Satish Chandra, C.J:— The Income-tax Appellate Tribunal has submitted this statement of the case and has referred several questions of law for our opinion at the instance of the assessee as well as the Revenue. The reference relates to six assessment years from 1964-65 to 1969-70.

2. The assessee is a private limited company. It is a hundred per cent. subsidiary of a foreign company, namely, Orient Carpet Manufacturers (London) Ltd. The latter is a company incorporated in England. The assessee company carries on the business of manufacture and sale of carpets. Almost its entire production of carpets is exported out of India.

3. We shall first take up the question of tax concession and higher rebate on super-tax.

4. It appears that in order to earn more foreign exchange the Govt. of India introduced incentives for encouraging export. One incentive was that the exporters will get import licences for certain items so that they can recoup their losses, if any, which they may have incurred in their export business. The other incentive was by way of tax concession and higher rebate.

5. The assessee-company exported carpets manufactured by it. It received import licence in respect of certain dyes, chemicals, wool and wool tops because of the carpets exported by it. It incurred a loss on the export of carpets. It sold the dyes, chemicals, wool and wool tops imported by it on the strength of the import licence given to it by the Govt. of India. It earned huge profits on such sales. For the assessment year 1964-65 profit on the sale of wool and wool tops and dyes was Rs. 18,84,498, whereas the loss in the export of carpets was Rs. 15,01,586. The net profit of the company in both these business activities was Rs. 3,82,912.

6. The Tribunal has held that there is no dispute that the export operations and the sale of import entitlements constitute the same business of the assessee. This is also clear from the fact that all the departmental authorities have allowed a set-off of the loss in the export part of the business against the profit made in the sale of imported items. The assessee has been taxed on the net profit which resulted after these adjustments.

7. The question is whether the assessee is entitled to the tax concessions granted by the Finance Acts of 1965, 1966 and 1967. The relevant provisions are:

Section 2(5)(a)(i) of the Finance Act of 1965 and 1966:

“5. (a) In respect of any assessment for the assessment year commencing on the 1st day of April, 1965—

(i) an assessee being an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India or an assessee (other than a company) whose total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of income-tax (and super-tax) with which he is chargeable, of an amount equal to the income-tax and super-tax calculated respectively at one-tenth of the average rate of income-tax and of the average rate of super-tax on the amount of such profits and gains included in the total income.”

8. Section 2(4)(a)(i) of the Finance Act, 1967:

“2(4)(a). In respect of any assessment for the assessment year commencing on the first day of April, 1967, in the case of an assessee being a domestic company or an assessee other than a company,—

(i) where his total income includes any profits and gains derived from the export made before the sixth day of June, 1965, of any goods or merchandise out of India, he shall be entitled to a deduction, from the amount of income-tax with which he is chargeable of an amount equal to the income-tax calculated at one-tenth of the average rate of income-tax on the amount of such profits and gains included in his total income.”

9. There is no dispute that the assessee-company fulfils the various requirements of these provisions. The only dispute is whether the total income of the assessee includes any profits and gains derived from the export of any goods out of India. The export of the carpets manufactured by the assessee-company resulted in a loss, but the sale of the imported items made up that loss and gave the company some profit on which it is being taxed. The question is whether the profits and gains resulting from the sale of the import entitlement can be said to be profit and gains “derived” from the sale of goods out of India.

10. On the facts found, it is clear that the Government had granted incentives for encouraging exports. One part of the incentive was import entitlement. The assessee's case is that because of this import entitlement it was able to export carpets at below its cost price. In view of the incentive, it seems clear that the export of goods by the assessee yielded two kinds of returns. One was the sale price for the carpets and the other, receipt of import entitlements. Both these receipts were directly due to the export of carpets. The import entitlements were assets of high value. They were given in order to enable the exporter to recoup his losses in the actual sale of the exported goods. In our opinion, both these receipts together constituted the income derived from the export of goods. Profits arising out of their combined value would be profits derived from the export of goods.

11. If, instead of granting incentive in kind, i.e, import licence of certain raw materials, the Government had granted an incentive in the form of cash subsidy, the cash subsidy could not but be said to be, in fact, derived from export. So should be the case with the incentive in the form of import entitlements. Profits arising from the sale of such entitlements are properly and truly derived from the export of goods out of India. The assessee was, in our opinion, entitled to the tax concessions mentioned in the Finance Acts of 1965, 1966 and 1967.

