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2002 (12) TMI 23
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....g Officer rejected the claim of the assessee for deduction for the following reasons recorded in the assessment order: "1. The accounts of the trust were not produced. So, it has not been possible to verify if any amount was spent during the year for the objects of the trust. 2. The assessee-company has not created the trust for the benefit of the employees, but dealers who are third parties. The assessee is not supposed to spend for third parties' welfare. The company has no charitable object. 3. The company has not filed details of activities undertaken by the trust during the year. 4. The trust deed has no clause whereby the assessee-company can haul up the trust or take action against the trustees if the trustees do not carry out the objects of the trust. 5. The trust was created on December 26, 1984, and within five days, i.e., by December 31, 1984, the trust could not have undertaken any action. 6. Anyway, the amount has not been spent wholly and exclusively for business purposes. So, deduction under section 37 is not allowed." The assessee challenged the order of assessment before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (....
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....Rs. 50 lakhs paid by the assessee on December 26, 1984. The Appellate Tribunal, in its elaborate order, considered the question of allowability of expenditure and rejected the contention that there was violation of section 295(1)(b) of the Companies Act as a sum of Rs. 40 lakhs was given by the trust as loans to its partnership firm in which the directors of the assessee-company were partners. The Appellate Tribunal held that there was no violation as the trustees had earned more interest than the prevailing interest rate offered by financial institutions and the assessee had invested the money in non-hazardous assets. The Appellate Tribunal went into the question of allowability of Rs. 50 lakhs as business expenditure and held that the transaction was not a colourable and collusive transaction. The Appellate Tribunal also held that the transaction was a genuine transaction and there was nothing to show that a sum of Rs. 50 lakhs had found its way back into the hands of the assessee-company. The Appellate Tribunal, on the basis of the materials, found that the trustees had been carrying out the objects of the trust by investing the funds of the trust in safe investment and by ea....
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....? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that with the transfer of Rs. 50 lakhs by the assessee-company to the Dynavision Dealers' Welfare Trust a valid trust came into existence on November 26, 1984, and that in this regard no written trust deed is necessary, in the context of the Income-tax Appellate Tribunal holding that the Dynavision Dealers' Welfare Trust was ab initio void and non est, in law, when it is created on November 27, 1984, with no corpus fund and no recognised instrument of trust deed?" Now we take up the second question first. The submission of learned counsel for the Revenue is that after holding that no trust by name, Dynavision Dealers' Welfare Trust, had come into existence on November 27,1984 and the trust deed dated November 27, 1984, was not a valid document, the Appellate Tribunal was not correct in holding that by the transfer of Rs. 50 lakhs, a trust was created by the assessee for the same objects which were set out in the deed of trust dated November 27, 1984, and the Appellate Tribunal committed an error in holding that the sum of Rs. 50 lakhs was accepted by the tru....
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....fic trust would establish a valid trust on those terms. In Radhasoami Satsang v. CIT [1992] 193 ITR 321, the Supreme Court, after noticing the decision of the Privy Council in the case of All India Spinners' Association v. CIT [1944] 12 ITR 482, held that where a property was given to the Satguru which was intended for the common purpose of furthering the purpose of the institution, the property was subject to a legal liability of being used for the religious and charitable purposes of the Satsang. The Supreme Court in CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 has held that a trust may be created by any language sufficient to show the intention and no technical words are necessary and it may even be created by the use of the words which are primarily words of condition. The Supreme Court further held that the requisites which must be satisfied are that there should be purposes independent of the donee to which the subject matter of the gift is required to be applied and an obligation on the donee to satisfy those purposes. We are therefore of the opinion that a formal deed is not necessary to create a trust and to create a legal obligation to be attached to the property transf....
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.... We answer the question as reframed by us in the affirmative, in favour of the assessee and against the Revenue. Now we take up the first question. The submission of learned counsel for the Revenue on the question of allowability is that there was no liability on the part of the assessee when it created the trust and since the assessee had transferred the money without any liability, it would not constitute an expenditure incurred by the assessee. Learned counsel for the Revenue referred to section 37 of the Income-tax Act and also the decisions of the Supreme Court in Indian Molasses Co. (Pvt.) Ltd. v. CIT [1959] 37 ITR 66 and Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 and the decision of the Karnataka High Court in Mysore Lamp Works Ltd. v. CIT [1990] 185 ITR 96. Learned counsel also placed reliance on the decision of the Gujarat High Court in CIT v. Shree Digvijay Cement Co. Ltd. [1983] 144 ITR 532. In Indian Molasses Co.'s case [1959] 37 ITR 66, the Supreme Court has held that the expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money, which may become expenditure on the....
