Patna High Court
Commissioner Of Income-Tax vs Darbhanga Sugar Co. Ltd. on 11 April, 1957
Equivalent citations: AIR1957PAT317, [1956]29ITR21(PATNA)
Author: Chief Justice
Bench: Chief Justice
JUDGMENT Ramaswami, C.J.
1. In this case the assesses is an incorporated Company owning two sugar factories at Lohat and at Sakri in the district of Darbhanga. The assessee is a member of the Indian Sugar Syndicate Ltd. (hereinafter referred to as the 'Syndicate') which was a trade organisation, the object of which was to promote the business interests of manufacturers of sugar and molasses. The Articles of Association of the Syndicate require that all the members should sell their entire output for each season to the Syndicate at a basic rate fixed by the Syndicate for this purpose. The members did not give actual delivery of the sugar to the Syndicate, but they were required to sell the stock of the sugar on behalf of the Syndicate and retain the price due to them by the Syndicate at the basic rate and pay the surplus to the Syndicate. Article 13 of the Articles of Association of the Syndicate is to the following effect:
"Notwithstanding anything to the contrary contained in these articles, the Board shall from time to time increase or decrease with retrospective effect the basic rates hereinbefore fixed so that the Syndicate will not at the end of the season earn a profit of more than one anna per maund on the entire quantity of sugar and molasses sold to and pooled by the Syndicate and direct all adjustment of accounts accordingly. Such increase or decrease shall be uniform for all the members."
Articles 24 (a) and (f) are also important. Article 24 (a) states as follows :
"24(a). In case the selling rate of sugar or molasses is higher than its basic rate, the member shall, out of the sale proceeds appropriate to himself the price payable to him by the Syndicate for such sugar or molasses at the basic rate."
Article 24 (f) reads as follows :
"24(f). In case the member is instructed to sell the sugar or molasses or any part at a lower rate than the basic purchase rate, the Syndicate will give credit for the difference to such member in respect of the quantity so sold."
The Syndicate did not anticipate that it would need more money for its expenses than contributions from its members at a rate of not exceeding one anna per maund of sugar sold by its members. But as a precautionary measure there is a provision in the Articles that the Syndicate had the right of calling for contributions of amounts in excess of one anna per maund, of the selling rate over the basic rate, if it should be in need. If the Syndicate's expenses fell below one anna per maund, it could raise the basic rate retrospectively, and thus refund to the members a part of the difference between the original basic rate and the selling rate. The Syndicate had arranged its affairs in the past on the assumption that it need not pay any income-tax, but all of a sudden the Income-tax authorities made an assessment upon the Syndicate for the past 8 or 9 years.
The Syndicate had no funds with which to pay the taxes, and, therefore, it called upon the members to contribute pro rata. The assesses had to pay to the Syndicate Rs. 53,759/- in respect of the two factories which it owned. The assesses claimed a deduction of this amount in the computation of the taxable profits. The Income-tax Officer, however, disallowed the deduction claimed on the ground that the assessee need not bear the burden of taxation of somebody else. An appeal was taken by the assessee to the Appellate Assistant Commissioner of Income-tax. The appeal was dismissed and the Appellate Assistant Commissioner agreed with the income-tax Officer that the payment did not fall within the purview of Section 10 (2) (xv) of the Indian Income-tax Act. The matter was taken before the Tribunal.
It was argued on behalf of the Income-tax Department that the demand made by the Syndicate was based on transactions which took place during the years long past. But the Tribunal rejected the argument on the ground that the occasion to make the demand arose and the liability of the members assumed a definite shape and became certain only in the year under review. The Tribunal also found that the payment of the amount by the assessee was not an ex gratia payment and the Syndicate had the power to compel the payment of the amount. The Tribunal, therefore, held that the payment of Rs. 53,759/- should be allowed as deduction under Section 10(2) (xv) from the taxable profits of the assessee.
2. Under Section 66 (2) of the Income-tax Act the Appellate Tribunal has submitted the following question of law for the determination of the High Court:--
"Whether on the facts and circumstances of the case, the sum of Rs. 53,759/- paid by the assessee to the Indian Sugar Syndicate Ltd., should be deducted as business expenditure under Section 10 (2) (xv)?"
