to the judgments in CIT v. Chandulal Keshavlal & Co.  38 ITR 601 (SC) and Sassoon J. David & Co. (P.) Ltd. v. CIT  118 ITR. 261 (SC). The submission made was that though the sum of Rs. 5,00,000 was paid as corpus for the trust, the purpose of incurring the expenditure was not to create a capital asset or to secure an enduring advantage but the purpose was to promote the business interests of the company and to facilitate the carrying on of the business The contribution was primarily meant to be part of the process of profit earning. Reference was made to the judgment in CIR v. Carron Co.  45 TC 18 (HL) wherein it has been held that what matters is the nature of the advantage and it is only where the advantage is in the capital field that the expenditure can be disallowed. Reference was also made to the judgments in Eastern Investments Ltd. v. CIT  20 ITR 1 (SC) and Chandulal Keshavlal & Co.'s case (supra) wherein the following observation of Viscount Cave, LC in Atherton's case (supra) was approved by the Supreme Court: A sum of money expended, not of necessity and with a view to direct and immediate benefit to 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 purpose of the trade.
Reference was also made to the judgments in CIT v. Nainital Bank Ltd.  62 ITR 638 (SC) and Morgan (Inspector of Taxes) v. Tate & Lyle Ltd.  26 ITR 195 (HL) wherein the aforesaid principle had been approved. Reference was also made to the judgment in Empire Jute Co.
Ltd. v. CIT  124 ITR 1 (SC) wherein it has been held that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. It was reiterated that the assessee's case was covered by the judgments in New India Assurance Co. Ltd.'s case (supra) and Hindusthan Klockner Switchgear Ltd.'s case (supra) which were referred before the ITO.10. Reference was also made to the judgments of the Madras High Court in Palani Andavar Mills Ltd. v. CIT [1977) 110 ITR 742 and CIT v. TV.Sundaram Iyengar & Sons (P.) Ltd.  95 ITR 428. Reference was also made to the two judgments of the Orissa High Court in CIT v. Belpahar Refractories Ltd.  109 ITR 667 and CIT v. Rupsa Rice Mill  104 ITR 249. Reference was made to the Andhra Pradesh High Court judgment in Panyam Cements & Mineral Industries Ltd. v. Addl. CIT  117 ITR 770. Reference was also made to the Calcutta High Court judgments in Calcutta Landing & Shipping Co. Ltd. v. CIT  65 ITR 1 and CIT v. Belgachi Tea Co. Ltd.  99 ITR 99. Reference was also made to the judgment in India United Mills Ltd. v. CIT  98 ITR 426 (Bom.). Reference was also made to the judgment of the Punjab & Haryana High Court in Atlas Cycle Industries Ltd. v. CIT  134 ITR 458. Reference was also made to the judgments of the Delhi High Court in CIT v. Delhi Cloth & General Mills Co. Ltd.  115 ITR 659, R.B.Narain Singh Sugar Milk (P.) Ltd. v. CIT  4 Taxman 519, Hindustan Times Ltd. v. CIT  122 ITR 977 and CIT v. New Garage Ltd.  129 ITR 122. Reference was also made to the Supreme Court judgment in Shahzada Nand & Sons v. CIT  108 ITR 358 wherein it has been held that any amount paid by the employer for the welfare of the employees would be fully deductible on the grounds of commercial expediency which is to be judged in the context of the current socio-economic thinking.
On the basis of these judgments it was submitted that the sum of Rs. 5,00,000 should be allowed as a revenue expenditure.
11. It was also explained that the mere fact that the trustees incurred no expenditure in this year was irrelevant because most prudent trustees endeavour to first build sufficient reserves so that the beneficiaries continue to derive an advantage for as long as possible.
