Judgment:
J.P. Devadhar, J.
1. The question of law relating to Assessment Year 1978-79 referred to this Court at the instance of the revenue, under Section 256(1) of the Income Tax Act, 1961, is as follows :
'Whether on the facts and in the circumstances of the case, the Tribunalwas justified in law in holding that the contribution of Rs. 17,08,000/- tothe three welfare trusts created by the assessee, is an allowable deductionunder Section 37 of the Income Tax Act, 1961 in computing the totalincome of the assessee for the assessment year 1978-79?'
2. The relevant facts are that the assessee is a registered firm having sevenpartners. The assessed/firm is carrying on business of construction and structuralengineers. For the assessment year 1978-79 the assessee filed return of incomedeclaring total income of Rs. 37,59,610/-. During the accounting year relevant tothe assessment year 1978-79, the assessee had created three welfare trusts for thewelfare of its employees of various grades and had contributed the followingamounts to the said three trusts.
1. B. G. Shirke and Co. Employees Welfare Trust Rs. 5,01,000/-
2. B. G. Shirke and Co. Staff Welfare Trust Rs. 4,01,000/-
3. B. G. Shirke and Co. Executives Welfare Trust Rs. 3,01,000/-
The assessee claimed the said contribution as deduction in computing the total income of the assessee, by relying upon the decision of this Court in the case of Hindustan Clockner Switch Gear Limited v. C.I.T. reported in 81 J.T.R. 20. The Income Tax Officer rejected the contention of the assessee and held that the contribution to the funds was capital expenditure, and therefore, not allowable under Section 37 of the Income Tax Act.
3. The assessee being aggrieved by the order of the Income Tax Officer went in appeal before C.I.T. (A) who differed from the view taken by the Income Tax Officer and held that the claim was admissible as deduction under Section 37 of the Income Tax Act.
4. Being aggrieved by the aforesaid order, the Revenue filed an appeal before the Income Tax Appellate Tribunal. The Tribunal agreed with the view taken by C.I.T. (A) and held that the contribution given to the Trusts is an admissible deduction. Hence, this reference at the instance of the Revenue.
5. Mr. R. V. Desai, learned Senior Counsel appearing on behalf of the Revenue contended that in the Assessment Year 1978-79 the assessee had earned huge profits and in order to reduce the incidence of taxation, the assessee had diverted the profits by creating Welfare Trusts. Referring to the Trust Deed set out at page 43 of the paper book, Mr. Desai submitted that the main object of the trust was inter alia to acquire by purchase or otherwise, to take on hire and to run and maintain lodging accommodation and holiday homes and render incidental services like provision of food and services etc., at hill stations or other places of interest in India for use by the Employees. According to Mr. Desai these expenditure incurred by way of contribution to these Welfare Trusts were liable to be treated as capital expenditure and could not be allowed as deduction under Section 37 of the Income Tax Act. He further submitted that there was no fixed liability cast upon the assessee to make contribution to the funds, and that the administration of the Trusts were virtually in the hands of the assessee and hence the funds were in fact under the control of the assessee. Accordingly, Mr. Desai submitted that the said contribution to the Welfare Trusts created by the assessee could not be allowed as revenue expenditure.
6. Mr. Inamdar, learned Counsel appearing on behalf of the assessee, on the other hand, contended that the main object of the Trust as per the Trust Deed was to provide medical facility to the employees by way of granting reimbursement of actual medical expenses incurred by the employees and to establish and maintain hospitals, nursing homes, dispensaries, sanitorium for the benefit of the employees, special medical treatment to the physically handicapped and mentally retarded children of the employees, to provide quality food, food stuff, food grains, provision, grocery, clothing etc. on no profit no loss basis, to the employees, and for that purpose to establish, maintain and conduct canteens, fair price shops etc., at no profit no loss basis. The contribution to these funds being made as a welfare measure towards the employees, the same were allowable as revenue expenditure.
7. Mr. Inamdar further submitted that under Clause 50 of the Trust Deed, the Trust was to remain irrevocable for all time and the assessee had released, relinquished and surrendered rights, if any, reserved by it; that the Trusts were duly registered under the Public Trusts Act and the affairs of the Trusts were under the control of the Charity Commissioner; that the Trusts were under the legal obligation to spent the amount for the welfare of the employees; that nobody had doubted the genuineness of the Trusts; that the employees could file suit against the Trusts, if the funds were not utilised for the benefit of the employees. Mr. Inamdar further submitted that if the Trusts were found to be not bona fide created by the assessee for the benefit of its employees, then the funds received by the Trust could be taxed at the maximum marginal rate, as if it was the total income of the Association of persons under Section 164(1)(iv) of the Income Tax Act. In the instant case, in the absence of any such findings, it was submitted that the C.I.T. (A) and the Tribunal were justified in allowing the contribution to the Trusts as revenue expenditure. Mr. Inamdar submitted that in view of the decision of this Court in the case of Hindustan Clockner Switch Gear Limited (supra) and the decision of the Apex Court in the case of C.I.T. v. T. V. Sundaram Ayyangar reported in : [1990]186ITR276(SC) the reference be answered in favour of the assessee.
8. We have heard learned Counsel on both sides and perused records placed before us. In the instant case the undisputed facts are that, the Trusts were bona fide created for the welfare of the employees of the assessee firm. It is the case of the assessee firm that it is carrying on business of construction and structural engineers for several years and in the course of carrying out the business, the assessee has employed several persons as employees, who have given their unstinted and devoted services to the employer assessee and with a view to obtain the same kind of services from its employees, and in order to maintain and improve better employer and employee relationship the assessee has created these Trusts. Health of a firm or a company depends upon the healthy relationship between the employer and the employees. In a year in which the firm has earned huge profits, if the firm seeks to create welfare Trusts for employees, bona fide, for the welfare of its employees and executives, it cannot be said that the assessee is diverting income to reduce the tax liability. It was infact sharing the income with employees. It is pertinent to note that in the earlier years it was allowed as expenditure. Moreover, in view of socio-economic changes labour welfare can be treated by the Assessee as a liability in its accounts. Perusal of the Trust Deeds clearly shows that the assessee could not derive any mileage out of the funds contributed by it to the Trusts. There is no material adduced by the Income Tax Officer to establish that either the creation of the Trusts were not bona fide or the funds contributed by the assessee were utilised for purposes other than the welfare of the employees. Therefore, the decision of the assessee to establish welfare Trusts for the employees in the year in which the firm earned huge profits was a prudent commercial decision to strengthen the bonds between the employer and the employees. Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under Section 37 of the Income Tax Act. Such expenditure have nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with the employers is an expenditure for the carrying on of a business. In this view of the matter, in the facts of this case, where there is no dispute about the bona fides in creation of the Trusts or utilisation of the funds contributed by the assessee to the Trusts, we have no hesitation in holding that the expenditure incurred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under Section 37 of the Income Tax Act.
9. Accordingly, we answer the question in affirmative i.e. in favour of the assessee and against the revenue, with no order as to costs.