1. The question of law as to whether a contribution made to a municipality by a company for providing a pipeline through the municipal land for the disposal of the effluents discharged by the company so as to guard against health hazards to the citizens is a revenue expenditure (as contended by the assessee) or a capital expenditure (as contended by the revenue) gets elbowed out for the time being (for being dealt with later) for reasons which will come to the surface presently. (1) An exercise in futility is a 'must and the Appellate Tribunal should be required to state the case and refer the suggested question of law to the High Court when the High Court's powers under s. 256(2) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), are invoked either by the assessee or by the revenue. (2) And this 'must' has an option less content, even if the view taken by the Tribunal giving rise to the suggested question of law, is unimpeachable on merits and is wholeheartedly endorsed by the High Court. (3) We can agree with the opinion formed by the Tribunal after and only after we require the Tribunal to state the case and again regret the parties (we have already heard them at this stage of issuing the 'rule', but that is not enough. In other words we must rehear them once again after the case is formally stated and we formally rehear them, and at this stage the 'rule' must be made absolute as a matter of course. These three propositions, we must assent to, if we are to aside to the request of requiring the Tribunal to state a case and refer the suggested question of law to this court. We feel no hesitation, or entertain no misgiving on the score, and negative all the three proposition. We propose to give or reasons for doing so, as also for concluding that the opinion formed by the Tribunal, in regards to the question of law suggested by the applicant, is unexceptionable.
2. We propose to settle this seminal question at the threshold at this juncture before we enter upon a discussion on the question of law which the applicant persuaded the Tribunal to refer to the High Court but failed in his attempt.
3. Under sub-s (1) of s. 256, the Appellate Tribunal is enjoined to refer the case to the High Court upon any question of laws arising out of its order. The expression employed is : 'the Appellate Tribunal shall............. draw up a statement of case and refer it to the High Court.' Notwithstanding the fact that the expression 'shall' has been employed the courts have taken the view that it is not incumbent upon the Tribunal to invariable make a reference to the High Court merely upon it being shown that a question of law arises out of an order passed by it in appeal, (1) if the point is concluded or covered by a decision of the Supreme court; or (2) if the High Court of the concerned State has upheld or sustained the view taken by the Tribunal in an earlier matter and the question is not pending in the Supreme Court from an appeal carried by the aggrieved party from the said decision; or (3) if it is merely academic and has no impact on the validity of the order passed by it; or (4) if it is frivolous or patently unarguable. For the moment we want to highlight the difference in the language employed by the Legislature in regard to the power conferred on the High Court to require the Appellate Tribunal to state the case and refer the same to it for it opinion as envisaged by sub-s. (2) of s. 256 of the Act, as contra distinguished from the language employed by the Legislature in the aforesaid provision. So far as sub s. (2) of s. 256 of the Act is concerned, it is enjoined that the High Court 'may' if it is not satisfied with the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and to refer it, upon the power under the said provision being invoked. The meaningful works in which the provision concerned is engaged in the Act, clearly, in the first place, show that the High Court has a 'discretion' in the matter as is indicated by the expression 'may' employed by the Legislature in adverting to the powers of the High Court to call for a refrain as contra distinguished from the expression 'shall' employed by the Legislature in adverting to the obligation cast on the Tribunal to refer a question of law upon the Tribunal being required to do so by ways of an application under sub-s. (1) of s. 256 of the Act. In the second place what stares one in the eye is the use of the expression 'if it is not satisfied with the correctness of the decision of Appellate Tribunal'. The High Court has, therefore, to apply its mind to both these aspects unless it is expected to mechanically grant an application invoking the powers of the High Court under sub-s. (2) of s. 256 of the Act. Whether or not the High Court should exercise the power liberally, almost for the asking of it, without attaching too much importance to the dimension as regards the discretion invested in the High Court (the expression used being 'may' and not 'shall' unlike sub-s. (1) of s.256 and without regard to the consideration as regards the correctness or otherwise of the decision to the Appellate Tribunal, is not a question which can be resolved in an unrealistic manner unmindful of the existing burden of arrears of cases of various categories in the high Court, which has almost brought the machinery of law to a grinding halt. So much so, that the citizens who are victims of serious injustice have to wait for a number of year (if they do not depart from the world meanwhile) before their causes come up for hearing. Then there are appeals and further appeals (which cannot be avoided) during the tendency of which even those citizens who have succeeded, are deprived of the fruits of the litigation by reason of stay orders that may be granted by the appellate courts. Every unworthy cause which is admitted in the queue of causes awaiting decisions results in greater delay postponing the day of deliverance for the genuine victims of injustice. We cannot shut our eye as to the aforesaid realities of life and live in a world of make-believe. Under these circumstances the power under s. 256(2) of the Act cannot be exercised in disregard of the mandate of Parliament which enjoins that the High Court : (1) exercise the discretion taking into account the pros and cons of the matter on sound principles, and (2) is also aware of the mandate of Parliament to do so provided only if it is not satisfied with the correctness of the decision of the Appellate Tribunal. On first principles, therefore, on a plain reading of sub-s. (2) of s. 256 of the Act, the High Court cannot be asked to require the Appellate Tribunal to state the case and refer the same to it merely because a question of law arises. The High Court must exercise its discretion on principles and in the light of its satisfaction as regards the correctness or otherwise of the decision of the Appellate Tribunal. Since there are a number of authorities, which buttress the view which has commended to us, we deem it proper to advert to these decision albeit briefly.
