1. In this appeal, the revenue objects to the order of the Commissioner (Appeals) allowing a sum of Rs. 21,016 as business expenditure.
On 29-3-1946, an immovable property was acquired on behalf of the Indore Mill Owners Association through its President, Sir Seth Hukamchand Sarupchand Kt., and the Vice President, Rai Bahadur Rajya Bhushan Seth Kanhaiyalal Nandlal Bhandari. According to the sale deed dated 29-3-1946 at pages 27 to 32 of the appellant's paper book, this property was purchased on behalf of the said association, which was not yet a registered corporation but which consisted of seven incorporated and registered companies under the Indore Companies Act, 1914. The assessee-company, the Hukamchand Mills Ltd., Indore, is the first company mentioned therein. It appears that these seven companies formed themselves into an association called the Indore Mill Owners Association and by resolution No. 1 dated 2-1-1946 resolved that the said association should buy all the property described as Bungalow No. 9, South Tukoganj, along with Block No. 7 originally known as Block No. 49 in Tukoganj, Indore, in the name of the President and the Vice-President of the said association for and on behalf of the association for a consideration of Rs. 76,000. The said consideration amount of Rs. 76,000 was contributed by the seven-member mills and the contribution of the assessee, Hukamchand Mills Ltd., amounted to Rs. 17,899,15 annas and 9 paise. It was also specified in the deed that each one of these seven companies, who are the members of the association, shall have a share in the properties so purchased, in proportion to the amount contributed by each of them. There is no dispute that this deed of conveyance in favour of the Indore Mill Owners Association is a registered document.
3. It appears that some time in 1968, the association, which by then came to be known as Madhya Pradesh Textile Mills Association, wanted to dispose of a portion of the land at the rear side of the building admeasuring about 40,000 sq. ft. on 2-4-1968. The assessee-company wrote to the Chairman of the Madhya Pradesh Textile Mills Association that they relinquished their claim, if any, in the said land that was proposed to be. sold by the association. It was also stated in this letter that the sale proceeds from the sale of the land should be utilised for the construction of new premises adjoining the old building and/or improvement in the present structure.
4. Subsequently, on 11-5-1970, the assessee-company passed a resolution and relinquished its share in the immovable property of Madhya Pradesh Textile Mills Association as their contribution to the said association, out of commercial necessity and business expediency for the advancement, promotion, development and encouragement of textile industry in the State of Madhya Pradesh. By this time, the assessee's share in the immovable property was shown at Rs. 21,016 in its books of account as on 31-12-1968.
5. Pursuant to this resolution, the assessee debited this amount of Rs. 21,016 to its profit and loss account as its contribution to Madhya Pradesh Textile Mills Association (share in immovable property given as contribution). This amount of Rs. 21,016 was originally shown in the balance sheet of the assessee-company under the head 'Investment' and at its cost of Rs. 21,016 as on 31-12-1969. The entry debiting the profit and loss account was passed in the year ended 31-12-1970, relevant for the assessment year 1971-72, with which we are presently concerned in this appeal.
6. The ITO disallowed this amount claimed by the assessee without assigning any reason in the assessment order. This action of the ITO was upheld by the AAC. So the assessee came up in appeal to the Tribunal, who set aside the order of the AAC and restored the matter to the AAC for fresh disposal in accordance with law after ascertaining the full and appropriate facts, by the order dated 27-10-1978, in IT Appeal No. 128 (Bom.) of 1977-78.
7. Thereafter, the Commissioner (Appeals) decided the matter afresh and held in favour of the assessee. In paragraph No. 4 of his order, the Commissioner held that the facts that emerged were (a) that the building along with the appurtenant land was purchased in the name of the association in 1946 and (b) that the relinquishment of part of the land was done in 1968 and that of the building in 1970. The Commissioner then examined the question whether the relinquishment necessitated any reconveyance as discussed in paragraph No. 5 of the order of the Tribunal dated 27-10-1978. The Commissioner (Appeals) held since the original deed was in the name of the association, there was no necessity of any reconveyance. He pointed out that the assessee-company, along with other members of the association, was showing its contribution towards purchase and appreciation thereon (which should be further contribution), as its asset in the balance sheet. He further held that the assessee relinquished its share in the year under appeal by appropriate resolution of the board of directors.
8. The Commissioner next held that the object of the assessee-company surrendering its right was quite clear. He pointed out that the purpose of the above-mentioned Textile Mills Association is to advance, promote, develop and encourage the textile industry in the State of Madhya Pradesh, of which the assessee-company is a founder member.