It was pointed out that the law permits a charitable trust and institution to accumulate their income in accordance with the provisions of law. Therefore, it was pleaded that the mere fact that the contributions and the income thereon had been accumulated and not spent would in no way militate against the objects of the trust and was certainly not a valid or justifiable ground for the ITO to disallow the contribution made by the assessee-company. It was also explained that the trust was giving scholarships to the employees and also loans at a nominal rate of interest of 4 per cent for purchase of domestic appliances like pressure cookers, sewing machines, mixies, coolers, television sets, refrigerators and Rajdoot motor cycles, etc., subject to a maximum of six months' salary of the concerned employee. The loan was repayable in 30 equal monthly instalments. It was submitted that the approximate number of employees, who had received loans/scholarships from the trust whether in workmen cadre and/or management cadre was approximately 700. The statement of scholarships and loans given by the trust was enclosed and it was submitted that the trust has so far given loans to the employees amounting to approximately Rs. 5,65,000. Commenting on the objection of the ITO that the trustees had the discretion to give the amount to any beneficiary, it was submitted that the power was meant to prevent the beneficiaries from making unreasonable claims. For all these reasons it was submitted that the sum of Rs. 5,00,000 should be allowed as a revenue deduction under Section 37(1).
12. The Commissioner (Appeals) did not accept the assessee's submissions. He observed that though the sum of Rs. 5,00,000 was given to the trustees irrevocably, the said amount did constitute the nucleus of the trust funds because the employees had made no contribution thereto. He also observed that in this year no disbursement had been made by the trust to any of the employees and even in the later years the trust funds had been mostly utilised for advancing recoverable loans to only some of the employees besides giving scholarships to the words of some of the employees, which constituted meagre amount. The Commissioner (Appeals) agreed with the ITO and upheld the disallowance of Rs. 5,00,000 as capital expenditure.
13. The learned counsel for the assessee relied on the resolution of the board of directors, the letter written fay the assessee-company to the trustees, whereby a cheque of Rs. 5,00,000 was handed over to the trustees, the trust deed executed on 31-12-1976, the rules and regulations and the written submissions made before the Commissioner (Appeals). It was submitted that the judgment in Atherton's case (supra) was distinguishable on facts because in that case the funds formed a part of the assets of the company and the amount disallowed was for past liabilities. The judgment in the case of Allahabad Bank Ltd. (supra) was also distinguishable because in that case in irrevocable trust was not created. It was claimed that the expenditure should be allowed under Section 37 as it was incurred wholly and exclusively for the purposes of its business.
14. The learned departmental representative relied on the orders of the authorities below and submitted that the expenditure of Rs. 5,00,000 did not pertain to the previous year. We posed a question, whether the sum of Rs. 5,00,000 was incurred wholly and exclusively for the purposes of the assessee's business and he answered it by stating that there was capitalisation of revenue expenditure. He submitted that the judgments relied on by the learned Counsel for the assessee were not applicable and the sum of Rs. 5,00,000 was rightly disallowed as capital expenditure.
15. We have carefully considered the rival submissions. In Atherton's case (supra) Viscount Cave, LC observed as under: It was made clear in the above cited cases of Usher's Wiltshire Brewery Ltd. v. Bruce (Surveyor of Taxes)  GTC 399 and Smith (Surveyor of Taxes v. Incorporated Council of Law Reporting for England and Wales  GTC 477 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to 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.
This principle has been approved by the Supreme Court in Eastern Investments Ltd.'s case (supra) and Chandulal Keshavlal & Co.'s case (supra). The judgment in Atherton's case (supra) was applied by the House of Lords in Morgan's case (supra). In Shahzada Nand & Sons' case (supra) it has been held as under: What is the requirement of commercial expediency must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees. . . .
(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test.
What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.
16. In New India Assurance Co. Ltd.'s case (supra), a society was formed to secure the welfare and interest of the permanent and retired employees, the families and dependants of deceased employees of the company.
The employees were also required to make contribution in order to promote the spirit of self-help and mutual assistance. The ITO disallowed the contribution made by the company on the ground that the amount transferred was to a nucleus of a fund and, hence, it was a capital expense since an enduring benefit had resulted. The High Court held that in the present case the income was not set apart as a nucleus but income alone was not to be spent but (sic) even the amount contributed was 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. In Hindusthan Klockner Switchgear Ltd.'s case (supra), an employees' welfare fund for the welfare of the employees of the assessee-company was created. A deed of trust was executed, inter alia, under the seal of the company by two of the directors. The company made a contribution of Rs. 25 000 to the fund and a sum of Rs. 581 was voluntarily collected from the employees. The company claimed the said expenditure of Rs. 25,000 as a deduction. The claim was rejected by the authorities and the Appellate Tribunal rejected an appeal holding that 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 the rules and regulations and that the expenditure of Rs. 25,000 had brought into existence an enduring asset and the expenditure was, therefore, capital expenditure. On a reference, the High Court held that the expenditure of Rs. 25,000 was made for commercial expediency and was not capital expenditure and was, therefore, deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. In India United Mills Ltd.'s case (supra), it was held that payment made to a hospital for providing medical facilities to the staff would be allowable as business expenditure even though the payment is computed on the basis of the turnover of the company and not its profits.
