TMI Blog1982 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... nd necessarily for the purpose of the assessees' business.. He took note of the fact that the said welfare fund was not approved by the Commissioner of Income-tax under s. 80G of the. Act. On appeal, it was again contended by the assessees that the appellants could not carry on their business without: incurring the said expenditure and, therefore, it must be held to be deductible under s. 37(1) of the Act. The AAC rejected this plea on the basis of statement made by the chartered accountant for the welfare fund, to the effect that there was no compulsion from the authorities to make any payment to the welfare fund and that it was thoroughly voluntary, He referred to certain instances where permits were granted without the dealers making such contribution to the welfare fund. The AAC further observed that the said contributions were made by the several members of the Rice Millers' Association in pursuance of a scheme evolved by them in consultation with the, District Collector, according to which understanding, each member of the. Association was to deposit an amount of 0.50 paise per quintal of rice he proposed to export to Kerala. This deposit had to be made in the Andhra Bank. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified to bold that the contribution made to the welfare fund was not opposed to public policy and that the same was motivated purely by commercial consideration, and that the deduction was allowable under section 37(1)?" While the question referred in R.C. No. 166/1978, at the instance of the assessee, is : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the sum of Rs. 9,164 paid by the assessee towards contribution to the District Welfare Fund for getting permits from the Government of Andhra Pradesh for export of rice, did not constitute business expenditure within the meaning of section 37 of the Income-tax Act, 1961 ? " Thus, the questions referred in all these referred cases, are identical, though in the first four cases the reference is made at the instance of the Department, while in the 5th case, the reference is at the instance of the assessee. Mr. M. Suryanarayana Murthy, the learned standing counsel for the Revenue, contended that, if the contributions to the welfare fund are treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found by the Tribunal; and inasmuch as these payments, though not necessary, were warranted by business expediency, they are entitled to be deducted as such. He contended that once the assessees establish that a particular expenditure incurred by them was actuated by business expediency, it is liable to be deducted as such, and no further question arises whether such payment is opposed to any law, or is opposed to public policy. He submitted that the argument that the said contributions were opposed to public policy was brought in for the first time at the stage of Tribunal and that the particular ground of public policy, which is said to have been violated, had not been specified either by the Department, or by the Tribunal in cases where it held such payments as opposed to public policy. Learned counsel stressed that there was no material before the Tribunal, nor before this court upon which the question whether the contributions are opposed to public policy or not, can be decided properly and fully. Counsel also submitted that the Fund was sponsored by the District Collector, and the assessees were under a bona fide impression that it was a lawful one, having been sponsored by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of all export permits issued by him. The letter of the Collect or reads as follows: "With reference to the representation of the Secretary, the West Godavari District Rice Millers Association, Tadepaalligudem, I am to inform you that the 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 account. " (emphasis added). We may also refer to a similar letter written by the Collector to the ITO, Palakole, Tanuku, wherein he stated: "We are collecting Welfare Fund at 0.50 paise per quintal in respect Of all rice and broken rice permits issued on trade to trade basis from our district to other districts. " (emphasis added). Now, it may be noticed that it was nobody's case that the Welfare Fund was organised by the Rice Millers'. Association. It was a Fund organised by the District Collector. Similarly, it was not the assessees' or the Department's case that the contributions were made because of the Association's decision. The letters of the Collector make it abundantly clear that the contribution was a compulsory one, and was being collected from all. Indeed, Mr. Anjaneyulu complained that the few i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sees; it must be remembered that the welfare fund was not a party to these proceedings at any stage. It is indeed difficult to believe, in the facts and circumstances of this case, that the contributions to the welfare fund were voluntary. They were made by the assessees only because they were told that they would not get the export permits unless they made the contributions. Accordingly, they made the contributions, precisely at the rate of 0.50 paise per quintal, on the quantity applied for by them and obtained permits. From the point