It was argued in the first place by Mr. Bahadur on behalf of the Income-tax Department that the payment of Rs. 53,759/- was an ex gratia payment and the assesee was not entitled to deduct this amount from the computation of taxable profits. I do not agree with this argument. The effect of Articles 13 and 24 (a) and (f) of the Articles of Association of the Syndicate is that there was contractual liability on the members to make the contribution required by the Syndicate. The Articles of Association indicate that the Syndicate had complete power to adjust rates retrospectively and to have recourse to such other steps as might be necessary to make its members not only to safeguard it against all possibility of loss but also to ensure that it made a profit up to one anna per maund.
That is, in my opinion, the correct interpretation of the Articles of Association; and if that interpretation is correct, the assessee had the contractual liability of making the contribution of Rs. 53,759/- which was paid by the assessee. I hold, therefore, that the payment was made in accordance with the Articles of Association which constitute the contract between the members and the Syndicate and that the payment was not made by the assessee ex gratia. The argument of the Standing Counsel of the Income-tax Department on this point must be rejected as not correct.
3. The next contention put forward on behalf of the Income-tax Department is that the payment of the amount was not wholly and exclusively for the purpose of the assessee's business within the, meaning of Section 10 (2) (xv) of the Indian Income-tax Act, and so the assessee was not entitled to deduct this amount from the computation of the taxable income. I do not accept this argument as right. Prom a perusal of Articles 13 and 24 of the Articles of Association of the Syndicate it is apparent that the main object of the Syndicate was to fix a basic sale rate of the sugar produced by the members of the Syndicate and to prevent an uneconomic competition between the members and to keep up the price level at a certain basic rate for promoting the business interests of all manufacturers of sugar.
All the Articles of Association of the Syndicate have not been printed as an exhibit along with the statement of the case, but it is stated by the Appellate Assistant Commissioner in paragraph 3 of his order dated the 31st March, 1952, that "the professed object of the Sugar Syndicate was the furtherance of the business interest of the Member Sugar Factories". In paragraph 2 of the statement of the case the Appellate Tribunal has said that the "object of the Syndicate was to promote the business interests of manufacturers of sugar and molasses". In the application under Section 66(1) made by the Commissioner of Income-tax also it is admitted that the payment of the contribution to the Syndicate was allowed as a business expense in the past years.
In paragraphs 4 and 5 of the statement of facts printed at page 23 of the paper book, the Commissioner said that the Syndicate used to call up a portion of the levy and the surplus was refunded to the members pro rata and the "payment of the levy in the hands of the member was allowed as a business expense and the refund received was taxed as a revenue receipt." It is, therefore, clear that for the past, years the Income-tax Department allowed the contribution made by the assessee to the Syndicate as a business expenditure under the provisions of Section 10 (2) (xv) of the Indian Income-tax Act. In the context of all these circumstances it appears to me that the contribution of the amount of Rs. 53,759/- was made by the assessee to the Indian Sugar Syndicate "wholly and exclusively for the purpose of the assessee's business", within the meaning of Section 10(2) (xv) of the Indian Income-tax Act.
The review that I have taken is borne out by several authorities. For instance in Grahamston Iron Co. v. Inland Revenue, (1915) 7 Tax Cas 25 (A) a Company claimed that levies paid to a Trade Association, of which it was a member, should be allowed as a deduction in the computation of its liabilities under Schedule D. The object of the Association was to raise and keep up prices and thus enable its members to earn larger amount of profits. It was held by the Lord President, in this state of facts, that the Company would be entitled to a deduction claimed if there was proof that the sum in question was actually expended by it for the alleged purpose. At p. 28 the Lord President states as follows:--
"My lords, the sole question in this case is whether or no the Appellants are entitled to have a deduction of a sum of £923 in fixing their income tax for a certain year. The sum I have just mentioned was, they say, paid by them to an Association, of which they are members, the object of which is, stated in a sentence to prevent the members playing against one another the game of 'Beggar my Neighbour'; in other words, it is an Association for the purpose of keeping up the prices and so maintaining, or raising, it may be, the profits of its members. And unquestionably, if they can show that the sum in question was actually expended by them for that purpose, they are entitled to the deduction, because it is now well-settled law that such subscriptions are sums expended for the purposes of trade and are not merely an application of profits already earned."