17. In T.V. Sundaram Iyengar & Sons (P.) Ltd.'s case (supra), the assessee-company purchased land in the name of the District Collector, Madurai, for the purpose of constructing houses for the company's workers by the Government under the subsidised industrial housing scheme sponsored by the State Government and claimed the sum of Rs. 39,696 being the purchase price as a deduction under Section 10(2)(xv) of the 1922 Act, as being in the nature of welfare expenses. The departmental authorities rejected this claim but the Tribunal upheld the claim on the ground that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee and the assesses had not acquired any capital asset of an enduring nature not had any enduring benefit accrued to the assessee by the purchase. On a reference, the High Court held that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee-company and that the assessee-company had not acquired for itself any capital asset. In Palani Andavar Mills Ltd.'s case (supra) the assessee expended a sum of Rs. 12,039 being a part of the total amount spent on the construction of an elementary school on the land belonging to the Employees' Housing Co-operative Society, the balance amount for the construction being met by the society. On the completion of the building, it was handed over to the municipality to be run as school for the benefit of the children of the employees of the assessee. This amount was transferred to labour welfare account during the close of the year. The departmental authorities and the Tribunal treated this sum as a capital expenditure. The High Court in the reference held that the school building was from its very inception not intended to be an asset of the company but was to be part of a welfare scheme for the educational facilities of the children of the employees of the assessee and, hence, the amount in question was a revenue expenditure.
18. In Rupsa Rice Mills' case (supra) the assessee claimed an amount of Rs. 12,137 donated for the construction of a primary health centre as business expenditure. The Tribunal found that the primary health centre was the property of the Government. The assessee had made the contribution in consideration of the fact that the health centre was located near its factory premises and would provide treatment to its ailing workmen. Under the Employees' State Insurance Act, 1948, the assessee had an obligation to maintain a hospital or meet the expenses on medical treatment of its workers. In view of the overall situation, the Tribunal recorded the finding that the amount contributed was business expenditure. On a reference, the High Court held that the aforesaid amount donated by the assessee for the construction of the primary health centre building was an admissible revenue expenditure.
In Belpahar Refractories Ltd.'s case (supra) the assessee had paid Rs. 25,000 to A.D.M. Hospital for erecting one air-conditioned cabin and Rs. 20,000 to T.M. Hospital for providing hospitalisation facilities for the assessee's employees. The ITO and the AAC disallowed the claim of these amounts. The Tribunal accepted the claim for deduction because no capital asset of the assessee had come into existence and the amounts were spent only as a part of the labour welfare expenses. On a reference, the claim of the assessee was upheld on the basis of the decision in Rupsa Rice Mills' case (supra).
19. In Panyam Cements & Mineral Industries' case (supra) there was an unmanned railway level crossing near the assessee's factory. On the insistence of the railway authorities, the assessee deposited a sum of Rs. 66,684 with the railway authorities for the construction of a bridge over the said rail track as a measure of safety for the workmen attending the factory. The claim of the assessee for deduction of the said sum as revenue expenditure was rejected by the ITO and on appeal, by the AAC also. On further appeal, the Tribunal accepted the plea of the assessee that the construction of a bridge did not bring into existence any asset of enduring nature to the assessee and held that, in the circumstances of the case, the assessee was entitled to deduction of the same as revenue expenditure.