12. For the same reason, the profits and gains arising out of the sale of import entitlements can validly be said to be, in fact, “attributable” to the business of manufacture and export of carpets. In our opinion, the Tribunal was justified in holding that the assessee was entitled to concessional rate of income-tax at 55% in view of the provisions of the Finance Acts of 1965 to 1967. The Tribunal held that the assessee is a company which is exclusively engaged in the manufacture of carpets. The receipt of import entitlements was in the course of its manufacturing activity and a direct result of export of its manufactured goods. The assessee incurred loss on export of manufactured goods, namely, carpets; but it derived profit from sale of import entitlements which are a consequence of the exports. Thus, the said profits are certainly attributable to the assessee's activity of manufacture of carpets. We affirm this view.

13. The Tribunal as well as learned counsel for the Revenue has relied upon CIT v. Raja Bahadur Kamakhaya Narayan Singh, [1948] 16 ITR 325 (PC), on the construction of the term “derived”. The question was whether interest paid on arrears of rent was itself rent or revenue derived from land. The Judicial Committee observed (p. 328):

“The word ‘derived’ is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment.”

14. It was held that the cause for the accrual of interest was not land or rent but the fact of non-payment of rent in time. There was no commercial connection between the interest and the rented land.

15. Relying on this decision, the Tribunal held:

“In the genealogical tree of profit, the export operations come in the second degree, but the immediate and effective source is the sale of import entitlements.”

16. In our opinion, the Tribunal misconceived the true effect of the aforesaid decision of the Privy Council. In the case before the Privy Council, the nature or character of the relationship underwent a legal change. Rent was payable because of the relationship of landlord and tenant, but the interest on arrears of rent was payable because of the relationship of creditor and debtor. In the present case, the Tribunal has held that the business of export of carpets and the sale of import entitlements was part of the same business of the assessee. We have shown above that the price fetched by the export of carpets as well as the sale of the import entitlements were parts of the same business of export. Both directly resulted from the activity of export.

17. The Tribunal went on to observe:

“If the assessee, instead of selling the import entitlements, imports the raw materials and utilizes them in the manufacture of carpets and sells a part of the production in the internal market, the profits arising from those sales can certainly be attributed to the benefits derived from the import of raw materials. But such profits cannot be treated as profits derived from the export of goods.”

18. This observation is again based on a misconception. If the assessee instead of cashing the import entitlements uses them for its business, it uses the import entitlements as an asset of the business. Its value could not then be included in the taxable income of the assessee. In that case it may well be said that the profits arising out of the use of the raw materials in the manufacture of carpets was due to a different business activity, namely, the manufacture of carpets other than those which had been exported.

19. The case of Mrs. Bacha F. Guzdar v. CIT, [1955] 27 ITR 1 (SC) is also distinguishable. There the question was whether dividend received by a shareholder from a company out of its agricultural income is exempt as “agricultural income”. The Supreme Court held (p. 4):

“Dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder. Dividend is not derived by a shareholder by his direct relationship with the land.”

20. This case shows that when the legal relationship changes, the nature and character of the income may also change. Agricultural income is derived from the use of land while dividend income of a shareholder is derived from the profits of a company. The shareholder takes no part in the agricultural activity which earns the income. His income can properly be said to be derived from the investment made by him in the company.

21. In the present case, however, the position is different. The business activity of the assessee-company produced the price of the carpets exported as well as the import entitlements which were cashed in order to recoup the loss add make profits on the business activity of export of carpets. These decisions do not help the Revenue.

22. The next question is whether the assessee was entitled to a lower rate of tax permissible under cl. 1(b)(ii) of the proviso to para. F of Pt. I of the First Schedule to the Finance Act of 1965 for the assessment year 1965-66 and under cl. 1(A)(I)(II) of para. F of Pt. I of the Finance Acts of 1966, 1967, 1968 and 1969 for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70, respectively.

23. Under these provisions of the Finance Acts, a company which has made the prescribed arrangements for the declaration and payment within India of the dividends payable out of its income liable to income-tax under the I.T Act in accordance with the provisions of s. 194 of the Act and is also a company as is referred to in s. 108 of the I.T Act, is entitled to a rebate of 30% or 35%, as the case may be, out of the income-tax rate of 80% on its income.