9. On the above facts, the Commissioner (Appeals) held that any contribution made by any members of the association, which was formed to promote and protect the interest of that trade, had a direct bearing to the interests of the members of that organisation. The association was formed for safeguarding and promoting the interests of its members.
He was of the view that it was not necessary that the action should have been of any immediate effect to the assessee. According to him, such situations were rare, that it was an overall effect and the climate that was created by the efforts made by such associations which ultimately go with the benefits of such associations and their members.
The Commissioner held that it was not possible in his view nor desirable, to take a short-sighted view of such contributions. In support of his conclusion, the Commissioner relied on the principles laid down by the Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1.
10. The Commissioner (Appeals) held that the amount of Rs. 21,016 shown in the balance sheet by the assessee-company in the earlier years, had been relinquished in favour of Madhya Pradesh Textile Mills Association during the year under appeal and that this relinquishment had been done, so that the association, of which the assessee-company is a prominent member, should perform its obligations in a better way. He held that this relinquishment could only be treated as contribution to that entity and was in the interest of the business of the assessee-company and deserves to be treated as business expenditure.
Accordingly, he allowed the assessee's claim for deduction of this expenditure. In view of this decision, he further held that the assessee's claim under Section 80G of the Income-tax Act, 1961 ('the Act'), did not survive.
11. The present appeal of the revenue is directed against this order of the Commissioner (Appeals) on the following ground: On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the amount of Rs. 21,016 contributed by the assessee-company towards purchase of immovable property and acquiring the right in the said property was relinquished and, therefore, the relinquishment amounts to contribution to the association and, therefore, the contribution made was a business expenditure.
12. The assessee has also come up by way of cross-objection, supporting the order of the Commissioner (Appeals) and further putting forward an alternative claim for relief under Section 80G on the contribution of Rs. 21,016.
13. We have heard Shri Roy Alphonso, the learned departmental representative, and Shri Dinesh Vyas, the learned counsel for the assessee, and carefully considered this submission in the light of the materials placed before us.
14. It is the argument of Shri Roy Alphonso that since the outlay had taken place in 1946, the expenditure itself was in fact incurred in 1946 and not in the year of account 1970. He pointed out that this item was not shown under fixed assets but under the head 'Investments'. Shri Roy Alphonso then pointed out that if there was any expenditure in this year, such expenditure could be claimed only under Section 37(1) of the Act. But he argued that the expenditure in question was in the nature of capital expenditure and further, it was not laid out wholly and exclusively for the purpose of the business of the assessee-company. In support of this plea, Shri Roy Alphonso relied on the decision of the Madras High Court in M.S.P. Senthikumara Nadar & Sons v. CIT [1957] 32 ITR 138. He, therefore, submitted that the Commissioner (Appeals) was in error in allowing this claim of the assessee, 15. Shri Dinesh Vyas, the learned counsel for the assessee, submitted that since the property was acquired even in 1946, in the name of the association itself, there was no need for any further re-conveyance in its favour. He further submitted that Madhya Pradesh Textile Mills Association was registered on 1-6-1966 only. He argued that it was for the sake of convenience that the property was purchased in 1946 itself in the name of the association and this was the agreed position between the assessee and the said association. He further submitted that the right, title and interest of the assessee-company continued in the assessee's name and the income from this property was being offered in its hands till December 1969. In this connection, he referred to the income from property amounting to Rs. 1,373 assessed in the hands of the assessee till the assessment year 1970-71. Shri Dinesh Vyas argued that the resolution of the board of the assessee-company as well as the entries in the books of the assessee-company were passed in the year 1970 to perfect the title of the association. Consequently, it became the expenditure incurred by the assessee-company this year when it passed the resolution relinquishing its right, title and interest and share in the property in favour of the said association. He further argued that all the other member mills of the association had also relinquished their rights and that the association had started showing this property in its balance sheet from 1970 onwards. In support of this, the learned counsel also obtained copies of the balance sheets of the Madhya Pradesh Textile Mills Association as at 31-12-1969 and as at 31-12-1970. Shri Dinesh Vyas relied on the decisions of the Madras High Court in CIT v. T.V. Sunclaram Iyengar & Sons (P.) Ltd. [1974] 95 ITR 428 