TaxTMI 
TaxTMI 
1967 (7) TMI 35
X X X X Extracts X X X X
X X X X Extracts X X X X
....During the pendency of the appeal before the Appellate Assistant Commissioner, the Income-tax Officer issued a notice, under section 34(1)(b) of the Indian Income-tax Act, on August 30, 1958, requiring the assessee to submit a revised return for the year 1957-58. The assessee filed a return on September 9, 1958, under protest and subject to objection as to the jurisdiction of the Income-tax Officer to issue such a notice. Thereafter, the Income-tax Officer wrote a letter, on September 12, 1958, to the assessee calling upon the assessee to explain how the contribution to the Indian National Congress could be claimed as an allowable deduction. The assessee replied to the letter, on September 19, 1958, taking up the position that the contribution was allowable as an expenditure under section 10(2)(xv), on the following lines of reasoning : " The Congress is a political party and in power ever since India attained independence in 1947. The company's memorandum of association authorises contributions to such parties. You will kindly recall the two recent decisions, one of the hon'ble High Court of Calcutta and the other by the Bombay High Court that donation by public companies to po....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s' particular industry or line of industry. . . " Before the Income-tax Officer could take further proceedings, the appeal before the Appellate Assistant Commissioner came up for hearing, on November 21, 1958. On the second date of the hearing, the Appellate Assistant Commissioner addressed a letter to the assessee pointing out that the Income-tax Officer should have disallowed the contribution by the assessee to the Indian National Congress and requiring the assessee to show cause why the assessment should not be enhanced by inclusion of the said amount of contribution in the income of the assessee. The assessee, thereupon, challenged the jurisdiction of the Appellate Assistant Commissioner on the following two grounds : (a) The Appellate Assistant Commissioner was not entitled to assume jurisdiction in the matter, when proceedings under section 34(1), covering the same matter, were pending before the Income-tax Officer, and (b) The power of enhancement given to the Appellate Assistant Commissioners was confined to matters which were the subject-matter of appeal and not to other matters. The Appellate Assistant Commissioner overruled the objections as to jurisdiction, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrying on of the appellant's trade. When the appellant makes a donation to a political party, it will naturally be utilised by the party for any of its aims and objects and such objects may have no bearing on the carrying on of the appellant's trade. It cannot, therefore, be said that the appellant's payment is to an organisation which is committed to the advancement of the appellant's trade. Also this payment appears to be ultra vires the company. It is true that clause 37 of the memorandum of association, as it now stands, entitles the appellant to make donations to political parties. This has been possible as a result of the order of the High Court dated the 17th June, 1957, sanctioning the application of the appellant-company for modifying the object clauses of the memorandum of association of the company. The payment of Rs. 1,50,000 may be authorised after the aforesaid change. But the payment was made in the financial year 1956-57, i.e., before the appellant-company was authorised to make such a donation. In the view taken, the Appellate Assistant Commissioner disallowed the claim for deduction of Rs. 1,50,000 as contribution to the Indian National Congress. He also exerci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e records of the case. In our opinion, it is also immaterial and of no consequence that the Income-tax Officer initiated some other proceedings for the purpose of revising or rectifying the assessment already made by him. The Appellate Assistant Commissioner's powers, in our opinion, are not curtailed by the existence of these proceedings. The powers given to the Income-tax Officer as well as to the Appellate Assistant Commissioner are concurrent and can be exercised by either of them if the circumstance of the case so demands. The Appellate Assistant Commissioner, on appeal filed before him, has the power to correct any error in assessment provided he acts within the ambit of his powers under section 31." The Tribunal thereafter turned to the merits of the case of the assessee and held that the provision for anticipated wealth-tax was not an allowable deduction, either under section 10(1) or section 10(2)(ix) or section 10(2)(xv) of the Indian Income-tax Act. The Tribunal further overruled the contention that the contribution to the Indian National Congress was an allowable deduction with the following observation : " The Appellate Assistant Commissioner, we find, has dealt ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Products Ltd. v. Commissioner of Income-tax) in all its aspects against the contention of the assessee. In the Supreme Court decision it was held that wealth-tax was not an allowable expenditure under section 10(2)(xv) of the Income-tax Act. In Income-tax Reference No. 44 of 1963 it has further been held that wealth-tax is not an allowable expenditure, under section 10(1) or section 10(2)(ix) of the Income-tax Act. In the result, we answer question No. 2 in the negative and against the assessee. So far as question No. 1 is concerned, Mr. S. R. Banerjee, learned counsel for the assessee, advanced a two-fold argument. He contended, in the first place, that in disallowing the assessee's claim for deduction of Rs. 1,50,000, contributed to the Indian National Congress, which had been allowed by the Income-tax Officer, the Appellate Assistant Commissioner did not act as a free agent and was influenced by the Income-tax Officer who became nervous about his own order allowing the contribution as a business contribution and approached the Appellate Assistant Commissioner to nullify his own order. He contended, in the next place, that the sum of Rs. 1,50,000, contributed by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ethod of accounting employed by the assessee on the ground that the income, profits and gains of the assessee cannot be properly deduced therefrom even though the Income-tax Officer has not applied the proviso to section 13 and has not expressly said so. (3) It is open to the Appellate Assistant Commissioner on an appeal preferred by the assessee to invoke, for the first time, the provisions of rule 33 of the Indian Income-tax Rules, 1922, for the purpose of computing the income of a non-resident even if the Income-tax Officer has not done so in the assessment proceedings. That being the extent of the jurisdiction of the Appellate Assistant Commissioner, we do not find any substance in the argument. He took into consideration the allowability of the contribution made by the assessee to the Indian National Congress and found that the same was not allowable under law and, therefore, directed that the same be included in the total income of the assessee for the purpose of taxation. We have before us a case in which the Income-tax Officer considered whether the sum of Rs. 1,50,000 contributed by the assessee to the Indian National Congress should be allowable as deduction. For....