Madras High Court
Commissioner Of Income Tax vs Cheran Transport Corporation Ltd. on 3 August, 1995
Equivalent citations: [1996]219ITR203(MAD)
JUDGMENT Abdul Hadi, J.
1. In all these tax cases under s. 256 of the IT Act, 1961 (hereinafter referred to as "the Act"), the assessee is the same, it being Cheran Transport Corporation Limited, Coimbatore. It is a State Government undertaking in which the assets of the erstwhile undertaking, which was taken over by the State Government under the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973, came to be vested. Tax case No. 226 of 1986 related to the asst. yr. 1978-79. It arises out of the order of the Tribunal dt. 11th Jan., 1983, In ITA No. 677 (Mds) of 1982. Tax Cases Nos. 958 to 963 of 1984 arise out of the common order dt 21st Dec., 1982 of the Tribunal. Tax Cases Nos. 958 to 960 of 1984 have been preferred by the Revenue in respect of the asst. yr. 1974-75 to 1976-77. Tax Cases Nos. 961 to 963 of 1984 have been preferred by the assessee in respect of the same asst. yrs. 1974-75 to 1976-77.
2. The only question of law referred to this Court in Tax Case No. 226 of 1986 filed by the Revenue is similar to the second question referred to this Court in Tax Cases Nos. 961 to 963 of 1984, filed by the assessee.
The above said sole question in Tax Case No. 226 of 1986 runs as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest payable on the compensation due to the former owners of the transport undertaking which had been nationalised and vested with the assessee-corporation should be allowed as a revenue expenditure ?"
The abovesaid similar question in Tax Cases Nos. 961 to 963 of 1984 runs as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 1,39,910 for the asst. yr. 1974-75 and Rs. 1,49,379 for each of the asst. yrs. 1975-76 and 1976-77 payable to the private bus operators from whom the buses were taken over, is not an accrued liability and, therefore, not an allowable expenditure under the Act ?"
Thus, since the assessee had paid interest on the compensation it paid to its predecessor on the abovesaid taking over under the abovesaid Act, the question is whether the said interest could be allowed as revenue expenditure under s. 37(1) of the Act. The Tribunal has held in its abovesaid order dt. 21st Dec., 1982, that the law by which the erstwhile undertaking was taken over, was struck down by this Court in the decision in K. A. Kannappa Chetti vs. State of Tamil Nadu (1973) II MLJ 212, hence there is no liability on the part of the assessee to pay the abovesaid interest and hence not liable. No doubt, the Tribunal, in its abovesaid subsequent order dt. 11th Jan., 1983 held differently and allowed the abovesaid interest payment as revenue expenditure. Only because of these two differing decisions, Tax Case No. 226 of 1986 came to be filed by the Revenue and Tax Cases Nos. 961 to 963 of 1984 came to be filed by the assessee.
At any rate, learned counsel for the Revenue fairly points out that the abovesaid decision in K. A. Kannappa Chetti vs. State of Tamil Nadu has been reversed by the Supreme Court in State of Tamil Nadu vs. L. Abu Kavur Bai, , which upheld the validity of the said Act. So, the said interest payments in each of the above referred to assessment years are liabilities incurred by the assessee.
So, the next question is whether it is a revenue expenditure or capital expenditure. In this regard also, learned counsel for the Revenue fairly submits that in view of the decision in Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC), as well as CIT vs. Cherian Transport Corporation Ltd. (1986) 160 ITR 630, the said interest payments have to be held only as revenue expenditure. The net result is, the only question referred to this Court in Tax Case No. 226 of 1986 and the above referred to second question referred to this Court in Tax Cases Nos. 961 to 963 of 1984 are answered against the Revenue.
3. In Tax Cases Nos. 958 to 960 of 1984, two other questions have been referred to this Court. The first question relates to the asst. yrs. 1974-75 and 1975-76 and the second question relates to the asst. yrs. 1975-76 and 1976-77. With reference to the first of these two questions, both counsels are agreed that the said question has to be answered in the negative and against the assessee, in view of the order of this Court dt. 22nd Dec., 1994 in Tax Cases Nos. 630 to 635 of 1982 [Anna Transport Corporation Ltd. vs. CIT ]. Accordingly, the said question is answered. In so far as the second of the abovesaid two questions also, both counsel are agreed that the said question has to be answered in the affirmative and against the Revenue, applying the principles laid down by the Supreme Court in CIT vs. Associated Cement Cos. (1988) 172 ITR (SC) and CIT vs. T. V. Sundaram Iyengar & Sons . Accordingly, the said second question is answered.
