Commissioner of Income-tax Vs. B.G. Shirke and Co. - Court Judgment

SooperKanoon Citationsooperkanoon.com/362446
SubjectDirect Taxation
CourtMumbai High Court
Decided OnDec-18-2002
Case NumberIncome Tax Reference No. 570 of 1987
JudgeS.H. Kapadia and ;J.P. Devadhar, JJ.
Reported in[2003]264ITR83(Bom); 2003(1)MhLj1008
ActsIncome Tax Act, 1961 - Sections 37
AppellantCommissioner of Income-tax
RespondentB.G. Shirke and Co.
Appellant AdvocateR.V. Desai, Sr. Counsel and ;P.S. Jetly, Adv., i/b., K.B. Rao, Adv.
Respondent AdvocateS.N. Inamdar and ;P.Y. Vaidya, Advs.
Excerpt:
- section 10: [swatanter kumar, c.j., a.p. deshpande & smt. nishita mhatre, jj] admission to professional colleges - technical courses - publication of brochure on basis of which candidates seek admission to various institution keeping in mind their merit and preference of colleges held, for ensuring adherence to proper appreciation of an academic course, it is essential that the method of admission is just, fair and transparent. the first step in this direction would be publication of a brochure on the basis of which the applicants are supposed to aspire for admission to various institution keeping in mind their merit and preference of college. brochure, firstly has to be in conformity with law and the statutory scheme notified by the competent authority. it is a complete and composite document as it deals with the scheme for conducting their entrance examinations, declaration of results, general instructions and method of admission, etc. this brochure is binding on the applicants as well as the authorities. this brochure or admission notification issued by the state or other competent authority cannot be altered at a subsequent stage particularly once the process of admission has begun. there is hardly any exception to this accepted rule of law. section 10: [swatanter kumar, c.j., a.p. deshpande & smt. nishita mhatre,jj] admission to professional colleges - technical courses - approval to additional seats or to start new course - cut off dates held, the settled principle of law is that merit of the applicant is the primary criteria which would determine his rank as well as the college where he would be entitled to admission. this rule should not be frustrated as it will tantamount to entirely upsetting the object of admissions based on merit oriented method and would cast cloud on the fairness and transparency of the method of admission. one of the ways in which merit can be defeated is allowing increase in the intake strength or commencement if new colleges beyond cut-off date and admissions beyond the last date specified in the notification/calendar issued by the concerned authorities. this can be illustrated by giving an example. college a which is running a professional course like engineering or mba etc. has an intake capacity of 60 seats which has duly been notified in the information brochure. however, after the cut-off date, approval is granted by the aicte and thereafter, the process is taken up by the state and the intake capacity of the college is increased by 30 more seats. these seats would obviously, not be notified in the information brochure and the candidate who are meritorious and for whom college a; be the college of reference could not get seats or give preference as the seats were limited. none had the proper knowledge about the increase in intake of seats though at a much subsequent stage and may be even after the last date of admission is over either by themselves or under the order of the court even it is put on the internet or given in the newspaper, the candidates of higher rank or meritorious candidates would not be able to avail of that benefit because they have already submitted the testimonial, have paid their fees and the courses have commenced. in that situation, for variety of reasons, they may not be able to take admission in the institution of their higher preference while the candidates of much lower merit will be admitted to that course. besides defeating the merit, it has been commonly noticed that the late admissions made by the colleges directly effect notified candidates who have questioned it more than often as their admission process is not so just, fair and transparent which has given rise to the litigation. it is also a kind of back door entry method. another serious consequence that result from such admissions is shortening of the academic courses in an undesirable manner. it is expected of other candidate selected to a professional course that he or she would complete the course in its entirety and not by missing more than a month or so in joining the said course. this results in lowering the excellence of education as well as harms the academic standard of professional education. admission to professional colleges: [swatanter kumar, c.j., a.p. deshpande & smt. nishita mhatre, jj] technical courses - held, in process of admission to professional colleges relating to technical courses, primarily three institutional bodies are involved. (i) all india technical council for technical education, (ii) state of maharashtra through director of technical education and (iii) university to which such institution is affiliated the role of all these institutions in distinct and different but for a common object. primary of the rule of all india council for technical education (aicte) is now well settled but that certainly does not mean that role of the state government and for that matter the university is without any purpose or of no importance. the council is the authority constituted under the central act with the responsibility of maintaining education standards and judging upon the infra-structure and facilities available for imparting such professional education. its opinion is of utmost importance and shall take precedence over views of the state as well as that of the university. the concerned department of the state and the affiliating university has a role to pay but it is limited in its application. they cannot lay down any guidelines or policies which would be in conflict with the central statute or the students laid down a by the central body. state can frame its policy for admission to such professional courses but such policy again has to be in conformity with the directives issued by the central body. while the state grants its approval and university its affiliation for increased intake of seats or commencement for a new course/college, its directions should not offend and be repugnant to what has been laid down in the condition of approval granted by the central authority or council. what is most important is that all these authorities have to work ad idem as they all have a common object to achieve i.e. of proper imparting of education an ensuring maintenance of proper standards of education, examination and ensuring proper infrastructure for betterment of educational system. only if all these authorities work in a co-ordinated manner and with co-operation they would be able to achieve the very object for which all these entities exist admission to professional courses: [swatanter kumar, c.j.,a.p. deshpande & smt. nishita mhatre, jj] admission schedule - interference by courts held, all the expert bodies viz. aicte as well as directorate of education in consultation with the departments of the state regulating the process of admission and maintenance of standards of education had notified a legal binding document specifying dates and schedule for various matters in relation to admission of students and commencement of courses. there has to be so compelling circumstances and grounds before the court to interfere with the prescribed schedule. it is neither so arbitrary nor so perverse, keeping in view the essential features relating to imparting education to professional courses that it should invite judicial chastisement to the extent of laying down entirely new schedule. merely because there has been some delay on the part of either of these authorities to timely grant of either of these authorities to timely grant or decline approval and permission to commence a course per se would not be sufficient ground for disturbing the notified schedule and timely commencement of courses. - 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. 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. 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.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.
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.