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... different High Courts, in support of his contention that contribution to the Indian National Congress should be allowed as an expenditure wholly and exclusively laid out for the business of the assessee within the meaning of section 10(2)(xv) of the Indian Income-tax Act. We need at first deal with the cases relied upon by him. The first decision, to which he invited our attention, was a Calcutta decision in In re Indian Iron and Steel Company Limited in which this court had to deal with an application under section 17 of the Companies Act, 1956, by a company engaged in manufacture and production of iron and steel, seeking court's confirmation of the alteration of the memorandum of association of the company, effected by a special resolution, for enabling the company, inter alia, to subscribe or contribute money to any political fund. The reason put forward in support of the alteration was : " Prosperity of the company's business is very much dependent upon the industrial policy of the Central Government of the day. Further, the company's principal business being the manufacture of iron and steel, the sale and distribution of the company's products, the price to be received by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the wisdom of the shareholders is neither supreme nor impeccable and for good reasons or bad it has to be passed by suc wisdom as the courts possess. The decision on this application for the present must depend on the actual provisions of the Companies Act, 1956, and their interpretation. If the Companies Act, 1956, permits such alteration and if the Constitution of India does not prevent it then no further question in my view arises and the amendment of the memorandum must have to be allowed and sanctioned although even then the court can impose any terms and conditions is it thinks fit. " Thereafter, turning to section 17(1)(a) of the Companies Act, his Lordship observed : " The question then becomes whether a company's contribution to the political funds of political parties can be said ' to be required to enable it to carry on its business more economically or more efficiently '. Words 'economically' and 'efficiently' are designedly vague with large import, for the obvious purpose of enabling the company to alter its memorandum in respect of its objects with as much freedom as possible. The crux of the problem then is, can it be said that a company by contributing its m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nlawful. What is forcefully pointed out by Mr. Gokhale is that nothing could be more corruptive in a democracy than to permit industrial or commercial concerns to contribute funds to a political party. It is nothing short of buying over the party so that the party should pursue a policy which would be in the interests of the commercial and industrial concerns which make contributions to the political parties. Mr. Gokhale says that if this was permissible it would be impossible to get a party which is elected to power with the help of such financial aid to determine upon policies in the interests of the country, in the interests of socialism, or in the interests of democracy. . . . . Now, before we deal with the legal aspect, it may be pointed out in fairness to the company that it has made the position clear that the Congress has already come to a particular decision as to policy and contribution that is sought to be made is not to influence or mould that policy but to keep in power a party which having already laid down its policy, that policy is being looked upon by the company as conducive to its interests. We must confess that we realise the danger--and the grave danger--of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility, then that mode or means or method is a mode, means or method which is more efficient, and what the company tells us is that if you permit us to spend this money by helping a political party we expect results from that contribution which results would be beneficial to the company. It is difficult to accept Mr. Gokhale's suggestion that ' efficiently ' in this context must be confined and limited to ' efficiently ' with regard to actual production of iron and steel and that only that alteration should be permitted which would enable the company to produce iron and steel more efficiently. There is nothing in the expression 'efficiently' which carries with it the connotation suggested by Mr. Gokhale, nor is there anything in the plain natural meaning of that expression which would compel us to limit that word to a case of production and to no other case." The third decision on which he relied was a Madras decision In re Sri Nateswar Spinning and Weaving Mills Private Limited, in which case, dealing with a similar application, Ramaswami J. observed : " Modern democracies require for its successful working stable political parties and stable parties require, whether they ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h power if it cares to have it. But the question for our consideration is whether such a contribution is allowable as expenditure wholly and exclusively laid out for the business of the company, within the meaning of section 10(2)(xv) of the Indian Income-tax Act. Mr. Banerjee contends that the expenditure " wholly and exclusively laid out for the purpose of the business " as in section 10(2)(xv) of the Indian Income-tax Act does not mean expenses incurred only for earning minimum profit. Expenses incurred, he submits, though not directly related to the earning of income may be allowable deduction, if they are related to the efficient carriage of the business even indirectly. He further submits that in deciding what expenditure should be deemed to have been