20. In Calcutta Landing & Shipping Co. Ltd.'s case (supra), the payment of pension to the wife of the deceased employee (he was murdered while on the company's business) was held to be an expenditure solely laid out for the purpose of the business and, hence, allowable. It was also held that payment made to employees in the expectation of creating impetus or encouraging them to put in selfless work for the employer was a payment made out of commercial considerations and commercial expediency and had to be allowed as an expenditure incurred wholly and exclusively for the purpose of the business.
21. In Atlas Cycle Industries Ltd.'s case (supra) it has been held that, it cannot be disputed that a satisfied worker is a great asset to the business and the satisfaction of the worker not only depends upon the packets which he received at the end of the month but also on the other amenities provided to him by his employer. The question for consideration in that case was whether the expenditure of Rs. 5,500 on account of periodic grant to the management committee of a temple was laid out or expended wholly or exclusively for the purposes of the assessee's business and the question was determined in favour of the assessee.
22. In Belgachi Tea Co. Ltd.'s case (supra), the business of the assessee was of growing tea and some expenditure was incurred on proper fencing. This expenditure was held to be an allowable expenditure.
23. In Delhi Cloth & General Mills Co. Ltd.'s case (supra), it has been held that the expenditure incurred by the assessee in organising football and hockey tournaments was an allowable deduction under Section 10(2)(xv). In R.B. Narain Singh Sugar Mills (P.) Ltd.'s case (supra), it has been held that the contributions made by the assessee were with a view to improve cultivation of sugarcane which would in turn ensure better yield of sugarcane. These objects, though not directly, at least indirectly facilitated the carrying on of the business by the assessee. In Hindustan Times Ltd.'s case (supra), certain amounts were paid to the municipality to lay new cables which were to belong to the municipality on change over from direct current electricity to alternating current. It was held that the expenditure could not be said to be laid out either to acquire an asset or to acquire any advantage of an enduring nature. The expenditure did not constitute capital expenditure but was allowable as business expenditure in computing the assessee's profits.
24. The ratio of the aforesaid judgments of the Supreme Court as well as of different High Courts clearly is that if a particular amount is paid for the welfare of the employees it is allowable as an expenditure incurred wholly and exclusively for the purposes of the assessee's business. By making the payment of Rs. 5,00,000 to Goetze (India) Ltd. Employees' Welfare Trust, the assessee has not acquired any benefit of enduring nature. The money has been irrevocably handed over to the trustees of the Employees' Welfare Trust and the assessee exercises no control over this amount. This amount has been paid for facilitating the carrying on of the assessee's business. If the workers are contented, they would increase the productivity and that would be for purposes of business expediency. The amount of Rs. 5,00,000 has, therefore, to be allowed as a revenue expenditure incurred wholly and exclusively for purposes of the assessee's business. It will not be correct to disallow either in full or a part of this amount for the simple reason that no part of the amount has been actually spent on the employees' welfare in this year. The welfare trust has given scholarships in different years and for certain years the following scholarships were given:For the year ending 30-6-1979 20,980For the year ending 30-6-1980 34,250For the year ending 30-6-1981 55,660For the year ending 30-6-1982 28,600.
The details of the yearwise loans given at various occasions are as under: 'Accounting year 1979-80:Patiala 5,22,763.34Delhi 34,376.84Bangalore 45,068.85Accounting year 1980-81:Patiala 2,038.00Delhi 22,316.35Bangalore 2,33,554.35Accounting year 1981-82:Patiala 3,21,527.00Delhi 48,586.85Bangalore 3,22,857.41.
The trustees are the five persons who have to utilise the funds of the trust to the best advantage of the beneficiaries and they have been utilising the funds to the best advantage of the beneficiaries. The beneficiaries are the employees of the assessee-company and the dependent members of the families of the employees. The trust deed itself contains the definition of the expressions 'employees', 'beneficiaries' and 'dependent members of the family of such an employee'. It, thus, cannot be said that the beneficiaries of the trust cannot be indicated with reasonable certainty. We, thus, do not find any reason to disallow the sum of Rs. 5,00,000 claimed by the assessee.
This amount of Rs. 5,00,000 is admissible under Section 37.
25. The judgments in Atherton's case (supra) and Allahabad Bank Ltd.'s case (supra) are distinguishable on facts. These judgments do not help the revenue in any manner.
26. & 27. [These paras are not reproduced here as they involve minor issues.]