TMI Blog1992 (1) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... had claimed expenditure of Rs. 2,29,386 said to have been made in giving presents to the members of the society on the occasion of its silver jubilee celebrations. The Income-tax Officer, in the assessment order, allowed these expenses, but the Commissioner of Income-tax, vide his order passed under section 263 of the Act, considered the relief granted by the Income-tax Officer to be erroneous in so far as it was prejudicial to the interests of the Revenue as, according to him, this was a non-business expenditure laid out towards the purchase of stainless steel tumblers for giving as gifts to shareholders and as such he issued a showcause notice. In reply, the assessee submitted that the society was registered in the year 1948. It completed 25 years of its existence in 1973 and as such it was decided to celebrate its silver jubilee and that, in pursuance of the aforesaid decision, the managing committee resolved that two stainless steel cups (tumblers) be given as a token of remembrance to every new member of the society enrolled after 1968 and it was also resolved that four such cups be given to its old members who were enrolled before 1968. It was also submitted that this gesture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome earned by the assessee-society out of its business of ginning and pressing of cotton and marketing the same is chargeable to income-tax. As per section 29, income from profits and gains of business or profession as referred to in section 28 has to be computed in accordance with the provisions contained in sections 30 to 43A. In that group of sections is found section 37 which reads as under : " 37. General. - (1) Any expenditure (not being expenditure of the nature as described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee ), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." The assessee-society in its return for the relevant assessment year claimed as permissible expenditure the amount spent by it for purchasing the stainless steel cups (tumblers) which were given to the members as presents on the occasion of its silver jubilee celebrations. The short question is whether this expenditure was a permissible expenditure under section 37 of the Act, not being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntatives of the foreign collaborators in good humour, the work of the assessee-company vis-a-vis the foreign collaborators would be smoothened considerably, it was clearly an act of good management and good managership to generate goodwill and such goodwill would help and was bound to help the assessee-company in keeping good relations with the employees of the foreign collaborators working smoothly and on proper lines. Since this expenditure of Rs. 2,125 was incurred by the assessee-company for the purpose of establishing a good image for itself and for keeping relations with the foreign collaborators working smoothly it must be held that this amount was incurred by the assessee-company for the purpose of business. In the present case, it is the contention of the assessee-society that these presents were given to the members to keep them in good humour as it was an occasion of celebration of the silver jubilee of the assessee society and in order to see that these members continue to supply their cotton for the purpose of ginning and pressing to the assessee-society and for getting it marketed through it, this type of presents were found necessary for augmenting and maintaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(xv). In that case, the assessee was partnership firm carrying on the business of distribution and exhibition of films. It had taken the picture " Kalyana Parisu " for exhibition in the city of Madras from the producers, Trinity Pictures, on a minimum guarantee of Rs. 70,000 on which fifteen per cent. was payable. If the collection exceeded that percentage, 50 per cent. was agreed to be paid. The picture ran for 25 weeks and that was the occasion for celebration of the silver jubilee. On that occasion, the assessee-company spent Rs. 13,376 towards the celebration. The Income-tax Appellate Tribunal disallowed the said expenditure as, according to it, there was no causal connection between the expenditure and the taking of further leases of the picture or collections therefrom by the assessee-company. Disagreeing with the view of the Tribunal, the Division Bench of the Madras High Court, speaking through Veeraswami J., held that the expenditure was clearly permissible under section 10(2)(xv) ; that it was incurred in the course of carrying on the business of exhibition of films ; that, on the occasion of the celebration, there was presentation of shields to the theatres, artistes, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led in India. These amounts were paid by the company under section 84 of the Estate Duty Act, 1953. The question was whether these amounts were permissible expenditure covered by section 10(2)(xv) of the Indian Income-tax Act, 1922, as business expenditure. Answering the question against the assessee, the Supreme Court, speaking through Subba Rao J., held that these payments had nothing to do with the conduct of the business of the company. The fact that, on its default, if any, in the payment of the dues, the Revenue might realise the amounts from the business assets was a consequence of the default of the company in not discharging its statutory obligations but that did not make the expenditure any the more expenditure incurred in the conduct of the business. The obligation of the company to pay estate duty under section 84 of the Estate Duty Act, 1953, was a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. The Supreme Court, in that case, examined the scope and ambit of section 10(2)(xv) of the Act and held that the expression " for the purpose of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,500, which was paid by it to the managed company during the previous year relevant to the assessment year 1962-63 in partial discharge of its liability of Rs. 47,500, deducted as business expenditure, was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner confirmed the order of the Incometax Officer on the ground that the amount was actually the loss of a firm which was no longer in existence, that the loss had been borne by the assessee on personal considerations and that the managing agency firm had