24. There is no dispute that the arrangements mentioned above have been made by the assessee-company. The question, however, is whether the assessee is a company as is referred to in s. 108.

25. Section 108 says:

“108. Nothing contained in section 104 shall apply—

(a) to any company in which the public are substantially interested, or

(b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.”

26. Admittedly, the assessee is a 100% subsidiary of O.C.M (London) Ltd. It comes within the purview of cl. (b) of s. 108, that is to say, it is a subsidiary company. But the question is whether it is a subsidiary company of “such company”. “Such company” refers to the company mentioned in cl. (a), namely, to a company in which the public are substantially interested.

27. Section 2(17) of the I.T Act defines a company. It is not in dispute that O.C.M (London) Ltd. is a company as defined by s. 2(17). Section 2(18) of the I.T Act defines a company in which the public are substantially interested. It reads as under:

“2. (18). A company is said to be a company in which the public are substantially interested—

(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than 40% of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank, or

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and

(i) its shares (not being shares entitled to a fixed rate of dividend whether with or with out a further right to participate in profits) carrying not less than 50% of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—

(a) the Government) or

(b) a Corporation established by a Central, State or Provincial Act, or

(c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in clause (b) of section 108 (hereinafter in this clause referred to as the subsidiary company) or

(d) the public (not being a director, or a company to which this clause does not apply);

(ii) the said shares were at any time during the relevant previous year the subject of dealings in any recognized stock exchange in India or were freely transferable by the holder to the other members of the public; and

(iii) the affairs of the company, or the shares carrying more than 50% of its total voting power were at no time during the relevant previous year controlled or held by five or less persons;.”

28. It will be seen that to be a company in which the public are substantially interested it has to answer the description mentioned in cl. (a) or cl. (b). O.C.M (London) Ltd. does not fall within the purview of cl. (a) because it is neither owned by the Government or the Reserve Bank of India and at least 40% of its shares are not owned by the Government or by the Reserve Bank of India or a Corporation owned by that bank.

29. For the assessee it was stressed that O.C.M (London) Ltd. will fall within the purview of cl. (b) of s. 2(18). Sub-section (b) has three sub-clauses. Under cl. (b)(i), its shares carrying not less than 50% of its voting power should be held either by the Government, a Corporation or by a company as described in sub-cl. (c) or the public. Under cl. (b)(ii), the said shares should either be subject of dealings in any recognized stock exchange in India or be freely transferable among the public and under cl. (b)(iii) there is yet another condition. It will be seen that the word “and” occurs between cls. (ii) and (iii) of cl. (b). It is thus apparent that in order to come within the purview of cl. (b), the company must fulfil the requirements of all the three of its sub-clauses.

30. The Tribunal has held that the term “public” occurring in sub-cl. (d) of cl. (b)(i) refers to the public in India. Admittedly, the shares of O.C.M (London) Ltd. are all held by persons in England. The Tribunal held “for this reason O.C.M (London) Ltd. does not come within the purview of sub-clause (d) of sub-section (b)(i)”. The Tribunal further found that there was no evidence that the shares of O.C.M (London) Ltd. were at any time during the relevant previous year subject of any dealings in any stock exchange in India or were freely transferable to the other members of the public.

31. Learned counsel for the assessee did not question this finding. He did not bring to our attention any material which could go to show that the shares of O.C.M (London) Ltd. were at any time during the previous year subject of any dealings in any stock exchange in India or were freely transferable among the members of the public. Thus, the requirements of-sub-cl. (ii) of cl. (b) remain unfulfilled.

32. Since the conditions mentioned in all the three sub-clauses of cl. (b) have to be fulfilled, the non-fulfilment of the provisions of sub-cl. (ii) negatives the assessee's case that O.C.M (London) Ltd. was a company in which the public were substantially interested as defined in s. 2(18) of the I.T Act. In this view, it is unnecessary for us to express any opinion whether the term “public” occurring in sub-cl. (d) of cl. (b)(i) is confined to the public in India. Accordingly, the assessee was not entitled to the tax rebates under the relevant provisions of the Finance Acts.