and of the Bombay High Court in CIT v. Excel Industries Ltd. [1980] 122 ITR 995. He further argued that the property in question became a capital asset of the association on its acquisition in 1946 and not that of the assessee and that when the assessee relinquished its interest in favour of the association, it represented the contribution made by the assessee for acquiring the said property for the benefit of the said association. The learned counsel argued that this expenditure was laid out wholly and exclusively for the purpose of the business of the company out of commercial expediency. In this connection, Shri Dinesh Vyas relied on the passage at p. 481 of Volume 1 of Kanga and Palkhivala's Law and Practice of Income-tax, 7th edn., under the heading 'Where capital asset belongs to third party'. He, therefore, submitted that the decision of the Commissioner (Appeals) was correct and that the same should be upheld. Shri Dinesh Vyas further submitted that the assessee's claim under Section 80G was only an alternative claim in the cross-objection and that the same should be considered if the assessee's claim for deduction under Section 37(1) is not accepted by the Tribunal, 16. From the facts stated above, it is clear that the property in question stood in the name of the Madhya Pradesh Textile Mills Association and its predecessor Indore Textile Mills Association right from the date of its acquisition on 29-3-1946. Therefore, the Commissioner was right in his conclusion that no further deed of conveyance or reconveyance was necessary for conferring title in favour of the association. There is no dispute in the present case that this amount of Rs. 21,016 was being shown by the assessee-company as an investment at its original cost in its balance sheet as at 31-12-1969.
Consistent with this position the assessee had also been declaring its share in the income from this property as its own income till the year ending 31-12-1969. The resolution passed by the board of directors of the assessee-company on 11-5-1970 states as follows: The Board unanimously resolved that the mill company's share in the immovable property of the Madhya Pradesh Textile Mills Association be given in contribution to the Madhya Pradesh Textile Mills Association, out of commercial necessity and business expediency for advancement, promotion, development and encouragement of textile industry in the State of Madhya Pradesh.
Before passing this resolution, the directors have discussed the work done by the association and have found that the Madhya Pradesh Textile Mills Association was rendering very useful service in the promotion, development and encouragement of textile industry in the State of Madhya Pradesh. It is also stated therein that the assessee-company had already contributed their share in part of the land by relinquishing their rights therein, the sale proceeds of which the association was using in putting up an assembly hall and allied structure. Obviously, this refers to the letter dated 2-4-1968 written by the assessee-company to the association, relinquishing its claim in the portion of the land measuring 40,000 sq. ft. which was disposed of by the said association on that date. There is no dispute that on 2-4-1968, the company did not make any entries in its books of account.
It is only in the year under appeal that the assessee passed the necessary entries debiting its profit and loss account and crediting the investment account pursuant to the resolution dated 11-5-1970, referred to above.
17. The balance sheets of the Madhya Pradesh Textile Mills Association as at 31-12-1969 and 31-12-1970 fully support the case of the present assessee. In fact in the auditor's report dated 16-3-1971, it is stated as follows: During the year under report, the following Indore Mills have surrendered their respective shares in favour of the Madhya Pradesh Textile Mills Association without any compensation ; Rs. In view of this surrender, Rs. 58,219.75 have now been transferred from the Indore Mills Building Fund to the Building fund of the association.
Swadeshi Cotton and Flour Mills Ltd. have agreed to surrender their share against payment of Rs. 5,489.87, their original contribution.
18. On the above facts, we are satisfied with the decision of the Commissioner (Appeals) allowing the assessee's claim for deduction under Section 37(1) is right and the same has to be upheld. We are unable to agree with the revenue that the expenditure has been incurred by the assesses in 1946 itself and not in the year under appeal. This is clearly opposed to facts which we have discussed above. The expenditure has been incurred only in the year under appeal when the board passed the resolution relinquishing its right, title and interest in the property in favour of the association and stating that it was making it as its contribution to the association. Apparently, the original amount of Rs. 21,016, contributed by the assessce-company for acquiring this property for and on behalf of the association, has been treated as an expenditure in the year under appeal. As rightly contended for the assessee, it did not bring into existence any capital asset for the assessee but it brought into existence a capital asset only for the Madhya Pradesh Textile Mills Association. The Commissioner's conclusion that these expenses were laid out wholly and exclusively for the purpose of the business, is also correct.