4. Now, coming back to the first question in Tax Cases Nos. 961 to 963 of 1984, it is as follows :
"Whether, on the facts, and in the circumstances of the case, the Tribunal was right in law in holding that the amounts Rs. 5,000 for 1974-75 and Rs. 7,500 for each of the asst. yrs. 1975-76 and 1976-77 paid towards Flag Day Fund and Rs. 1 lakh and Rs. 3,87,476 for the asst. yrs. 1975-76 and 1976-77, respectively, towards Chief Minister's Rehabilitation Fund under the directions of the Government are not allowable expenditure ?"
Thus, this question relates to two types of expenditure, one to amounts paid for Flag Day Fund and another to amounts paid for the Chief Minister's Rehabilitation Fund, both under the directions of the Government. In relation to both the types of expenditure, the Tribunal has, following its earlier decision in another case, held that there was no commercial expediency in such matters as regards public sector undertaking, disallowed the said expenditures as deductions under s. 37(1) of the Act.
But, learned counsel for the Revenue, relying on a decision of the Andhra Pradesh High Court in CIT vs. Kodandarama & Co. which has been followed by CIT vs. K. Subbaraju & Venkateswara Rao & Co. , contends that these payments were opposed to public policy and hence could not be allowed as business expenditure. On the other hand, learned counsel for the assessee contends that the said decisions will not be applicable to the present case since there was no contravention of public policy in the present case and that, at any rate, in view of several other decisions, particularly the decision of this Court in Southern & Rajamani Transports (P) Ltd. vs. CIT , Addl. CIT vs. Kuber Singh Bhagwandas (1979) 118 ITR 379 (MP) (FB) and Goodlas Nerolac Paints Ltd. vs. CIT (1982) 137 ITR 58 (Bom) the expenditure should be allowed as deduction.
5. We have considered the rival submissions. The sole decision relied on by the Revenue is the above said CIT vs. Kodandarama & Co., since the other decision relied on by it, viz., CIT vs. K. Subbaraju & Venkateswara Rao & Co. simply follows CIT vs. Kodandarama & Co. (supra) without any discussion. In CIT vs. Kodandarama & Co. contributions were made by the assessee at specified rates to the Andhra Pradesh Welfare Fund for obtaining permits from the District Collector for export of rice to other States and the said contributions were found to be compulsory payments. Those payments were made by the assessees therein only because they were told that they would not get the export permits unless they made the contributions. Further, it was found that the regularity and systematic manner, in which the contributions were made, showed that the contributions, to the above said welfare fund was a pre-condition for the grant of the abovesaid export permits. In such a context, the Andhra Pradesh High Court held that those contributions were opposed to public policy, being the nature of unlawful consideration for discharging an official duty, otherwise than according to law, that is, otherwise than on the merits. The relevant observations therein are as follows :
".... since the contribution is a 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 the assessee, such a payment is warranted by his business expediency; but, we are not prepared to agree with Mr. Anjaneyulu that every payment which is expedient in the interest of the assessee's business must be deducted under s. 37. Any payment which is either opposed to any law, or is opposed to public policy, cannot be recognized, because it is well settled that infraction of law is not a normal incident of business. Similarly, payments which are opposed to public policy, being in the nature of unlawful consideration for discharging an official duty otherwise than according to law and merits, i.e., otherwise than on merits, cannot equally be recognized....
It would be short-sighted and myopic to hold that businessmen are entitled to conduct their business even contrary to law and that, so long as the payments made by them are justified by their business expediency, they should be allowed as business deductions, notwithstanding the fact that such payments are illegal, or opposed to public policy, or have pernicious consequences to the nation's life as a whole."
In the abovesaid Andhra Pradesh High Court case Sassoon J. David & Co. (P) Ltd. vs. CIT and also the above referred to case Addl. CIT vs. Kuber Singh Bhagwandas (supra) were considered. The contention before the Andhra Pradesh High Court based on Sassoon J. David & Co. (P) Ltd. vs. CIT (supra), was that ordinarily it was for the assessee to decide whether any expenditure should be incurred in the course of his business and that so long as it is incurred for promoting the business and to earn profits, the assessee is entitled to claim deduction of that amount, though there was no compelling necessity to incur such expenditure. Dealing with the said contention, the Andhra Pradesh High Court observed thus :
"While the said principle is unexceptionable, a line must be drawn where the expenditure is for a purpose which is forbidden by law, or is opposed to public policy. In this case the Supreme Court had no occasion to consider this aspect; and, therefore, we fail to see how this decision advances the assessees' case."