4. It was some 28 years back, as early as on September 14, 1953, that a Full Bench of the Bombay High Court in Mangaldas N. Varma v. CIT : 25ITR175(Bom) , expressed a similar view in the context of the relevant provisions contained the Taxation on Income (Investigation Commission) Act (XXX of 1947) in s. 8(5) of the said Act which is in pari materia with sub-s. (1) of s. 256 of the Act and which enjoins that the Commissioner may be required to refer to the High Court any question of law arising out of an order passed by him of the specified nature. In the context of this provision, Chagla C.J., speaking for the Full Bench, negatived the contentions that if it was shown that the question of law did arise, the Commissioner was bound to refer the question to the High Court regardless of, (1) however frivolous it was, (2) however insupportable it was, and (3) however unarguable it was, merely because such a question such a question of law did arise. The opinion was expressed by him that, (1) if the court finds that the question of law answers itself, or (2) that it is patently unarguable, there is no reason why the time of the Commissioner or of the court should be wasted in asking the Commissioner to refer to the High Court question of law. 'Ingenuity of lawyers', says Chagla C.J. (p. 191) 'will always suggest questions of law arising out of the findings of the Commissioner. It is only when the court is satisfied that a question of law arises and that it requires consideration by the court that the court would direct the Commissioner to arise a question of law.' Needless to say that the aforesaid statement of law is made in the context of the duty cast of the Commissioner to make a reference to the High Court upon being required to do so (which corresponds to sub-s. (1) of s. 256 of the Act), whereas we are concerned with the power of the High Court to require the Tribunal to refer a question to it under sub-s. (2) of s. 256 of the Act, which itself confers powers upon the High Court with a rider to use its discretion in a judicial manner (the expression used is 'may') and upon the High Court not being satisfied with the correctness of the decision of the Tribunal. It is, therefore, evident that we are on much firmer footing in the view that we are taking. The test laid down by the Full Bench can usefully be applied in exercising the discretion conferred by sub-s. (2) of s. 256 of the Act, when the powers of the High Court are invoked in this behalf, provided the High Court is not satisfied with regard to the correctness of the decision of the Tribunal.
5. We are also fully fortified in the view that we are taking by the observations made in a number of decisions of the Supreme Court which impel us to take the view that has commended to us more particularly in the background of the critical situation of the position of arrears adverted to earlier. In CIT v. Chander Bhan Harbhajan Lal : 60ITR188(SC) , in the context of an order passed by the Punjab High Court rejecting an application made by the Commissioner invoking the powers of the High Court under s. 66(2) of the Indian I.T. Act, 1922, which are in pari materia with the powers of the High Court under s. 256(2) of the I.T. Act, 1961, the Supreme Court, more than 14 years back on January 4, 1966, has observed that where the question of law raised is not substantial and the answer to the question is self-evident, the High Court is not bound to require the Tribunal to refer the question to it. What more does one need in support of the view that the High Court cannot be expected to act mechanically and require the Tribunal to refer a question of law as soon as it is shown that a question of law does arise regardless of the merits of the question and regardless of its opinion that the question has been correctly decided in an unexceptionable manner would it serve any purpose to say so only after obliging the Tribunal to make a formal reference and after hearing the other side If the High Court is satisfied that it is not necessary to do so, there is nothing in sub-s. (2) of s. 256 which commends the High Court to do so. In fact, we are of the opinion that we would be failing in our duty, (1) if we do not exercise the discretion which Parliament in its wisdom has conferred on us, and (2) if we are unmindful of the dimension as regards the correctness or otherwise of the decision of the Tribunal. We need not impose unnecessary fetters on ourselves and on our hands, particularly when to add an unnecessary matter to the mountain of matters awaiting decision is to deny justice to those who are suffering injustice for a time interval of unpredictable duration. We, therefore, unhesitatingly hold that we are not bound to require the Tribunal to refer the question to us for our opinion merely because a question of law arises, if we are otherwise satisfied that the point has been rightly decided and can be supported by reasonable and valid arguments. Nay, we would go to the length of saying that we would be abdicating our duty and betraying the trust reposed in us by Parliament, if we were to accede to the request unmindful of the aforesaid two considerations enjoined by the Legislature.
