1. This appeal by the assessee is directed against the order of the ld.CIT(A)XIII, Chennai and relates to the assessment year 1996-97. The first issue relates to the tax treatment of incentive received by the assessee from the under-writer on the purchase of TNPL shares.
2. We have heard the rival submissions in the light of materials placed before us and precedents relied upon. Part-14 of Schedule-24 on page 36 of Notes annexed to and forming part of balance-sheet and profit and loss account is reproduced here asunder "During the year, the company subscribed to the Public Issue of M/s.
TNPL and was allowed 7,00,000 equity shares. The company has received brokerage amounting to Rs. 11,55,000/- company has received brokerage amounting to Rs. 11,55,000/- for subscribing to these shares which has been adjusted to the cost. Out of 7,00,000 shares, the company sold 2,00,000 shares and earned a net profit of Rs. 25,47,500/-. The Government of Tamil Nadu's permission for investment as well as sale of the shares are awaited. On 25.1.1996, the company received the first call of Rs. 40/- per share payable before 15.4.1996. No provision has been considered for the same since the company has got time upto 15.4.19% for the payment of the call money." 3. It transpires from the perusal of the aforesaid para that the assessee, a State Government undertaking subscribed public issue of TNPL through the under-writer and broker. The said under-writer and broker shared the brokerage received on account of the subscription of shares and parted a sum of Rs. 11,55,000 to the assessee. In the accounts assessee adjusted this amount towards cost of shares. It was made clear that the cost of acquisition was reduced pro tanto. Out of seven lakhs shares the assessee did sell two lakh shares and capital gains on it, was offered for taxation and the gain was computed on the basis of reduced acquisition cost.
4. The remaining five lakhs shares were retained by the assessee as investment The share of brokerage received by the assessee attributable to those shares comes to Rs. 8,25,000. The AO treated this as the income of the assessee. The CIT(A) confirmed the order of the AO on this count.
5. Taxability of an amount would depend on the nature and character of the receipt at the initial stage. If the amount initially received partakes the character of a trading receipt, the amount would necessarily be exigible to tax as such. However, if the amounts are initially not taxable, it cannot be taxed. An amount which is not initially received as a trading receipt, cannot become a trading receipt by influx of time. Whenever there is receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of Income-tax Act but the receipt would have to be considered under the provisions of the Income-tax Act from the commercial point of view. Income-tax is a tax on income. But the word 'income' is a dark cat in the bag of the Income-tax Code. There is no exhaustive definition of the word 'income'. The definition is only enumerative. For the present we are concerned whether the receipt in question could be construed to be capital receipt or revenue receipt 6. We have considered the entire conspectus of the case. The receipt bears clear nexus with the investment. Income was not earned on investment, but on account of investment Funds were deployed through a particular broker and the broker agreed to part with brokerage in consideration of deployment of such funds through him. In a way assessee acquired the shares at a lesser value. The cost to the assessee was the amount paid for the shares minus brokerage received in the form of incentive. Such incentive cannot be construed to be revenue receipt. It was adjusted towards the cost of shares. It is of capital nature. In CIT v. U.P. State Industrial Development Corporation (225 ITR 703) the Supreme Court held that in order to determine, the question of taxability, well settled legal principles as well as principles of accountancy have to be taken into account. It is a well accepted proposition that for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, as long as they do not conflict with any express provision of fee relevant statutes. Underwriting commission not taken to P&L A/c but adjusted to reduce cost of shares is not exigible to tax. The facts of the present case are different. Here the assesses is not under-writer.
It received apart of the commission given to the under-writers. That amount of commission was adjusted to reduce cost of shares. This was in accordance with the principles of accounts. As such the amount is not exigible to tax. We, therefore, decide this issue in favour of the assessee and against the Revenue.
7. The next issue relates to the claim for deduction towards construction of noon-meal centre and school building. The ld. Counsel for the assessee for the first time placed before us a letter dated 11.12.1991 addressed by Tmt. R. Indirakumari, Social Welfare Minister, Government of Tamil Nadu, Fort St. George, Chennai-9 to Thiru A.N.Dyaneswaran, IAS, Managing Director of the assessee-company. The English translation of this letter reads as under.
