1996 (10) TMI 2 - SC - Income Tax

Deduction under s.37(1) allowed for business-related public welfare fund contributions, voluntary or solicited, not illegal gratification

Sri Venkata Satyanarayana Rice Mill Contractors Company Versus Commissioner of Income-Tax

SC allowed deduction under s.37(1) for contributions to a public welfare fund made in connection with the taxpayer's business, holding such ... Commercial expediency - public policy - Claim for deduction of the amounts paid by it to the Andhra Pradesh Welfare Fund, West Godavari (Branch Eluru) as a business expenditure u/s 37(1) - HELD THAT:- Any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business. Thus, we hold that the conclusion of the High Court arrived at in the present cases was not correct. The questions of law referred by the Tribunal are accordingly answered in favour of the appellants who will also be entitled to costs. Issues Involved:1. Deduction of contributions to a welfare fund as business expenditure under section 37(1) of the Income-tax Act, 1961.2. Whether the contributions were opposed to public policy.3. Commercial expediency as a justification for the deduction.4. Legality and public policy implications of the contributions.Issue-wise Detailed Analysis:1. Deduction of Contributions to a Welfare Fund as Business Expenditure under Section 37(1) of the Income-tax Act, 1961:The appellant, engaged in the business of exporting rice, claimed deductions for contributions made to the Andhra Pradesh Welfare Fund as business expenses under section 37(1) of the Income-tax Act, 1961. The Income-tax Officer disallowed the deduction, stating that the payment was discretionary and not mandatory or statutory. The Appellate Assistant Commissioner upheld this decision. However, the Income-tax Tribunal allowed the appeals, concluding that the contributions, though not compulsory, were made pursuant to a scheme devised by the Rice Millers' Association in consultation with the District Collector, thereby providing a business advantage and making the deduction allowable under section 37(1).2. Whether the Contributions Were Opposed to Public Policy:The High Court initially ruled in favor of the respondent, asserting that the contributions to the welfare fund were a pre-condition for obtaining export permits and were, therefore, compulsory payments. However, it disallowed the deduction on the grounds that such payments were opposed to public policy, equating them with bribes. The appellant's counsel argued that the High Court erred in equating the contributions to bribes and that the payments were made for commercial expediency, not as illegal gratification.3. Commercial Expediency as a Justification for the Deduction:The Supreme Court emphasized the principle that payments made for commercial expediency, even if voluntary, are allowable as business expenses if they benefit the business. This principle was established in the case of Atherton v. British Insulated and Helsby Cables Ltd., where it was noted that voluntary payments made for commercial reasons to facilitate business operations can be deductible. The court also referenced Eastern Investments Ltd. v. CIT and CIT v. Chandulal Keshavlal and Co., reinforcing the idea that commercial expediency justifies deductions.4. Legality and Public Policy Implications of the Contributions:The Supreme Court distinguished the present case from those involving illegal transactions. It was noted that the contributions to the welfare fund were not illegal payments or opposed to public policy. The fund was established for public benefit, and the payments were made openly by all millers. The court cited several cases, including CIT v. S. C. Kothari and CIT v. Piara Singh, where losses in illegal businesses were allowed as deductions, to argue that the contributions in this case were legal and made for public benefit.The court also referred to similar cases, such as Addl. CIT v. Kuber Singh Bhagwandas, where contributions to a public fund were allowed as deductions because they facilitated business operations. The court concluded that contributions to a public welfare fund directly connected to business operations and resulting in business benefits are allowable deductions under section 37(1).Conclusion:The Supreme Court held that the High Court's conclusion was incorrect. Contributions to the welfare fund, made for commercial expediency and public benefit, are allowable as business deductions under section 37(1) of the Income-tax Act, 1961. The questions of law were answered in favor of the appellants, who were also entitled to costs.