Income Tax Appellate Tribunal - Madras
Dynavision Ltd. vs Income-Tax Officer on 17 September, 1990
Equivalent citations: [1991]36ITD1A(MAD)
ORDER
D.S. Meenakshisundaram, Judicial Member
1. The appellant is a public limited company carrying on business in the manufacture of Television sets. This appeal relates to its income-tax assessment for the year 1985-86, for which the previous year ended on 31-12-1984. The appellant objects to the following two items, which have been disallowed by the departmental authorities in the present appeal:-
(i) Contribution to Dynavision Dealers' Welfare Trust Rs. 50,00,000.
(ii) Deduction claimed by the appellant under Section 80-I of the Income-tax Act, 1961 in respect of its new industrial undertaking for manufacture of Colour Television sets (CTV).
2. The appellant debited a sum of Rs. 50 lakhs under the head "Contribution to Dynavision Dealers' Welfare Trust," which is included under the head 'other expenses' in Schedule II on the debit side of its profit and loss account and claimed the same as a deduction in the computation of its business income for this year. While completing the assessment Under Section 143(3) of the Act, the assessing officer found that the appellant-company had paid Rs. 50 lakhs to Dynavision Dealers' Welfare Trust during the year. He further found that the trust was formed on 27-11 -1984 with the company as the settlor and Rs. 50 lakhs was paid by the assessee on 26-12-1984. He further noticed that the assessee's accounting year ended on 31 -12-1984 and that all the dealers of the Dyanora T. V. sets are the beneficiaries of the Trust. After setting out the names of the six trustees appointed under the Trust deed, as well as the four objects of the trust from the Trust deed, the Income-tax officer pointed out that the appellant had claimed deduction for this payment under Section 37 of the Income-tax Act. The Income-tax officer rejected the claim of the appellant for deduction, for the following reasons recorded in the assessment order :-
1. The accounts of the trust were not produced. So it has not been possible to verify if any amount was spent during the year for the objects of the trust.
2. The assessee company has not created the trust for the benefit of employees, but dealers who are third parties. The assessee is not supposed to spend for third parties welfare. The company has no charitable object.
3. The company has not filed details of activities undertaken by the trust during the year.
4. The trust deed has no Clause whereby the assessee company can haul up the trust or take action against the trustees if the trustees do not carry out the objects of the trust.
5. The trust was created on 26-12-1984 and within five days, i.e., by 31-12-1984 the trust could not have undertaken any action.
6. Anyway, the amount has not been spent wholly and exclusively for business nurposes. So deduction under Section 37 is not allowed.
3. The appellant had also claimed deduction under Section 80-I of the Act on the ground that a separate new industrial undertaking for manufacture of Colour T. V. sets had come into existence with effect from 1-1-1984. In support of this claim, the appellant relied on the following evidence :
(i) A shop floor had been arranged for production of colour T. V. sets, independent of black and white production lines.
(ii) Certain machinery had been acquired for production of Colour T. V. sets (CTV).
(iii) Certain persons had been trained abroad to take up the work of production of CTV sets.
(iv) A license for production of CTV with annual capacity of 50,000 Nos. had been granted to the appellant.
The appellant also filed a profit and loss account for the CTV unit showing a net profit of Rs. 1,75,77,019, as against the total assessable income of Rs. 85,73,920 disclosed in the return for the company as a whole.
4. The assessing officer held that the claim of the appellant for this deduction under Section 80-I was not allowable for the following reasons set out in paragraph 4, on page 6 of the assessment order :-
It may be remarked that the assessee is engaged in manufacture and sale of T. V. sets for the last several years. Till 31-12-1983 it was manufacturing black and white television sets and, with effect from 1-1-1984 it has diversified its activity and has started manufacturing colour T. V. sets also. For this purpose the assessee has not constructed any new building, as could be verified from the details of additions to buildings filed by the assessee. Out of the total additions of Rs. 11.93 lakhs to buildings, Rs. 8.11 lakhs represents construction of store-shed, compound wall, security office etc. and about Rs. 2 lakhs for the extension of second floor. A perusal of the additions to plant and machinery also shows that, but for one or two items, such additions do not relate exclusively to only the C.T.V. section. As against the total investment in fixed assets of nearly Rs. 1 crore, the additional investment on account of the C.T.V. section would amount to only about 8 lakhs (excluding Rs. 2 lakhs on R&D expenditure) which cannot be said to be a substantial investment. Though the assessee claimed at one stage that special enhancement of loans from banks of nearly Rs. 2 crores were obtained, no amount representing interest has been debited to the C.T.V. section, thereby implying that the funds so borrowed were not used in the colour T.V. section. Thus, the assessee itself admits no substantial borrowed funds had been invested in manufacture of C.T.V. Even the personnel employed exclusively in this activity are said to be only 50 in number. All these factors show that the tests laid down by the Supreme Court in the case of Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 are not fully satisfied, inasmuch as the C.T.V. section cannot function totally independently of the existing black and white unit. Hence, the C.T.V. section can only be regarded as an expansion, not substantial in nature and cannot be treated as a separate industrial undertaking. No deduction Under Section 80-I is therefore admissible.
5. However, without prejudice to his stand, the assessing officer found that the assessee's claim for deduction was highly disproportionate, as it had shown highly disproportionate profit in C.T.V. division. He re-worked the profit of C.T.V. Division in the proportion of Colour T.V. sets sold
--------------------- x assessable profit Total T.V. sets sold and arrived at a profit of Rs. 46.96 lakhs in C.T.V. Division.
On. this basis the deduction Under Section 80-I would be 25% of Rs. 46.96 lakhs or Rs. 11.74 lakhs. Sincehehad held that the appellant-company was not entitled to deduction under Section 80-I, the Income-tax officer did not allow this deduction while computing the income of the assessee for this year.
6. The appellant objected, inter alia, to these two disallowances in its appeal filed before the Commissioner of Income-tax (Appeals). After setting out the contentions of the appellant and the assessing officer and the case law relied on by them, in paragraphs 8 to 8.6 of his order, the Commissioner (Appeals) held that taking into consideration the quantum of expenditure which is highly out of proportion on contrast to other expenses of the appellant, the subsequent events that have clearly shown the purpose for which the contribution of Rs. 50 lakhs had been utilised by the trust and also the publicity and advertisement expenses which were established as not incurred in the immediate past, he was of the opinion that the principles of commercial expediency laid down in the various decisions relied on by him in the earlier part of his order, were not satisfied by the appellant. He further held that the advantage to be secured by incurring the expenditure was in the nature of remote possible advantage depending on 'ifs' and 'buts' and that in fact there was an apparent tint of excessive contribution, collusiveness and colourable discretion. For the above conclusions, the Commissioner (Appeals) relied on the fact that the Trust was created towards the end of the financial year and an amount of Rs. 50 lakhs was contributed within five days of the end of the year, i.e., 31-12-1984 and that, therefore, as far as this year was concerned, it could not have been spent at all. He next pointed out that it was by way of contribution to a trust where two of the Directors of the assessee and a very close relative of these Directors are the trustees and that the amount transferred by way of contribution was substantial. The Commissioner (A) referred to the fact that the other expenses of the appellant for the assessment years 1982-83 to 1986-87 was Rs. 97.55 lakhs, Rs. 1.01 crore, Rs. 1 crore, Rs. 2.03 crores and Rs. 2.48 crores, respectively. From this, the Commissioner concluded that the amount of Rs. 50 lakhs contributed in this year was nearly 25% of the expenditure under the head 'other expenses' that was debited to the profit and loss account. The Commissioner(A) next referred to the objects of the trust as basically three-fold, namely (a) financing of stockists and dealers ; (b) publicity and promotion of sales ; and (c) organising seminars, get together of the dealers. The Commissioner(A) also took into account the subsequent events that had affected the pattern of expenditure of the trust and found that as on 31-10-1985 nearly Rs. 46 lakhs out of this amount of Rs. 50 lakhs was with the sister concerns of the appellant, that as on 31-10-1986 and subsequently as on 31-10-1987 it was Rs. 46 lakhs and Rs. 42 lakhs respectively. The Commissioner found that amounts of Rs. 11.29 lakhs, Rs. 14.68 lakhs and Rs. 16.54 lakhs were said to have been spent on dealers as well as promotion (sic) for the years ended 31-10-1985, 31-10-1986 and 31-10-1987, respectively. He also noticed that amounts of Rs. 1.11 lakhs, Rs. 39,866 and Rs. 5,473 were alleged to have been spent for dealers' conference during the years ended 31-10-1985, 31-10-1986 and 31-10-1987, respectively by the trust. From the above facts, the Commissioner (A) drew the inference that it was clear that a large chunk of the expenditure had gone towards financing of sister concerns through a trust. He also observed that he was not discussing or commenting on the expenditure supposed to have been incurred by the trust on the sales promotion expenses and conference of dealers, but that it would be sufficient to refer to his orders in the assessee's own case for the years 1979-80, 1980-81 and 1981-82, wherein he had held that the assessee had not established that these expenses were incurred for the purposes of business. In support of these conclusions, the Commissioner (Appeals) relied on the decision of the Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 as well as the decision of the Delhi High Court in the case of Siddho Mai & Sons v. CIT [1980] 122 ITR 839.
7. The CIT (Appeals) examined the assessee's claim for deduction Under Section 80-I of the Act in paragraphs 9.1 to 9.6 of his appellate order and rejected the same. He held that there was a lot of substance in the submissions of the assessing officer, especially his argument that nearly 60% of the plant and machinery could be made use of for colour as well as for black and white (TV manufacture), that it was also clear that the ground floor which was earlier used for black and white was subsequently changed over to colour T.V. and that the assessing officer had also very rightly pointed out that an item of Rs. 1.17 lakhs concerned black and white and not colour T.V. the Commissioned (A) also held that the assessing officer's submission that the colour T.V. Pattern Generator could not serve nearly 150 to 200 pieces of colour T.V., was accepted by the learned representative for the appellant, but that his submission was that at the beginning of the production, thorough testing was not done. The Commissioner(A) rejected this submission of the assessee's representative as not carrying much conviction, as manufacturers always very thoroughly check their products at the commencement of the production of a new item. He further observed that the assessee's reluctance to place before him the machinery records and all the invoices regarding machinery, gave strength to the assessing officer's argument that some of the machineries like FTD 001, FTD 002 could also have been very well used for black and white as well as colour T.V. The Commissioner also held that even as per the assessee's representative himself, the appellant had been able to apply credit secured for colour T.V. to the black and white and thus the arguments of the representative for the appellant that the production of colour T.V. sets was independent of black and white production and that the machinery was also exclusive, was not substantiated. The Commissioner (A) further held that the condition of Section 80-I, Sub-section (2) that it was not formed by transfer to a new business of machinery or plant previously used for business purposes had not been proved by the appellant, but that on the other hand, the assessing officer had been able to convincingly show that it was formed by splitting up and the reconstruction of the business already in existence. He was of the opinion that the tests laid down in the case of Textile Machinery Corporation Ltd, v. CIT [1977] 107 ITR 195 (SC) required that substantial funds must have been invested and that the new unit must be an integrated unit. The Commissioner held that in the appellant's case no substantial funds had been invested and that the colour T. V. unit was an integrated unit by itself, but it was very much dependant on the existing unit and that even the personnel were hand-picked from the existing unit and with a little bit of training had been put on the colour T.V. production. He was, therefore, of the opinion that the assessing officer was right in not giving the deduction under Section 80-I of the Act. The Commissioner (Appeals) therefore partly allowed the assessee's appeal.
8. The appellant feels aggrieved by this order of the Commissioner of Income-tax (Appeals) and hence the present appeal to the Tribunal.
9. We have heard the learned counsel on both sides and carefully examined their contentions in the light of the materials placed before us and the authorities relied on by them. We have also perused the written submissions filed by the learned counsel for the appellant as well as the learned departmental representative.
10. First we shall consider the appellant's claim for deduction of the contribution of Rs. 50 lakhs to Dynavision Dealers' Welfare Trust as an allowable deduction in the computation of its business income Under Section 37(1)of the Income-tax Act, 1961. The following points arise for our consideration out of the arguments urged on both sides and the materials relied on by them in support there of:-
(i) Whether any Trust by the name of Dynavision Dealers' Welfare Trust had come into existence on 27-11-1984 as claimed by the appellant?
(ii) Whether the Trust Deed dated 27-11-1984 is a valid document and whether it had brought into existence a valid trust on that date?
(iii) Whether the said Trust is invalid and void ab initio as contended by the Revenue?
(iv) Whether it is open to the Revenue to challenge the validity of the Trust at this stage of the proceedings after having accepted its validity in the course of the assessment proceedings as well as the proceedings before the first appellate authority?
(v) Whether the matter should go back to the assessing authority for deciding this issue as contended on behalf of the assessee?
(vi) Even if the Trust Deed dated 27-11-1984 is held to be invalid and void ab initio, whether any trust had come into existence on 26-12-1984 under the name and style of 'Dynavision Dealers' Welfare Trust" and whether such a trust is a valid trust?
(vii) Whether any legal obligation is attached to the contribution of Rs. 50 lakhs paid to Dynavision Dealers' Welfare Trust on 26-12-1984 even if it were to be held that there was no valid trust created either on 27-11-1984 or on 26-12-1984?
(viii) Whether the sum of Rs. 50 lakhs paid by the assessee to Dynavision Dealers' Welfare Trust on 26-12-1984 is allowable as business expenditure laid out wholly and exclusively for the purpose of its business under Section 37(1) of the Act?
11. It would be seen from the eight points set out above that question Nos. (iv) and (v) are in the nature of preliminary objections raised by the assessee to certain arguments urged on behalf of the revenue during the course of the hearing of the appeal and, therefore, they have to be dealt with first. We set out below question Nos. (iv) and (v) for facility of reference :-
(iv) Whether it is open to the Revenue to challenge the validity of the Trust at this stage of the proceedings after having accepted its validity in the course of the assessment proceedings as well as the proceedings before the first appellate authority?
(v) Whether the matter should go back to the assessing authority for deciding this issue as contended on behalf of the assessee?
We find that this point is raised by the appellant for the first time in its written objections dated 23-4-1990, though no specific arguments were urged in the course of the hearing in this regard. However, for the sake of completeness, we have to deal with it. The objection of the appellant is that since the validity of Dynavision Dealers' Welfare Trust was not attacked and questioned by the departmental authorities till this stage of the appeal, but was accepted by them as a validly constituted and genuine trust, it would not be open to the departmental authorities to raise these objections for the first time at the hearing of the appeal before the Tribunal. It is also their contention that as the issue goes to the root of the problem and is raised for the first time, the appellant should be granted an opportunity before the assessing officer to adjudicate the issue raised by the respondent without prejudice to its contention that the payment is impressed with an obligation for the payee to hold for the said purposes.
12. In our view, there is no merit in these contentions urged on behalf of the appellant. The defects and deficiencies pointed out by the learned departmental representative in the course of the hearing of the appeal in the deed of trust relied on by the assessee, arise on the facts and evidence placed by the appellant in support of its contentions before the departmental authorities as well as before the Tribunal. This deed has always been in the possession and custody of the appellant and that it cannot plead that it was not aware of these deficiencies and defects until they were pointed out by the learned departmental representative at the time of hearing of the appeal. The fact that the departmental authorities, either at the assessment stage or at the first appellate stage, did not notice these defects and deficiencies would not stand in the way of the revenue relying on them for the first time before the Tribunal, as they arise directly from the facts relied on by the appellant itself. As rightly contended on behalf of the revenue, these defects and deficiencies go to the root of the matter and can be raised at any stage of the proceedings even if they were not noticed earlier. We do not find any merit in the submission that the matter must go back to the assessing officer for giving an opportunity to the appellant to adjudicate this issue, as the objections raised by the revenue are purely legal arguments based on these defects and deficiencies noticed at the time of hearing of the appeal. We have, further, given sufficient opportunity to the appellant to explain these defects and deficiencies and therefore no useful purpose would be served in sending the matter back to the assessing officer for this purpose. We, therefore, reject these preliminary objections raised by the appellant in question Nos. (iv) and (v) as of no substance and merit.
13. Now, it will be convenient to consider the first three questions, which are the objections raised by the revenue to the validity of the trust. They are:
(i) Whether any Trust by the name of Dynavision Dealers' Welfare Trust had come into existence on 27-11-1984 as claimed by the appellant?
(ii) Whether the Trust Deed dated 27-11-1984 is a valid document and whether it had brought into existence a valid trust on that date?
(iii) Whether the said Trust is invalid and void ab initio, as contended by the Revenue?
14. The foundation for the appellant's claim of having created a trust under the name of Dynavision Dealers' Welfare Trust (hereinafter referred to as 'DDW Trust'), is the trust deed dated 27-11-1984, a copy of which is at pages 59 to 67 of the appellant's paper book No. 1. This document is purported to have been executed by Dynavision Limited, the appellant herein, represented by its Director Sri P. Obul Reddy. Theappellant is described as the settlor-company. The following six persons have also joined in the execution of this deed and they are described as the Trustees:-
1. Shir P. Vijayakumar Reddy, Managing Trustee.
2. Shri P. Obul Reddy, Trustee.
3. Shri P. Dwarkanath Reddy, Trustee.
4. Shri S. Ranjan C/o M/s Standard Electric Co., Trustee.
5. Shri N.R. Parthasarathy, C/o M/s "Vijayas", Trustee.
6. Shri S. Raman, C/o M/s Ganeshram Electronics, Trustee.
The preamble of the document declares the circumstances in which this deed came to be executed, in the following words :-
Whereas the Settlor Company has been cherishing a desire to establish a Trust for the benefit of dealers and stockists of the Company to help them financially when need arise with a view to promote their welfare which will indirectly promote the cordial relations between the Settlor Company and the dealers and stockists.
