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TMI Blog2009 (2) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1990-91 out of the total sales about Rs. 7.21 crores was to the military canteen which constitute 45 per cent. of its total turnover. The company's business interest is critically linked with the sales to Canteen Stores Departments. The company a liquor manufacturer, is banned from direct media and television advertising of its products. The military authorities on the other hand are debarred from directly accepting any free samples from a liquor manufacturer. As per the Canteen Stores Department Rules, the liquor required for any function are to be procured from the canteens only against actual payments. The company from the point of commercial expediency offers samples of its products at various military functions so that the personnel develop a taste for it and the company secures bigger orders from the Canteen Stores Department. To avoid any infringement of any rules, the concerned defence establishments buy the requisite quantity of the company' s liquor from the Army liquor shops against actual payment. The regiment or the defence establishment forwards the cash memo to the company to reimburse the amount. This, it is submitted, is nothing but free sample of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the Canteen Stores Department and reimbursement was made to whom with documentary evidence. Pursuant to that an affidavit has been filed by Dyaneshwar Chandrashekhar Agashe, the chairman and the managing director of the appellant. In the said affidavit, it is set out that the defence establishment draws the supply of liquor manufactured by the company from the military canteen retail store in its precincts. The cash memo for this liquor which is drawn is issued in the name of the regiment/unit by the Canteen Stores Department retail store. The commanding officer of the regiment/unit then forwards the cash memo to the company accompanied by his official letter requesting reimbursement of the said cash memo. This request is processed by the company's accounts department in normal course and sanctioned for payment by cheque/demand draft drawn in favour of the regiment/unit. The company never sends any liquor samples or money directly to any individual defence personnel but always to the regiment/unit by cheque/draft drawn in favour of the regiment/unit. This procedure is followed to ensure strict compliance with the terms of the licence and the provisions of the Bombay Prohibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the party was remitted back. The transaction took place. The case of the assessee was that it had entered into the transaction with a view to dispose of the stock of inferior quality tobacco. Hence deduction was claimed. This was confirmed by the Commissioner of Income-tax (Appeals). The Tribunal reversed the findings. On appeal the High Court proceeded on the basis that the agreement was tainted with illegality and consequently the agreement was illegal and contrary to law. The High Court held that one exception to this rule that deduction cannot be claimed in respect of payments set out illegally is where the entire business of the assessee is illegal and that income is sought to be taxed by the Income-tax Officer. The expenditure thus incurred in the illegal activities will also have to be allowed as deduction. But if the business is otherwise lawful and the assessee resorts to unlawful means to augment his profits or reduce his loss, then the expenditure incurred for these unlawful activities cannot be allowed to be deducted. Various judgments were referred to. The Supreme Court proceeded to hold that the fear of loss cannot be justification of contravention of law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely for the purposes of the trade." The court noted what was to be considered is not whether it was compulsory but whether it was expended out of consideration. The test, therefore, is not to see whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. Referring thereafter to various other cases the Supreme Court was pleased to hold that the contribution made by the assessee towards public welfare fund which is directly connected or related to the carrying on the assessee' s business has to be regarded as allowable deduction and cannot be regarded as payment opposed to public policy. 11. In Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379 (MP) a Full Bench of the Madhya Pradesh High Court was considering whether donations made to the Chief Minister' s Drought Relief Fund to obtain permits to enable merchants to earn profits by exporting gram to neighbouring States where price of commodity was double, could be said to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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