6. The present is a case where, we are constrained to say, the aforesaid principle is attracted and attracted squarely so that we feel justified in rejecting the application made by the Commissioner for requiring the Tribunal to state the case to us in exercise of the powers under sub-s. (2) of s. 256 of the Act. The reasons which impel us to reach this conclusion we shall presently state after setting out the question of law which the Commissioner requested the Tribunal to refer to us, namely :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the amount of Rs. 1,80,000 being the assessee's share of contribution at 20% of the total expenditure of Navasari Borough Municipality by way of betterment charges for the underground drainage lines was an allowable revenue deduction ?'
7. What is a mixed question of fact and law Where the authority concerned has to inform itself about the true meaning and content of the statutory provision or as regards an expression employed by the Legislature in any enactment or in regard to a legal concept before drawing an inference from primary facts established before it, mixed question of fact and law arises. Such a question has arisen in the present case on the following facts :
(1) The effluents discharged by the assessee-company were creating a healthy hazard as the drain in which the same were being discharged used to overflow.
(2) The citizens and agriculturists affected by the aforesaid phenomenon were loudly and strongly protesting in this behalf.
(3) The assessee-company could reasonably apprehend a spate of suits instituted by the citizens in order to prevent the alleged nuisance which endangered their health and safety.
(4) The municipality could not have remedied the situation with its own resources as they then existed soon enough to prevent litigation that could be reasonably apprehended.
(5) If the assessee-company was injuncted from operating its mills even for a short duration it would have suffered financial dormant for several obvious reasons. The overhead expenses would have to be incurred as usual without being able to carry on its manufacturing activities. It also ran the risk of losing the market, customers and goodwill. Someone else would have stepped into its shoes in the matter and won the allegiance of the customers of the assessee-company.
8. In these facts and circumstances, the problem is posed whether the contribution made to the municipality for repairing the drainage pipeline is business expenditure under s. 37, inter alia, incurred on account of commercial expediency which can be allowed by way of a deduction. Of course, before it can be claimed under s. 37 of the Act, the following essential conditions will have to be satisfied, namely :
1. It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure.
2. It must be laid out or expended wholly and exclusively for the purpose of the business or profession.
3. It must not be of the nature described in ss. 30 to 36 and s. 80 VV (which is enforced with effect from April 1, 1976).
9. Subject to these three basic conditions being satisfied some tests can be evolved on first principles. The tests can be divided into two categories, namely, (1) positive tests, (2) negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do so in order to affirmatively hold that the expenditure is a business expenditure - inter alia, incurred on account of commercial expediency.
10. Positive tests
11. If the expenditure incurred :-
1. with a view to bring profits or monetary advantage either today or tomorrow.
2. to render the assessee immune from impending or reasonably apprehended litigation.
3. in order to save losses in foreseeable future.
4. for effecting economy in working which may pay dividends to-day or to-morrow.
5. for increasing efficiency in working
6. for removing inefficiency in the working.
7. where the expenditure incurred in such as a, (i) wise, (ii) prudent, (iii) pragmatic, (iv) ethical, man of the world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits.
8. where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limit.
12. Negative tests
13. If it is incurred :-
1. for a mere altruistic consideration.
2. mainly in order to satisfy his philanthropic urges.
14. Explanation - Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one's own cost or sacrifice. Not at the cost of public exchequer or other taxpayers and those living below the poverty line.
3. mainly in order to win applause or earn garlands or public appreciation.
4. for illegal, immoral or corrupt purposes or by any such means or for any such reasons.
5. mainly in order to oblige a relative or an official.
6. mainly in order to earn the goodwill of a political party or a politician.
7. mainly in order to show off or impress others with his affluence or for ostentatious purposes.
8. Apparently for a factor listed as a positive factor in the left side column but in reality for one of the obnoxious purposes listed hereinabove.
9. On a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects by really for one or the other of the above mentioned purposes.
10. it must not be a bogus, fictitious or sham transaction.
11. it must not be unreasonable and out of proportion.
12. it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.
13. the advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on 'ifs' and 'buts', and if at all, to be secured at an uncertain future date which may be considered too remote.
15. As we pointed out earlier :
(1) one of the positive tests must be attracted whereas,
(2) none of the negative tests should be attracted.
16. In the present case, the expenditure fulfills all the pre-conditions and passes the tests (positive test No. 2 is attracted whilst no negative test is attracted) devised by us. Hence, on merits, we concur with the view of the Tribunal and refuse to direct the Tribunal to make a superfluous reference.
17. Rule is, therefore, discharged with no order as to costs.