The same principle has been expressed by the King's Bench Division in another case, Guest, Keen and Nettlefolds, Ltd. v. Fowler, (1913) 5 Tax Cas 511 (B). The assessee in that case was a member of the Steel Hoop Manufacturers' Association which was mainly formed for the purpose of keeping up prices. Under the rules and pooling arrangements of the Association the members were entitled each to a fixed proportion of all orders received, and any member invoicing more than his proportion of orders must pay 10 shillings per ton on the excess to the pool account which was distributed among those members who had invoiced less than their proportions.
It was held in these circumstances by Bray, J. that the net payments made by the Company to the Association in excess of those received from the Association by the Company were an admissible deduction for the purpose of arriving at the Company's assessable profits. The same view was also expressed by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax West Bengal, 1951-20 I. T. R. 1: (AIR 1951 SC 278) (C). It was argued on behalf of the Income-tax Department in that case that the interest paid on certain debentures could not be deducted under Section 12 (2) of the Indian Income-tax Act, on the ground (1) that it was not expenditure incurred for the purpose of earning the income, profits and gains, of the assessee, and (2) that even if it was so, it was at any rate not expenditure' incurred solely for that purpose.
The argument was rejected by the Supreme Court and it was held that the only question that should be considered was whether the transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the assessee and was made on the ground of commercial expediency. It was further held that the transaction fell within the purview of Section 12 (2) and the interest paid was a permissible deduction under that sub-section. In the course of his judgment Bose, J. quoted with approval the principle laid down by the House of Lords in British Insulated and Helsby Cables Ltd. v. Atherton, 1926 A. C. 205 (D) that for the purpose of claiming deduction it was enough to show that the money was expended "Not of necessity, and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business."
This statement of principle has been taken from the speech of Lord Cave in 1926 A. C., 205 (D), which was as follows:
"My Lords, I think it clear that the deduction from the profits of the abovementioned sum of £31,784 is not prohibited by the First Rule applicable to Cases I and II, which prohibits the deduction of a disbursement not being money wholly and exclusively laid out or expended for the purposes of the trade. It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce, (1915) 6 Tax Cas 399 (E) and Smith v. Incorporated Council of Law Reporting (1914) 6 Tax Cas 477 (P) that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade; and it appears to me that the findings of the Commissioners in the present case bring the payment in question within the description.
They found (in words which I have already quoted) that the payment was made for the sound commercial purpose of enabling the Company to retain the services of existing and future members of their staff and of increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of £31,784 was not money wholly and exclusively laid out for the purposes of the trade under the Rule above referred to, they found that the deduction was admissible thus in effect, although not in terms, negativing the Crown's contention. I think that there was ample material to support, the findings of the Commissioners, and accordingly that this prohibition does not apply."
It is true that the decision of the Supreme Court in Eastern Investments Ltd. v. Commissioner of income-tax, West Bengal 1951-20 I. T. R. 1: (AIR 1951 SC 278) (C) was given with reference to a case arising under Section 12 (2) of the Indian Income-tax Act; but I think the language of Section 12 (2) is closely similar to the language of Section 10(2) (xv), and the principle laid down by the Supreme Court in that case is, therefore, applicable to the present case. The question has been elaborately considered recently in an English case, Morgan v. Tate and Lyle, Ltd. (1953) 35 Tax Cas, 367 (G), where the assessee Company which carried on the business of sugar refiners claimed to deduct in the computation of its trading profits for income-tax purposes expenses incurred on a propaganda campaign designed to show that nationalisation of the sugar refining industry would be harmful to "workers, consumers and stockholders alike." It was held by the General Commissioners that the sum in question was money wholly and exclusively laid out for the purposes of the Company's trade and was an admissible deduction. This view was affirmed by the House of Lords and it was held that the finding of the Commissioners should not be interfered with because there was no reason in law which prevented the commissioners from so finding. Applying the principle laid down by all these authorities I am of the opinion that the amount of Rs. 53,759/- paid by the asseasee to the Syndicate was a payment made wholly and exclusively for the purpose of the assessee's business and was, therefore, a proper deduction to be made under Section 10 (2) (xv) of the Indian Income-
tax Act.
