TMI Blog1996 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ng rice from the State of Andhra Pradesh. This rice could not be exported without the appellant's obtaining a permit from the District Collector. The permits were given only if payment was made to a welfare fund which had been established. The Income-tax Officer, however, disallowed the deduction by holding that the said payment was neither mandatory, nor statutory but was only discretionary. He further observed that the welfare fund had not been approved by the Commissioner of Income-tax under section 80G of the Act and, therefore, contribution to it could not be deducted. The appeals filed by the appellant before the Appellate Assistant Commissioner met with no success. Thereupon, second appeals were filed before the Income-tax Tribunal. The appeals were heard by a Full Bench of the Tribunal which, while allowing the appeals, came to the conclusion that though there was no compulsion on the appellant to make a contribution to a welfare fund still the contributions made in pursuance of a scheme which was evolved by the Rice Millers' Association in consultation with the District Collector would show that an advantage would ensue on the payment of the contribution and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the rice millers association with the District Collector. According to this, each member of the association was to deposit an amount of fifty paise per quintal of rice if he proposed to export the same from Andhra Pradesh. This deposit was to be made in the Andhra Bank. The application for the export permit was required to be made in a form wherein the applicant had to state the amount of contribution deposited by him, giving the particulars of the bank, the challan number and the date. The High Court referred to the letter written to the Appellate Assistant Commissioner by the Collector in which it was stated as follows : "With reference to the representation of the Secretary, the West Godavari District Rice Millers' Association, Tadepalligudem, I am to inform you that welfare fund at Rs. 0.50 paise per quintal is being collected in respect of all rice and broken rice permits issued on trade to trade accounts." A similar letter had also been written to the Income-tax Officer at the time of assessment. From the aforesaid facts, the High Court came to the conclusion that the contribution was a compulsory one and was being collected from all the exporters of rice from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins of speculative transaction. While allowing the set-off it was observed that if a business is illegal, neither the profits earned nor the losses incurred would be enforceable in law ; but that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amounts which can be subjected to tax under section 10(1) of the 1922 Act. The tax collector, it was observed, cannot be heard to say that he will bring the gross receipts to tax without deducting losses and the legitimate expenses of the business. Again in the case of CIT v. Piara Singh [1980] 124 ITR 40 (SC), a question arose with regard to the loss sustained by an assessee in the carrying on of an illegal business. The respondent therein carried on smuggling activities and was apprehended by the Indian police while crossing the border into Pakistan and Rs. 65,000 in currency notes were recovered from him. This money was being taken to Pakistan for the purposes of purchasing gold which was to be smuggled into India. This amount was confiscated. Thereupon the income-tax authorities came to the conclusion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of foodgrain merchants of the State, addressed a representation to the Food Minister to the effect that the stock of gulabi chana and other pulses was steadily deteriorating in quality because of want of market. The Chief Minister of Madhya Pradesh thereupon informed the President of the Maha Sangh that the Government had decided to allow liberally permits for the export of gulabi chana and pulses outside the State. In the same letter, the Chief Minister brought to the notice of the trading community that the kisans and labourers were undergoing untold hardship on account of drought conditions resulting from the failure of the monsoon and, as the merchants were bound to earn rich profits, he appealed to the trading community that they should contribute a portion of such profits to the Chief Minister's Drought Relief Fund. This was followed by a letter written by the joint Secretary of the Maha Sangh asking the merchants to deposit Rs. 30 per quintal for the export of gulabi chana and Rs. 5 per quintal for the export of pulses into the State Bank of India or the State Bank of Indore to the credit of the Chief Minister's Drought Relief Fund and to obtain duplicate receipt from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were the donations made as penalty for infraction of any law. It, therefore, concluded that the Tribunal was right in holding that there was a direct nexus between the assessee's business and the donations made to the Chief Minister's Drought Relief Fund and that the donations were allowable under section 37(1) of the Act and as expenditure incurred wholly and exclusively for purposes of the assessee's business. In our opinion, the decision in Kuber Singh's case [1979] 118 ITR 379 (MP) [FB] correctly spells out the principle relating to the allowability of such an expense which has been incurred with a view to the promotion of an assessee's business. The same principle as was followed in Kuber Singh's case [1979] 118 ITR 379 (MP) [FB] has been applied, in somewhat different circumstances, by other High Courts and the same has been approved by this court. In CIT v. Middle East Construction Equipments [1979] 117 ITR 382, the Orissa High Court had to deal with a case where the assessee carried on the business of supplying machines to the Government Departments. The State Government decided to give preferential treatment in the matter of placing of orders for supply of materials t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otor vehicle inspector had handed over the necessary forms to the assessee for purchasing Government bonds, that the assessee was under an obligation to purchase the bonds for the smooth running of the transport business especially when the mandate for the purchase of the bonds came from the inspector and, therefore, the loss was allowable as deduction. While upholding the decision of the Tribunal, the Madras High Court observed "subscribing to Government loans as in the present case is not, in our opinion, opposed to public policy, and we are of the opinion that the Tribunal has rightly found that the assessee was obliged to sell the bonds before they became ripe for payment only to stop incurring further loss as the money with which the subscription for the Government bonds had been made had been borrowed by the assessee from a bank at ten per cent. interest while the bonds carried interest only at 4.5 per cent." A similar question again arose for consideration before the Madras High Court in CIT v. Dhandayuthapani Foundry (Private) Ltd. [1980] 123 ITR 709. In that case, as a result of the persuasion of the sales tax authorities who were making assessments on the assessee and who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Addl. CIT v. B. M. S. (P.) Ltd. [1979] 119 ITR 321 and again in CIT v. Dhandayuthapani Foundry P. Ltd. [1980] 123 ITR 709, that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss." From the aforesaid discussion it follows 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 in benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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