33. Learned counsel relied upon CIT v. Aspinwall & Co. Ltd., [1975] 98 ITR 291 (Ker) and Yercaud Coffee Curing Works Ltd. v. CIT, [1978] 111 ITR 787 (Mad). In both these cases the question for consideration was whether a company in which public were substantially interested was within the ambit of the term “public” within the meaning of s. 2(18) of the I.T Act and the answer given was in the affirmative. The question for consideration in the present case is very different, namely, whether the expression “public” in the aforesaid clause referred to the public in India alone as distinguished from “public” in foreign countries. As already mentioned above, we have refrained from expressing an opinion on this point. The cited cases are hence not very helpful.

34. The next point relates to the disallowance of the expenditure relating to repairs to buildings. This question relates only to the assessment years 1966-67 and 1967-68.

35. It appears that in 1964 a major fire broke out in the factory premises. It resulted in a substantial loss to the factory building as well as to the residential quarters of the managing director called Bari Kothi situate within the campus of the factory. The roof of the factory building as well as of the Bari Kothi were originally of wooden ballis and khaprail. They were destroyed as a result of fire. They were replaced by asbestos sheets placed on iron angles and girders. This was done in order to avoid risk of fire in future. In the accounting year relevant to the assessment year 1966-67, the assessee-company incurred a total expenditure of Rs. 1,09,102. The assessee-company itself capitalized the expenditure to the extent of Rs. 76,236. It claimed the balance as revenue expenditure. In the next assessment year, the assessee incurred an expenditure of Rs. 66,583. It claimed the entire expenditure under the head “Repairs”. The ITO disallowed the claim for the assessment year 1966-67, but in respect of the assessment year 1967-68 he allowed Rs. 11,277 under the head “Current repairs” and disallowed the balance of Rs. 56,306. He held that this part of the expenditure was capital in nature. The AAC as well as the Tribunal confirmed the view that this expepditure was capital in nature. It held that the expenditure was incurred in effecting major structural alterations to the building and in making some additions to the existing buildings. This was not “current repairs”. It certainly created an enduring benefit to the assessee. The expenditure was, therefore, capital in nature.

36. For the assessment year 1966-67 out of a total expenditure of Rs. 1,09,102 the assessee itself treated Rs. 76,236 as capital expenditure claiming only the balance amount of Rs. 32,866, as revenue under the revenue account. The ITO held that of these amounts, a sum of Rs. 12,000 represented expenditure which was capital in nature and was not allowable as revenue expenditure. He allowed the balance. So the dispute for the assessment year 1966-67 relates to the amount of Rs. 12,000 only. The AAC examined the accounts and held that a sum of Rs. 13,546 represented cost of asbestos sheets and bricks and their freight and cartage. They were capital expenditure. Similar was the case for the assessment year 1967-68 in which an expenditure of Rs. 56,306 was disallowed on the same ground.

37. It transpires that the cost of asbestos sheets and bricks have beeri disallowed on the ground that it was not revenue expenditure but it was incurred in order to create an enduring benefit to the assessee.

38. The fire which broke out in the factory premises damaged the buildings. The buildings originally were of ballis and khaprail. The assessee-company decided to replace the roof by asbestos sheets based on iron angles to make it fire proof and thus safe from the repetition of fire accidents.

39. It cannot be denied that in order to carry on its business as usual the factory premises as well as the residential quarters for the managing director who was all the time living there, had to be repaired or reconstructed. While doing so the assessee-company resolved that the building should be made safe from fire accidents. This was obviously a decision in the interest of the business of the assessee-company. It was dictated by commercial expediency.

40. The expenditure in putting the original building in proper working shape did not bring info existence a new building. The fact that some additions were made to the existing building have already been accounted for by the assessee in treating a substantial portion of the expenditure in 1966-67 as capital. The expenditure incurred in replacing the roof which had been damaged, by fire-proof roof was an expenditure which was revenue in nature. By repairing and reconstructing the roof, etc., the assessee-company enabled itself to carry on its business. It was an expenditure wholly and exclusively laid out for purposes of business. The fact that the freshly constructed roof by asbestos sheets based on iron angles became more enduring than the previously existing roof of khaprail based on ballis, does not change the nature or character of the expenditure. The business asset, namely, the building was there. It remained so, though it was made safe from fire for the future.