not claimed the loss in its return. The Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and allowed the assessee's claim. The High Court, on reference of the question, held that the assessee was entitled to the deduction claimed. On further appeal to the Supreme Court by the Revenue, the Supreme Court, speaking through Venkataramiah J., upheld the decision of the High Court and the claim of the assessee. While deciding the said question, the Supreme Court made the following pertinent observations (at page 760) : " The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Answering the question in the affirmative in favour of the assessee, the Division Bench, speaking through M. P. Thakkar J., as he then was, laid down the scope and ambit of section 37 of the Act as under (at page 554); "Before an expenditure can be claimed under section 37 of the Act, the following essential conditions will have to be satisfied, namely : 1. It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure. 2. It must be laid out or expended wholly and exclusively for the purpose of the business or profession. 3. It must not be of the nature described in sections 30 to 36 and section 80VV (which is enforced with effect from April 1, 1976). Subject to these three basic conditions being satisfied, some tests can be evolved on first principles. The tests can be divided into two categories, namely, (1) positive tests, (2) negative tests. One ( at least one ) of the positive tests must nod its head and none (not even one) must do so in order to affirmatively hold that the expenditure is a business expenditure, inter alia, incurred on account of commercial expediency. ------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable limits. 9. on a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects but really for one or the other of the above-mentioned purposes. 10. it must not be a bogus, fictitious or sham transaction. 11. it must not be unreasonable and out of proportion. 12. it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith. 13. the advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on 'ifs' and 'buts', and if at all, to be secured at an uncertain future date which may be considered too remote. As we pointed out earlier: (1) one of the positive tests must be attracted, whereas (2) none of the negative tests should be attracted. " Applying the aforesaid ratio of the Division Bench of this court to the facts of the present case, it becomes clear that the expenditure in question has attracted at least two of the positive tests being tests Nos. 1 and 7. The expenditure was incurred with a view to bringing profits or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure laid out wholly or exclusively for the purposes of the assessee's business as the chairman's death had nothing to do with the object or purpose of the company. We fail to appreciate as to how this decision can be of any avail to learned counsel for the Revenue. The facts of the present case giving rise to the expenditure in question are entirely different. Any amount paid ex gratia and gratuitously and which had nothing to do with the business activities of the company would obviously not get covered by the sphere of section 37 of the Income-tax Act, 1961. Such are not the facts in the present case. It is now time for us to turn to the Division Bench decision of this court which has been made the subject-matter of the present reference to the Full Bench. In the case of CIT v. Dascroi Taluka Co-operative Purchase and Sales Union Ltd. [1980] 126 ITR 413, on almost parallel facts, the question had arisen whether the expenditure incurred by the assessee co-operative society in connection with travelling for purchase of certain articles and for the purchase of these articles which were to be presented to its members on the occasion of the silver jubilee celebrations was per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good image amongst its members and ensuring that goodwill and ensuring the continuity of business with the member-societies as before." The aforesaid decision clearly covers the facts of the present case; however, learned counsel for the Revenue submitted that the present reference has been made to a larger Bench by the earlier Division Bench for reconsidering this decision. We have given our anxious consideration to this aspect. In our view, the ratio of the decision of this court in CIT v. Dascroi Taluka Co-operative Purchase and Sales Union Ltd. [1980] 126 ITR 413, does not require reconsideration, nor can it be said to be contrary to the established legal position. We have already discussed the true scope and ambit of section 37 of the Income-tax Act, 1961, as culled out from various other decisions of this court as well as other High Courts and by the decision of the Supreme Court which have authoritatively pronounced on the subject. In the light of this settled legal position, therefore, it has to be held that if any expenditure is wholly or exclusively incurred by an assessee businessman with a view to preserving and augmenting his business prospects in future, such expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al lays down that two steel glasses are to be given to members who joined the society after October 31, 1968, and four steel glasses are to be given to members who joined earlier and that the accounts be closed after adjusting the profits and losses of the current year. Thus, the money value of the stainless steel cups is not dependent upon the proportion of shares held by the concerned members, but on the contrary, it is linked up with the seniority of the members. It was, therefore, rightly not contended that this expenditure Would be treated as dividend nor can it be treated as " rebate " as rebate is defined by section 2(16) to mean any payment made in cash or kind, out of the profits of a society, to member or any other person, on the basis of his contribution to the business of the society. In fact, the value of the articles of presentation is in no way linked up with the contribution of the concerned recipient to the business of the society. Consequentially, the contention on behalf of the Revenue that this expenditure is not permissible business expenditure cannot be accepted. As a result of the aforesaid discussion, it is held that the ratio of the decision of the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X
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