TMI Blog2002 (12) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... s year ended on December 31, 1984. The assessee claimed, in the course of assessment proceedings for the assessment year 1985-86, a deduction of the contribution made to Dynavision Dealers' Welfare Trust of a sum of Rs. 50 lakhs. The Assessing Officer found that the Dynavision Dealers' Welfare Trust was formed on November 27, 1984, with the assessee-company as settlor, and a sum of Rs. 50 lakhs was paid by the assessee on December 26, 1984. It was also noticed that all the dealers of Dyanora T.V. sets were the beneficiaries of the trust. After noticing the objects of the trust, the Assessing Officer rejected the claim of the assessee for deduction for the following reasons recorded in the assessment order: "1. The accounts of the trust were not produced. So, it has not been possible to verify if any amount was spent during the year for the objects of the trust. 2. The assessee-company has not created the trust for the benefit of the employees, but dealers who are third parties. The assessee is not supposed to spend for third parties' welfare. The company has no charitable object. 3. The company has not filed details of activities undertaken by the trust during the year. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustee, the Appellate Tribunal held that all the ingredients for the creation of a trust under sections 5 and 6 of the Indian Trusts Act were fulfilled. The Appellate Tribunal rejected the contention urged on behalf of the Department that since the trust deed dated November 27, 1984, was invalid, it could not be revived by means of letter dated December 26, 1984. The Appellate Tribunal held that the trust had come into existence on December 26, 1984, in the name and style, Dynavision Dealers' Welfare Trust and legal obligations had been attached to the trust by the contribution of Rs. 50 lakhs paid by the assessee on December 26, 1984. The Appellate Tribunal, in its elaborate order, considered the question of allowability of expenditure and rejected the contention that there was violation of section 295(1)(b) of the Companies Act as a sum of Rs. 40 lakhs was given by the trust as loans to its partnership firm in which the directors of the assessee-company were partners. The Appellate Tribunal held that there was no violation as the trustees had earned more interest than the prevailing interest rate offered by financial institutions and the assessee had invested the money in non-ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by the Appellate Tribunal, and on the basis of the directions of this court, the Appellate Tribunal has stated a case and referred the following questions of law for our consideration: "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law and had valid material in holding that the sum of Rs. 50 lakhs paid by the assessee to Dynavision Dealers' Welfare Trust on December 26, 1984, is allowable as a business expenditure, laid out wholly and exclusively for its business under section 37(1) of the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that with the transfer of Rs. 50 lakhs by the assessee-company to the Dynavision Dealers' Welfare Trust a valid trust came into existence on November 26, 1984, and that in this regard no written trust deed is necessary, in the context of the Income-tax Appellate Tribunal holding that the Dynavision Dealers' Welfare Trust was ab initio void and non est, in law, when it is created on November 27, 1984, with no corpus fund and no recognised instrument of trust deed?" Now we take up the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust dated November 27, 1984. The submission of learned counsel for the Revenue that since the earlier trust deed dated November 27, 1984, has not come into force, there is no trust at all is not acceptable as it is well settled that even an oral trust is permissible in the case of creation of a trust. In Fazlhussein Sharafally v. Mahomedally Abdu Lally Sassoor [1943] AIR 1943 Bom 366, a Division Bench of the Bombay High Court has held that where the original trust deed is void, the conduct of the trustees in subsequently admitting that he is holding the property on specific trust would establish a valid trust on those terms. In Radhasoami Satsang v. CIT [1992] 193 ITR 321, the Supreme Court, after noticing the decision of the Privy Council in the case of All India Spinners' Association v. CIT [1944] 12 ITR 482, held that where a property was given to the Satguru which was intended for the common purpose of furthering the purpose of the institution, the property was subject to a legal liability of being used for the religious and charitable purposes of the Satsang. The Supreme Court in CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 has held that a trust may be created by any la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed November 27, 1984 was not a valid document and it had not brought into a valid trust which is far different from saying that the trust was void ab initio and non est in the eye of law. Accordingly, we reframe the second question of law as under: "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that by the transfer of a sum of Rs. 50 lakhs by the assessee to the Dynavision Dealers' Welfare Trust, a valid trust has come into existence with the objects set out in the trust deed dated November 27, 1984?" We answer the question as reframed by us in the affirmative, in favour of the assessee and against the Revenue. Now we take up the first question. The submission of learned counsel for the Revenue on the question of allowability is that there was no liability on the part of the assessee when it created the trust and since the assessee had transferred the money without any liability, it would not constitute an expenditure incurred by the assessee. Learned counsel for the Revenue referred to section 37 of the Income-tax Act and also the decisions of the Supreme Court in Indian Molasses Co. (Pvt.) Ltd. v. CIT [1959 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction, there must be an existing liability and the case of the assessee would be defeated on the short point that there was no existing liability when the assessee transferred the money to the trust and, hence, it would not be regarded as an expenditure, but, however, the case of the assessee is not that there was an existing liability, but the payment has been made by the assessee voluntarily for commercial expediency. We propose to consider this topic later. Before that, we consider some of the submissions made by learned counsel for the Revenue before we consider the main questions. Learned counsel for the Revenue submitted that the payment is not a genuine payment as the money transferred to the trust has found its way to the assessee