Clause 1 of the Trust Deed declares that the trust being established shall be irrevocable and that no part of the trust fund shall in any circumstances whatsoever be applied for the benefit of the Settlor Company without full consideration. It further declares that if the trust fails or is held to be invalid for any reason, there shall be no resulting Trust in favour of the Settlor Company, but the assets of the Trust including the corpus and accumulations, shall be distributed amongst the beneficiaries or their legal representatives or to any charitable trust as per the Trustees' decision. Then comes Clause No. 2, which is of very vital importance and the said Clause is quoted below :-
2. The Settlor Company above-named hereby conveys, transfers Rs. (Rupees ...only) by account-payee cheque to the Trust and the Trustees hereby acknowledge the conveyance, transfer and assignment of the same.(sic) The learned departmental representative heavily relied on the absence of any figures mentioned in Clause 2 quoted above, stating the amount conveyed or transferred by the appellant-company to the trustees and pointed out that in the absence of any such transfer of property, there could be no valid trust created by this deed. The further argument of the revenue is that nobody has signed the trust deed on behalf of the appellant-company, who is the author of the trust, nor the seal of the company had been affixed and therefore, the trust deed is invalid. It is further pointed out that no witnesses have also signed this deed, as could be seen from page 9 of the deed. According to the revenue, the Directors of the appellant-company had no authority to create a trust as per the Memorandum and Articles of Association and that the Directors had overstepped their powers and therefore the trust is an invalid trust. The learned departmental representative further relied on the fact that no resolution had been passed by the Board of Directors to create a trust, much less for the payment of a sum of Rs. 50 lakhs to this trust and that even in the Directors' report, this fact had not been highlighted. The learned departmental representative, therefore, contended that the entire act of creation of the trust by the appellant-company was ultra-vires its powers and hence invalid.
15. The learned departmental representative further relied on Section 293(e) of the Companies Act, 1956 and contended that under the said provision of law, the Board of Directors of a company can give or contribute either Rs. 50,000 or 5% of the average net profit, whichever is greater, for a purpose which is not directly related to the business of the company and that as it was accepted on behalf of the appellant-company that the whole purpose of giving the sum of Rs. 50 lakhs was to get benefits which would indirectly occur to the company, he argued that the words used in this section are only 'directly' and not 'directly or indirectly' and that further, this contribution was made without the permission or consent of the general body meeting and hence violated the provisions of Section 293(e) of the Companies Act. Hence, he argued that the trust is invalid.
16. The learned departmental representative also relied on Section 46 of the Companies Act, to point out that even to create a legal obligation in the form of a trust, it should be in writing and should be signed by a person acting under the authority of the company. The learned departmental representative argued that as there was no authorisation to the director, who is supposed to have created this trust, the whole action of creating this trust was invalid and unauthorised and that the vires of the contribution could not be ratified even by the general body meeting.
17. The further argument on behalf of the revenue is that the trust is void ab initio, as it has been created for an unlawful purpose, as could be seen from the objects specified in Clause 6 of the trust deed. We quote below Clause 6 of the trust deed, for facility of reference :-
6. The objects of the Trust include
(a) To finance dealers/stockists in case of financial difficulties at interest-free or at concessional rate of interest;
(b) to organise seminars, get-togethers of the dealers at a convenient place;
(c) to present gifts in cash or in kind at marriages, birthday functions, etc., of dealers/ stockists and their dependant family members ;
(d) to arrange holiday trips and tours for the recreation of dealers/stockists and their employees or their dependant family members ;
(e) to take up publicity campaigns for promoting the sales of dealers/stockists, when necessary, through press and other media;
(f) to benefit dealers and stockists, especially on account of indigence, ill-health or other necessitous circumstances ;
(g) to participate or encourage participation of dealers/stockists in exhibitions organised by Government/Semi-Government or private bodies for promoting sales of company's products;
(h) to take up any work which will help the dealers/stockists to achieve common goals like promotion of sales, making their products more competitive, reduce their overheads, make them more useful for the company, etc.;
(i) to take up any other work for the benefit of dealers/stockists. All/any objects will be executed by the Trustees at their unfettered discretion.
Dealer/Stockist" for this purpose means a person/firm/company concern dealing in any of Company's products, which for the time being are Television Receiver Sets.
18. The learned departmental representative pointed out that except for one object, all the other objects in Clause 6 of the trust deed quoted above are for either entertaining or for sales promotion. He submitted that as far as entertainment expenditure is concerned, it is not allowable as per the provisions of the Income-tax Act and that for sales promotion expenditure for the year under consideration, the provisions of Section 37(3A) are applicable. He further submitted that if the assessee had incurred this expenditure, these provisions would have been attracted. He argued that this payment of Rs. 50 lakhs to the trust as well as the creation of the trust was to defeat the provisions of law contained in Section 37 of the Income-tax Act, 1961 and that as per Section 4 of the Indian Trusts Act, a trust created for unlawful purposes is void. The learned departmental representative submitted that the unlawful purposes included in the objects of the trust would defeat the provisions contained in the Income-tax Act and therefore it would be hit by Section 4 of the Trusts Act.
19. It was also argued that the objects of the trust showed that entertainment of the dealers, their relatives and their employees is one of the main objects of the trust, but such expenditure under this head is not allowable under the Income-tax Act. The learned departmental representative submitted that since the trust is having mixed objects and at the same time since the trustees have unfettered discretion to use the money of the trust in any way they like, there was a possibility of spending the entire amount on entertainment, which is not an allowable expenditure under the Income-tax law. He relied on the decisions in Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 (SC), Dharamaposhanam Co. v. CIT [1978] 114 ITR 463 (SC), East India Industries (Madras) (P.) Ltd. v. CIT [1967] 65 ITR 611 (SC) and Jaipur Charitable Trust v. CIT [1981] 127 ITR 620 (Delhi). In the light of the ratio of these judgments, the learned departmental representative contended that the trust in question is void.
20. The trust is also attacked by the revenue on the ground of uncertainty as regards the beneficiaries. It was submitted that the trust is supposed to be for the benefit of the dealers of Dynavision products, but as per the objects of the trust, the benefits have to be given to the dealers/stockists, their dependent family members, employees etc. and that this huge mass of beneficiaries is unidentifiable and uncertain. It was argued that the company has no list of dependent members or the employees of the dealers or stockists. It was further submitted that as a matter of fact, the company has no dealers except three distributors, who in turn have appointed dealers It was argued that these dealers had paid deposits to the distributors to become dealers. It was therefore argued that when the appellant-company has no dealer and the question of looking after their welfare does not arise. Having regard to the unfettered discretion of the trustees regarding the execution of the trust objects as specified in Clause 6 of the trust deed and uncertainty of the dealers coupled with the uncertainty as regards the beneficiaries, the trust fails and therefore it must be held that no valid trust had been created.
21. It is also the argument of the revenue that since the trust is an invalid trust, it must be held that the money has not been expended within the meaning of Section 37(1) and that the assessee would not be entitled to the deduction of Rs. 50 lakhs claimed by it under Section 37(1) of the Act. In support of this plea, the revenue relied on the decision of the Calcutta High Court in Allahabad Bank Ltd. v. CIT [1952] 21 ITR 169.
22. In reply to the above contentions, the learned counsel for the appellant, Shri K.R. Ramamani submitted that the defects and discrepancies pointed out by the learned departmental representative, Shri Tilak Chand, in the trust deed would not vitiate the validity of the trust, nor be held against its genuineness. He submitted that the materials placed by him before the Tribunal as well as the departmental authorities would establish that the appellant-company had created the trust for the welfare of its dealers on 27-11-1984. He further submitted that on that date, i.e., 27-11-1984, a sum of Rs. 100 wasreceived by the trust, as could be seen from the cash book entry in the books of the trust. He submitted that P. Obul Reddy, who is the director of the appellant-company, has acted both for the company as its director, as well as for himself as one of the trustees and signed the deed on 27-11-1984 and that it is not necessary for him to sign at two places. The absence of the signature of Obul Reddy as the Director of the appellant-company with the seal of the company on the trust deed would not affect the validity of this document. He further submitted that since the settlor had signed the deed in the presence of the Secretary and the cash of Rs. 100 was not deposited in the bank, but was kept as cash till it was deposited on 18-3-1985, it was quite likely that the contribution amount would have been given by the Trustee, Sri Obul Reddy on behalf of the settlor. He therefore contended that a valid trust had come into existence on 27-11 -1984 if the entry in the cash book of the trust along with the trust deed were taken together.
23. The assessee's learned counsel next argued that since a sum of Rs. 50 lakhs had been validly transferred on 26-12-1984 and the said sum was accepted by the Trustees subject to the terms and conditions set out in the trust deed dated 27-11-1984, it must be held that the legal obligation constituted in the trust came to existence at least on 26-12-1984 when the subject matter of the trust property was transferred and accepted by the trustees. In support of this, the learned counsel relied on a copy of the letter dated 26-12-1984 written by the appellant-company to the Managing Trustee of DDW Trust confirming the amount given by the appellant to the trust. The learned counsel argued that this letter dated 26-12-1984 clearly spelt out the amount given to the trust, the person to whom it was given, as well as the objects for which it was given, to establish that the payment of Rs. 50 lakhs was to be held under trust. The learned counsel submitted that no deed or formal document is essential in law for creating a legal obligation. He further submitted that the fact that there was no resolution of the Board of Directors either for the formation of the trust or for the payment of Rs. 50 lakhs to the trust, would render the formation of the trust either ultra vires the powers of the company, or the provisions of the Companies Act. He pointed out that the annual accounts for the year under appeal had been approved by the general body of the shareholders at the annual general meeting and therefore it must be taken that the general body had approved not only the formation of the trust, but also the payment of Rs. 50 lakhs to the trust.
24. The learned counsel further relied on Clause 26 of "the objects incidental or ancillary to the attainment of the main objects" in the objects Clause of the Memorandum of Association of the Company, which appears at page 6 of the Memorandum and Articles of Association of the Company, a copy of which was filed before us. The said Clause reads as follows:-
26. To make donations to any person, company or association and to subscribe or guarantee money for any national, international, charitable, benevolent, educational, public, general or other useful object, activity, exhibition or trade show, or for any purpose whatsoever which may be or appear to be conducive directly or indirectly to the furtherance of the objects of the Company or the interests of the members.
He next relied on Article 198 of the Articles of Association, which deals with the powers of the Directors. The said Article 198 reads as follows :-
198. Subject to the provisions of the Act the Board of Directors of the Company shall be entitled to exercise all such 'powers, give all such consents, make all such arrangements and generally do all such acts and things as are or shall be, by the said Act and Memorandum or Association and these present directed or authorised to be exercised, given, made, or done by the Company and are not thereby or hereby expressly directed or required to be exercised, given, made or done by the Company in General Meeting but subject to such regulations (if any) being not inconsistent with the said provisions as from time to time may be prescribed by the Company in General Meeting provided that no regulation so made by the company in general meeting shall invalidate any prior act of the Directors which would have been valid if the regulation had not been made.
He further relied on Article 200(ff), which is one of the specific powers given to the Directors and which reads as follows:-
200. Subject to the provisions of Article 197 and without prejudice to the general powers thereby conferred and so as not in any way to limit or restrict those powers and without prejudice to the other powers conferred by these presents, it is hereby expressly declared that the Directors shall have the following powers and authorities that is to say, power and authority :
** ** ** (ff) to appoint any person or persons (whether incorporated or not) to accept and hold in trust for the Company, any property belonging to the Company or in which it is interested or for any other purpose and to execute and do all such deeds and other things as may be requisite in relation to any such trust and to provide for the remuneration of such trustee or trustees.
The learned counsel submitted that P. Obul Reddy is one of the promoter-directors, though he is not the Managing Director of the appellant-company and that all the directors carried on the company's affairs as a Board of Directors. He submitted that in the light of the object Clause in the Memorandum of Association as well as the directors' powers under the Articles of Association relied on by him, the creation of the trust by the appellant-company was not ultra-vires, as it was not beyond the objects Clause of the company. If there was any irregularity in the initial stages of the formation of the trust, such as the absence of signature of the Director of the company on behalf of the company, as settlor or the omission to affix the seal of the company, would all get cured by the subsequent ratification of these acts by the annual general meeting of the company when they passed and approved the annual accounts of the appellant-company. The learned counsel therefore argued that there was no violation or contravention of any of the provisions of the Companies Act, which would render the Trust, invalid or void ab initio.
25. The learned counsel relied on the decision of the Privy Council in the case of All India Spinners' Association v. CIT [1944] 12 ITR 482 where in it has been held that a formal deed is not necessary to constitute a trust, still less to constitute a legal obligation binding the trustees. Hence, he argued that the Trust had come into existence by virtue of legal obligation on 26-12-1984, even though assuming, without admitting for the sake of argument that the trust deed dated 27-11 -1984 did not fulfil all the legal formalities.
26. The learned counsel for the appellant next argued that it was not correct to contend that when the original trust is void, the subsequent trust is also void, ignoring the conduct of parties in the present case. In this connection, the learned counsel relied on the accounts of the trust as well as the assessments made on the trust, copies of which were filed before us, to point out that a genuine and valid trust had come into existence and that it was being carried on by the trustees as was unequivocally established by the conduct of parties. He submitted that the materials placed by the appellant-company conclusively proved that the amount of Rs. 50 lakhs was paid by the company to the trust to be held in trust on the various objects set out in Clause 6 of the Trust Deed dated 27-11-1984 and that the trustees were also holding the said property in trust and carrying out the objects of the trust, as specified in the said trust deed. In support of this submission, the learned counsel relied on the decision of the Bombay High Court in (Fazlhussein Sharafally v. Mahomedally Abdullally Sassoor AIR 1943 Bom. 366, wherein it, has been held : "Where the original Trust is void, the conduct of the Trustee in subsequently admitting that he holds the property on specified trust to which there is no valid objection establishes a valid trust on those terms." The learned counsel pointed out that the accounts of the DDW Trust were produced before the Asstt. Commissioner in pursuance of the directions of the CIT(Appeals). The learned counsel further submitted that in the Indian market set up, the role played by the stockists/dealers cannot be over-emphasised and that dealers or stockists are important in promoting the sales of the company, just as employees are important for the successful running of the company. He argued that as the appellant-company was a manufacturer of television sets, it was essential for it to retain the existing dealers and stockists and that it was possible only by providing certain welfare measures for their benefit and that the creation of a trust for their welfare would definitely serve the purpose. He argued that it was wrong to say that the appellant-company had no dealers or stockists, ignoring the entire distribution net-work of the appellant-company. He submitted that such an argument ignored the factual position and that it was wrong to say that the appellant could not ascertain the dealers and stockists at any point of time, as they are always ascertainable from the records of the company as well as the records of the distributors of the appellant-company.
27. The learned counsel for the appellant further argued that it was incorrect to say that the appellant-company had created this Trust with a view to defeat the provisions of the Income-tax Act. He submitted that a reading of the entire deed dated 27-11-1984 would show that the appellant-company had established this Trust for the purpose of promoting its sales by taking care of the welfare of its dealers and stockists, who are the persons through whom the appellant's products will have to be sold in the market against stiff competition. The learned counsel also submitted that there is no prohibition in Section 37(3A) of the Income-tax Act against the incurring of expenditure by an assessee. The restrictions contained in Section 37(3A) and other provisions in Section 37 of the Act are only intended to determine the question of expenditure incurred by an assessee, which is allowable as an admissible deduction for the purpose of his business under Section 37(1) of the Act. There is no total ban or prohibition on the incurring of any expenditure by an assessee in the provisions contained in Section 37(3 A) relied on by the learned departmental representative and therefore the trust deed cannot be held to be void under Section 4 of the Trusts Act.
28. The learned counsel, therefore, finally submitted that the assessee's contentions regarding the validity of the Trust created by it on 27-11-1984 should be accepted and the same should be upheld as valid or at any rate it must be held that a valid trust had been brought into existence by the appellant on 26-12-1984 in the light of the letter dated 26-12-1984 written by the appellant-company to the trust making the contribution of Rs. 50 lakhs for the objects specified in the deed dated 27-11-1984.
29. In the first three questions we are concerned only with the legality and validity of the trust deed dated 27-11-1984 and therefore we shall confine ourselves only to the said questions and shall consider the other arguments with reference to the letter dated 26-12-1984 at the appropriate stage later in the order.
30. In paragraph 14 supra, we have set out the relevant facts relating to this trust deed dated 27-11-1984 and also quoted the relevant clauses which were referred to by the parties in the course of their arguments. It is no doubt true that for creation of a trust no formal deed is necessary. However, when anassessee claims to have created a trust and produces a document purporting to be the trust deed containing the terms and conditions of the trust and relies on the same before the departmental authorities, it has to comply with the legal formalities prescribed by law. If the said deed does not fulfil the legal requirements then the assessee cannot plead that in spite of these defects and deficiencies, it must be held that a trust had come into existence as stated in the said document.
31. In the present case, the document dated 27-11-1984 is an unregistered document, though it is engrossed on non-judicial stamp papers of the value of Rs. 75. We have called for the original of the trustdeed dated 27-11-1984 to satisfy ourselves about the defects and deficiencies noted by us in the copy of the said deed at pages 59 to 67 of the appellant's paper book. The said deed also contained all these deficiencies and defects, namely the absence of any signature on behalf of the settlor-company any where in the trust deed. We find only the signatures of the six trustees in all the pages of the trust deed. On the last page of the document, i.e., page 9, it is typed above the signatures of these trustees "for Dynavision Dealers' Welfare Trust". As rightly pointed out on behalf of the revenue, there are no signatures of the witnesses. On the top of these defects, we find that no amount was paid by the settlor-company to the trustees by account-payee cheque on 27-11-1984, as stated in Clause 2 of the trust deed, which we have already quoted in para 14 supra. In fact, the space for the amount of the cheque remains blank, both in figures and in words. It means that no amount was paid by an account-payee cheque, as contemplated in Clause 2 of the trustdeed. Section 5 of the Indian Trusts Act 1882 deals with trust of immovable and movable properties and reads as follows :-
5. Trust of immovable property - No trust in relation to immovable property is valid unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by will of the author of the trust or of the trustee.
