Income Tax Appellate Tribunal - Ahmedabad
Himson Textile Engg. Industries Ltd. vs Dy. Cit on 28 February, 2001
Equivalent citations: (2002)75TTJ(AHD)576
ORDER
T.N. Chopra, A.M. This appeal filed by the assessee is directed against the order of the Commissioner (Appeals), dated 10-10-1994, for assessment year 1991-92. Ground No. 1 is against sustaining the disallowance of deduction of donation aggregating to Rs. 5,65,569.
2. The assessee-company derives income from manufacture of textile machinery. During the year relevant for assessment year 1991-92 the assessee claimed deduction in respect of donations of Rs. 5,65,569 made to the charitable institutions on the ground that these institutions are connected with the parties with whom the assessee has business dealings. According to the assessee the donations were given to such institutions in order to maintain better relations with the parties with whom the assessee has business dealings. The assessing officer, however, disallowed the claim of deduction under section 37(1). The Commissioner (Appeals) upheld the disallowance with the observation that such expenses in the other cases of the group have been held as disallowable by the Tribunal Ahmedabad.
3. Shri R.N Vepari, the learned counsel for the assessee, pressed the disallowance with respect to the donation of Rs. 5 lakhs made to Sahakar Charitable Foundation on the ground that the donation has been made for business purposes and is allowable under section 37(1). With regard to the balance amount of Rs. 65,569 donated to other institutions the learned counsel did not press the disallowance. We would accordingly consider the issue of deduction of Rs. 5 lakhs donated by the assessee to Sahakar Charitable Foundation.
4. It is claimed that in the assessment year 1991-92 the assessee had sold machinery worth Rs. 13,06,52,195 to M/s Petrofils Co-op. Ltd. as against the total turnover of Rs. 124 crores. Petrofils Co-op. Ltd. is a joint venture of Government of India and co-operatives in the Gujarat State. The learned counsel referred to the letter of the Petrofils Co-op. Ltd. dated 14-5-1990, appearing at page 4 of the paper book which reads as under :
"This is reference to our discussion with you during your last visit to Baroda wherein we had mentioned that we have created a charitable trust called Sahakar Charitable Foundation for carrying out various activities like promotion of culture, education, performing art, medical assistance for the citizen of Vadodara City and surrounding areas. This being a charitable activity would require finance to support the same. Considering our long business association, we look forward to you for a generous donation. We would be thankful if you could kindly consider a generous donation of Rs. 10 lakhs to this charitable trust."
It is further claimed that a resolution was passed at the meeting of Board of Directors on 30-6-1990, for making a contribution of Rs. 5 lakhs to Sahakar Charitable Foundation. In the written submissions filed before us it is contended that the donation made to Sahakar Charitable Foundation Trust would fall within the realm of public relation and was not given on philantropic motives. The learned counsel placed reliance on the following decisions in support of the claim of deduction in respect of the donation of Rs. 5 lakhs under section 37(1) :
1. Khimji Vishram & Sons (Gujarat) (P) Ltd. v. CIT (1994) 209 ITR 993 (Guj);
2. Sassoon J. David & Co. (P) Ltd. v. CIT (1979) 118 ITR 261 (SC);
3. Addl. CIT v. Kubersingh Bhagwandas (1979) 118 ITR 379 (MP) (FB);
4. Addl. CIT v. Symonds Distributors (P) Ltd. (1977) 108 ITR 947 (All);
5. Asstt. CIT v. Hindustan Marketing & Advertising Co. Ltd. (1994) 49 TTJ (Del) 96; and
6. Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. (1983) 144 ITR 275 (Del).
