TMI Blog1983 (10) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... eference under question No. 1 stated above are as under : The assessee is a company limited by guarantee and registered under the Companies Act, 1913. In the original assessment for the year 1968-69, development rebate on air-conditioners had been allowed by the ITO, though they were used in the office and in the residential premises of the assessee and as such not eligible for rebate under s. 33(6) of the I.T. Act, 1961 (hereinafter referred to as " the Act "). In the reassessment made for the assessment year 1968-69, the ITO was of the view that the development rebate had been wrongly allowed and added back Rs. 8,486. Later, other air-conditioning equipments valued at Rs. 2,58,219 had been installed and for the assessment year 1970-71, the ITO made an addition of Rs. 56,642, negativing the claim for development rebate made by the assessee. On appeal, the AAC deleted the addition of Rs. 8,486 and Rs. 56,642 for the assessment years 1968-69 and 1970-71, respectively, on the ground that the clarification furnished by the assessee established that the place of installation of the air-conditioning equipments was only the club house forming part of the business premises of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om set apart and used for discussions and deliberations and taking decisions touching upon racing in all its aspects in the premises of the assessee. No material has been made available by the assessee to show that this premises is used by the members of the club for their other activities. The Tribunal in para. 35 of its order had observed that this question is covered by its earlier decision relating to the assessee in I.T.As. Nos. 1147 to 1149 (MDS)/1969-70 (C Bench) dated March 31, 1975, for the assessment years 1965-66 to 1967-68. We have looked into that order. We agree with the Tribunal that the air-conditioning equipment has been installed in the office premises of the assessee falling within s. 33(6) of the Act and, therefore, the claim of the assessee for development rebate has been rightly negatived for the assessment years 1968-69 and 1970-71. We, therefore, answer question No. 1 in the negative and against the assessee. We now proceed to consider the second question referred and the circumstances giving rise to that question. For the assessment year 1969-70, the assessee claimed as deduction a sum of Rs. 3,42,539 on the ground that the amount represented charities ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amounts did not constitute the income of the assessee. On the other hand, the Department contended that the income accrued to the assessee and was thereafter applied or spent by the assessee for charitable purposes. It was also the stand of the Revenue that none of the race-goers could compel the assessee to spend the collections for any particular or specific purpose and, therefore, there was no legal obligation on the assessee to apply the collections only to any particular or specific purpose. The Tribunal, after taking into consideration the resolution passed at an extraordinary general body meeting of the assessee held on March 21, 1969, took the view that there was no element of compulsion with reference to the spending of the amounts on charity, but that a discretion had been left to the committee to spend or not to spend on charity, so that it may even be open to the committee of management to appropriate all the collections for the use of the assessee and, under those circumstances, a legal diversion by overriding title cannot be spelt out at all but that only a discretionary spending on the part of the committee backed by the resolution of the general body meeting alone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the assessee which was appropriated by the assessee in the manner authorised as well. Tile learned counsel drew attention to the circumstance that the so-called beneficiaries had really no enforceable legal rights against the assessee with reference to the collections and, therefore, there could be no question of diversion by overriding title. The resolution relied upon by the assessee in respect of the assessment year 1969-70, according to the learned counsel for the Revenue, was one which merely enabled the assessee to appropriate the collections in a particular manner. It was also further pointed out that there was no reference to the net collections in the resolution and, therefore, the idea of contributing the collections at the races on these days after defraying the expenses to charitable institutions could not have been contemplated at all. The discretion vested by the resolution in the committee of management to contribute to such charitable institution, such sums as the committee may think fit was also relied upon as negativing the annexation of any definite legal obligation at the inception to the collections at the races on these days for any particular or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion merely enabled the committee of management to appropriate those collections by making contributions to charitable institutions and other organisations. Even such an application by contribution was made a matter of discretion to be exercised by the committee of management as seen from the terms of the resolution. No reference to the availability of net collections for distribution amongst charitable institutions and organisations has been made in the resolutions and this would indicate that there was no earlier earmarking of the collections or net proceeds for any particular purpose. With reference to the racing event held on March 26, 1969, the assessee's reliance upon the resolution, referred to earlier, is of no avail as the resolution merely enables the committee of management to indulge in a discretionary appropriation of the collections from the events held limiting such appropriation to Rs. 7 lakhs. The resolution is merely in the nature of an authorisation and not a mandate and does not compel the committee of management to spend amounts on charities. In other words, if the committee of management chose to spend Rs. 7 lakhs or much less or nothing even on charities, its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o particular or stated charities, either at the time of making the collections or even before, so as to enable the assessee to claim that the collections were not its income by invoking the principle of diversion by overriding title. We may now refer to CIT v. Sitaldas Tirathdas [1961] 41 ITR 367(SC).In that case,the assessee sought to deduct amounts paid by him as maintenance to his wife and children under a decree of court whereunder no charge on any property of the assessee was created, in computing his total income for purposes of income-tax. All the authorities including the Tribunal did not accept the claim for a deduction made by the assessee. On a reference, the High Court took the view that the income of the assessee to the extent of the decree for maintenance must be taken to have been diverted to the wife and children of the assessee and never became income in the hands of the assessee. In considering the correctness of this view and in laying down the tests for the applicability of the principle of diversion by overriding title, the Supreme Court observed thus (at page 374 of 41 ITR): " In our opinion, the true test is whether the amount sought to be deducted, in tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now