Trust of movable property-No trust in relation to movable property is valid unless declared as aforesaid, or unless the ownership of the property is transferred to the trustee.
These rules do not apply where they would operate so as to effectuate a fraud.
In the light of this provision, it may be held that the signature of the author of the trust, namely the settlor-company in the present case, may not be a serious defect so as to invalidate the trust deed but it is absolutely essential that there must be a transfer of ownership of the movable property to the trustee. Further Section 6 of the Indian Trusts Act, which deals with creation of trusts states as follows :-
6. Creation of trust - Subject to the provisions of Section 5, a trust is created when the author of the trust indicates with reasonable certainty by any words or acts (a) an intention or his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary and (d) the trust-property and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust property to the trustee.
Thus, it would be clear that transfer of the trust property to the trustee is an essential ingredient for the creation of a trust. A reading of Clause 2 of the trust deed dated 27-11-1984 shows that no such property was transferred by the settlor-company to the trustees on that date by an account-payee cheque, as stated in the said clause. We have therefore to hold in the light of the provisions of Sections 5 and 6 of the Trusts Act that no valid trust had been created by the trust deed dated 27-11-1984, as no trust property was conveyed or transferred to the trustees by the settlor-company on that date.
32. The assessee's learned counsel has sought to place reliance on an entry in the cash book of the trust for the receipt of a sum of Rs. 100 from the trustee himself on behalf of the settlor-company, for which there is no evidence at all, because no material has been placed before us to show that this amount of Rs. 100 was paid by the trustee on behalf of the appellant-company on that date. In fact, it is only by way of an argument the learned counsel wants us to infer that a trust had come into existence on 27-11-1984 by taking into account the cash book entry in the books of the trust on 27-11-1984. We are unable to accept this submission of the learned counsel for the appellant, as we are construing the recitals contained in the document by which a trust is claimed to have been created.
33. Our answer to the first question, therefore, is that no trust by the name of Dynavision Dealers' Welfare Trust had come into existence on 27-11-1984, as claimed by the appellant for the reasons discussed above. For the very same reasons, we have to answer the second question also against the assessee and hold that the trust deed dated 27-11-1984 is not valid document and that it had not brought into existence a valid trust on that date. In view of this conclusion of ours on question Nos. (i) and (ii), we need not go into the third question, wherein the department had challenged the validity of the trust on other grounds, as that question does not survive.
34. This takes us to question Nos. (vi) and (vii), which may be conveniently considered together:
(vi) Even if the Trust deed dated 27-11-1984 is held to be invalid and void ab initio, whether any trust had come into existence on 26-12-1984 under the name and style of 'Dynavision Dealers' Welfare Trust' and whether such a trust is a valid trust?
(vii) Whether any legal obligation is attached to the contribution of Rs. 50 lakhs paid to Dynavision Dealers' Welfare Trust on 26-12-1984 even if it were to be held that there was no valid trust created either on 27-11-1984 or on 26-12-1984?
The appellant's case is that a sum of Rs. 50 lakhs was validly transferred by cheque by the appellant-company to the trust on 26-12-1984 and the said amount was accepted by the trustees subject to the terms and conditions set out in the trust deed dated 27-11-1984. According to the learned counsel for the appellant, this letter dated 26-12-1984 taken along with the deed dated 27-11-1984 would fulfil all the conditions of a valid trust as required by law and therefore it must be held to have come into existence on that date, namely 26-12-1984. In other respects, the learned counsel reiterated his submissions in reply to the arguments which were urged by the learned departmental representative attacking the validity of the trust.
35. Alternatively it was pleaded by the appellant's learned counsel that it could not be denied that a legal obligation in the nature of a trust had come into existence at least on 26-12-1984 when the subject matter of the trust property was transferred by the appellant-company to the trustees and that would be sufficient for the appellant-company to put forward a claim for deduction under Section 37(1) of the IT Act.
36. The learned departmental representative contended that when once the deed dated 27-11-1984 is held to be invalid and void ab initio, it could not be revived or re-activated by a mere letter dated 26-12-1984. Even if it can be said that such a trust had come into existence on 26-12-1984 it would be open to challenge on the same grounds, which he had already urged in regard to the trust deed dated 27-11-1984 and that the same arguments earlier urged by him may be considered here also.
37. On the alternative contention of the assessee's learned counsel, the learned departmental representative submitted that no legal obligation in the nature of a trust could come into existence as claimed by the appellant, as the said claim is again based on an invalid deed of trust dated 27-11 -1984.
38. The learned counsel for the appellant in his reply contended that there can be no objection to the recitals in the trust deed dated 27-11-1984 being looked into as it is a case of a trust created in respect of movable property and all the conditions for creation of a trust of a movable property were fulfilled in the present case. He pointed out that the parties to the transaction, namely the appellant-company and the trustees have acted in accordance with the terms and conditions contained in the deed dated 27-11-1984, as directed in the letter dated 26-12-1984 and therefore the recitals in the document dated 27-11-1984, can be looked into for the collateral purpose of ascertaining the objects of the trust, the powers of the trustees and other collateral matters relating to the trust created on 26-12-1984 and that the same can also be looked into for the purpose of ascertaining the legal obligation in the nature of a trust created by the said letter dated 26-12-1984.
39. We set out below the contents of the letter dated 26-12-1984 written by the appellant-company to the Managing Trustee of Dynavision Dealers' Welfare Trust:
Dear Sir:
Please find enclosed a cheque for Rs. 50 lakhs (Rupees Fifty lakhs only) by cheque No. 505117 dated 26-12-1984 drawn on State Bank of India.
Kindly accept and hold the same in Trust as per the terms of Trust Deed dated 27th November 1984. Please signify your acceptance by signing on extra copy of the letter which may be returned, The terms of the said Deed shall govern the Trust.
Thanking you, Yours faithfully, for Dynavision Limited, Sd/-
K. Venkkateswaran Secretary.
This letter is signed by the Secretary of the company and also by P. Obul Reddy, as the Trustee on behalf of Dynavision Dealers' Welfare Trust.
40. We found that the cheque for Rs. 50 lakhs issued by the appellant-company has been debited in its bank account on 26-12-1984 and also credited to the current account of the trust on the same date. This is also clear from the cash book entry in the books of the trust, which shows this amount of Rs. 50 lakhs as received from the appellant and debited in the bank column on 26-12-1984. The above entries taken along with the letter dated 26-12-1984 clearly establish the fact that the sum of Rs. 50 lakhs was paid by the appellant-company to the DDW Trust on 26-12-1984 and that the said amount was also accepted by the trust through its Trustee. It is further established that all the ingredients for the creation of a trust, as required by Sections 5 and 6 of the Indian Trusts Act are fulfilled.
41. The objection on behalf of the revenue is that since the trust deed dated 27-11-1984 is an invalid one, it could not be revived subsequently by means of this letter dated 26-12-1984. The answer to this objection of the revenue is provided in the case of All India Spinners' Association (supra). The facts of the case as summarised by the Privy Council at page 484 of the reports are the following: The All India Spinners' Association was formed in the year 1925 and had its origin in a resolution of the All India Congress Committee passed in 1925. It was started for the purpose of the development of the village industry of hand-weaving (called "khadi") and the weaving of cotton material (called "Khaddar") by the use of hand looms. The constitution of the Association was set out in a document without date or signature (Ex. "G" of the record) which was contained in a publication by the Association called the "Khadi Guide", published in 1931. After referring to the various clauses of the said document and discussing their effect, the Judicial Committee held as follows at page 487 :-
On a fair construction of the constitution their Lordships cannot agree with the opinion of the learned Judges that no trust or legal obligation is shown binding the Association or its trustees or Council to devote the property of the Association from which the income is derived to the charitable purposes for which the Association was formed, assuming for the moment that the purposes were charitable within the meaning of the Act. It is not really questioned that the practice has been to use the surplus income for the purposes of the Association and that the business has been carried on in pursuance of the primary purpose in addition mainly by beneficiaries of the Association. The practice however is not enough. The purpose is to be ascertained from the constitution. In their Lordships' judgment its provisions already quoted show a trust or binding obligation so to carry it on. The constitution is a written instrument, the terms of which bind not only the trustees and Council, but the members who by their application for membership accept its rules. Any departure either by the trustees or Council or members from the rules would be a breach of trust or legal obligation which the Court could restrain. A formal deed is not necessary to constitute a trust, still less to constitute a legal obligation binding the trustees, the Council and the members inter se. Their Lordships hold that there is such a trust or at least that there is a legal obligation, which is all that the section requires.
42. in CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 (SC), the respondent, asocial and sports club conducted horse races with amateur riders and charged fees for admission into the enclosure of the club at the time of the races. A resolution was passed in 1945 at a general body meeting of the respondent for levying a surcharge of eight annas over and above the admission fees, the proceeds of which were to go to the Red Cross Fund. This resolution was varied by another dated January 30,1950, to the effect that the surcharge should be earmarked "for local charities and not solely for the Indian Red Cross". Every entrant was issued two tickets, one, an admission ticket for admission to the enclosure of the club and the other, a separate ticket in respect of the surcharge of eight annas for local charities. The question was whether receipts on account of the surcharge were to be treated as the respondent's income for the assessment year 1960-61. The Appellate Tribunal and the High Court on a reference held that the respondent's receipts from the surcharge levied on admission tickets for purposes of charity could not be included in the respondent's taxable income. While affirming the decision of the High Court, Their Lordships of the Supreme Court held as follows at page 781 of the reports :-
It is settled law, as observed by this Court in CIT v. Thakar Da S Bhargava [1960] 40 ITR 301 (SC) that a trust may be created by any language sufficient to show the intention and no technical words are necessary and it may even be created by the use of words which are primarily words of condition. The only requisites which must be satisfied are that there should be "purposes independent of the donee to which the subject matter of the gift is required to be applied and an obligation on the donee to satisfy those purposes". When the race-goers paid the surcharge to the assessee, they did so for a specific purpose and thereby imposed an obligation on the assessee to utilise it for local charities.
43. In our view, these two decisions answer the objection of the revenue. We, therefore, respectfully follow these two decisions and hold that a valid trust under the name and style of Dynavision Dealers' Welfare Trust had come into existence on 26-12-1984 and that further a legal obligation in the nature of a trust was attached to the contribution of Rs. 50 lakhs paid by the appellant to the DDW Trust on 26-12-1984.
44. The learned departmental representative, however, contended that all the other objections, which he had stated to the validity of the trust deed dated 27-11-1984 would equally hold good to the trust created on 26-12-1984, but we are unable to agree for the following reasons :
We have already referred to the factual position as to how a genuine and valid trust had been created by the appellant on 26-12-1984. Clause 26 of the "objects incidental or ancillary to the attainment of the main objects" in the objects Clause of the memorandum of association of the company and articles 198 and 200 (ff) of the Articles of Association, which we have quoted in paragraph 24 supra, show that the creation of the trust as well as the contribution made by the appellant-company to the said trust are within its powers and that there was no contravention of Section 293(e) or of Section 46 of the Companies Act, 1956, ascontended by the revenue. The letter dated 26-12-1984 shows that this amount of Rs. 50 lakhs is to be held in trust as per the terms of the trust deed dated 27-11-1984. According to the revenue, the objects specified in Clause 6 of the trust deed dated 27-11-1984, except one, were not lawful. We have quoted the entire objects of the trust as contained in Clause 6 of the trust deed dated 27-11-1984 in para 17supra. Weare unable to find any thing unlawful in any of the objects specified in Clause 6 of the trust deed. On the contrary, the various objects are normal activities in the ordinary course of business of a manufacturing concern, which is interested in promoting the sales of its products through its dealers and stockists and there is nothing unlawful or illegal in any of these objects to hold that the trust is void ab in it to, as contended on behalf of the revenue. The further contention of the revenue is that these objects seek to defeat the provisions contained in Section 37(3 A) of the Income-tax Act and therefore the trust is for an unlawful purpose and is hence void. This argument of the revenue overlooks that there is no prohibition in Section 37(3A) against incurring of any expenditure on advertisement, publicity and sales promotion or payments made to hotels or on entertainment expenditure. It fixes a ceiling on the expenditure that would be allowable as a deduction for purposes of computing the income of an assessee under Section 37(1) of the Act and also indicates what percentage of the excess amount should be disallowed under the said provision of law. We are also unable to agree with the revenue that the trust is void on account of the fact that it provided for the entertainment of the dealers and their relatives and their employees and also on the ground of uncertainty as regards the beneficiaries. There is nothing unlawful in any of the objects mentioned in Clause 6 of the trust deed and the beneficiaries under the trust deed are also ascertainable, as could be seen from the list of dealers and stockists filed by the assessee's learned counsel. In fact, the papers filed by the assessee's learned counsel in paper book II clearly establish that the beneficiaries of the trust are ascertainable and there is no uncertainty about them, as their full names and address are given. We are, therefore, unable to accept the contention of the revenue that the appellant-company has no dealers except three distributors. On the other hand, the materials placed by theappellant before us conclusively establish that apart from the three distributors, the appellant-company had a net work of dealers and stockists appointed by these three distributors and that the appellant-company sells its products through this net work of distributors, dealers and stockists. The further argument on behalf of the revenue is that the trustees have unfettered discretion regarding the execution of the trust and therefore they may spend the entire amount on entertainment of the dealers. This argument again does not take note of the factual position established by the materials on record and contained in paper book No. II filed by the appellant. These materials show that the expenses have been incurred by the trust on the various objects about which we will discuss at a later stage in this order and not exclusively on entertainment, as contended for the revenue. The trustees are bound to deal with the trust property as carefully as a man of ordinary prudence and to be impartial and prevent waste and are bound to keep clear and accurate account of the trust property. The appellant's further argument is that the appellant-company has authority to question the manner of spending the trust money by the trustees inasmuch as under Section 11 of the Trusts Act, the trustee is bound to fulfil the purpose of the trust and to obey the directions of the author of the trust given at the time of creation of the trust. It is also contended that the various statements contained in paper book No. II would show that the trust had incurred expenditure on the various objects of the trust and not merely on entertainment, as assumed by the revenue in the course of the arguments. We find force in these submissions urged on behalf of the assessee, as the comparative statement at page 3 of the paper book No. II show the various items of expenditure incurred by the trust under the various heads, such as dealers' conference expenses, dealers' welfare expenses, dealers' tie-up advertisement and incentives to the dealers during the previous years ended 31-10-1985,31-10-1986 and 31-10-1987. The statements of income and expenditure account and balance-sheets contained in the paper book support the contention of the appellant. In our view, the contentions of the revenue, as set out by us in para 19 supra, proceed on an erroneous appreciation of the facts of the case and it is, therefore, not necessary for us to deal with them any further. We are also of the view that the decisions relied on by the revenue in the said para are not applicable to the facts of the present case and, therefore, we do not propose to discuss them.
45. In Indian Molasses Co. Ltd. v. CIT [1959] 37 ITR 66, the Supreme Court held that "spending" in the sense of "paying out or away" of money is the primary meaning of "expenditure" and that "expenditure" is what is paid out or away and is something which is gone irretrievably. Their Lordships further held that expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. Their Lordships also held that the income-tax law makes a distinction between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent and that the former is deductible but not the latter. Applying the above tests laid down by the Supreme Court, it would be noticed that the sum of Rs. 50 lakhs had gone irretrievably to the coffers of the DDW Trust, as established by the entries in the books of accounts of the trust as well as the bank account of the appellant-company. Further, Clause 1 of the trustdeed dated 27-11-1984, which we have already referred to in para 14 supra, expressly declares that the trust is an irrevocable trust and that no part of the trust fund shall, in any circumstances whatsoever, be applied for the benefit of the settlor-company without full consideration. It is therefore clear that the sum of Rs. 50 lakhs has been given away in trust by the appellant-company to the DDW Trust on the same terms and conditions contained in the trust deed dated 27-11 -1984 when this amount was entrusted by the appellant-company to the trustee on 26-12-1984. We, therefore, hold that a valid and genuine trust under the name and style of Dynavision Dealers' Welfare Trust had come into existence on 26-12-1984 and that the trustees of the trust were bound to carry out the objects of the trust as specified in the trust deed dated 27-11-1984, as directed by the appellant-company, who is the author of the trust. We also hold that a sum of Rs. 50 lakhs, which was paid by the appellant-company to the said trust, was attached with a legal obligation in the nature of trust, as specified in the terms and conditions in the Trust Deed dated 27-11-1984.
46. The above findings are sufficient to dispose of question Nos. (vi) and (vii). However, there are three more minor points raised by the revenue in the course of arguments and also in its written submissions. They are considered below.
47. Since on 27-11-1984 no artificial person or legal entity by the name of Dynavision Dealers' Welfare Trust had come into existence, it could not have received the sum of Rs. 50 lakhs on the subsequent date on 26-12-1984 and therefore the contribution of Rs. 50 lakhs said to have been made to this trust was invalid. Reliance was sought to be placed on behalf of the revenue on the decision of the Supreme Court in the case of Surjit Lal Chhabda v. CIT [1975] 101 ITR 776. Hence it is argued that the status quo ante should continue. We are unable to accept these contentions of the revenue, as these arguments proceed on the basis that a valid trust had not come into existence on 27-11-1984. We have already accepted the department's contentions that no such valid trust had come into existence on 27-11-1984. However, it does not mean that the trust could not have come into existence on a subsequent date, namely 26-12-1984 by the contribution of Rs. 50 lakhs. We have already discussed in the earlier paragraphs how a genuine and valid trust had been created by the appellant-company through its Secretary by entrusting the sum of Rs. 50 lakhs to the trustee. Therefore, all these arguments have no force in view of the above conclusion reached by us about the creation of the trust on 26-12-1984. It is therefore not necessary to examine the decision of the Supreme Court in the case of Surjit Lal Chhabda (supra) as it has no bearing on the point at issue.