A separate compilation *of the aforesaid judgments has been furnished before us by the learned counsel. With regard to the orders of the Tribunal in the connected cases of the assessee the learned counsel placed before us consolidated order of the Tribunal dated 20-3-1991, in the three connected cases viz :
1. ITA No. 117/Ahd/88 M/s Him Crimp Industries;
2. ITA No. 118/Ahd/88 Himson Techno Services (P) Ltd.; and
3. ITA No. 119/Ahd/88 Himson Knitting Industries (P) Ltd.
wherein donations made to charitable institutions claimed as permissible business expenses under section 37(1) has been held as disallowable by the Tribunal. In the case of Hiralal M. & Sons, Surat, another connected case of the assessee the Tribunal in pursuance of the request of both the parties restored the issue to the file of the Commissioner (Appeals) for fresh adjudication.
5. Shri L.H, Manne, the learned Departmental Representative, supporting the order of the learned Commissioner (Appeals) argued that donation made to a charitable institution cannot be treated as business expenditure merely on the basis of a letter of Petrofils Co-op. Ltd. requesting for the donation. The learned Departmental Representative further argued that the expenditure should have direct nexus and connection with the business of the assessee and should be incurred wholly and exclusively for the purposes of business. In the instant case the charitable institution to whom the donation has been given viz., Sahakar Charitable Foundation is a charitable trust formed for the welfare of the citizens of Vadodara and this institution cannot be treated as an associated or connected concern of Petrofils Co-op. Ltd.
6. We have carefully considered the facts and circumstances of the case and have gone through the string of judicial authorities cited by the learned counsel. The facts are undisputed that payment of Rs. 5 lakhs has been made to a public trust viz., Sahakar Charitable Foundation which has been carrying on charitable activities for the welfare of the citizens of Vadodara city. There is nothing on record to indicate as to whether this trust is in any manner connected with Petrofils Co-op. Ltd. The assessee has claimed deduction under section 37(1) in respect of donation made to the charitable trust merely on the strength of letter of Petrofils Co-op. Ltd. requesting for such donation, where the payment has been made by the assessee to a charitable trust, it may be entitled to get relief under section 8OG if the requirements of that section are fulfilled. It cannot get deduction under section 37(1) in respect of the said payment simply by contending that as a prudent businessman such deduction in his opinion might help the business in the long run. The mere opinion of the businessman is not binding on the Income Tax Authorities. For the purpose of claiming benefit under section 37(1) it has to be proved that the expenditure was wholly and exclusively for the purpose of business. In that view of the matter where there was no direct nexus established between the expenditure by way of donations and the business of the assessee such expenditure would not be allowable under section 37(1). Merely because donation in the instant case has been made by the assessee in the light of the request made by a customer would not by itself establish the nexus between the donation and the business of the assessee. This is particularly, so since the donee-trust is a public trust and could not conceivably have a business connection with Petrofils which is a joint venture of Government of India as well as the co-operative institutions. The donation has, therefore, been made due to altruistic considerations and not for the purposes of assessee's business.,
7. Regarding the string of judicial authorities cited by the learned counsel, we may point out that certain broad principles have been spelt out by various courts governing the deduction of expenditure under section 37(1). These decisions have been rendered in the context of attendant facts and circumstances prevailing in the respective cases. We would specifically refer to the Full Bench decision of Madhya Pradesh High Court in Addl. CIT v. Kubersingh Bhagwandas (supra) cited by the learned counsel. This decision has been approved by the Hon'ble Supreme Court in Shri Venkat Satyanarayan Rice Mill v. CIT (1997) 223 ITR 101 (SC).