laid out wholly or exclusively for the purposes of business, the test should not be empiric or the test appealing to the court but the test of what a prudent businessman would or should do in similar circumstances. In support of this branch of his contention, he strongly relied upon a judgment of this court in Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax and also on certain observations contained in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f democracy, it is well-known, political parties germinate and grow quickly. Different political parties have different political philosophies, different political programmes and different political passions. There are no bigotries or absurdities too gross for political parties to create or adopt under stimulus of political passions. This is a well-known historical fact. In countries where parliamentary form of Government prevails, no one political party can remain in power for ever. The fate of a political party in power depends on the support of public opinion, which is a deep sea of sentiments with billowingly wavering surface. Public opinion changes. The circumstances of the world are so variable that there can be no irrevocable opinion. When this change of opinion reflects itself in the polls of an election, one party gives way to another party, until such time as history repeats itself. But so long as a political party remains in power, it has favours to show and patronages to distribute, which attract aspirants for favour and patronage. A short-cut to such favours and patronage is considered to be payment of money to party funds, because fund-hunger at party level is well-kn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tic Constitution of India itself, and also in the policies of the Congress in power. The contribution was inspired no less by concern, anxiety and motive to indirectly create some influence against nationalization of the particular industry in which the assessee was engaged. (5) The contribution was brought to the knowledge of the shareholders by prominently printing the amount of contribution in the annual report of the directors of the shareholders. The shareholders never objected to the contribution. (6) As the Congress party guaranteed reasonable private enterprise it was considered commercially expedient to subscribe to the funds of that party. The first reason pleaded is far too general. It may be that it becomes at times expedient to lubricate a party in power by the grease of money, so as to obtain some commercial benefit not otherwise obtainable. But all contributions may not be made with that end in view as already observed. The second reason pleaded is uninformative. Which particular business interest was being sought to be served is not disclosed. The third reason is more or less a matter of opinion. How far priorities are guaranteed, or labour disputes are res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sation and since the Congress Government expressed itself in terms of co-existence, the assessee thought of strengthening the Congress party by political contribution, so that the Congress Government might remain in power and allow the assessee company to survive. There is too much of political speculation in this argument. We do not know that all other political parties in this country are absolutely opposed to private ownership or existence of a private sector in industries. Political prejudice and commercial expediency are not synonymous. The fourth reason only reveals of fixation of a political prejudice in the assessee, which should not be allowed to pass off as commercial expediency, without more. The last reason is no reason at all. Everybody knows that shareholders in large companies do not generally unite to put their foot upon what the directors may choose to do. They are satisfied and remain satisfied, if some return be made to them for their investments. The fact that the shareholders did not object is no indication of the approval of the contribution as one justified by commercial expediency. Theirs was an attitude of detachment which should not be mistaken as impliedl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the company. We are, therefore, of the view that the resolution donating the funds of the company was not within the objects mentioned in the memorandum of association and on that account it was ultra vires." In the instant case, there is no evidence that there was any chance of immediate nationalisation of iron industry. There is no evidence to show that even such a talk was in the air. When the assessee company made the contribution to the Congress fund, it was not earmarked for the purpose that the Congress political party must utilise that fund in opposition to any scheme of nationalisation of the industry. The Congress political party was free to utilise the fund for any of their objects with which the assessee was least concerned. In such circumstances, the contribution cannot be justified as one paid out of commercial expediency. Mr. Banerjee emphasised upon the fact that the existence of the Congress Government itself would prove beneficial to the assessee as a private entrepreneur. This is a matter of political opinion or of political prejudice which we should not confuse with commercial expediency. We, therefore, hold that the assessee has failed to establish the ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ained in section 17 of the Companies Act. I am unable to hold that there is any restriction on the part of the court to make an order as asked for." What his Lordship meant by the above passage was that if the court sanctioned a special resolution conferring power, upon the company to amalgamate, with retrospective effect, the sanction would relate back. The decision is no authority for the proposition that if the court confirming the resolution did not expressly direct that the resolution would relate back even then the resolution would relate back of its own force. In the instant case, nothing was shown to us that the order confirming the resolution of alteration of the memorandum of association was to have retrospective effect. We, therefore, find that at the point of time when the contribution was made, the company had no jurisdiction to make such contribution and its action was ultra vires the memorandum of association. It is not necessary for us to go deeper into this aspect, because if the contribution was not justified by business expediency and was not laid out wholly or exclusively for the purposes of business, it would not matter whether the contribution was intra vir....