48. The next objection of the revenue is that Clause 19 of the trust deed is too vague so as to find out the situation whether the last lineal descendant member or a person is stockist or dealer and therefore the trust suffered from uncertainty and principle of perpetuity. We set out below Clause 19 of the trust deed, which relates to determination of the trust:-
19. Determination of the Trust.
The trust shall stand determined on the expiry of the last lineal descendants of past or present stockists or dealers of the Settlor Company and the Trustees shall transfer the Trust funds to any Trust with the same objects as these presents or at its discretion to a public charitable Trust.
This Clause deals with the determination of the trust. We are unable to see what is wrong in this Clause to make the trust uncertain or as violating the principle of perpetuity. A careful reading of this Clause will show that it has provided for the transfer of the trust funds in the event of the determination of the trust. How it would make the trust uncertain or how it violates the principle of perpetuity, we are unable to follow. On the contrary, this Clause shows that the trust funds would not go back to the appellant-company, but only to similar trusts or to any public charitable trust at the discretion of the trustees in the event of determination of the trust. We are therefore unable to accept this objection of the revenue also.
49. The next objection of the revenue is based on Clause 20 of the trust deed, which reads as follows:-
20. The Settlor Company reserves the power to modify or alter this deed so as to bring out the intentions should the same have not been expressed clearly and correctly in the presents or so as to be in consonance with the Income-tax Act, 1961 as it stands amended from time to time.
According to the revenue, this Clause confers full powers on the settlor-company to modify or alter the clauses of the trust deed and therefore it can even amend the power of revocability. The learned counsel for the appellant submitted that this Clause should be read in its proper context and setting and not in isolation. It is submitted that the power reserved to itself by the settlor-company is intended to effectuate and further the obejcts of the trust only, so as to be in conformity with law, particularly the Income-tax Act, 1961 and not with a view to make it a revocable transfer.
50. It is an elementary rule of construction that a deed should be read as a whole and construed fairly and reasonably and that a particular Clause should not be read out of context or in isolation. If we read the terms and conditions of the entire trust deed along with Clause 20, it would be clear that the appellant-company is anxious to see that the trust deed is in consonance with and in conformity with the provisions of law, particularly the provisions of the Income-tax Act, 1961 as it stands amended from time to time. The company has not reserved to itself any power to revoke the trust itself. Such a reading would not be a reasonable way of reading of the clauses of the deed all together. We are therefore unable to agree with the submissions urged on behalf of the revenue on this aspect of the case.
51. The learned departmental representative further submitted that the appellant-company had advanced loans to Directors by the means of this trust, as could be seen from the fact that Rs. 46 lakhs was given by the trust as loans to partnership firms, in which the Directors of the appellant-company were partners as on 30-11-1985 and, therefore, it violated Section 295(1)(b) of the Companies Act. To this argument, the learned counsel for the appellant invited our attention to the profit and loss account and balance sheets of the trust in paper book No. II filed by him and pointed out that all these loans were advanced by the trustees in order to safeguard the interest of the trust by investing the trust funds in non-hazardous assets and in fact the trustees have earned more interest than the prevailing interest rate offered by the financial institutions, as could be seen from the profit and loss accounts of the trust for the various years. He therefore argued that there was no violation of Section 295(1)(b) of the Act by the appellant-company. After examining the materials contained in paper book No. II filed by the appellant's learned counsel, we find force in his submissions and we are unable to agree with the revenue that there is any violation of Section 295(1)(b) of the Act by the appellant-company in the present case.
52. This takes us to the last question regarding the allow ability of the sum of Rs. 50 lakhs as business expenditure. We set out below the said question :-
Whether the sum of Rs. 50 lakhs paid by the assessee to Dynavision Dealers' Welfare Trust on 26-12-1984 is allowable as business expenditure laid out wholly and exclusively for the purpose of its business under Section 37(1) of the Act?
Shri K.R. Ramamani, the learned counsel for the appellant submitted that this payment of Rs. 50 lakhs by the appellant-company to the trust is a business expenditure, which the appellant-company is entitled to deduct under Section 37(1) of the Income-tax Act, 1961. According to him, the payment has been made in furtherance of trade for improving the sales of the appellant-company through conferment of benefit on the dealers by the appellant under the Dealers Welfare Trust. He argued that the benefit to the company's trade was real and direct and that the expenditure has been incurred by the appellant as a trader only.
53. The learned counsel submitted that the expenditure was for the purposes of business of the appellant-company and that it was not personal expenditure, nor capital expenditure. He submitted that the only connection between the beneficiaries of the trust and the appellant-company was trade and trade only. He further submitted that the fact that it was a lump sum payment was not relevant in the circumstances of the case, as it represented surrogated expenditure or a compressed revenue expenditure. In support of these submissions, the learned counsel relied on the following decisions :-
1. CIT v. Madras Auto Service Ltd. [1985] 156 ITR 740 (Mad.)
2. CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) at 262 and 263/38 Taxman 110A
3. CIT v. Janak Steel Tubes (P.) Ltd. [1990] 182 ITR 92 (Punj. & Har.)
4. Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) at page 10.
54. The learned counsel further argued that the fact that there was some benefit to a third party was only incidental and did not detract from the fact that the payment of Rs. 50 lakhs to thetrust was for the purpose of business of the appellant-company. In support of this submission, the learned counsel relied on the following three decisions:-
1. CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC)
2. Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC)
3. CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC)
55. The learned counsel also argued that the fact that the benefit of the expenditure enured for more than one year was not relevant and on that account it could not be considered as capital expenditure or as not deductible in the year of account, so long as the payment was for facilitating trade. In support of this proposition, the learned counsel relied on the following two decisions :-
1. Mysore Spg. & Mfg. Co. Ltd. v. CIT [1966] 61 ITR 572 (Bom.) affirmed in CIT v. Mysore Spg. & Mfg. Co. Ltd. [1970] 78 ITR 4 (SC)
2. Empire Jute Co. Ltd.'s case (supra).
56. The learned counsel finally submitted that the relevant consideration should be the aim and object of the expenditure and not its quantum for allowance under Section 37(1) of the Act. In support of this contention, the learned counsel relied on the decision of the Supreme Court in M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38.
57. The learned counsel further reiterated the submissions made by him earlier in connection with the genuineness and validity of the trust deed to show how the appellant-company is carrying on its business through a large net work of distributors, wholesalers, stockists and sub-dealers in different parts of the country and that this Welfare Trust for the benefit of the dealers of the appellant-company was created and the contribution of Rs. 50 lakhs was made to this trust in order to ensure the wholehearted support and interest of these dealers in favour of the appellant-company and its products in the face of stiff competition from other manufacturers in the field. The learned counsel argued that when competitors enter the field, an existing company had to face the said competition by spending more amount on advertisement, sales promotion etc. and it had also to see that there was no possibility of losing well-established and fully trained dealers and stockists. He submitted that if any of the fully trained and well established old dealers or stockists of the appellant-company were to join the competitors, it would be a serious blow to the appellant-company and it was therefore essential for the appellant-company to retain the loyalty of the existing dealers and stockists and that it was possible for the appellant-company to ensure this loyalty by providing certain welfare measures for the benefit of the said dealers and stockists. In these circumstances, the learned counsel submitted that the creation of the Dealers' Welfare Trust by the appellant-company served the appellant's business only and therefore the contribution must be held to be expenditure laid out wholly and exclusively for the purposes of the business of the appellant-company.
58. The learned counsel explained the incurring of the expenditure by the DDW Trust and the basis of working of the incentive and submitted that the improvement of sales turnover of the appellant would show that the expenditure in question was genuine and that the only consideration for the creation of the trust was trade and trade only and that it was not intended to defeat any provision of law, as assumed by the departmental authorities, but was with a view to promote the sales of the appellant's products.
59. The learned counsel argued that the decision of the Calcutta High Court in Allahabad Bank Ltd.'s case (supra) was not applicable to the facts of the present case, as the appellant had not terminated any of its dealers and the beneficiaries under the trust were all ascertainable from the records maintained by the appellant-company and its distributors. The learned counsel further submitted that the fact that the dealers were dealing in other products could not militate against the claim of the appellant, as the intention of the appellant in creating the trust and incurring the expenditure was only to promote the sales of its own products. He also argued that even if the contribution given by the appellant were to be treated as grants or a voluntary payment, it would still qualify for deduction, inasmuch as the said amount was paid in the interests of the assessee' s business and for the purpose of its business. He further argued that it was settled law that an expenditure incurred voluntarily out of business expediency was deductible, even though there was no statutory or contractual compulsions. He submitted that Section 37(1) of the Act does not require that there should be necessity for the expenditure and that under the said provision of law, an expenditure which would indirectly facilitate the carrying on of the business would still be allowable. He also relied on the passage in Aiyengar on Income-tax Law, Vol. II, page 1627.
60. The learned counsel next argued that the nexus for making the contribution was direct, as it was necessitated on account of severe competition for the appellant's products during the impugned period and was therefore necessitated on account of commercial expediency. He further submitted that the trust was not established for any obnoxious or oblique purpose and therefore the decisions relied on by the revenue would be inapplicable, as the expenditure has been incurred by the appellant bona fide for the promotion of its sales.
61. The learned counsel further argued that the contention of the department that the appellant-company had given loans indirectly to the firms in which the Directors of the appellant-company were interested through the Trust was misconceived and contrary to facts, inasmuch as the trustees were under an obligation to invest the money in proper non-hazardous assets and in fact the trustees had earned more interest than the prevailing interest rate offered by financial institutions. He pointed out that there was no apparent tinge of excessiveness or colourable discretion, having regard to the nature of the business needs of the appellant's products, as the company was interested in becoming a leader in a particular line and the findings of the CIT (Appeals) to the contrary were erroneous and unsustainable.
62. Shri Ramamani, the learned counsel for the appellant submitted that since the expenditure had been incurred on account of commercial expediency, it was allowable under Section 37 of the Act. He argued that there was no attempt to avoid the tax, as the consideration for incurring the expenditure was to promote the sales, thereby to contribute more to the public exchequer in the long run and the decision relied on by the department, namely McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) was no longer applicable on the facts of the present case. He relied on the later decision of the Supreme Court in the case of Aravind Mafatlal as answering the issue raised by the department regarding tax avoidance and tax planning and submitted that it was not the aim of the appellant-company to avoid tax and that the sole object of the contribution of Rs. 50 lakhs to the trust in the present case was to promote the sales and thereby increase the profits of the appellant-company, as well as that of the dealers.
63. The learned counsel relied on Clauses 6(e), (g) & (h) of the Trust Deed and pointed out that these clearly establish that the objects of the Trust was to promote the sales. He submitted that Section 37(3A) of the Act would not be applicable, inasmuch as the expenditure was in the nature of business expenditure and that further, the said provisions of law in Section 37(3A) would have to be looked into only in the hands of the Trust and not in the hands of the appellant. He further sought to distinguish the decision of the Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 by pointing out that in the said case the only object was to reduce the amount to be paid to the workers by way of bonus, whereas in the present case there was no such device adopted by the appellant-company.
64. The learned counsel for the assessee further submitted that it was not the case of the department that the DDW Trust had not spent any money towards the objects of the Trust. On the contrary, he pointed out with reference to the materials placed by him in paper book No. II that the trust had actually incurred expenditure on various objects from year to year, while investing the funds received from the appellant-company in safe investments and earning income there from, out of which it has been incurring such expenditure. He also relied on the fact that the assessment order made on the Dynavision Dealers' Welfare Trust for the assessment year 1986-87 dated 30-3-1989 at pages 13 to 15 of paper book No. II clearly established that the trust was very much in existence and was carrying on the objects of the trust by incurring the expenditure under various heads, as discussed in the said assessment order also. The learned counsel submitted that the future potentiality of the nature of the expenditure as entertainment expenditure or on advertisement and publicity expenditure, could be considered only in the hands of the Trust and not in the hands of the appellant and whether such expenditure incurred by the Trust would fall within the mischief of Section 37(2A) or Section 37(3 A) of the Act would also come up for consideration as and when the trust incurs the expenditure in the respective years in its hands and that these factors would not stand in the way of the allowance of the present claim for deduction of this amount of Rs. 50 lakhs as business expenditure on grounds of commercial expediency in the hands of the present appellant. The learned counsel submitted that the provisions contained in Sections 40A(9) and (10) of the Income-tax Act, 1961 were applicable to Trusts created for the welfare of the employees of a company and that in the absence of a similar provision in the Act against Dealers' Welfare Trust, there could be no objection to the acceptance of the appellant's claim for deduction of this amount. He argued that no disallowance could be made on the basis of analogy with reference to the provisions contained in Sections 40A(9) and (10) of the Act. He further argued that Section 37(2A) and (3 A) of the Act would not apply to the present expenditure claimed by the appellant and that at any rate it would not apply in the hands of the appellant for this year in respect of this amount of expenditure of Rs. 50 lakhs.
65. The learned counsel further submitted that the appellant-company is a Joint-Sector undertaking, in which the State Government of Tamil Nadu is represented by TIDCO, which holds 50% interest during the material time and that TIDCO is also represented by its Chairman and Managing Director, who is also the Chairman of the appellant-company. He therefore submitted that it was futile to contend that the DDW trust had been created by the appellant-company for any colourable or collusive purpose(s). Hence, the learned counsel submitted that the disallowance of the appellant's claim for deduction of this amount of Rs. 50 lakhs by the departmental authorities was not justified and that the same should be allowed as an admissible deduction under Section 37(1) of the Act.
66. Shri K.L. Tilak Chand, the learned Departmental Representative vehemently opposed these contentions and argued that the contribution of Rs. 50 lakhs to the DDW Trust by the appellant-company did not represent any expenditure, much less business expenditure and that it was rightly disallowed by the departmental authorities. He pointed out that there was neither contractual nor statutory liability for incurring this expenditure and that at best this payment could be treated only as a donation or a gift by the appellant-company to the Trust. The learned departmental representative pointed out that it was not a case where the welfare of the dealers was statutorily required as a duty of the manufacturer to be looked after. He further pointed out that the distributors and dealers of the appellant-company were not dealing exclusively in the products of the appellant only, that as a matter of fact, one of the dealers, Associated Electrical Agencies, was mainly a dealer in Nippo Batteries and that the dealers and sub-dealers were dealing in many brands of T. Vs. He therefore submitted that the comparison between the employees who are exclusively under one employer and the dealers who trade in the goods of a particular manufacturer was far fetched.
67. Shri Tilak Chand next submitted that there was no contract between the appellant-company and the dealers, either written or oral, appointing them as dealers, but that the materials on record showed that the dealers were given dealership by the distributors, who received deposits from the said dealers and dealership agreements entered into between the distributors and dealers were totally silent in regard to the various matters provided for in the trust deed. The learned departmental representative argued that there was no criteria as to how the benefits were to be given and to whom and what were the benefits to be given. According to him, the appellant-company had no control over the trust as to how they should spend the money, or whether they should spend at all and that, therefore, this entire payment of Rs. 50 lakhs by the appellant-company to the trust was in the nature of a gratuitous payment.
68. Shri Tilak Chand next argued that this payment was not wholly and exclusively for the business purposes of the appellant-company and that further it had not been incurred wholly and exclusively for the purpose of the business of the company. For this, he relied on the preamble of the Trust Deed and also on the objects of the Trust Deed to point out that there was no reference to any sales promotion of the appellant-company and hence there was no commercial expediency for creating the trust for the benefit of the dealers by the appellant-company. He referred to Clause 8(k) of the Trust Deed, under which the Trust could receive money by way of voluntary contribution from any person including the settlor-company by donation, legacy, gifts etc., only and argued that on the basis of this clause, the contribution of Rs. 50 lakhs could be received by the trust only as either a gift or a donation and consequently it could not be an expenditure in the hands of the appellant-company.