4. On behalf of the income-tax Department the Standing Counsel referred to three cases, Odharas Press Ltd. v. Cook, 1941-9 ITR (Sup) 92 (HL) (H), Union Cold Storage Co. Ltd. v. Jones (1923) 8 Tax Cas. 725 (I) and Commissioners of Inland Revenue v. Dowdall O'Mahoney & Co. Ltd., (1952) 33 Tax Cas 259 (J), in support of his argument. But I do not consider that any of these decisions has any bearing on the question presented for determination in the present case. In 1941-9 ITR (Sup) 92 (HL) (H), the assessee Company, who had acquired all the shares in a subsidiary company, printed and published a periodical for the subsidiary company upon a commercial basis. During the year ending the 31st of December, 1933, the subsidiary company made a net trading loss of £2,927.
The assessee company wrote off in their own accounts the sum of £2,927. The assessee company wrote off in their own accounts the sum of £2,927 from the amount of £10,118 due to them from the subsidiary company on trading account for work done at full trade prices. In assessing the company to income-tax, they claimed to deduct the sum of £2,927 from their profits as money laid out or expended for the purposes of their trade. The Special Commissioners found that the sum written off by the company was not written off wholly or exclusively for, the purpose of their trade or business and, therefore, it was not an admissible deduction. It was held by the House of Lords that the question was one of fact for the Special Commissioners to determine and there was evidence to justify their conclusion.
In the next case, (1923) 8 Tax Cas 725 (I), a British Company transferred the foreign cold storage businesses carried on by it to an American company for a term of years in consideration of certain annual payments. The premises, machinery and plant of the foreign businesses remained the property of the British company but they were placed under the sole control of, and were used by, the American company for the purpose of carrying on the businesses as it thought fit. They were not demised or leased to the American company and no rent was payable for their user but the American company was to keep them in proper repair and working order, save as regards all ordinary wear and tear and damage by fire.
The British company claimed that, in the computation of its profits for assessment to income-tax under Schedule D, deductions should be allowed for the fire insurance premiums paid by it in respect of the premises, and for wear and tear of the machinery and plant, of the transferred businesses. It was held in these circumstances by the Court of Appeal that the fire insurance premiums did not represent money wholly and exclusively laid out or expended for the purposes of the trade of the appellant company, that the machinery and plant in question had not been used for those purposes, and that the deductions claimed were accordingly Inadmissible. The principle laid down in this case has no relevance to the present case, for the material facts are obviously different.
In the last case, (1952) 33 Tax Cas 259 (J) the assessee Company was managed, controlled and resident in Eire where it carried on the business of margarine manufacturers & butter merchants. It had two branches in England where it conducted a general grocery business. The Company paid Irish income-tax, corporation profits tax, and excess profits tax on the whole of its profits, including the English branch profits. The company contended that in computing the profits of the English branches it was entitled to deduct that proportion of the Irish taxes which was attributable to those profits.
It was held by the House of Lords that the Irish taxes were not wholly and exclusively laid out for the purposes of the Company's trade in the United Kingdom and that no part of such taxes was an admissible deduction in computing its trading profits for the purposes of excess pro-fits tax. The principle of this decision has no application to the present case, because the material facts are wholly dissimilar. The assessee in the present case had made a contribution of the amount of Rs. 53,759/-, not as a portion of the income-tax payable by the Syndicate, but it was a contribution to the Syndicate made by the assessee in terms of its contractual liability, and the decision in (1952) 33 Tax Cas 259 (J), has no application to the present case.
5. For these reasons I hold that the question of law referred by the Income-tax Appellate Tribunal must be answered in favour of the assessed and against the Income-tax Department. The Income-tax Department must pay the costs of this reference. Hearing fee Rs. 250/-.
Raj Kishore Prasad, J.
6. I agree.