as the trustees have granted loans to the partnership firm in which the directors of the company are partners, and therefore there was no expenditure incurred by the assessee-company. We are unable to accept the said submission as the Appellate Tribunal, on the basis of the annual report of the assessee-company and also taking note of the fact that the directors of the assessee are the partners of the firm, has recorded a finding of fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the beneficiaries are uncertain and the objects of the trust are also vague in nature. Learned counsel also referred to clauses 19 and 20 of the deed of trust and submitted that under clauses 19 and 20 of the deed; the trust shall stand determined on the expiry of the last lineal descendants of past or present stockists or dealers of the assessee-company and the assessee-company has reserved a right to modify or alter the deed of trust. He therefore submitted that since the power to modify the deed of trust is vested with the assessee, the deed of trust has to fail and the money contributed by the assessee to the trust is not an expenditure. We are unable to accept the submission of learned counsel for the Revenue. As far as the beneficiaries of the trust are concerned, the reading of the deed of trust shows that the trust was created for the benefit of dealers and stockists of the assessee-company. The expression, "dealer and stockist" has also been defined in the deed of trust to mean a person/firm/company/concern dealing in any of the company's products which for the time being are television receiver sets. Therefore it cannot be stated that the beneficiaries are uncertain. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and the amount was also paid to the trustees. Learned counsel submitted that there is evidence on record which establishes the nexus between the assessee's business and the expenditure incurred on account of commercial expediency. Learned counsel submitted that on the basis of material on record it is clear that the trustees have incurred expenditure under various heads resulting in the welfare of the dealers and the Appellate Tribunal has found that the amount was spent for the welfare of the dealers and stockists. Learned counsel submitted that the expenditure is not a capital expenditure and the expenditure was incurred for the purpose of business of the assessee. According to him, no liability is necessary if the commercial expediency is established and what is applicable to the employees' welfare trust is also applicable to the dealers welfare trust as there is no difference between these two kinds of trust either qualitatively or quantitatively and the assessee, while creating the trust, has taken into account the welfare of the dealers in mind. According to him, marketing the products produced by the assessee is vital and unless the dealers welfare is taken into account an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC); (4) Addl. CIT v. Symonds Distributors (P.) Ltd. [1977] 108 ITR 947 (All); (5) CIT v. Shree Digvijay Cement Co. Ltd. [1983] 144 ITR 532 (Guj); and (6) CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom). On the other hand, learned counsel for the Revenue, submitted that there is absolutely no commercial expediency in making the payment to the trust and its connection to the business of the assessee is too remote and therefore, it does not qualify for deduction as revenue expenditure. Learned counsel referred to the decisions of the Supreme Court in Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 and submitted that there were only three dealers and others were sub-dealers to the main dealers and they had no direct contact with the assessee-company and there was no direct nexus between the expenditure incurred and the business of the assessee. His submission was that the trust was created to meet the dealers' expenditure. He submitted that the objects of the trust clearly show that the trust is discretionary in nature and it is open to the trustees to meet the advertisement expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed by this court in CIT v. Walchand and Co. Private Ltd. [1967] 65 ITR 381 in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. In J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 (SC), after applying the rule laid down in Walchand and Co. 's case [1967] 65 ITR 381 (SC) that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income-tax Department." The Supreme Court again in CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 has held that it is not open to the court to go behind the commercial expediency which had to be determined from the point of view of a businessman, and the Supreme Court has laid down the law as under: "Great stress was laid by counsel for the assessee-company on the fact that this court could not go behi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also referred to certain cases where expenditure was incurred by the assessee-company directly for the welfare of the dealer and one such case is the decision of the Gujarat High Court in CIT v. Shree Digvijay Cement Co. Ltd. [1983] 144 ITR 532 where the assessee was obliged to become a member of an organisation formed at the behest of the Government and the Gujarat High Court held that the contribution to the organisation would be allowable as business expenditure. Learned counsel for the assessee also referred to the decision of the Bombay High Court in CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 where the assessee incurred an expenditure in connection with the seminar arranged for the foreign and local distributors of the assessee with a view to boosting its sales in the foreign market and the Bombay High Court held that the seminar arranged was in connection with the assessee's business and the expenditure incurred would be al1owable as business expenditure. On the other hand, learned counsel for the Revenue referred to the decision of this court in CIT (Investigation) v. Jeevandas Laljee and Sons [2000] 245 ITR 719 where this court held that the expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HL) which has been quoted with approval by the Supreme Court in several decisions referred to earlier. Before considering the question, we make it clear that we are unable to accept the submission of Mr. V.D. Gopal, learned counsel for the assessee, that it is not open to the court to look into the terms of the trust deed as the assessee had incurred expenditure by transferring money to the trust and when the trust was created for the welfare of the distributors, it is not permissible to go into the objects of the trust. We are of the view that the assessee has created the trust and transferred the money and claimed the same as business expenditure. In