69. The learned departmental representative relied on the findings of the CIT(Appeals) in his appellate order and the reasons in support thereof to hold that the expenditure in question was not incurred wholly and exclusively for the business of the appellant. In support of these arguments, Shri Tilak Chand, relied on the following decisions :-
1. CIT v. Navsari Cotton & Silk Mills Ltd. [1982] 135 ITR 546 at 556 & 557 (Guj.)
2. Chandulal Keshavlal & Co.'s case (supra) at 610 and 611.
3. Chandmama Publications v. CIT [1989] 176 ITR 321/43 Taxman 147 (Mad.)
4. Shri Panzara-Kan Sahakari Sekhar Karkhana Ltd. v. ITO [1985] SOT 90 (Pune) (SB)
5. Modipon v. ITO [1985] 22 TTJ (Delhi - Trib.) 108
6. Wolkem (P.) Ltd. v. ITO
70. The learned departmental representative argued that the whole transaction was colourable and collusive in nature with an intention to defraud the revenue. He pointed out that the alleged trust had been created at the fag end of the year and the payment of Rs. 50 lakhs had been made in the. last week of the accounting year. He further relied on the fact that the the Directors of the company and the Trustees of the Trust were more or less common and that the Trust had advanced money to a sister or associated concern of the appellant-company, namely Apex Agency and Associated Electric Company, Hyderabad, where the Directors and their relatives were partners. He submitted that the amount of Rs. 50 lakhs was borrowed from the over-draft account and given to the Trust and that the Trust was supposed to incur the expenditure, which at present was being incurred by the appellant-company. Shri Tilak Chand pointed out that the amount of Rs. 50 lakhs was highly disproportionate to the expenditure which was incurred by the appellant-company in the previous three years and this was highlighted by the CIT (Appeals) in para 8.7 of his order. Shri Tiiak Chand argued that the advantage projected by the appellant's learned counsel was too remote as far as the company was concerned and that the whole plan depended on many "if s" and "buts". He submitted that the money of the company had been received back by the company from the sister concerns and that the company was well aware of the legal proposition that if it is allowed as expenditure in the hands of the appellant-company, it would save about Rs. 35 lakhs of Income-tax and Surtax, though no expenditure from this Rs. 50 lakhs had been incurred during the year under appeal. Shri Tilak Chand submitted that if the appellant was not entitled to get any amount out of this Rs. 50 lakhs as an allowable deduction if the Trust had not been created, on the same parity of reasoning the appellant would not be entitled to any deduction of this amount merely because it had routed this amount of Rs. 50 lakhs through the conduit of the trust for the welfare of its dealers by making a claim for expenditure of this amount for this year. He submitted that in this process the appellant-company had escaped the provisions relating to entertainment under Sections 37(2A) and 37(3 A) of the Act and that thus the whole transaction was collusive and entered into with an intention to defraud the revenue. In support of these submissions, the learned departmental representative relied on the following decisions:-
1. Mascot (India) Tools & For gins (P.) Ltd. v. ITO [1987] 23 ITD 274 (Delhi)
2. ITO v. Samir Builders [1987] 23 ITD 570 (Ahd.)
3. Workmen of Associated Rubber Industries Ltd.' s case (supra)
4. McDowell & Co. Ltd.'s case (supra)
5. Neroth Oil Mills Co. Ltd. v. CIT [1987] 166 ITR 418/33 Taxman 249 (Ker.).
71. Finally, Shri Tilak Chand referred to the provisions of Section 40A(9) and (10) of the Act and contended that the implied will of the legislature has been expressed against the creation of welfare trusts for the benefit of employees. In the light of the said provision against creation of trusts for the benefit of employees, the present claim of the appellant for deduction of Rs. 50 lakhs by way of contribution to a Dealers' Welfare Trust should not be allowed under Section 37(1) of the Act. He therefore submitted that the orders of the departmental authorities on this issue should be upheld.
72. Shri Ramamani in his reply, while reiterating his earlier submissions argued that there was no intention on the part of the appellant to defeat any provisions of the Income-tax Act, much less to defraud the revenue. He submitted that there could be no collusion in a case of this type, particularly where the business is carried on by a Joint-Sector undertaking, the business affairs of which were being controlled and watched by the Officers of TIDCO representing the State Government. The learned counsel submitted that the fact that the appellant was able to get out of the mischief of the provisions of Section 37(2 A) and (3A) of the Act by making this contribution to the Trust, would not mean that it was seeking to defeat the said provisions of law and on that ground the appellant's claim for deduction under Section 37(1) could not be disallowed or denied. He submitted that even the contentions of the learned departmental representative showed that the appellant-company had genuinely parted with this amount of Rs. 50 lakhs by making this contribution to the Trust for the welfare and benefit of its dealers and that the materials placed by him established that the trust was carrying out the objects, as could be seen from the figures of expenditure incurred by it under various heads. He submitted that the appellant has been able to establish direct nexus between the expenditure incurred by the trust and the benefit derived by the appellant-company and its dealers by way of increased sales. He therefore submitted that the appellant's claim was validly allowable under Section 37(1) of the Act, as it was prompted by commercial expediency and was laid out wholly and exclusively for the purpose of its business.
73. A perusal of the annual report of the appellant for 1984, which is the accounting year relevant for the assessment year 1985-86, shows that the appellant-company is a joint venture with Tamil Nadu Industrial Development Corporation Ltd. (TIDCO). Among the Board of Directors there were two officials of TIDCO, namely Shri M.A.K. Tayab, who is an IAS Officer and who was the Managing Director of TIDCO at the material time and Shri J. Jawahar, who was an official of TIDCO. We were informed that Shri Tayab was the Chairman of the appellant-company during this accounting year. It is further noticed from the explanatory note given in the notice to shareholders pursuant to Section 173 of the Companies Act, 1956 that TIDCO, which is a Government company owned by the Tamil Nadu State Government holds more than 25% of the subscribed share capital of the appellant-company. Article 158(2) of the Articles of Association shows that Shri P. Obul Reddy and TIDCO being promoters of the company, are entitled to have equal representation on the Board of Directors subject to the conditions specified therein. Article 158(1) contains the names of the first Directors of the company. This article further shows that the Chairman of the Board of Directors will be appointed in consultation with TIDCO and that further TIDCO holds more than 25% of the total shareholdings of the company. We may mention here that the sum of Rs. 50 lakhs is shown under the head "Contribution to Dynavision Dealers' Welfare Trust" in Schedule II of the annual accounts, which contains the particulars of the expenses under the head "other expenses" and forms part of the profit and loss account for the year under appeal. There is no dispute before us that these final accounts have been passed at the annual general meeting of the appellant-company.
74. In the light of the above facts, we find ourselves unable to agree with the revenue that the transaction in question is a colourable and collusive transaction which was entered into with an intention to defraud the revenue. The fact that the Trust was created at the fag end of the accounting year would not militate against its genuineness nor affect its validity in law. The other circumstances pointed out by the learned departmental representative, which we have set out in paragraph 70 above, would not also in any way affect either the genuineness of the transaction, or its validity, since the appellant is a joint-venture company, in which a Government company is vitally interested, holding more than 25% of the subscribed share capital. Apart from the two trustees, who are the Directors of the appellant-company, there are three other trustees, who are dealers of the appellant's products, as could be seen from their description set out in paragraph 14 supra. The investment of the funds of the trust by the, trustees in partnership firms, in which the Directors or their relatives are partners, would not in any way affect the genuine nature of the transaction. There is no material to showthat the amount of Rs. 50 lakhs had found its way back into the hands of the appellant-company. On the contrary, the materials placed by the appellant show that the trustees have been carrying on the objects of the trust by investing the funds of the company in safe investments and by earning substantial interest income for the trust with which they had carried out the various objects of the trust. This is established by the statements of the trust contained in Paper Book No. II filed by the appellant's learned counsel. To our mind, the appellant-company seems to have created this trust for the purpose of utilising a portion of its profits on its sales promotion campaign and publicity through the medium of the trust by involving its dealers also as a prudent business proposition. There is nothing collusive or colourable about this transaction. Whether the appellant is entitled to the deduction Under Section 37(1) is a different question, which we will consider separately, but that does not mean that the transaction in question is a collusive and colourable transaction, which has been entered into by the appellant-company to defraud the revenue, as contended by the department. We are, therefore, of the considered view that none of the decisions, namely McDowell & Co. Ltd.'s case (supra) and other decisions relied on by the learned departmental representative would be applicable to the facts of the present case and therefore it is not necessary to consider the same in detail.
75. Similarly, the reference to the provisions of Section 40A(9) and (10) of the Act has no material bearing, as we are not concerned with welfare trusts for the benefits of employees in the present case, but with a welfare trust for the benefit of the dealers of the appellant-company. We are therefore unable to accept the contention of the revenue that in the light of Sections 40A(9) and (10) of the Act, we should presume a prohibition as the implied will of the legislature against similar welfare trusts for the benefit of the dealers, as in the present case. For, it is well settled that "There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". [Please see Cape Brandy Syndicate v. IRC [1921] 1 KB 64,71].
76. This takes us to the question of allowability of the sum of Rs. 50 lakhs as an admissible deduction under Section 37(1) of the Act. In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Supreme Court held as follows at page 170 of the reports while construing the expression "for the purpose of the business" in Section 10(2)(xv) of the Indian Income-tax Act, 1922, which corresponds to Section 37(1) of the present Income-tax Act, 1961 :-
The aforesaid discussion leads to the following result : The expression " for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or ascertain of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. (sic)
77. In Chandulal Keshavlal & Co.'s case (supra) at 610, Their Lordships of the Supreme Court held as follows while considering the question of allowability of a portion of commission waived by a managing agent as business expenditure on grounds of commercial expediency under Section 10(2)(xv) of the old Act:-
Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce). Another test is whether the transaction is properly entered into as a part of the asscssee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. CIT). But inevery case it is a question of fact whether the expenditure was cxpended wholly and exclusively for the purpose of trade or business of the assessee.
We may point out that the learned counsel on both sides relied on this decision in support of their arguments.
78. In M.K. Bros. (P.) Ltd.' s case (supra), Their Lordships of the Supreme Court held as follows at page 42 of the reports :-
The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by instalments over a period of time. On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically.
Again, at page 43 of the same reports, after referring to their earlier decision in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34, 45 (SC), Their Lordships held as follows :-
The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence.
79. In Sassoon J. David & Co. (P.) Ltd.'s case (supra) Their Lordships of the Supreme Court held as follows at pages 275 and 276 of the reports :-
It has to be observed here that the expression wholly and exclusively" used in Section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of Section 37 of the IT Act, 1961, which corresponds to Section 10(2) (xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under Section 37. Section 37(1) in the Bill read "any expenditure ... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed...". The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when Section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48; 38 ITR 601, 610 (SC) :-
We have omitted the passage given in the earlier judgment of the Supreme Court in the case of Chandulal Keshavlal & Co. (supra) as it has already been quoted by us earlier.
80. In Empire Jute Co. Ltd.' s case (supra) the Supreme Court held as follows at page 10 of the reports :-
The decided cases have, from time to time evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem ; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and He is by Cables Ltd. [1925] 10 TC 155,192 (HL), where the learned Law Lord stated :
...when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
This test, as the parenthetical Clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Redcliffe in Commissioner of Taxes v. Exchange Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (TC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
81. When we examine the facts of the present case in the light of the ratio of the aforesaid decisions of the Supreme Court quoted above, it would be clear that this amount of Rs. 50 lakhs paid by the appellant-company to the Dynavision Dealers' Welfare Trust is neither personal expenditure nor capital expenditure. The covering letter dated 26-12-1984 enclosing the cheque for Rs. 50 lakhs establishes that this amount was paid to the Trustee of the said Trust to be held on the terms of the Trust Deed dated 27-11-1984. We have already pointed out that this amount had irretrievably gone out of the hands of the appellant-company and therefore it represents expenditure incurred by the company. This expenditure has not brought into existence any capital asset or any enduring advantage to the appellant- company. On the contrary, the facts of the case showed that this expenditure has been incurred only in the revenue filed, i.e., for the purpose of incurring the expenditure on the various objects specified in Clause 6 of the Trust Deed, which we have already set out in paragraph 17 supra. A perusal of the said Clause 6 would show that the amount was to be expended for providing interest-free finance or finance at concessional rates of interest to dealers and stockists of the assessee in case of financial difficulties and to promote the sales of the appellant-company by organising seminars, conferences, advertising and publicity campaigns etc. and also for the welfare and benefits of the dealers and stockists who are indigent or in ill-health and other similar difficult circumstances. Expenditure on any of these objects could not be considered as an expenditure in the capital field, much less as personal expenditure of the appellant-company. All of them go to contribute to the promotion of the sales of the products of the assessee-company by ensuring the welfare and loyality of the stockists and dealers of the appellant-company.
82. The further argument on behalf of the revenue is that even if this amount is considered to be revenue expenditure, it was not wholly and exclusively for the purpose of the appellant-company and that there was no commercial expediency involved for incurring such huge expenditure. It is further argued that there is no direct nexus between this expenditure and the benefits alleged to have been derived by the appellant-company by the payment of this amount to the trust and that at any rate such nexus was too remote to be accepted. All these arguments, in our view, are untenable and proceed on an incorrect appreciation of the materials brought on record. From the materials placed before us it is seen that the appellant-company had appointed three firms, namely Associated Electrical Agencies, Madras, Apex Agencies, Hyderabad and K.D. & Sons, Bhubaneswar as its distributors of wholesalers who in their turn, had appointed dealers at various places in Tamil Nadu, Andhra Pradesh, Karnataka and Kerala and also in Orissa. Paper Book No. II filed by the appellant contains a list of the dealers availing the facilities provided by the Trust. This list shows that there were 61 dealers in Karnataka area, who were benefited by the facilities afforded by the Trust. Similarly, paper book No. IV contains the present list of dealers for Karnataka, Kerala and Tamil Nadu of Associated Electrical Agencies at pages 16 to 27 as on 27-3-1989. At page 28 of paper book No. II there is a copy of a letter of appointment issued to M/s Amar Domestics Guntur on 3-1-1984 by Apex Agencies, Hyderabad, appointing the said Amar Domestics as "Dyanora" T. V. Dealers. This letter shows that this appointment was valid for a period of one year with effect from 1-12-1983 and was renewable every year by mutual agreement. There are various conditions as to how the dealer should carry on business in. respect of the appellant's products. Paragraph 6 of this letter shows that the 'dealer had deposited a sum of Rs. 10,000 as security deposit with the Distributor-firm, Apex Agencies, Hyderabad. This letter is only an illustrative example of the dealership appointment. The following particulars contained in the statement at page 3 of the appellant's paper book No. II sets out the expenditure incurred by the Dealers' Welfare Trust in the three years ended 31-10-1985,31-10-1986 and31-10-1987 with corresponding figures incurred by the appellant-company during the calendar years 1983,1984, 1985, 1986 and 1987. For facility of reference we set out the figures incurred by the Dealers' Welfare Trust as given in the statement:-
Nature of expenditure Expenditure incurred by Dealers' Welfare Trust 30-11-1985 31-10-1986 31-10-1987 Rs. Rs. Rs.
1. Dealers Conference 1,22,522 39,867 5,473 expenses
2. Dealers Welfare 9,293 29,205 nil expenses
3. Dealers Tie-up 5,87,781 14,68,312 16,54,968 advertisement
4. Incentive to 5,41,417 nil nil dealers 12,61,013 15,37,384 16,60,441 Total expenditure incurred for the three years ... ... Rs. 44,58,838 A comparison of these figures with the figures of expenditure incurred by the appellant-company under these heads in the various years show a sharp decline in the expenditure under the various heads. For example, the expenses under the head "Dealers Conference Expenses" show a decline, while the appellant-company did not have to incur any expenses under the head "Dealers Welfare Expenses". Under the head "Dealers Tie-up advertisement" there is a progressive increase in the expenditure incurred by the Trust, while there is a decline in the expenditure incurred by the appellant-company from 1983 to 1985 and it was nil in the years 1986 and 1987. Further, in the first year ending 30-11-1985 the Trust had incurred expenditure on incentive to dealers. The appellant's learned counsel has placed before us a circular by Apex Agencies, Hyderabad to all Dyanora T.V. Dealers on 15-2-1984 giving the particulars of the bonus incentives to the dealers on their sales performance. This is at page 30 of the paper book No. 4 of the appellant. In fact, at page 1 of paper book No. 4, a debit note dated 30-3-1985 raised by Apex Agencies, Hyderabad on Dynavision Dealers' Welfare Trust shows that the entire incentive bonus of Rs. 2,83,075 was reimbursed by the Trust to the wholesale distributor, i.e., Apex Agencies, Hyderabad. How these incentives were paid to various dealers with their workings are available at pages 2 to 5 of paper book No. 4. Paper Book No. 4 contains samples of Tie-up adverisements published by the various dealers in newspapers and how these amounts were reimbursed to the dealers by the Trust. It was explained before us that under the Tie-up arrangement 20% of the advertisement expenditure was to be borne by the dealer, while 30% was to be borne by the wholesaler or distributor and the balance of 50% by the Dynavision Dealers' Welfare Trust. This is proved by the debit note dated 17-3-1986 raised by K.D. & Sons, Bhuvaneswar on Dynavision Dealers' Welfare Trust, at page 6 of the paper book. This debit note shows that 50% of the press publicity expenses for the months of December 1985 and January 1986 amounting to Rs. 4,179 was paid by the Trust to the said wholesale distributor for Orissa area. The learned departmental representative contended that the appellant-company was still incurring huge expenditure on advertisements and publicity, as could be seen from the particulars furnished by the learned departmental representative. It was explained by the appellant's learned counsel that these expenses on advertisement and publicity were incurred by the appellant-company on their own advertisements and not on the Tie-up advertisements with the dealers, which was met by the Trust as explained above. We may mention here that the statements of income and expenditure of Dynavision Dealers' Welfare Trust contained in paper book No. 2 clearly establish the items of expenditure incurred by the said Trust under the various heads in carrying out the objects of the Trust, such as Dealers Conference Expenses, Dealers Sales promotion expenses and Dealers' Welfare expenses. The assessment order of the Trust for the assessment year 1986-87 dated 30-3-1989 at pages 13to 15of paper book No. 2 shows that the Trust has been carrying out the objects of the Trust by incurring the various items of expenditure on the above items. On these materials we are unable to agree with the revenue's contentions that the expenditure in question has not been incurred by the appellant-company for the purpose of its business and that it was not incurred out of commercial expediency. We are also unable to accept the department's contention that there is no nexus between the expenditure incurred by the appellant-company and the benefits derived by it, on that at any rate such nexus is too remote. On the other hand, the Directors Report shows a progressive increase and upward trend in the sales turnover of the appellant which had increased from Rs. 6.87 crores in 1983 to Rs. 17.92 crores in 1984. In later years the sales turnover has increased progressively to Rs. 28.66 crores in 1985, Rs. 31.60 crores in 1986 and Rs. 37.24 crores in 1987. The expenses incurred by the appellant-company directly on advertisement exprenses and publicity for the year 1984 relevant for the assessment year 1985-86 amounted to Rs. 54,70,606, as could be seen from the figures furnished by the learned departmental representative and also the figures mentioned on page 2 of the assessment order. The corresponding figures on advertisement expenses and publicity incurred by the appellant amounted to Rs. 81,53,216 for 1985 relevant for the assessment year 1986-87 and Rs. 1.1 corres for 1986 relevant for the assessment year 1987-88. The learned counsel further stated that such expenses incurred by the appellant-company on advertisements and publicity amounted to Rs. 1,26,36,000 in 1987 relevant for the assessment year 1988-89. The learned counsel for the appellant submitted that these expenses were incurred by the appellant-company directly, besides the expenditure incurred by the Dynavision Dealers' Welfare Trust for promotion of sales of the appellant-company under the various heads in the respective years, as set out above. The learned counsel's argument is that the above figures of expenses on advertisement and publicity incurred by the appellant-company and the Trust taken along with the increase in the figures of sales turnover establish a direct nexus between the expenditure incurred by the appellant-company as for business purposes. On the other hand, the argument of the learned departmental representative is that when the appellant-company was incurring such huge expenditure on their advertisements and publicity campaigns, there was no need for them to incur expenditure separately through their dealers and therefore there is no nexus between the expenditure of Rs. 50 lakhs claimed by the appellant and the appellant's business. We are unable to agree with the submissions urged on behalf of the revenue, as the figures of sales turnover mentioned above along with the firgures of expenditure incurred by the appellant-company directly and through the medium of the Dynavision Dealers' Welfare Trust clearly establish a direct nexus between the expenditure incurred by the appellant-company by making this contribution of Rs. 50 lakhs to the DDW Trust as for the purposes of its business. The operating results for the year 1984, i.e., the year under appeal, also show an upward trend, as the company had realised a gross profit of Rs. 96.85 lakhs and a net profit of Rs. 88.01 lakhs. The Directors have recommended a dividend of 18% of the equity share capital, which was 6% higher than the dividend declared in the previous years. We must remember that all these results were achieved by the appellant-company after incurring this expenditure of Rs. 50 lakhs, which was paid to the Dynavision Dealers' Welfare Trust.