41. For the Department it was argued that the assessee had initially claimed the expenditure under the head “Current repairs”. It could not be allowed to change its case and claim the expenditure under the head of “Revenue expenditure” for business purposes. This submission stands negatived by the decision of the Supreme Court in CIT v. Kalyanji Mavji & Co., [1980] 122 ITR 49 (SC). On that case one of the collieries of the assessee-company had been requisitioned by the military authorities. They occupied it for several years. After its release, the assessee spent over 1½ lakhs in renovating the building, reconditioning the machinery and clearing the land of debris accumulated over a number of years. The Supreme Court held that the expenditure so incurred may not come under the head “Current repairs” and may not be entitled to deduction under s. 10(2)(v) of the Indian I.T Act of 1922. However, it could not be said that such repairs to machinery and buildings which were not “current repairs” should not at all be considered for deduction on general principles under s. 10(2)(xv). On accepted commercial practice and trading principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes.

42. If, on the facts found, an expenditure in its true character and nature is business expenditure it can be allowed under s. 37 of the Act of 1961 (which corresponds to s. 10(2)(xv)) even though it may have been originally claimed under s. 31 (which corresponds to s. 10(2)(v) of the Act of 1922). There is hence no legal defect in applying s. 37 if it, otherwise, is attracted.

43. On the question whether such an expenditure is capital in nature, the Supreme Court in the aforesaid case held that the buildings were renovated, the machinery reconditioned and the accumulated debris removed from the land. The colliery was, in a word, reinstated to the condition necessary for ensuring production. No new asset was brought into existence; no advantage for the enduring benefit of the business was acquired. An activity which was continuously in operation but had been temporarily suspended was to be resumed.

44. These observations are applicable to the present case. Because of the fire the factory premises had been damaged with the necessary result of stoppage of production. In order to resume production it was necessary to remove the impediment which had come in the way, namely, the partial damage to the building. The buildings were restored so that the business operations may continue. The mere fact that in the process of restoration the building was made safe and secure from future fire accidents did not detract from the expenditure being a business expenditure because the decision to make the building secure from fire was dictated by commercial expediency to prevent further loss due to fire. In the circumstances, we are satisfied that the expenditure was not capital in nature but was allowable as business expenditure for both the years.

45. The next point relates to the disallowance of the pension paid by the assessee-company to the widows of ex-directors of the company. The sums involved are as follows:

Assessment year Name of the person to whom paid Amount Rs. 1965-66 Mrs. Martin 6,000 Mrs. Wallis 4,250 1966-67 Mrs. Martin 6,000 Mrs. Wallis 3,000 1967-68 Mrs. Martin 6,000 Mrs. Wallis 1,500 1968-69 Mrs. Martin 6,000 1969-70 Mrs. Martin 6,000

46. It appears that Mr. Martin joined the company in 1921 and retired in 1948. He was a director of the company. By a resolution of October 13, 1948, he was sanctioned a pension for his lifetime at Rs. 500 per month with effect from August 15, 1948. He, however, died in 1949. His widow, Mrs. Martin, addressed a letter to the company on February 18, 1950, whereupon the company passed a resolution on March 7, 1950, allowing Mrs. Martin a pension at the same rate, i.e, Rs. 500 per month. This was payable to Mrs. Martin till the education of her children necessitated it.

47. Mr. Wallis was another director. He died in May, 1959, while in service. On August 24, 1959, the company passed a resolution allowing a pension of Rs. 500 per month to his widow, Mrs. Wallis, for three years with effect from June 1, 1959. This pension was continued for another two years by a resolution passed on April 21, 1962. This resolution was passed because Mrs, Wallis expressed some financial difficulties on account of the education of her daughters. Subsequently on September 10, 1964, another resolution was passed by the company granting a pension of Rs. 250 per month for a further period of two years with effect from June 1, 1964.

48. The assessee claimed deduction of the pension payments made to the two widows of the ex-directors of the company. All the authorities below have disallowed the claim. The findings on facts are that the pension was paid on humanitarian and personal considerations rather than on occount of business expediency. There was no practice in the company to pay pension to the widows of the deceased employees of the company even if they were to die in harness. By granting pension to the two widows, the company was not laying down any new convention of business for the benefit of its employees. The employees were not in expectation of similar pensionary benefits.

49. The law on this point is well settled. The Supreme Court in Gordon Woodroffe's case, [1962] 44 ITR 551, 555 held:

“In our opinion, the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.”