considering the question whether the amount is allowable as business expenditure or not, the objects of the trust are relevant. It is not possible to overlook or ignore the objects of the trust and determine the question only on the basis of the transfer of money by the assessee to the trust without examining the purposes or objects for which the trust was created. We find on examining various objects of the trust, the objects of the trust are very wide and some of the objects are to render financial help to the dealers in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hand, on the facts of the case, the assessee-company has no control over the trustees in the matter of incurring expenditure for the benefit of the dealers. As we have stated, it is at the discretion of the trustees to spend the funds of the trust for the benefit of the beneficiaries. We hold that there is no connection between the expenditure incurred and the business of the assessee-company. It is also relevant to note that there is no scheme or safeguard for the disbursement of the funds of the trust for the benefit of the dealers and the investment of the money is also left to the complete discretion of the trustees. We are therefore of the opinion that by Incurring expenditure, though voluntarily, the object of commercial expediency for which the trust was created is not achieved by the creation of the discretionary trust. It is also relevant to note here that it is not a case where the money was transferred by the assessee to the trustees of the trust in recognition of an existing liability, nor is it a case where the trust has been created with a condition that the beneficiaries have a right to claim the amount. As far as Atherton's case [1925] 10 TC 155 (HL), is concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the expenditure will be ephemeral and therefore there is no connection or nexus either direct or indirect between the expenditure incurred and the business of the assessee company and the test of commercial expediency fails on the facts of the case. It is no doubt true that the beneficiaries under the discretionary trust have a right to be considered for the benefit from the trustees and the trustees must exercise their discretion properly and not arbitrarily, but, however, the trustees here have an unfettered discretion to spend the funds of the trust for any of the objects of the trust and also to invest the money. In the state of affairs, we are of the view that the connection between the business of the assessee and the expenditure is too remote. We are of the view that if the assessee had spent the money for anyone of the dealers or for all the dealers and sub-dealers of the assessee-company, necessarily an enquiry has to be made whether the money was expended by the assessee for the benefit of the dealers or whether the money was expended for the advertisement or entertainment expenditure, allowability of which is subject to the provisions of the Income-tax Act or whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that in the absence of any provision like section 40A(9), (10) and (11) of the Income-tax Act, the assessee is entitled to claim the deduction. We are unable to accept the submission of learned counsel for the assessee. As we have observed earlier, section 40A(9) of the Income-tax Act was introduced only as an abundant caution and therefore the absence of a similar provision like section 40A(9) in the matter of creation of trust in favour of the dealers is not relevant when the money transferred to the trust may not reach the dealers for their welfare. Further, a reading of the Statement of Objects and Reasons for the insertion of section 40A(9) of the Income-tax Act shows that the said provision was inserted to avoid litigation regarding allowability of claim or deduction in respect of contribution made to the trust. Therefore, it cannot be stated that in the absence of a similar provision to section 40A(9) of the Income-tax Act for the creation of trust in favour of the dealers, the amount is allowable as business expenditure. The Appellate Tribunal, after analysing the evidence on record has recorded a finding that the expenditure was incurred by the trustees for the promot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the Revenue also submitted that the expenditure incurred is a capital expenditure. Learned counsel for the assessee submitted that the expenditure is only revenue in nature and in support of his submission, he relied upon the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. We are of the view that the facts in Atherton's case [1925] 10 TC 155 (HL) are nearer. In Atherton's case [1925] 10 TC 155 (HL), the company claimed deduction of a lump sum amount contributed irrevocably as the nucleus of the pension fund established by the trust deed for the benefit of its staff. The House of Lords held that it was a capital expenditure. Lord Viscount Cave, L.C. holding that it was a capital expenditure, held as under: "The payment of £ 31,784, which is the subject of dispute, was made, not merely as a gift or bonus to the older servants of the appellant-company, but (as the deed shows) to 'form a nucleus' of the pension fund which it was desired to create; and it is a fair inference from the terms of the deed and from the Commissioners' findings that without this contribution the fund might not have come into existence at all. The object and effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill have the goodwill of the dealers till the death of the last lineal descendent of the past or present dealers of the assessee-company and such an expenditure incurred for the acquisition of an asset a material asset, in our opinion, is capital in nature and the decision of the Supreme Court in Empire Jute Co.'s case [1980] 124 ITR 1 is not of much help to learned counsel for the assessee. Learned counsel for the assessee also submitted that the Appellate Tribunal in its elaborate order has considered the matter in detail and arrived at the finding of fact and therefore this court sitting in reference should not interfere with the said finding. Learned counsel relied upon the decision of the Supreme Court in Hazarat Pirmahomed Shah Saheb Roza Committee v. CIT [1967] 63 ITR 490 wherein the Supreme Court referred to CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 and held that even if the question referred to the High Court regarding the existence of material to support a finding of fact arrived at by the Appellate Tribunal, the High Court should not act as an appellate court and consider whether the finding was justified or not. There can be no quarrel over the proposition of law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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