2002 (12) TMI 23 - HC - Income Tax

Validity of Rs. 50 lakh trust contribution questioned under Income-tax Act ruling

The court held that the Rs. 50 lakhs contribution to the Dynavision Dealers' Welfare Trust was not allowable as a business expenditure under Section 37(1) ... Creation of trust - Whether, Tribunal is right in law and had valid material in holding that the sum of Rs. 50 lakhs paid by the assessee to Dynavision Dealers' Welfare Trust is allowable as a business expenditure, laid out wholly and exclusively for its business u/s 37(1)? – This question is answered in negative, against the assessee and in favour of the Revenue – 'Whether Tribunal was right in holding that by the transfer of a sum of Rs. 50 lakhs by the assessee to the Dynavision Dealers' Welfare Trust, a valid trust has come into existence with the objects set out in the trust deed?' – This question is answered in affirmative, against the Revenue and in favour of the assessee Issues Involved:1. Validity of the Dynavision Dealers' Welfare Trust.2. Allowability of the Rs. 50 lakhs contribution as business expenditure under Section 37(1) of the Income-tax Act, 1961.Detailed Analysis:1. Validity of the Dynavision Dealers' Welfare Trust:The primary issue was whether a valid trust was created by the assessee on December 26, 1984, despite the earlier trust deed dated November 27, 1984, being invalid. The Appellate Tribunal held that no trust by the name 'Dynavision Dealers' Welfare Trust' came into existence on November 27, 1984, and the trust deed dated November 27, 1984, was not a valid document. However, the Tribunal recognized the creation of a trust on December 26, 1984, based on a letter from the assessee-company to the managing trustee and the transfer of Rs. 50 lakhs.The High Court upheld this finding, stating that the letter dated December 26, 1984, clearly imposed a legal obligation on the trustees to hold the money for the objects set out in the invalid trust deed dated November 27, 1984. The court noted that a formal deed is not necessary to create a trust if the conditions for a valid trust under the Indian Trusts Act are met, which include a settlor-settlee relationship and the acceptance of the sum by the trustees. The court referenced the Supreme Court's decisions in Radhasoami Satsang v. CIT and CIT v. Tollygunge Club Ltd., which support the notion that a trust can be created without a formal deed if the intention and legal obligations are clear.The court reframed the second question of law to: 'Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that by the transfer of a sum of Rs. 50 lakhs by the assessee to the Dynavision Dealers' Welfare Trust, a valid trust has come into existence with the objects set out in the trust deed dated November 27, 1984Rs.' The court answered this in the affirmative, in favor of the assessee.2. Allowability of the Rs. 50 lakhs Contribution as Business Expenditure:The second issue was whether the Rs. 50 lakhs paid by the assessee to the Dynavision Dealers' Welfare Trust was allowable as a business expenditure under Section 37(1) of the Income-tax Act, 1961. The Revenue argued that the payment did not constitute an expenditure incurred towards an existing liability and was not made wholly and exclusively for the purpose of the assessee's business. They cited several Supreme Court decisions, including Indian Molasses Co. (Pvt.) Ltd. v. CIT and Shree Sajjan Mills Ltd. v. CIT, which differentiate between actual liabilities and contingent liabilities, the latter being non-deductible.The assessee contended that the payment was made voluntarily for commercial expediency to promote business, improve profitability, and ensure the welfare and loyalty of dealers. They argued that the expenditure was not capital in nature and cited various judgments, including CIT v. Chandulal Keshavlal and Co. and Sri Venkata Satyanarayana Rice Mills Contractors Co. v. CIT, which support the deduction of voluntary expenditures made for commercial expediency.The High Court, however, found that the trust deed conferred unfettered discretion on the trustees to spend or not spend the funds for any of the trust's objects. This lack of control by the assessee over the trustees' discretion meant there was no direct or indirect nexus between the expenditure and the assessee's business. The court also noted that some of the trust's objects, such as arranging holiday trips and presenting gifts at personal functions of dealers, were not exclusively for the purpose of the assessee's business.The court concluded that the expenditure did not meet the test of commercial expediency and was not incurred wholly and exclusively for the purpose of the assessee's business. Therefore, the Rs. 50 lakhs contribution was not allowable as a business expenditure under Section 37(1) of the Income-tax Act. The court answered the first question of law in the negative, against the assessee and in favor of the Revenue.Conclusion:- First Question: The Rs. 50 lakhs contribution to the Dynavision Dealers' Welfare Trust is not allowable as a business expenditure under Section 37(1) of the Income-tax Act. (Answered in the negative, against the assessee and in favor of the Revenue).- Second Question: A valid trust came into existence with the transfer of Rs. 50 lakhs by the assessee to the Dynavision Dealers' Welfare Trust on December 26, 1984. (Answered in the affirmative, in favor of the assessee and against the Revenue).The Revenue is entitled to costs of Rs. 2,000.