refer to the decisions relied upon the learned counsel for the assessee. In CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 (SC) on appeal from [1971] 79 ITR 179, the Supreme Court had to consider the nature of surcharge collections made by the assessee-club on sale of printed tickets showing that the surcharge was for purposes of local charities. The Supreme Court pointed out that the line of enquiry in ascertaining the true character of the collections should be to find out whether it involved an application by the assessee of a part of its income to local charities or was it an allocation of receipt for local charities before it became the income in the hands of the assessee. In so holding, the Supreme Court referred to the passage extracted earlier from the judgement in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, 374 (SC) and ultimately held that the surcharge having been impressed ab initio with a legal obligation to be applied for the benefit of the local charities never reached the assessee as part of its income. This decision, far from supporting the assessee, would negative its claim. In the surcharge tickets, in that case, it was clearly printed that the surcharge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the income of the assessee liable to tax as the customers had specifically paid those amounts on account of Dharmada and the assessee also never treated those amounts as trading receipts or surcharge on the sale price. It was also further held that the assessee was merely acting as a conduit pipe for the passing of the amounts to the objects of charity. On further appeal to the Supreme Court, the Supreme Court upheld the decision of the High Court. The Supreme Court pointed out that the payments for " Dharmada " made by customers or brokers were clearly earmarked for charity right from the inception and the amounts were received and held by the assessee under an obligation to spend them for charitable purposes only with the result that those amounts were not the trading assets of the assessee. It was also further held that the payments towards " Dharmada " could not be regarded as part of the price or surcharge, as such a payment was made by the customer in addition to the price of the goods and the purchase of the goods was merely the occasion for the payment and not the consideration for the amount paid and, therefore, the Dharmada amount was not a part of the price, but pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having come into force. The decision was primarily based on the terms of the sub-partnership deed and the conclusion with reference to the terms thereof having become operative prior to the receipt of the share of profits by the partner in the principal business. That case also cannot, therefore, be pressed into service by the assessee. The decision in CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR I (SC) lays down the principle that income can be said to be diverted when such diversion is at source, so that when it accrues, it is not really the income of the assessee but that of somebody else and that where, by an obligation income is diverted before it reaches the assessee, it is deductible, but where such income is required to be applied to discharge an obligation after such income reaches the assessee, it is merely a case of application of income to satisfy an obligation of payment and, therefore, not deductible. We have earlier pointed out how in this case there has been no collection by the assessee for and on behalf of the charities and, therefore, no diversion by clear earmarking or setting apart of the collections on the specified days of the racing events for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the distribution of standard cloth and if so, whether such income was assessable in their hands. Under the scheme, the assessees were to open and operate a separate bank account and the orders for the cloth were to be placed by Government and on arrival of the consignment, the assessees were to pay the Deputy Commissioner the value of the consignment together with 6 1/4 per cent. of the ex-mill price. The consignment was thereupon to be checked and delivered to the assessees. The Deputy Commissioner would pay 41 per cent. of the ex-mill price to the assessees out of the amount paid by the latter for contingent expenses of working the scheme, which were not, however, to exceed 3 per cent. The distribution of the cloth had to be made through a shop to be opened by the assessees and the Deputy Commissioner had to fix the sale price. The Deputy Commissioner was also made responsible to the assessees for the sale proceeds and provision was made in an agreement for the utilisation of the profits resulting from the scheme for such charitable purposes as may be decided by the Deputy Commissioner in consultation with the Advisory Committee appointed to supervise the scheme. For the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons really belonged to the assessee as its income. The resolution for application of a portion of those collections to charity clearly indicated that the collections really belonged to the assessee and without such a resolution authorising the expenditure on charities, the assessee could have used up the entire collections for its own benefit and purposes. Ratilal B. Daftari v. CIT [1959] 36 ITR 18 (Bom), emphasises the need to ascertain the real income of the assessee from his share in the profits of a partnership business and to exclude what is really not his income in the sense that a portion of profits having been diverted by overriding title as a consequence of the operation of the terms of a sub-partnership. We have earlier pointed out that having regard to the facts and the circumstances of the present case, the assessee had secured the collections in the usual manner in which such collections are made on ordinary racing days and cannot claim that there was a diversion by overriding title of the whole or any portion of such collections for purposes of charity. We, therefore, answer the second question referred to us against the assessee for the assessment years 1969-70 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Cements Ltd. v. CIT [1966] 601 TR 52, to the effect that the legal expenses incurred by the assessee for borrowing money, irrespective of whether the borrowing went in for a revenue purpose or for a capital purpose, must be necessarily regarded as an item of revenue outgoing, was applied. Besides, reliance was also laced on CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 (Mad). In that case also, the assessee claimed an allowance of legal charges representing the fees paid to the Registrar of Companies for increasing the capital of the company. The Revenue contended that the expenditure attributed to the increase in the capital of the company could not be allowed as a revenue item. But this contention was negatived following the decision of the Supreme Court in India Cements Ltd. v. CIT[1966] 60 ITR 52, and it was held that the money was spent only for the purpose of the business and there was no element of capital in the expenditure and that merely because the fees paid to the Registrar of Companies related to the raising of the company's capital, the amount could not be classified as capital expenditure. In this case also, the amount had been expended by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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