83. We have already referred to the decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 to show how this amount of Rs. 50 lakhs has irretrievably gone out of the coffers of the appellant-company and hence represents expenditure incurred by the appellant-company. Clause 8(a) of the Trust Deed empowers the Board of Trustees of DDW Trust "to apply the whole or any part of the trust property or fund, whether capital or income in or towards the payment of the expenses of the Trust or for towards all or any of the purposes of the trust". This Clause would show that the amount of Rs. 50 lakhs was available with the Trust not only for the purposes of investment, but also for the purpose of expenditure on the various objects of the Trust and therefore it did not form part of the corpus of the trust as such. The facts of the present case are similar to the facts relating to the second question in the case of CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 (Bom.). In that case, a sum of Rs. 1 lakh was paid by the General Department Fund to a mutual benefit society started by the company, inter alia, to secure the welfare and interest of the permanent and retired employees, their families and dependants of the deceased employees of the New India Assurance Co. The company claimed this amount as an admissible expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. This claim was allowed by the Tribunal and the decision of the Tribunal was upheld by the Bombay High Court. The discussion on this question No. 2 commences at page 785 of the reports. After discussing the various decisions, Their Lordships of the Bombay High Court held finally as follows at pages 791 and 792 of the reports to answer the second question in the affirmative and in favour of the assessee:-
In the present case, the amount was not set apart as a nucleus. The income alone was not to be spent but even the amount contributed was to be spent towards the purposes of the fund and there was no liability upon the company which had to be got rid of. It was a pure and simple expenditure on the ground of commercial expediency out of the bounty of the assessee-company. It does not weaken the argument in favour of holding that this was a business expense that the whole thing was done with the approval of the Controller of Insurance, for the annual accounts of a general insurance company must be submitted under the Insurance Act to the Controller of Insurance. It was also pointed out by counsel for the assessee that the actual payments made out of this fund are being allowed year after year by the department as an allowable expenditure and it can hardly be a matter of dispute today that the amount was spent on account of the assessee's business. Looking at it from any point of view and taking into account all circumstances, it is clear to us that this amount of Rs. 96,665 paid by the assessee out of the funds of its general department to the Mutual Benefit Society would be an allowable expenditure under Section 10(2)(xv). It is not an expenditure of a capital nature. Accordingly, we answer question No. 2 in the affirmative.
This decision of the Bombay High Court was followed in the case of Hindusthan Klockner Switchgear Ltd. v. CIT [1971] 81 ITR 20.
84. In CIT v. T.V. Sundaram Iyengar & Sons (P.) Ltd. [1974] 95 ITR 428, Their Lordships of the Madras High Court held that a sum of Rs. 39,696 paid by the assessee-company in the said case for the purchase of a piece of land in the name of the District Collector, Madurai for the purpose of constructing houses for the company's workers by the Government under the subsidised industrial housing scheme sponsored by the State Government represented expenditure incurred wholly and exclusively for the purpose of the business of the assessee-company and hence it was allowable as a deduction.
85. In our view, the ratio of these three decisions support the contentions of the appellant for deduction of this amount of Rs. 50 lakhs as business expenditure allowable under Section 37(1) of the Act on the ground of commercial expediency.
86. We are not called upon in the present case to decide whether any portion of this expenditure would be inadmissible under Section 37(2A) or (3A) of the Act, as contended by the revenue, as the said question would be relevant only when the expenditure is incurred by the Dynavision Dealers' Welfare Trust in later years on the various objects of the Trust. So far as this year is concerned, the appellant-company had not incurred any such expenditure which would fall within the mischief of Section 37(2A) or (3A) of the Act, as contended by the Revenue with regard to this sum of Rs. 50 lakhs. Whatever disallowances that were to be made under the said provisions of law in this assessment year have already been made by the assessing officer, as could be seen from the disallowance of Rs. 43,796 under Section 37(2A) under the head "entertainment expenditure" and of Rs. 41,273 disallowed under Section 37(3 A) out of advertisement expenditure etc., by the assessing officer at page 2 of the assessment order.
87. We are also unable to agree with the learned counsel for the appellant that the sum of Rs. 50 lakhs paid by the appellant to the DDW Trust represented surrogated expenditure or compressed revenue expenditure and that the decisions in Madras Auto Service Ltd.'s case (supra) and of the Punjab & Haryana High Court in Janak Steel Tubes (P.) Ltd.'s case (supra) would be applicable to the facts of the present case. In our view, neither of these two decisions, nor the decision of the Supreme Court in Delhi Safe Deposit Co. Ltd.' s case (supra) would be applicable to the facts of the present case. We do not consider it necessary to classify this expenditure either as surrogated expenditure or a compressed revenue expenditure, as the expenditure claimed by the appellant-company does not satisfy the conditions and requirements to be fulfilled for such classification. It would suffice for our purpose to consider this expenditure as revenue expenditure only without giving it any further nomenclature so as to put it in any particular slot.
88. The argument on behalf of the revenue is that the appellant was having the benefit, of this expenditure of Rs. 50 lakhs for an indefinite period and therefore it would amount to an enduring advantage or benefit, which would deprive the appellant from claiming this expenditure as business expenditure under Section 37(1) of the Act. We have already referred to the decision of the Supreme Court in Empire Jute Co. Ltd.'s case (supra) where similar contentions urged on behalf of the revenue were rejected by their lordships of the Supreme Court. A similar argument was also put forward on behalf of the revenue before the Supreme Court in the case of Associated Cement Companies Ltd. (supra). The argument on behalf of the revenue there was that the advantage secured by the respondent-company by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years and therefore it was an enduring advantage. After adverting to the ratio of their earlier decision in the case of Empire Jute Co. Ltd. (supra), Their Lordships of the Supreme Court held as follows at page 263 of the reports:-
If this principle is applied to the facts of the case before us, what we find is that the advantage which was secured by the assessee by making the expenditure in question was the securing of absolution or immunity from liability to pay municipal rates and taxes under normal conditions for a period of fifteen years. If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital. As a result of the expenditure incurred, there was no addition to the capital assets of the assessee-company and no change in its capital structure. The pipelines, etc., which might have been regarded as capital assets and which came into existence as a result of the expenditure incurred did not belong to the assessee-company but to the municipality. In these circumstances, applying the principles laid down in Empire Jute Co.'s case [1980] 124 ITR 1 (SC), the expenditure is clearly liable to be allowed as deductible from the profits under Section 10(2)(xv) of the Indian Income-tax Act.
Respectfully following these two decisions of the Supreme Court, we hold that the fact that the appellant would be having the benefit of this expenditure of Rs. 50 lakhs through the medium of the Trust in later years for an indefinite period, would not militate against the appellant's claim for deduction being allowed under Section 37(1) of the Act in the year under appeal.
89. We, therefore, hold that the appellant-company is entitled to this deduction of Rs. 50 lakhs as an admissible deduction, as it represents expenditure incurred by the appellant-company wholly and exclusively for the purpose of its business out of commercial expediency and that it is allowable under Section 37(1) of the Act in the year under appeal. Accordingly, we delete the addition of Rs. 50 lakhs made by the departmental authorities by disallowing this claim of the appellant.
90. This takes us to the second item in dispute, namely the disallowance of the appellant's claim for deduction under Section 80-I of the Income-tax Act, 1961 in respect of its new industrial undertaking for manufacture of Colour Television Sets (CTV). We have set out the findings of the assessing officer as well as that of the CIT(Appeals) in paragraphs 4 and 7 supra.
91. The learned counsel for the appellant, Shri K.R. Ramamani, submitted that during the previous year relevant for the assessment year under appeal, the appellant had established a new identifiable, distinct and different industrial undertaking for the manufacture of CTVs and that this was established by the following facts, materials and evidence placed by the appellant before the departmental authorities and the Appellate Tribunal:-
(a) The assessee obtained a new industrial licence which is the sine qua non for starting a new industrial undertaking.
(b) The appellant-company trained some of its Engineers in foreign country in the production of CTVs, as could be seen from the applications of the appellant-company to the Reserve Bank of India and the exchange control permits granted by the Reserve Bank of India for this purpose.
(c) Employment of additional work force in the new industrial undertaking.
(d) Establishment of a new production shop floor on the ground floor of the existing factory building, which was being used as storage facility till then.
(e) Procurement of materials for production of Colour TVs.
(f) Production of various parts like pubs and production of separate products viz. Colour T. V. sets of various models.
(g) Investment of borrowed capital by way of credit for particular period.
In support of the above, the learned counsel relied on the various documents contained at pages 1 to 58 of his paper book No. 1 paper book No. 3 containing 18 pages and paper book No. 5 containing pages 1 to 52. He further relied on the annual report of the appellant-company for the year under appeal, particularly the Directors' report, which specifically shows the establishment of this new industrial undertaking. The learned counsel therefore argued that on these facts, the departmental authorities ought to have accepted the appellant's claim for deduction under sec; 80-I of the Act and allowed the same.
92. The learned Departmental Representative, Shri K.L. Tilak Chand, pointed out that it was not for the first time the appellant-company was manufacturing Colour TVs since even as per the company's report, it had manufactured CTVs in earlier two years also. He submitted that in those years the assessee-company was manufacturing CTVs which were imported in S.K.D./C.K.D. condition. He relied on the decision of the Bombay High Court in the case of CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325, wherein it was held that even the assembling of such imported S.K.D. or C.K.D. kits would amount to manufacturing. The learned departmental representative therefore argued that it was not correct to say that the previous year ended 31-12-1984 was the first year for the manufacture of colour TVs by the appellant-company.
93. The learned departmental representative next submitted that as per the provisions of Section 80-I, the appellant-company should satisfy the conditions laid down in Section 80-I (2)(i) and (ii) of the Act and that both these conditions were not satisfied by the appellant-company. He further submitted that as the company was already manufacturing Colour TVs in earlier years, what the appellant-company did in the year under appeal would amount only to an expansion and reconstruction of the business already in existence. He further submitted that the second condition was also not satisfied because the machinery which was used for manufacturing black & white TVs was substantially used for the manufacture of colour TVs by the appellant-company. In this connection, the learned departmental representative pointed out that the alleged machinery which was used for manufacturing colour TVs was purchased at the fag end of the accounting year, whereas during the entire year the assessee has been manufacturing colour TVs. He therefore argued that even before the arrival of the new machinery, the appellant-company was able to manufacture 15,000 Colour TV sets. According to Shri Tilak Chand, this clearly established that more than 20% of the old machinery had been used for manufacturing colour TV sets. He submitted that the assessee's plea that it was able to manufacture 15,000 TV sets with the old machinery worthless than Rs. 25,000 was beyond comprehension. He further submitted that the arrival of jigs in the second quarter of the year would improve the situation for testing and quality control of the products manufactured and that otherwise only the old existing machinery in the black & white division had to be used. Shri Tilak Chand relied on the fact that the assessing officer had visited the factory of the assessee and after detailed analysis had come to the conclusion that substantial portion of the aforesaid machinery in black & white division was used for manufacturing Colour TV sets also in the year under appeal.
94. With reference to the subsequent year's report of the company, Shri Tilakchand submitted that there was no substantial increase in production even after the arrival of the new machinery and that almost the same quantity of TV sets were manufactured. From this, he argued that if the appellant's version was to be believed, then it would be a case of the appellant earning a huge income of Rs. 1.5 crores with petty machinery which was worth less than Rs. 25,000. He therefore submitted that it would be very difficult to comprehend, much less to digest and accept such a plea, which was untenable on the face of it.
95. The learned departmental representative next referred to the invoice for the purchase of jigs and pointed out that they were also TV parts and that many jigs were purchased in 1980 and 1981 also and if we take into account the value of the machinery used for quality control, then the value of old machinery used for this purpose in the new industrial undertaking would be much more than the permissible limit of 20%.
96. Shri Tilakchand next pointed out that as per the expert on T.V. technology brought by the appellant, most of the machines in black and white TV division could be used for manufacture of Colour TVs and vice-versa. From this, he argued that the department's contention that the appellant did use black and white TV manufacturing machines for production of Colour TVs, was substantiated. He further submitted that the appellant's plea that it was not quality conscious in the beginning, deserved to be rejected as totally unacceptable, as every manufacturer who introduces a new commodity in the market would test the quality of its new product at every stage to capture the market and develop a competitive edge.
97. The learned departmental representative, therefore, argued that no distinct, identifiable industrial undertaking capable of functioning independently had come into existence for manufacture of CTVs during the year under appeal and that the appellant-company did not satisfy the conditions prescribed in Section 80-I (2)(i) & (ii) and Explanation 2 and therefore its claim for the benefits of Section 80-I was rightly rejected by the departmental authorities.
98. In support of his arguments, the learned departmental representative relied on the following decisions :-
1. Tata Locomotive & Engg. Co. Ltd.'s case (supra)
2. Khoday Industries (P.) Ltd. v. CIT [1986] 163 ITR 646/26 Taxman 732 (Kar.)
3. CIT v. Travancore Rayons Ltd. [1986] 164 ITR 134 (Ker.)
4. Canara Wire & Wire Products Ltd. v. First ITO [1984] 9 ITD 807 (Bang.).
99. Shri K.R. Ramamani, the learned counsel for the assessee, in his reply submitted that the cases relied on by the learned departmental representative were distinguishable on facts for the simple reason that the appellant-company had established a new industrial undertaking for the manufacture of Colour TV sets within the meaning of Section 80-I of the Act. The learned counsel submitted that the appellant had satisfied the tests laid down by the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195. He argued that (a) the appellant-company was not formed by splitting up or reconstruction of the business already in existence, (b) it was not formed by the transfer to a new business of machinery or plant previously used for any purpose within the meaning of Explanation 2 to Section 80-I (2) of the Act, (c) that it manufactured or produced any article not being an article specified in Schedule 11 of the Act and (d) that the new industrial undertaking employed more than 10 workers in the manufacturing process. In support of these contentions, the learned counsel relied on the various materials and evidence contained in the paper books filed by him.
100. The learned counsel met the argument of the learned departmental representative that this was not the first year of the manufacture of colour TV sets by the appellant-company, by pointing out that in October, 1982 falling within the assessment year 1983-84 the appellant had manufactured CTV sets for entirely different purposes viz. for ASIAD. The learned counsel pointed out that at that time the appellant-company had simply assembled semi knocked down kits supplied by the Government of India. He further urged that for the said purpose no licence was obtained by the appellant in the earlier years and that no shop floor was also established for such production. He urged that what was done in the earlier year was only by way of trading at the instance of the Govt. of India taking advantage of the demand for Colour TVs at the time of the ASIAD held at Delhi. He submitted that the appellant had not established any separate and distinct identifiable new industrial unit so as to qualify for relief under Section 80-I in the earlier years and it was not even a case of trial production of a new industrial undertaking. He therefore argued that the contentions of the revenue in this regard were incorrect and proceeded on an erroneous appreciation of the facts relating to the sale of colour TV sets during the ASIAD.
101. The learned counsel refuted the contentions of the revenue that most of the machines had been acquired during the later part of the year and hence only the old machines must have been used for CTV production. Shri Ramamani submitted that it was not the case of the appellant that it had utilised only new machinery in the new unit set up for manufacture of Colour TV sets. He further submitted that certain old machinery had been used, the details of which were in the statements furnished to the departmental authorities and that the value of such old machinery was less than the statutory percentage. He argued that there was no transfer of assets within the meaning of the provisions of Section 80-I of the Act to deny exemption to the appellant. He pleaded that the departmental authorities have based their conclusions on mere suspicion and surmisesignoring the facts and relevant materials that were placed by the appellant in support of its contentions. The learned counsel pointed out that the revenue was taking a contradictory stand when it accepts that the CTV production is only a screw driver technology and that no attempt has been made to justify this contention of the department. The learned counsel relied on the flow chart of the production and the list of machineries that are required for production of CTV sets and pointed out that the appellant could manufacture CTV and actually manufactured and sold CTVs only during the accounting year 1984 relevant for assessment year 1985-86.