"As TAMIN has come forward to take up Renovation of Nutritious "Noon Meals Centres at Chennai, the Hon'ble Chief Minister of Tamil Nadu has consented to provide all public sector undertakings contribution of 5% of fee net profit earned by them for this work and accordingly the renovation work has been started in various noon meal centres throughout the State. The Secretary, Social Welfare Department has contacted you in connection for contribution of Rs. 50,000 as first instalment. The same way be issued in favour of the Secretary, Social Welfare Department by means of cheque directly.
The Secretary, Industries Department will convene a meeting of all public sector undertakings authority to raise funds for the above work. In the meeting he will request every public sector undertaking to contribute not less than 5% of the net profit. In the meanwhile to carry out the renovation work without interruption I request you to contribute Rs. 10.00 lakhs as first instalment. I would like to express my thanks to all those have contributed to renovate all the noon meal centres before the Hon'ble Chief Minister birth day on 24.2.1992. Further, the Hon'ble Chief Minister has ordered to take up the question of exception of this expenditure under the Income-tax Act in those who made the contribution.
I knew very well that you have more anxiety and TAMIN is leading in this cause than other public sector undertakings. I also know that you have been (SIC) in life welfare of children's development." 8. The ld. Counsel for the assessee invited our attention to the decision of the Apex Court rendered in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101 (SC).
In this case the Hon'ble Supreme Court has 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 any benefits to the assessee's business has to be regarded as an allowable deduction under Section 37(1) of the Act. It is, therefore, important to see that whether the contribution was made towards the welfare fund or directly connected or related with the carrying on of the assessee's business. The Apex Court further indicated that such contribution must result in benefit to the assessee's business. Did the assessee earn any extra profit by making such donation or earn any business advantage? This is the determining factor as per the ratio of the Hon'ble Apex Court. In the case of CIT v. Industrial Development Corporation of Orissa Ltd. (249 ITR 401) (Ori.) it was held that the donation made by the assessee to the Chief Minister's Relief Fund was not allowable as business expenditure under section 37(1) because there was nothing on record to establish that such donation was directly connected with and related to carrying on the business of the assesses.
9. It is true as held by the Hon'ble jurisdictional High court in the case of CIT v. Madras Refineries Ltd. (266 ITR 170) that the concept of business is not static. The Madras Refineries Ltd. was found to be a polluting industry. It has spent amounts on bringing drinking water to the locality and aiding local school. The expenditure was incurred to earn goodwill of local community. It was to safeguard the interest of the busies. As such, the expenditure was held to be allowable. In the case of Trichy Distilleries & Chemicals Ltd. v. ITO 33 ITD 249 (Mad.) the expenditure was incurred out of commercial consideration. The assessee was carrying on business in industrial alcohol. It had to depend upon Government for supply of its raw materials to its factory.
To gain favour of the officials the assessee incurred expenditure. In the present case the assessee is a State Government undertaking. It is not expected that to gain favour of the officials expenses are required to be made. There is absolutely nothing on record to indicate that the assessee did acquire any business advantage out of such expenses. It transpires from the perusal of letters submitted that assessee was required to contribute to renovate noon-meal centres before the Chief Minister's birthday, besides the Hon'ble Chief Minister had ordered to take up the question of exemption of this expenditure under the Income-tax Act to those who made the contribution. There is absolutely no business nexus with these expenses. As such, it cannot be allowed under Section 37(1).
10. The next issue relates to the allowability of expenditure incured towards contribution to Tamil Nadu Basket Ball Association in connection with S.A.F. Games. Here also the assessee failed to explain that how (SIC) some business advantage by roaking this expenditure.
Following the reasoning given in the aforesaid para, we uphold the impugned order on this court also.
11. The last issue relates to the claim for deduction under Section 80HHC of the Act. The assessee did not make the claim in the return. It was urged that in view of the CBDT Circular No. 14 of 1955 dated 11.4.1955, it was the duty of the AO to allow the claim even if it was not made in the return. Nothing was placed before us to show that the assessee did fulfill all the required conditions for availing the benefit of Section 80HHC. The benefit is available subject to the fulfilment of conditions stipulated in the statute. The AO is not expected to test the case on touchstone of Section 80HHC unless the required details are available. As such we find no infirmity in the impugned order on this count. We uphold the same.