of the assessees, it was immaterial to whom they were asked to make the payment. Since they were told that the said contribution is a pre-condition for obtaining export permits, they would have made the payments to whomsoever they were directed -be it a welfare fund, or any other person or authority, as the case may be. The regularity and the systematic manner in which these contributions were made shows that the contribution to the welfare fund was pre-condition for the grant of export permits. The assessees were, therefore right in contending throughout that the contribution was a compulsory payment exacted from them as a price for granting export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on " is bad, paying it is equally bad and cannot be encouraged, even if the payment is made involuntarily. Both are privies to a wrong. It is immaterial that such collections are made openly, for, in such cases, the payer is not really worried about the nature or the objects of the fund into which he is making the payment, nor is he concerned to see how the fund is ultimately applied. (Indeed, the judgment in R.C. No. 48/1978 (Andhra Pradesh Welfare Fund v. CIT[1983] 143 ITR 82 (AP)), shows that this fund was in no way connected with the A.P. Social Welfare Fund established by the Govt. of A.P. and further that because of misapplication of a part of the funds of this Fund, its income was held not entitled to exemption, and was brought to tax in fall measure which action was upheld by this court. All that he is concerned with, is to obtain the permit; and since the contribution is pre-condition, he feels obliged to comply with the same, because he thinks, and rightly, that there is no other way of obtaining the permit and to carry on his business. This is not different from paying bribes the difference, if any, may only be one of degree. It is true that, from the point of view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference in I both if at all, as observed by us earlier, the difference is only a matter of degree. By not recognizing such payments, we would indeed be discouraging the formation of such funds by persons exercising public authority. We are not persuaded that such a course would, in any manner, interfere with the course of business or trade. We may, in this connection, refer to the decision of a Bench of this court in R.C. No. 73 of 1977, dated November 26, 1982 (CIT v. Maddi Venkataratnam Co.-[1983] 144 ITR 373), to which one of us (Jeevan Reddy J.) was a party, wherein this court, applying the principle of the decisions of the Supreme Court in Haji, Aziz and Abdul Shakoor Bros. v. CIT[1961] 41 ITR 350, CIT v. S. C. Kothari [1971] 82 ITR 794 and CIT v. Piara Singh [1980] 124 ITR 40, pointed out the distinction between a lawful business and an inherently unlawful business. It was pointed out that where the business is lawful, any illegal payment, or a payment made with a view to further an illegal activity, cannot be allowed as business deduction, whereas in the case of an inherently unlawful business, even the illegal payments have to be deducted, the business itself being i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that public policy should not depend upon " the idiosyncratic inferences of a few judicial minds and that moral indignation must not be mistaken for " public policy but, at the same time, this should not deter us from putting the clear public interest above, the business expediency of businessmen, since, by failing to do so we would become party to, and acquiesce in a public wrong. We may recall in this connection the observations of Lord Denning in Enderby Town Football Club Ltd. v. Football Association Ltd. [1970] 3 WLR 1021 (CA), where he said (p. 1026): "(I know that over three hundred years ago Hobart C.J. said the public Policy is an unruly horse". 'It has of ten been repeated since. So unruly is the horse, it is said (per Borough J. in Richardson v. MeUish [1824] 2 Bin 229, 252), that 'no judge should ever try to mount it lest it run away him. I disagree. With a good, man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. It can leap the fences put up by Actions and come down on the side of justice, as indeed was done in Nagle v. Feilden [1966] 2 QB 633 (CA)." A thorough discussion of this subject is found in the decision of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a pre-condition for grant of export permits, the assessee should not have acceded to the same and, in any event, they cannot claim such payment as a business deduction. By dint of the same logic, all illegal and corrupt payments would also qualify as business deductions under s. 37, a prospect which we shudder to contemplate. In Indian Steel and Wire Products Ltd. v. CIT [1968] 69 ITR 379 (Cal), the legitimacy, morality and the business expediency of making donation to a political party has been thoroughly considered. The following observations are of relevance to us (p. 395): "In this country, where social controls over trade and industry are wide and varied, commercial men feel, for reasons good or bad, that their existence and prosperity depend upon Governmental graces. This feeling is not unreasonable. Since power of money is well known to commercial men and since they know best to exploit that power, large scale contributions to political party funds may at times be considered to be commercially expedient. Since commercial men are best experienced in commercial expediency, we are prepared to proceed on the basis that some contributions to some political funds sometimes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al force to contributions to funds set up by Government officials as well. Mr. Anjaneyulu cited the decisions in J. W. Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 6 TC 477 (KB) (at p. 484) and Usher's Wiltshire Brewery Ltd. v. Bruce[1914] 6 TC 399 (HL), in support of his proposition that, for qualifying for deduction as a business expenditure, the expenditure, need not necessarily be obligatory ; that it can be voluntary as well and that so long as the expenditure is in the interest of the business, it has to be allowed. There can be little quarrel with this proposition. This is indeed a well accepted principle of income-tax law in this country too; and Mr. Anjaneyulu is right in saying that the decision of the Madhya Pradesh High Court in Addl CIT v. Badrinarayan Shrinarayan Akodiya [1975] 101 ITR 817 (MP), relied upon for the Department, in so far as it holds that voluntary donations cannot be allowed as business deductions under s. 37, cannot be correct. Mr. Anjaneyulu then relied upon the decision of the House of Lords in Morgan (Inspector of Taxes) v. Tate Lyle Ltd. [1954] 26 ITR 195 (HL), where the expenditure incurred by a sugar refining c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... munity at the disposal of the Government to relieve the distress of the people of the famine affected areas raging in 12 districts that year. There upon the Chief Minister addressed a letter to the president of the association, stating that the Government has decided to allow liberally permits for the export of gulabi chana and pulses outside the State, and also bringing to the notice of the trading community that the kisans and labourers were undergoing untold hardship on account of drought conditions in a part of the State. He observed that since the merchants were bound to earn enormous profits as a result of allowing them to export the said goods outside the State, they may contribute portion of such profits to the Chief Minister's Drought Relief Fund to be used for relieving the distress of the famine stricken people. Accordingly, the association decided to deposit Rs. 30 per quintal of gulabi chana and Rs. 5 per quintal for the export of pulses into the bank to the credit of the Chief Minister's Drought Relief Fund, and to enclose the duplicate receipts, obtained from the bank, to the applications for export permits. The Tribunal found that, though the payments were voluntary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in view of the finding of the Tribunal that the said expenditure was inevitable if the assessee had to carry on its business and did not pertain to anything illegal or improper the deduction was rightly allowed. Another decision of the Madras High Court to the similar effect is in CIT v. Arumugham Chettiar [1980] 125 ITR 753 (Mad), where, the court held that the " commission" or mamool paid to the crew of the ship to obtain " no damage certificate " from the captain of the ship, for obtaining payment of the bills, was not illegal. It must, however, be noticed that the, finding of the Tribunal in that case was that the payments were in the nature of general business expenditure and were inevitable in the circumstances. The next decision of the Madras High Court relied upon is in CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49, and another decision in CIT v. Sree Rajendra Mills Ltd. reported in the same volume at page 122, where it was held that even a payment made to the managing agent contrary to s. 348 of the Companies Act was eligible for deduction under s. 10(2)(xv) of the 1922 Act, so long as it was warranted by business expediency. So far as the last two cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected to discharge their duties dispassionately, and decide on the merits of each case ; and not because somebody keeps them in good humour. In other words, either the contribution is a philanthropic one, or constitutes either a reason or consideration for the discharge of official duties. In the first eventuality, it cannot be said to be an expenditure laid out wholly and exclusively for the purpose of the business; and, in the second case, it would be disqualified as being opposed to public policy. Mr. Anjaneyulu contended that " Where an assessee incurs expenditure in order to promote and advance the interests of the business and shares his prosperity with the society, courts should give up a doctrinaire approach and take a liberal attitude in directing deduction ". We have said enough on this aspect in the preceding paragraphs of our judgment. If " doctrinaire approach " means adherence to law, we are happy to be doctrinaire ; and if the expression " liberal attitude " means ignoring the law and public interest, we would rather shun such a misguided " liberal approach." For the above reasons, the question referred to us in R.Cs. Nos. 20, 73, 74 and 85 of 1979, is answered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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