102. Adverting to the argument of the learned departmental representative that the Control Signal Generator purchased in 1981 was used in CTV production, the learned counsel submitted that the Control Signal Generator purchased in 1981 could not be used for CTV production. He pointed out that some confusion had arisen in the mind of the assessing officer when he visited the factory in 1989 and saw the said machinery kept on the ground floor. The learned counsel pointed out that the Control Signal Generator was housed on the ground floor as it requires Air conditioned atmosphere which was available only on the ground floor. In support of this submission, the learned counsel relied on the photographs on pages 30,31 and 32 of appellant's paper book No. 6 and pointed out that the colour TV Singal Generators were purchased and installed only in 1986 in the same premises marked as transmitter rooms which was air conditioned on the ground floor of the factory where the Control Signal Generator for black and white TV manufacture was kept.
103. The learned counsel relied on the following cases in support of his contentions:-
CIT v. Ambur Co-operative Sugar Mills Ltd. [1981] 27 ITR 495 (Mad.), CIT v. Batala Engg. Co. Ltd. [1979] 20 ITR 683/2 Taxman 248 (Punj. & Har), CIT v. Ridhkeran Someni [1980] 121 ITR 668 (Pat.), CIT v. Madras Rubber Factory Ltd. (No. 2) [1984] 149 ITR 41I (Mad.), Addl. CIT v. Hutti Gold Mines Co. Ltd. [1981] 128 ITR 416(Kar.), CIT v. N. Guru Investment (P.) Ltd. [1979] 117 ITR 522 (Cal.), CIT v. Hindustan General Industries Ltd. [1982] 137 ITR 851 (Delhi), CIT v. A.K. Silk & Woollen Mills (P.) Ltd. [1985] 23 Taxman 408/[1986] 158ITR 462 (Delhi), CIT v. Indian Oxygen Ltd. [1978] 113 ITR 109 (Cal.), T. Satish U. Pai v. CIT [1979] 119 ITR 877 (Kar.), CIT v. Shankar Cold Storage [1982] 138 ITR 286/9 Taxman 253 (All.), Oswal Woollen Mills Ltd. v. CIT [1982] 138 ITR 338/9 Taxman 253 (Punj. & Har.), [1988] 174 ITR 111 (sic), Oswal Spg. & Wvg. Mills Ltd. v. CIT [1988] 174 ITR 354/40 Taxman 173 (Punj. & Har.), Rajeswari Mills Ltd. v. CIT [1963] 50 ITR 29 (Mad.), CIT v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173 (Delhi), CIT v. Orient Paper Mills Ltd. [1974] 94 ITR 73 (Cal.), International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11 (Kar.) and CIT v. Standard Motor Products of India Ltd. [1981] 131 ITR 300 (Mad.).
104. The learned counsel further submitted that the department's contention that if the appellant-company was not entitled to relief for the first year it would not be entitled for such relief for subsequent years proceeded on an incorrect appreciation of the law on the subject. He submitted that on the materials and evidence placed by him in the light of the case law set out above, the appellant-company was entitled to relief in the year under appeal and therefore such relief would be available to it for later years also. He further submitted that these arguments urged on behalf of the revenue have been rejected in CIT v. Satellite Engg. Ltd. [1978] 113 ITR 208 (Guj.) and in Madras Machine Tools Mfrs. Ltd. v. CIT [1975] 98 ITR 119 (Mad.). The learned counsel therefore submitted that the appellant's claim for deduction under Section 80-I was correctly and properly made in the year under appeal and that the same ought to have been allowed by the departmental authorities.
105. Section 80-I was reintroduced in the Income-tax Act, 1961 by the Finance (No. 2) Act of 1980. This provision introduced, with effect from 1-4-1981, anew tax holiday provision for certain industrial undertakings, ships or hotels which start functioning within four years (now nine years) next following the 31st March, 1981 which will be allowed for a total of eight years (ten years in the case of co-operative societies). Further amendments were made by the Finance Act of 1983andFinance Act of 1985. We quote below the relevant provisions of Section 80-I as applicable to the assessment year 1985-86 and as published in A.N. Aiyar's Indian Tax Laws [1985] at pages 307 to 312 :-
80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc. -
(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent, thereof:
Provided that in the case of an assessee, being a company, the provisions of this Sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the 'business of a hotel, as if for the words "twenty per cent", the words "twenty-five per cent" had been substituted.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:-
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India and begins to manufacture or produce articles or things or to operate such plant or plants, at anytime within the period of nine years next following the 31st day of March, 1981, or such further period as the Central Government may by notification in the Official Gazette, specify with reference to any particular industrial undertaking ;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power :
** ** ** Explanation 2. - Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent, of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
We have quoted the relevant sub-sections of Section 80-I as well as Explanation 2 which have a material bearing on the point at issue in the present appeal and omitted the other provisions, as they are not relevant for the purposes of this appeal.
106. From the arguments urged by the learned counsel on both sides, which we have set out supra, it would be noticed that it is the assessee's contention that it fulfils all the conditions specified in Section 80-I(2), while the department contends that it does not satisfy the first two conditions specified in Section 80-I(2)0) & (ii) of the Act.
107. It would be noticed that the conditions specified in Section 80-I(2) of the Act correspond to the conditions contained in Section 15C(2) of the Indian Income-tax Act, 1922 and Section 80J (4) of the Income-tax Act, 1961. The learned counsel on both sides are agreed that the decisions which arose under Section 15C of the old Act and Section 80J of the new Act, would have a direct bearing in construing the provisions of Section 80-I(2), with which we are presertstly concerned in this appeal.
108. The leading case on which reliance is placed on by both sides is the decision of the Supreme Court in the case of Textile Machinery Corporation Ltd. (supra). At pages 204 and 205 of the reports, the Supreme Court held as follows while construing the provisions of Section 15C of the old Act:-
Section 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that Section 15C is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit ' by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of Section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of Section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned.
Again at pages 206 and 207, the Supreme Court held as follows :-
Reconstruction of business involves the idea of substantially the same persons carrying on subtantially the same business. It is slated on behalf of the revenue that the same company in the instant case continues to do the same business of heavy engineering - no matter certain spare parts necessary as components to completion of the end-product are now manufactured in the business itself. The fact that the assessee is carrying on the general business of heavy engineering will not prevent him from setting up new industrial undertakings and from claiming benefit under Section 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under Section 15C, the following facts have to be established by the assessee, subject always to time-schedule in the section :
(1) investment of substantial fresh capital in the industrial undertaking set up, (2) employment of requisite labour therein, (3) manufacture or production of articles in the said undertaking, (4) earning of profits clearly attributable to the said new undertaking, and (5) above all, a separate and distinct identity of the industrial unit set up.
We may add that there is no bar to an assessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax under Section 15C may be claimed.
The legislature has advisedly refrained from inserting a definition of the word "reconstruction" in the Act. Indeed, in the infinite variety of instances of restructuring of industry in the course of strides in technology and of other developments, the question has to be left for decision on the peculiar facts of each case.
If any undertaking is not formed by reconstruction of the old business that undertaking will not be denied the benefit of Section 15C simply because it goes to expand the general business of the assessee in some directions. As in the instant case, once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business.
The business of the assessee is of heavy engineering. The two new undertakings are independently producing articles which may be of aid to the principal business but yet the undertakings are distinct and not reconstruction out of the existing business of the assessee. Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in construing Section 15C. The High Court is not right in holding the two undertakings as formed by reconstruction of the existing business of the assessee.
This decision was followed by the Supreme Court in CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367. It would be noticed from the facts of this case that new production units were added to the existing production units of the assessee at Belur, Alupuram and Muri, in respect of which the assessee claimed exemption under Section 15C of the old Act, which was allowed by the High Court. The Supreme Court upheld the decision of the Calcutta High Court by following their decision in Textile Machinery Corporation Ltd.'s case (supra).
109. This decision of the Supreme Court has been followed in a number of cases by various High Courts, such as the decision in the case of CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110(Cal.). Since the tests laid down by the Supreme Court have been quoted above, we do not consider it necessary to examine the other decisions in detail.
110. When we examine the facts of the present case in the light of the aforesaid principles of the Supreme Court decision, we find that the appellant-company made an application to the Government of India for the gran to fan industrial licence under the Industries (Development & Regulation) Act, 1951 on 2-4-1983 for the manufacture of Colour T.V. sets falling under Scheduled Industry No. 6(5). The Government of India issued the Letter of Intent on 23-7-1983 to the appellant-company, a copy of which is available at page 17 of the appellant's paper book No. 5. This Letter of Intent shows that the Government were prepared to issue an Industrial Licence to the appellant-company for the manufacture of Colour Television Receiver Sets by setting up anew unit in a Category 'B' backward District in the State of Tamil Nadu with an annual capacity of one lakh numbers on the basis of maximum utilisation of plant and machinery. Pursuant to this Letter of Intent, the Government of India issued an industrial licence to the appellant-company on 29-11-1983, a copy of which is at page 1 of the appellant's paper book No. 1. We quote below paragraphs 2 to 4 of the said licence, subject to which the licence was granted to the appellant by the Government of India:-
2. The new industrial undertaking shall have the installed capacity as specified below on the basis of maximum utilisation of plant and machinery :-
Item of manufacture Annual capacity Colour Television Receiver sets. 50,000 (fifty thousand numbers).
3. The new industrial undertaking is to be located at Tehsil Saidapet, District Chingleput in the State of Tamil Nadu.
4. The new undertaking shall be completed and commercial production established within a period of two years from the date of issue of this industrial licence.
111. In the wake of this Letter of Intent and the Industrial Licence issued by the Government, the appellant-company deputed three of its employees, namly Mr. Meera Mohideen, Mr. C.E. Ravichandran and Mr. G. Dayanidhi for undergoing training in the manufacture of Colour Television receiver sets and other allied activities with European Standard Electronics Pvt. Ltd., Singapore. The company' s applications to the Reserve Bank of India for release of foreign exchange for this purpose as well as the permits issued by the Foreign Exchange Control Department of the Reserve Bank of India are at pages 5 to 11 of the appellant's paper book No. 1.
112. Regarding the additional finance required for this new line of manufacture, the appellant-company took steps to arrange for the same shortly after it received the Letter of Intent from the Government of India. In its letter dated 11-8-1983 at page 20 of paper book No. 5, the appellant-company informed the Branch Manager of State Bank of India, Adyar, Madras about the receipt of the Letter of Intent dated 23 rd July, 1983 for manufacture of 1 lakh numbers of Colour TV sets. They have mentioned in this letter that they would be reviewing the total requirements for their colour T.V. project separately. This letter was written by them for enhancing their present L/C limits relating to their present activity in the manufacture of black and white T.V. sets. Again the company wrote to the Bank on 12-11-1983, as could be seen from their letter at page 2 of paper book No. 5. This letter shows that the appellant-company have asked for enhancement of their existing limit under the head (a) Cash Credit Hypothecation against stocks from Rs. 50 lakhs to Rs. 100 lakhs ; (b) Receivables against book debts from Rs. 27 lakhs to Rs. 53 lakhs ; and (c) Bills discounting facilities Rs. 35 lakhs. This letter further shows that the said proposals of the company were pending with the Bank's head office. In the meanwhile, the company had requested the bank for permission to draw a sum of Rs. 50 lakhs over and above the existing limits to clear the consignments of colour picture tubes and 400 sets of Components and Jigs for colour T.V. assembling, which had been shipped by their foreign suppliers and which consignments were expected to arrive at Madras Port after the 14th November, 1983. The next document that is relevant for our purpose is the extract of the minutes of the meeting of the Board of Directors of the appellant-company held on 25th May 1984 at page 14 of the paper book No. 5. Item No. 6(a) is the resolution to increase the borrowings from State Bank of India. These minutes show that the Board discussed the additional financial requirements to meet the working capital and for acquiring capital equipment for the increased production activities of the company due to the introduction of colour T. V. production on regular basis. The Board resolved to make a request to the State Bank of India for enhancement of existing facilities under various heads from the original limit of Rs. 1,79,00,000 to Rs. 3,73,00,000, as set out in the resolution. The resolution also authorised Shri P. Obul Reddy, Director of the Company to deposit the title deeds of the company's immovable properties with intent to create security by way of mortgage thereon in favour of the Bank and to execute the necessary security documents required by the Bank. Pursuant to this resolution, Shri P. Obul Reddy executed the letter of security for creating an equitable mortgage by deposit of title deeds in respect of immovable properties on 2-7-1984, as could be seen from page 3 of paper book No. 5. These documents establish that the appellant-company had taken steps to arrange for the additional capital that may be required for launching of the new project for manufacture of colour T. V. sets under the new Industrial Licence obtained from the Government of India.
113. We may mention here that the resolution dated 25-5-1984 of the Board of Directors also deals with the construction of an additional building and storage shed at Kottivakkam factory area. We quote below the relevant portion of item No. 6(a) for facility of reference :-
In view of the increasing demand for our TV sets, both black & white and colour and our expansion programme of CTV Production, it was decided to put up an additional building with a floor area of 54,000 sq. ft., consisting of 3 floors of 18,000 sq. ft., each, which can be used exclusively for colour TV production with the most modern equipment and also accommodate the necessary stores items.
However, there is no dispute before us that during the previous year under appeal, the appellant-company had established a separate production shop floor for the manufacture of colour T.V. sets on the ground floor of the existing factory building, as sufficient space was available for that purpose on the ground floor of the building." Previously this space was being utilised by the company as storage facility for its black and white television manufacturing operations. The resolution referred to above shows that in view of the proposal to establish a separate shop floor for manufacture of colour T.V. sets, the Board decided to put up immediately about 5,000 sq. ft., of stores building on an emergency basis and action was to be taken for calling lor quotations and awarding the contract as per the recommendations of the Architect. In its reply dated 2-3-1989 addressed to the Asstt. Commissioner of Income-lax, Central Circle 11(1), Madras, the assessee stated as follows :-
We have, in our earlier correspondence stated that we have got a separate production door for the production of colour Television receivers where exclusively colour Televisions are produced with the machineries and equipment purchased and installed. The other black & white televisions are produced in different shop floors and are fully equipped with the necessary equipment for the production of black and white televisions. As such, as permitted by the Government, the production of colour Televisions under separate industrial licence is issued for this purpose, we have allocated a separate shop floor and are producing colour Television sets in that floor.
Regarding the query raised by the Assistant Commissioner as to how they could substantiate their claim that the shop floor established for colour television sets were used exclusively for Colour TV production, the appellant-company suggested that the same could be verified by the Asstt. Commissioner making a visit to their factory premises.
114. There seems to have been further enquiry into this matter by the Asstt. Commissioner of Income-tax, as could be seen from the reply of the appellant-company dated 8th September, 1989. The first question raised by the Asstt. Commissioner was whether the Colour Television division had separate plant and machinery as per balance-sheet and whether they could be identified separately. The assessee stated that the Colour Television division had separate plant and machinery and that the same could be identified separately. They further stated that the total value of plantand machinery for CTV division amounted to Rs. 10,28,186. We quote below question No. 3 as well as the appellant's reply thereto, as it is relevant for our purpose :-
Whether there is any separate production floor for CTV and whether any new power connection has been obtained ?
There is a separate production floor for Colour Television Division.
No new power connection has been obtained for CTV Division as the original power requirement has already taken into account the power requirement for CTV Division also. Hence the connected load of HT power is sufficient to meet the power requirement of CTV Division.
115. All the above facts clearly establish that the appellant-company had set up a new and separate production floor for the manufacture of Colour TV sets in the Colour Television Division. We may mention here that the point made by the departmental authorities is that the appellant-company had not constructed any new building exclusively for Colour Television Division, which was in fact occupying only a part of the existing structure. We are unable to appreciate this line of reasoning adopted by the departmental authorities, as the provisions contained in Section 80-I do not require the construction of any new building for the purpose of obtaining the benefit of the said provision of law. There can hardly be any dispute on the facts discussed above that the appellant had set up a separate shop floor for the manufacture of colour T.V. sets and that it is identifiable, distinct and separate from the already existing shop floors for the manufacture of black and white T.V. sets.
116. In a note dated 27-11-1989 said to have been filed before the CIT(Appeals), a copy of which appears at page 30 of paper book No. 1, the appellant stated that colour T.V. production was introduced by the company in 1984 under a separate Industrial Licence granted by the Government of India, that for this purpose the company purchased 53 numbers of portable CTV Pattern Generators to take care of the CTV production and that this was necessary since the central signal supply unit which was installed in 1981 was equipped with instruments to generate black & white signal only. The appellant also stated that since the average production of Colour TV was only 60 sets per day and since the entire kit was imported from Singapore in SKD/CKD form, the company could assemble colour TV sets with the portable pattern generators purchased to this purpose. The company also stated that in the year 1986, only additional instruments were added to the central signal supply unit to generate colour pattern and from then onwards the production of colour televisions were carried on with the signals generated from the central signal supply unit. The appellant also filed photo copies of the invoices showing the units of central signal supply unit purchased in 1981 for generating black and white signals and in 1986 showing the equipment purchased for generating colour signals, for the information of the Commissioner (Appeals).
117. In its letter dated 8th September, 1989 addressed to the Asstt. Commissioner of Income-tax, the assessee stated as follows in para 6 under the head, 'note on production process for colour TV Division':
6. Note on production process for colour TV Division :
For Colour TV production, the Printed Circuit Board assembly is totally different from E & W TVS. In the Printed Circuit "Boards of Colour TVs, additional colour processing circuits and colour killer circuits have been provided with the result that at the time of assembly, all these additional components have to be carefully assembled and also testing totally differs with that of B&W TVs.
Additional and specific tests have to be carried out for colour TVs, such as Chroma Testing circuit and Delay Line functioning, in order to ensure colour reproduction as well as the compatibility on Indian Colour TV system.
As far as the Colour TV assembly is concerned, generally we have been manufacturing sets fitted with electronic tuning components which will cover both VHF and UHF circuitary. Generally in B & W TVs, it has been VHF circuits that too with mechanical tuners.