19. We are unable to appreciate how the decision of the Madras High Court in the case of S.P. Senthikumara Nadar & Sons (supra) supports the case of the revenue in the present case. In our view, the said decision has no bearing to the point at issue in the present appeal. On the other hand, the two decisions, one of the Madras High Court in T.V.Sundaram Iyengar & Sons (P.) Ltd.'s case (supra) and the other in Excel Industries Ltd.'s case (supra) and the Bombay High Court fully support the case of the assessee. In the first case of T.V. Sundaram Iyengar & Sons (P.) Ltd.'s case (supra), the assessee had contributed a sum of Rs. 39,696 for purchasing a piece of land in the name of District Collector, Madurai, for the purpose of constructing houses for the company's workers by the Government under the subsidised industrial housing scheme sponsored by the State Government. This claim was allowed by the Tribunal as being in the nature of welfare expenses under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ('the 1922 Act'). This decision of the Tribunal was upheld by the High Court and it was held that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee-company in T.V.Sundaram Iyengar & Sons (P.) Ltd.'s case (supra). The decision of the Bombay High Court in the case of Excel Industries Ltd. (supra), referred to above, involved the claim of the assessee for deduction of a sum of Rs. 9 lakhs paid by the assessee as its contribution towards the cost of laying the overhead service line to its factory for its new units for the manufacture of phosphorus. The overhead service line was to remain the property of the State Electricity Board. The assessee claimed that it did not acquire any capital asset or benefit or advantage and that the object of making the payment to the State Electricity Board was purely one of commercial expediency, was upheld by the High Court. The assessee's claim that the payment made to the State Electricity Board towards the cost of laying the overhead service line constituted revenue expenditure and was an allowable deduction, was accepted by their Lordships in the said decision.
20. In addition to these two decisions, the following decisions also are in support of the assessee's case. In CIT v. Associated Cement Cos.
Ltd. [1974] 96 ITR 650 (Bom.) an amount of Rs. 2,09,459 spent by the assessee on installing pipelines, etc., to provide water supply to the Shahabad town Municipality, was held to be allowable as business expenditure under Section 10(2)(xv). In that case, the pipelines became the property of the Shahabad Municipality. It was held that the expenditure was made for the convenient and economical running of the business for a period of 15 years during which the Government agreed not to include the area in which the assessee's factory was situated within the municipal limits, so that the assessee would not have to pay municipal taxes for the period.
21. The next decision is also of the Bombay High Court in CIT v. Tata Sons (P.) Ltd. [1978] 111 ITR 290. In this case, a contribution of Rs. 1 lakh made by the assessee to the managed mills, without earmarking the contribution for any particular business purpose, on the occasion of the Golden Jubilee celebrations of the managed mills and which amount was utilised by the managed mills for construction of a canteen for its workers, was held to be allowable as a business expenditure under Section 10(2)(XV).
22. In our view, the ratio of these four decisions are directly applicable to the facts of the present case. We, therefore, respectfully follow these three decisions of the Bombay High Court and the decision of the Madras High Court referred to above and hold that the Commissioner (Appeals) was right in allowing the assessee's claim for deduction of this expenditure, as admissible under Section 37(1) in computing the business income of the assessee for this year.
23. In view of our decision in the revenue's appeal, the assessee's cross-objection may not survive. However, for the sake of completeness, we would decide the issue raised in the cross-objection also, In ground No. 1, the assessee merely supports the order of the Commissioner (Appeals) allowing its claim as business expenditure. In ground No. 2, the assessee has claimed in the alternative that it would be entitled to relief under Section 80G, on this contribution of Rs. 21,016. In our view, this claim of the assessee also is well-founded and has to be allowed in view of the following three decisions of the Bombay High Court--CIT v. Associated Cement Co. Ltd. [1968] 68 ITR 478, CIT v.Traub (India)(P.) Ltd. [1979] 118 ITR 525 and CIT v. Khandelwal Laboratories (P.) Ltd. [1979] 118 ITR 531. In all these decisions, it was held by the Hon'ble Bombay High Court that the assessees would be entitled to relief under Section 80G even in respect of donations made in kind such as a kiln, a lathe and medicines. The amendment made by the Finance Act, 1976, in Section 80G by inserting Explanation 5 to that section would be applicable only from the assessment year 1976-77 and as such is not applicable for the year under appeal. We, therefore, respectfully follow the three decisions referred to above and allow the assessee's cross-objection also.
24. In the result, the revenue's appeal is dismissed. The assessee's cross-objection shall be treated as allowed, since the assessee's alternative claim for relief under Section 80G, would not survive in view of our order in the revenue's appeal.