Then, dealing with Addl. CIT vs. Kuber Singh Bhagwandas (supra), the Andhra Pradesh High Court in CIT vs. Kodandarama & Co. (supra) observed as follows :
"The Court further observed that, in making the donations, the assessee did not contravene any law.... It is significant to notice that the question whether the payments made were opposed to public policy was not raised or considered in the said decision..... We are, therefore, unable to see the relevance of the said decision on the question referred to us."
We may also add that in Southern & Rajamani Transports (P) Ltd. vs. CIT (supra) also, the abovesaid public policy aspect was not considered, though the donation made by the assessee therein was to a political party and what was held therein was only that there was no nexus or link between the donation and the business carried on by the assessee and hence it was disallowed. Likewise in Goodlas Nerolac Paints Ltd. vs. CIT (supra) also, the aspect of public policy was not considered, even though it was a case of payment by the assessee, of 'secret commissions'."
6. In the light of the abovesaid decisions, let us now see the facts found in the present case, which could be seen from the relevant observations of the first appellate authority, viz., the CIT (A). In relation to the abovesaid contribution to the Chief Minister's Drought Relief Fund, the observations, are as follows :
"In response to an appeal for contribution to the Chief Minister's Drought Relief Fund, the Tamil Nadu Bus Owners' Federation has passed a unanimous resolution that each member of that body would contribute to the fund an amount calculated at the rate of Rs. 1,000 for each stage carriage plied by him and a memorandum was issued by the Home Department of the State Government to the effect that the District Transport Officers should arrange for the collection of the contributions given in conformity with the resolution, in the respective areas under their jurisdiction..... the memorandum makes it clear that the contributions were to be voluntary..."
Thus, we find that in so far as the abovesaid contribution of the Chief Minister's Drought Relief Fund is concerned, the contribution was only in response to an appeal, and was to be voluntary and was not a condition precedent for getting any favour from the Government as it was factually found in the abovesaid CIT vs. Kodandarama & Co. So, it cannot be said that the contribution was made in contravention of any law or is opposed to public policy.
No doubt, in the earlier portion of the order of the first appellate authority, it is stated in relation to the contribution to both the Flag Day Fund and the Chief Minister's Drought Relief Fund, that the contention was that "even if it were to be assumed that the contributions were voluntary, it would still have been imprudent on the company's part not to give them, since that would have entailed incurring the displeasure of the Regional Transport Authorities, whose goodwill was required for the smooth and profitable running of the business carried on by the company." From this contention alone, it cannot be concluded that the abovesaid contributions, both for the Flag Day Fund and the Chief Minister's Drought Relief Fund were in contravention of any law or opposed to public policy. It is also seen from the same order of the first appellate authority that in one case, the assessee was one of the five applicants for the grant of a stage-carriage permit to ply one town bus on the Udumalpet town service route, and the permit was eventually granted to one U. G. Kanakaraj, a private operator. The same order also says that several other such instances have also been brought to the said officer's notice of permits being given to private operators in preference to the assessee. From this also, it can be concluded that the abovesaid contributions were not actually opposed to public policy. Therefore, our view in the present case is that, certain relevant factual features, which were present in CIT vs. Kodandarama & Co. (supra) are not present in the present case and hence CIT vs. Kodandarama & Co. (supra) is not applicable to the present case. Therefore, there is strictly no necessity to assess the correctness of the said decision.
However, we may incidentally add that the Supreme Court, while dealing with a business loss as distinguished from a business expenditure has laid down, approving the earlier decisions, including that of the Orissa High Court in CIT vs. Industry & Commerce Enterprises (P) Ltd. (1979) 118 ITR 606 (Ori) that where Government bonds, as securities, were purchased by the assessee with a view to increase his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as business loss. In that case, according to the statement of case drawn up, the assessee was told that if it subscribed for the Government bonds, preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government departments. However, it must be stated that the aspect of contravention of public policy or contravention of any law, was not considered in the abovesaid Supreme Court case also. Anyway, in view of the factual difference between CIT vs. Kodandarama & Co. (supra) and the present case, we reiterate that CIT vs. Kodandarama & Co. (supra) is not applicable to the present facts.
In so far as the nexus or link between the abovesaid expenditure incurred by the assessee and its business, we should say that it stands established in view of the abovesaid factual observations made by the CIT(A). Therefore, the above referred to first question in Tax Cases Nos. 961 to 963 of 1984 is answered in the negative and in favour of the assessee. No costs.