With reference to testing and adjustments of the Colour TV receivers, the production line will have to have additional facilities for carrying out purity testing, colour balancing test and also white balancing adjustment. All these facilities are not required for B&W TVs.
In addition to the above specific tests, we also have to have VHF and UHF signal receiving checks on the receivers, which are specially made for Colour TV production. As such, for colour TV production we had to make additional testing facilities and get additional testing equipment.
A general note on production operation of CTV sets was furnished by us during the hearing for the Assessment year 1985-86. We are enclosing a copy of the same for your reference.
118. The appellant has also placed before us a colour television production flow chart at page of paper book No. 6 with photographs of the Central Signal Supply System for both Black & White TVs and for Colour TVs. These appear at pages 30 to 32 of the appellant's paper book No. 6.
119. At pages 32 to 41 of paper book No. 1, the appellant-company had furnished the details of the raw materials received for production of colour television sets during the year under appeal together with sample documents for receipt of these materials from abroad.
120. According to the appellant, it had employed additional labour strength in 1984 when colour TV production was taken up. The labour strength was increased by 52 workers. In support thereof, the appellant has filed a copy of the annual return for the year ending 31st December, 1983 in form No. 22 filed under the Tamil Nadu Factories Rules 1950 with the Inspector of Factories on 31st January, 1984 and the copies of the muster rolls for the month of January, 1984 to March, 1984. These appear at pages 21 to 52 of the appellant's paper book No. 5. A perusal of these papers show that there was an increase in the labour strength by the addition of more than 50 workers in the appellant's factory in the year 1984, compared to the earlier year 1983. In fact, there was no dispute before us that the appellant-company had employed more than ten workers for manufacture of CTVs in its Colour CTV Division and thus satisfied the requirements of Section 80-I(2)(iv) of the Act.
121. According to the statement of colour television sets production details, 1984 at page 8 of the appellant's paper book No. 5, the total number of colour television sets produced were 17,635, which figure tallies with the copy of the statement filed by the learned departmental representative in the course of hearing of the appeal.
In the annual accounts of the appellant-company for this year, the Directors' Report contains the following particulars regarding production and sales :-
The Company opened a new division during 1984 for the introduction of Colour TV sets based on the Industrial Licence received in November, 1983. Production during the year was 50,180 TV Sets inculding 17,643 colour TV Sets as against 31,625 TV Sets produced in 1983 showing an increase of 58.67% during the year.
The Company's sales also increased to a very large extent during the year as the demand went up due to the opening of new TV Stations. The Company sold a total of 50,460 including 15,926 Colour Sets compared to 29,474 Sets sold during 1983. Correspondingly, the turnover figures also showed an upward trend, the sales turnover for 1984 reaching Rs. 17.92 crores as against Rs. 6.87 crores in 1983.
The above facts and figures conclusively establish that the appellant-company had produced colour television sets in its new industrial undertaking established by it pursuant to and incompliance with the new industrial licence issued to it by the Government of India.
122. The learned departmental representative, Shri Tilakchand, however, argued quite vehemently as to why the appellant-company would not be entitled to the relief claimed by it under Section 80-I of the Act, which we have already set out in detail in paragraphs 92 to 98 supra. We are unable to accept these objections raised by the learned departmental representative for the following reasons.
123. We have already pointed out that the provisions of Section 80-I do not require the construction of a new building for the establishment of a new industrial undertaking while dealing with the objections raised by the assessing officer and the CIT(A) on this issue. Similarly, we have also pointed out that the appellant-company had fulfilled the requirements of Section 80-I (2)(v) of the Act. The production figures of colour television sets", which we have already referred to, in the earlier paragraphs would show that Section 80-I(2)(hi) is also fulfilled. Therefore, the area of dispute between the appellant and the department narrows down to Section 80-I(2)0) and (ii) of the Act. The facts above do not establish that the new industrial undertaking for the manufacture of colour television sets was formed by the splitting up or the re-construction of a business already in existence, namely the business in the manufacture of black & white television sets. On the contrary, the facts of the case clearly establish that the Colour Television Division was established as a separate industrial undertaking, though within the same factory premises, but on a different floor, namely the ground floor, by setting up a new production shop floor for the manufacture of Colour Television sets. We have already referred to the steps taken by the appellant-company to obtain the necessary licences from the Government and the clearance from the Reserve Bank of India as well as from Bankers for finance and credit facilities for setting up this new industrial undertaking. All these materials and facts go to prove that the Colour Television Division was not formed by the splitting up or the reconstruction of the already existing business in the manufacture of black & white TV sets. Thus, the appellant-company fulfils the first condition in Section 80-I (2)(i) of the Act.
124. This further narrows down the area of controversy to Section 80-I(2)00 of the Act. We have already quoted this provision of law along with its Explanation 2 in paragraph 105 supra. The appellant had originally claimed before the departmental authorities and also before us that the total value of plant and machineries purchased for Colour T.V. production in the year 1984 amounted to Rs. 8,70,456, as detailed in the statements at pages 1 to4 of the appellant's paper book No. 3 and that the written down value of existing plant and machineries, which were six items and which were used in colour TV production amounted to Rs. 25,762 only and that the percentage of the old plant and machinery used in Colour TV production as against the value of the new plant and machinery purchased and employed in Colour TV production worked out to 2.96% only, which was negligible and well within the margin of 20% of old plant and machinery allowed to be used in a new industrial undertaking by Explanation 2 to Section 80-I(2)07)- However, the learned departmental representative pointed out that out of the various items of plant and machineries numbering 25,17 items as set out in the statement filed by the learned departmental representative, the value of which amounted to Rs. 8,44,095 could not have been used for the manufacture of Colour Television sets in 1984 as they were purchased only in the latter half of 1984, namely August to November, 1984 and that, therefore, they would not be available for the manufacture of colour television sets, as claimed by the appellant. It is therefore argued on behalf of the revenue that the appellant-company must have used its existing plant and machinery in the black & white division for the manufacture of colour television sets and that therefore the appellant would not be entitled to the relief claimed by it, as it has not fulfilled the requirements of Section 80-I(2)(ii) of the Act. The learned counsel for the appellant after perusing the statement filed by the learned departmental representative pointed out that one of the items, namely Jigs, which were purchased from European Standard Electronics P. Ltd., for Rs. 1,71,647 on 5-3-1984, would be available for the manufacture of Colour Television sets, on the argument of the learned departmental representative himself. He further submitted that on the same line of argument of the learned departmental representative, item No. 13 in the list filed by the departmental representative, namely 3 Nos. of CTV Pattern Generators purchased for Rs. 44,59 Ion 28-6-1984 would also be available for the manufacture of Colour Television sets in the CTV Division by the appellant and that if these two items are excluded for the statement filed by the learned D.R. and included in the value of new plant and machinery available for manufacture of CTV sets in the Colour Television Division, even then the percentage of the old machinery used in the CTV division would be well within the permissible percentage of 20% and that, therefore, the appellant would be entitled to the relief claimed by it. In fact, the learned counsel also filed a fresh working, according to which the percentage of old plant and machinery used in Colour TV production worked out to only 13.01 % as set out below :-
1. WDV of existing plant and machinery used in CTV production. (Refer Paper Book No. 3 page 5) Rs. 25,762
2. Total value of plant and machinery purchased for CTV production till March, 1984.
(SI. Nos. 1 to 8 and 24, page 1 to 3 paper book No. 3). Rs. 1,98,007
3. Percentage of Items (1) & Item (2). 13.01% If we add the value of CTV Pattern Generators amounting to Rs. 44,591, which was purchased on 28-6-1984 and shown as item No. 13 in the list filed by the learned departmental representative and as item No. 21 on page 3 of the appellant's paper book No. 3, the total value of new plant and machinery purchased and utilised till June 1984 would amount to Rs. 2,42,598. The percentage of old plant and machinery would still be less with reference to this figure of Rs. 2,42,598 representing the value of new plant and machinery used in Colour TV production in the CTV Division, namely 10.5% only. Thus, it would be seen that the proportion of old plant and machinery which was used in Colour TV production was well within the permissible percentage of 20% allowed by Explanation 2 to Section 80-I(2) of the Act and therefore, the relief due to the appellant cannot be denied on the alleged ground that it had not fulfilled this condition imposed by Section 80-I(2)(ii) of the Act.
125. Shri Tilakchand, the learned departmental representative has contended that it is difficult to believe and accept that the appellant-company was able to make a profit of more than Rs. 1.5crores in the manufacture of colour TV production with petty machineries worth less than Rs. 25,000. This argument cannot be accepted in view of the fact that on the facts and figures of plant and machinery referred to above, the appellant-company had utilised new plant and machinery of the value of Rs. 2,42,598 for the manufacture of Colour TV, as established by the materials placed before us. The next argument on behalf of the revenue is that this was not the first year of manufacture of Colour TV sets, as the company had already manufactured Colour TV sets in the earlier years at the time of ASIAD and reliance was placed on the decision in the case of Tata Locomotive & Engg. Co. Ltd. (supra). We find that this point was specifically raised by the Asstt. Commissioner of Income-tax in the course of the appeal proceedings at the first appellate stage and the appellant-company had given its explanation in its letter dated 8th September, 1989 in paragraph 4 :-
4. Note on 437 CTVs appearing in the Balance-sheet as at 31-12-1983 :
During the ASIAD in October, 1982, all TV manufacturers were asked by the Government of India to assemble a few colour TV sets from out of the kits supplied by the Government themselves. At that time no TV manufacturer in the country held a valid Industrial Licence for production of colour TV sets. Out of the kits supplied by the Government, the Company assembled the major portion before December, 1982 and the balance kits available on hand from out of the kits supplied by the Government, 437 kits, which spilled over to 1983, were assembled and sold during 1983. This 437 colour TV sets were shown in the balance-sheet as at 31-12-1983.
The above explanation would show that what the appellant did during the ASIAD was mere assembling of kits supplied by the Government and they had no Industrial Licence for the manufacture and production of Colour TV sets as such. The decision in Tata Locomotive & Engg. Co. Ltd.'s case (supra) relied on by the learned departmental representative turned on the interpretation of agreement with the foreign collaborating company and the licence granted by the Government of India. A careful reading of the said judgment would show that in the said case the assembly stage was a part and parcel of the entire industrial undertaking of the assessee, whereby they manufactured or produced bus/truck chassis, which were wholly indigenous and that the assembly stage, upon the facts, was not a different industrial undertaking but one intimately connected with the subsequent stages, whereby the Indian bus/truck chassis were progressively manufactured. In fact, at page 343 of the reports, Their Lordships of the Bombay High Court have held as follows:-
This argument in essence is no more than another shade of the same arguments which we have dealt with above. No doubt, the exemption granted by Section 15C attaches only to an industrial undertaking which manufactures or produces articles but having regard to the particular facts and circumstances here, (the facts and circumstances with which we have already dealt), we cannot but hold in the present case that the assembly stage was a part and parcel of the entire industrial undertaking of the assessee whereby they manufactured or produced bus/truck chassis which were wholly indigenous. The assembly stage upon the facts was not a different industrial undertaking but one intimately connected with the subsequent stages whereby the Indian bus/truck chassis were progressively manufactured. The whole was one integrated scheme ; one programme and this notional division of that programme into two industrial undertakings is unjustified upon the facts. (Underlined by us).
The above passage would show that the said decision turned on the interpretation of the collaboration agreement entered into by the company with its West German Collaborator and the scheme for the manufacture of bus and truck chassis by the company under the Industrial Licence issued by the Government of India. In the case of the present appellant, there is no such collaboration agreement and there is no such integrated scheme under the Industrial Licence granted by the Government of India, which we have already quoted above. Therefore, this decision of the Bombay High Court relied on by the learned departmental representative is inapplicable to the facts of the present case. On the contrary, the terms and conditions of the Industrial Licence granted by the Government of India, which we have quoted in para 110 supra, clearly contemplate the establishment of a new industrial undertaking by the assessee for the manufacture of colour television receiver sets with an annual capacity of 50,000 numbers under the said Industrial Licence. It can hardly be disputed that in our country, any manufacturer who wants to start a new industry, which involves the release of foreign exchange, would have to obtain an industrial licence from the Government of India before he establishes such industrial undertaking and it cannot be and it is no also the case of the department in the present appeal before us that the appellant-company had any industrial licence other than the one issued to it on 29-11-1983 by the Government of India for the manufacture of Colour television sets for the first time in its factory.
126. The decision in Khoday Industries (P.) Ltd.'s case (supra) turned on entirely different facts and it is therefore inapplicable to the facts of the present case. There the assessee-company had acquired the business undertaking of a partnership firm and claimed deduction under Section 80J, which was rejected by the departmental authorities and the Tribunal, which was upheld by the Karnataka High Court. Therefore, this decision is of no assistance to the department in the present case.
127. The next decision of the Kerala High Court in Travancore Rayons Ltd.'s case (supra) turned on its peculiar facts, as it was found in the said case that "C.F. Plant No. IV" was formed by the reconstruction of an existing business. In the present case, the facts are entirely different and therefore this decision is also not applicable.
128. Similarly, the decision of the Bangalore Bench of the Appellate Tribunal in the case of Can are Wire & Wire Products Ltd. (supra) is also inapplicable to the facts of the present case, as it was found as a fact by the Tribunal in the said case that no new and identifiable undertaking separate and distinct from the existing business had come into existence. Therefore, this decision is also inapplicable to the facts of the present case.
129. In the course of the hearing of the appeal, we ascertained from the Engineer of the appellant-company, who was present at the time of hearing, that in a Black and White TV set, the total number of components are 400, while in the Colour Television sets, the component parts would be in the region of 700. He further explained that in the initial stage of manufacture of colour television sets, the appellant-company imported 80% of the component parts, of which Colour picture Tube represented 40%. At present, he stated that 70% of the component parts were indigenously produced, while 30% are imported. He also explained that it would be impossible to manufacture a colour television with the help of the plant and machinery used for the manufacture of Black and White television sets. He also explained the manufacturing process for CTV with reference to the Production Flow Chart at page 14 of the Paper book No. 6. This statement seems to be supported by the fact that during the year under appeal, the appellant had manufactured 32,537 Black & White television sets as against 31,188 Black & White television sets manufactured in the earlier year 1983. In the light of these facts, the inference sought to be drawn by the departmental authorities that the appellant-company must have utilised the existing facilities for the manufacture of Black and White television sets, even for the manufacture of Colour Television sets, seems to be based on mere suspicion and surmises.
130. One of the points emphasised by the departmental authorities and the learned departmental representative is that though the assessee had made arrangements for loan facilities from banks, yet there was no substantial investment of borrowed funds in the manufacture of CTVs on the assessee's own admission and that therefore it is difficult to accept the assessee's claim that it had set up a new industrial undertaking without any substantial investment of either own capital or borrowed funds. This conclusion of the departmental authorities is not correct, as we have already referred to the relevant facts, wherein the appellant-company had arranged for enhancement of credit and loan facilities with bankers from Rs. 1.79 crores to Rs. 3.73 crores under various heads of loans and credit facilities. It is only by utilising these facilities arranged with the State Bank of India the appellant-company was able to import both capital machinery for its new project in the manufacture of colour television sets and also the raw materials required for the said project from abroad. In fact, the appellant had explained this position before the de partmental authorities in a note on allocation of interest to Black and White television Division at page 51 of paper book No. 1 and also in their letter dated 2-3-1989 addressed to the Assistant Commissioner of Income-tax. According to the appellants, it obtained credit facilities of 180 days on its imports from its foreign suppliers. It is only this facility allowed by the foreign suppliers which helped the appellant-company for not utilising its loan and other credit facilities arranged with the bank, except to the extent actually required as and when the occasion arose. The appellant had also stated that whatever bank charges were incurred for utilising this loan and credit facilities from the bank have been apportioned and debited to the respective profit and loss account relating to the Black and White Television division and Colour Television Division separately. This factual position stated by the appellants has not been disputed by the departmental authorities, nor any material placed before us or pointed out to us by the departmental authorities to hold that it is not correct. The very fact that the appellant was able to command credit for 180 days from its foreign suppliers shows the name the appellant had made not only in the domestic market, but also in the foreign markets and that itself is sufficient borrowed capital to carry on the new business in CTV division by the appellant-company. We are, therefore, unable to agree with the revenue that the appellant would not be entitled to the relief claimed by it on this ground.
131. There was some discussion about the basis followed by the assessing officer for re-working the profit of the colour Television Dvn. with reference to the number of colour television sets sold to the total TV sets sold by the appellant during the year of account. When we pointed out to the learned counsel that the proportion adopted by the assessing officer was not correct and that the proportion should be with reference to the sales turnover of colour television sets sold to the total sales turnover of television sets sold, which would afford a more rational and correct basis for reworking the profit from the CTV Division, the learned counsel for the appellant had no objection to the adoption of the said proportion for working out the profits from the colour television division with reference to the assessable profit. In fact, the learned counsel stated that appropriate directions may be given in th is regard so that the assessing officer may rework the profit of the colour television division on an appropriate basis and allow the consequential relief due to the appellant under Section 80-I of the Act with reference to such reworked profit of the CTV Division.
132. In the light of the above discussion, we hold that the appellant-company has fulfilled all the conditions contained in Section 80-I(2) of the Act and that, therefore, it is entitled to the relief under Section 80-I in respect of the profits earned by it in the new industrial undertaking, namely the Colour Television Division established by it in the year of account. We therefore direct the assessing officer to rework the profit from the Colour Television Division in the following proportion, namely:
Sales Turnover of Colour T.V. Sets Sold
--------------------------------------- x Assessable profit.
Total sales turnover of TV sets sold We further direct the assessing officer to allow the amount of relief due to the appellant under Section 80-I of the Act on the profit of CTV Division arrived at on the above basis.
133. In the result, the assessee's appeal is allowed.