8. In Kubersingh Bhagwandas' case the facts were that the Government of Madhya Pradesh had under the Essential Commodities Act, 1955, passed an order which, inter alia, prohibited any person from exporting gram from Madhya Pradesh except under and in accordance with the permit issued by the State Government. As per the procedure laid down by the gsovernment foodgrain merchants were required to deposit Rs. 30 per quintal for the export of Gulabi Chana and Rs. 5 per quintal for the export of pulses into the State Bank of India or the State Bank of Indore to the credit of the Chief Minister's Draught Relief Fund and obtain duplicate receipt from the bank. It was further directed that the originals of such receipts were to be sent along with the duly filled in application forms for permits to the Grains Merchants Association. Members were also required to send fifty paise per quintal for meeting administrative expenses of the Maha Sangh. The applications being received in accordance with the aforesaid documents, the Association forwarded the same to the relevant authorities of the Food Department whereupon permits for export of Gulabi Chana or pulses, as mentioned in the applications, were issued to the merchants. The High Court allowed deduction on the ground that the donations have been made on the consideration of commercial expediency to facilitate obtaining the permits which were necessary for carrying on the export trade. The quantity of foodgrains for which the permit was applied for and granted was directly related to the amount of donation paid by the merchant. The High Court held that the expenditure had a direct connection with the grant of permits by the government as the receipts of donations were attached with the applications for permits and such permits were granted in proportion to the donation made.
9. As we have already discussed above the facts of the instant case before us are entirely different inasmuch as the donations made to a public charitable trust are not in any manner linked with the business of the assessee. A mere letter of a customer for considering the generous donation to the charitable trust would not establish the nexus with the business of the assessee. Thus, the proposition laid out in the Full Bench decision in Kubersingh Bhagwandas case (supra) would in fact reinforce the case of the department against deduction under section 37(1) in the present case.
10. We may also refer to the Supreme Court decision in Shri Venkata Satyanarayana Rice Mills' case (supra) donations have been made at the instance of the Andhra Pradesh Government to the Andhra Pradesh Welfare Fund for grant of export permits. The contribution to the welfare fund was a precondition for the grant of the export permits and the contribution was a compulsory payment extracted from the rice merchants as a price for granting export permits. In these circumstances the Supreme Court held that there was a direct nexus between the assessee's business and the donations made to the Andhra Pradesh Welfare Funds and the donations were allowable under section 37 of the Act. In this case again the donations were inextricably linked with the grant of permits for export of rice and the donations were accordingly held deductible under section 37(1). This decision, therefore, further reinforce the conclusion arrived at by us, in the facts and circumstances of the instant case. The donations, having no direct nexus with the business of the assessee, would not qualify for deduction under section 37(1). The earlier decisions of the Ahmedabad Bench in the connected cases of the assessee cited supra further support the view taken by us.
11. For the aforesaid reasons we hold that disallowance of the entire donations of Rs. 5,65,569 including the donations of Rs. 5 lakhs to Sahakar Charitable Foundation has been rightly disallowed by the assessing officer under section 37(1).
12. Regarding the alternative contention of the assessee for deduction under section 8OG, we would direct the assessing officer to consider the claim of the assessee for deduction under section 80G in accordance with law.
13. The next ground is against the disallowance of Rs. 15,05,097 on account of royalty paid to M/s. Teijin Seiki Ltd. Japan. The payment of royalty has been disallowed under section 40(a) since tax has been deducted and paid in the subsequent year. The learned counsel made strong grievance of the fact that for the succeeding assessment year 1992-93 no such deduction has been allowed by the assessing officer even though it has been observed in para 4 of the assessment order that the deduction would be allowed in the subsequent assessment year. Both the parties present before us agreed that deduction for this amount may be allowed to the assessee in the assessment year 1992-93. We hold accordingly.
14. The next ground is against the deduction under section 80-I in respect of the disclosed amount as well as the rental income. The learned counsel conceded that the issue is covered against the assessee by the order of the Tribunal for the assessment year 1990-91 in the assessee's case. Respectfully following the said order of the Tribunal and in the context of the identical facts we would accordingly dismiss this ground.
15. The next ground is regarding non-consideration of the following ground by the learned Commissioner (Appeals) while adjudicating the appeal of the assessee.
"The assessing officer was not justified in not granting entire interest under section 244A merely because the return was delayed by six months."
We would accordingly direct the Commissioner (Appeals) to adjudicate the ground after hearing the assessee.
16. In the result, the appeal is partly allowed as above.