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....he main questions. Learned counsel for the Revenue submitted that the payment is not a genuine payment as the money transferred to the trust has found its way to the assessee as the trustees have granted loans to the partnership firm in which the directors of the company are partners, and therefore there was no expenditure incurred by the assessee-company. We are unable to accept the said submission as the Appellate Tribunal, on the basis of the annual report of the assessee-company and also taking note of the fact that the directors of the assessee are the partners of the firm, has recorded a finding of fact that the transaction was not a colourable or collusive transaction. We are of the view that the said finding of the Appellate Tribunal is a pure finding of fact and the said finding has been rendered after taking into consideration the constitution of the board of directors of the assessee-company and the members of the board of the trust. The second submission of learned counsel for the Revenue is that the assessee-company has violated the provisions of section 295(1)(b) of the Companies Act. We are unable to accept the submission as it was found by the Appellate Tribun....
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....and the money contributed by the assessee to the trust is not an expenditure. We are unable to accept the submission of learned counsel for the Revenue. As far as the beneficiaries of the trust are concerned, the reading of the deed of trust shows that the trust was created for the benefit of dealers and stockists of the assessee-company. The expression, "dealer and stockist" has also been defined in the deed of trust to mean a person/firm/company/concern dealing in any of the company's products which for the time being are television receiver sets. Therefore it cannot be stated that the beneficiaries are uncertain. We have also gone through the objects of the trust and we find that the objects are wide and it cannot be stated that the objects are vague. As far as the determination of the trust is concerned, the deed of trust provides that the deed shall continue till the expiry of the last lineal descendants of past or present stockists or dealers of the assessee. It cannot therefore be stated that the duration of the trust is not specified as it is stated that after the expiry of the last lineal descendants, it is open to the trustees to transfer the trust fund to a public cha....
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.... is not a capital expenditure and the expenditure was incurred for the purpose of business of the assessee. According to him, no liability is necessary if the commercial expediency is established and what is applicable to the employees' welfare trust is also applicable to the dealers welfare trust as there is no difference between these two kinds of trust either qualitatively or quantitatively and the assessee, while creating the trust, has taken into account the welfare of the dealers in mind. According to him, marketing the products produced by the assessee is vital and unless the dealers welfare is taken into account and provided for, it will not be possible for the assessee to sell the commodities produced by it. Learned counsel also submitted that the dealers deal with several commodities belonging to different manufacturers and hence, it is essential that the interest of the dealers is taken care of so that the dealers would take care of the sale of products of the assessee in the market and therefore the object behind the expenditure is purely commercial in nature and it is allowable as a business expenditure. Learned counsel further submitted that it is impermissible to loo....
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....me Court in Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 and submitted that there were only three dealers and others were sub-dealers to the main dealers and they had no direct contact with the assessee-company and there was no direct nexus between the expenditure incurred and the business of the assessee. His submission was that the trust was created to meet the dealers' expenditure. He submitted that the objects of the trust clearly show that the trust is discretionary in nature and it is open to the trustees to meet the advertisement expenditure of the dealers and since there is no nexus between the expenditure and the business of the assessee, the amount is not allowable as business expenditure. We have carefully considered the submissions of learned counsel for the assessee and learned counsel for the Revenue. Both the counsel relied upon the decision in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, wherein the House of Lords observed as under: "A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but volunta....
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....termining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income-tax Department." The Supreme Court again in CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 has held that it is not open to the court to go behind the commercial expediency which had to be determined from the point of view of a businessman, and the Supreme Court has laid down the law as under: "Great stress was laid by counsel for the assessee-company on the fact that this court could not go behind the commercial expediency which had to be determined from the point of view of a businessman. Even so whatever be the commercial considerations, it is difficult to hold that the commercial expediency dictated the assessee-company to allow itself to be completely overshadowed by its selling agents so as to pay them not only for the services rendered but also allow them to share profits, control the manufacture of the goods and the programme thereof and also to share the losses. The test of commercial expediency cannot be reduced in the shape of a r....
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....h Court in CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 where the assessee incurred an expenditure in connection with the seminar arranged for the foreign and local distributors of the assessee with a view to boosting its sales in the foreign market and the Bombay High Court held that the seminar arranged was in connection with the assessee's business and the expenditure incurred would be al1owable as business expenditure. On the other hand, learned counsel for the Revenue referred to the decision of this court in CIT (Investigation) v. Jeevandas Laljee and Sons [2000] 245 ITR 719 where this court held that the expenditure incurred by the assessee in offering gifts on the occasion of the marriage of a family member of the director of the company which whom the assessee had business dealings would not qualify for deduction as a business expenditure. This court held that the expenditure was made not on commercial expediency. Learned counsei for the Revenue also referred to the decision of this court in CIT v. Tiam House Service Ltd. [2000] 243 ITR 695 where this court was dealing with a case of allowability of medical expenditure incurred on the part-time advisor of the as....
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....at the assessee has created the trust and transferred the money and claimed the same as business expenditure. In considering the question whether the amount is allowable as business expenditure or not, the objects of the trust are relevant. It is not possible to overlook or ignore the objects of the trust and determine the question only on the basis of the transfer of money by the assessee to the trust without examining the purposes or objects for which the trust was created. We find on examining various objects of the trust, the objects of the trust are very wide and some of the objects are to render financial help to the dealers in the case of financial difficulties interest-free or at concessional rate of interest, to arrange holiday trips and tours for the recreation of dealers, to take up publicity campaigns for promoting the sales of dealers, to present gifts in cash or in kind at marriages, birthday functions, etc., of dealers and their dependent family members, to benefit dealers and stockists on account of indigence, ill-health or other necessitous circumstances, to take up any work which will help the dealers or stockists to achieve common goals like, promotion of sales, ....
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.... investment of the money is also left to the complete discretion of the trustees. We are therefore of the opinion that by Incurring expenditure, though voluntarily, the object of commercial expediency for which the trust was created is not achieved by the creation of the discretionary trust. It is also relevant to note here that it is not a case where the money was transferred by the assessee to the trustees of the trust in recognition of an existing liability, nor is it a case where the trust has been created with a condition that the beneficiaries have a right to claim the amount. As far as Atherton's case [1925] 10 TC 155 (HL), is concerned, a pension scheme was framed by the assessee-company to meet the claims of the members of the staff on their retirement. In the circumstances, it was held that the contribution was made for a laudable object and also prudent one in the interests of the company. In view of the unfettered discretion of the trustees, it cannot be stated that there is a direct and immediate benefit to the beneficiaries by the payment of huge sum of money to the trustees. Learned counsel referred to the findings of the Appellate Tribunal and submitted that t....
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....funds of the trust for any of the objects of the trust and also to invest the money. In the state of affairs, we are of the view that the connection between the business of the assessee and the expenditure is too remote. We are of the view that if the assessee had spent the money for anyone of the dealers or for all the dealers and sub-dealers of the assessee-company, necessarily an enquiry has to be made whether the money was expended by the assessee for the benefit of the dealers or whether the money was expended for the advertisement or entertainment expenditure, allowability of which is subject to the provisions of the Income-tax Act or whether it is a capital expenditure. We are of the view that if the benefit flows directly from the assessee to the dealers or sub-dealers of the assessee, the matter would stand on a different footing subject to the allowability of the expenditure provided in the Income-tax Act. However, we are of the view that where the assessee sought to spend the money through the medium of trust vesting the trustees with uncontrolled discretion without retaining any control over the exercise of the power of discretion by the trustees, the benefit that may f....
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.... for their welfare. Further, a reading of the Statement of Objects and Reasons for the insertion of section 40A(9) of the Income-tax Act shows that the said provision was inserted to avoid litigation regarding allowability of claim or deduction in respect of contribution made to the trust. Therefore, it cannot be stated that in the absence of a similar provision to section 40A(9) of the Income-tax Act for the creation of trust in favour of the dealers, the amount is allowable as business expenditure. The Appellate Tribunal, after analysing the evidence on record has recorded a finding that the expenditure was incurred by the trustees for the promotion of sale of the assessee's products under various heads. We have already observed that what is relevant to see is the objects of the trust and the powers of the trustees in carrying out the objects of the trust and not the amount of expenditure incurred by the trustees. Though during some of the years, as found by the Appellate Tribunal, the trust had incurred certain expenditure for the dealers conference and advertisements and also granted some incentives that would not be relevant as an unfettered power is conferred on the truste....
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....e pension fund established by the trust deed for the benefit of its staff. The House of Lords held that it was a capital expenditure. Lord Viscount Cave, L.C. holding that it was a capital expenditure, held as under: "The payment of £ 31,784, which is the subject of dispute, was made, not merely as a gift or bonus to the older servants of the appellant-company, but (as the deed shows) to 'form a nucleus' of the pension fund which it was desired to create; and it is a fair inference from the terms of the deed and from the Commissioners' findings that without this contribution the fund might not have come into existence at all. The object and effect of the payment of this large sum was to enable the company to establish the pension fund and to offer to all its existil1g and future employees a sure provision for their old age, and so to obtain for the company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contended and efficient staff. I am satisfied on full consideration that the payment was in the nature of capital expenditure, and accordingly that the deduction of the amount from profits, although....
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....nd arrived at the finding of fact and therefore this court sitting in reference should not interfere with the said finding. Learned counsel relied upon the decision of the Supreme Court in Hazarat Pirmahomed Shah Saheb Roza Committee v. CIT [1967] 63 ITR 490 wherein the Supreme Court referred to CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 and held that even if the question referred to the High Court regarding the existence of material to support a finding of fact arrived at by the Appellate Tribunal, the High Court should not act as an appellate court and consider whether the finding was justified or not. There can be no quarrel over the proposition of law laid down by the Supreme Court, but the said proposition has no application as the Appellate Tribunal has not considered, while holding that the amount was allowable as business expenditure, the effect of the trust deed or the discretionary power vested with the trustees to spend the money and since the relevant criteria for considering the allowability were overlooked by the Appellate Tribunal, we hold that the finding arrived at by the Appellate Tribunal is not a finding of fact. Further, the Supreme Court in Eastern Investm....