50. On the findings of fact, it is evident that the test formulated by the Supreme Court is not satisfied in the present case.

51. Learned counsel for the assessee, however, relied upon Laxmi Cement Distributor's case, [1976] 104 ITR 711 (Guj). He especially invited our attention to the following passage from this decision (p. 716):

“It is well settled that any payment made by an assessee in his character as a trader, not out 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 his business, might still be treated as having been made wholly and exclusively for the purposes of the trade.”

52. In our opinion, this principle is inapplicable to the facts of the present case. Here the company by a resolution granted pension to the two widows out of regard for their personal financial difficulties. In both cases, the motivating factor was the difficulty that the widows were facing in giving proper education to their daughters. There was no element of facility to the carrying on of the business of the assessee-company acting as a trader in granting the pension to the widows. There was no indirect facility that was or could be obtained in the carrying on of the business by the grant of the pension. In our opinion, the authorities below were justified in declining to accept the claim of the assessee-company.

53. The next submission of learned counsel for the assessee related to the disallowance of Rs. 1,50,000 as provision for sales tax liability for the assessment year 1967-68. It appears that the sales tax authorities of Bombay served notices dated March 26, 1966, on the assessee-company asking them to show cause why sales tax on the goods imported and acquired in Bombay from April 1, 1959, onwards be not deemed to have been sold in Bombay and why the appellant be not treated as a dealer under the Bombay Sales Tax Act and sales tax charged. The assessee-company disputed its liability and ultimately took the matter to the Bombay High Court and it appears that further proceedings were stayed by the High Court. The assessee-company, however, made a provision under the head of contingencies of Rs. 1,50,000 in respect of the sales tax liability for the assessment year 1967-68.

54. The AAC, while disallowing the claim, held that till date the company had not received any demand notice from the STO. The company made the provision for meeting a contingent liability which was not admissible because it was an established proposition of law that deductions can be claimed in respect of liability in praestnti and not liability in future or anticipated liability. The Tribunal upheld this view. It expressed an opinion that no demand had been raised against the assessee so far. It was not known for certain whether the assessee is really liable to sales tax. If the assessee made a provision for an unknown and uncertain liability, it could be allowed as an admissible deduction. The principle that liability to sales tax accrued as soon as sales were effected, was applicable in cases where there was no dispute about the liability, though it was not quantified.

55. It has not been disputed by any of the authorities below or by the learned counsel for the Revenue that the assessee had not made the provision for the sales tax liability with a view to defraud the Revenue or avoid incidence of tax or with any mala fide intention. The provision was made to meet the liability of sales tax which the Sales Tax Dept. was seriously pressing, and which the assessee was disputing. The correctness of the sales tax authorities' claim that the assessee was liable to sales tax appeared to be controversial because the High Court had entertained the writ petition filed by the assessee-company and had stayed further proceedings. The view-point of the sales tax authorities that the assessee-company was liable to sales tax could not hence be treated lightly or casually. It was a case of a questionable liability for which the Department held the assessee-company liable and which the assessee was contesting. In this situation it cannot be said that the liability to sales tax was merely contingent simply because it was being disputed by the assessee nor could it be said that the assessee's claim for provision for the sales tax liability was fictitious. Undeniably, the assessee-company was maintaining accounts on the mercantile basis.

56. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC), it was observed that under sales tax laws the moment a dealer made either purchases or sales which were subject to taxation, the obligation to pay the tax arose and tax liability was attracted. Although that liability could not be enforced till the quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment.

57. In our view, from the mere fact that the liability was being disputed by the assessee, though according to the Sales Tax Dept. the assessee was liable, it could not be said that the liability was at this stage contingent so as to be disallowed as a business expense.

58. Learned counsel for the assessee invited our attention to CIT v. Rajeswari Distributors (P.) Ltd, [1980] 125 ITR 618 (Cal). In that case, sales of certain categories of match boxes were not liable to sales tax. By a subsequent notification, they were made liable. The Sales Tax Dept. initiated assessment proceedings. The assessee contested its liability to sales tax. It, however, made a provision in its accounts for the estimated amount of sales tax. The Calcutta High Court held that the liability to pay sales tax was not contingent because it was being disputed by the assessee. Irrespective of the ultimate result, the claim made by the assessee could not be rejected. This case is applicable to the present case. It is not quite correct that the principle, that the liability to sales tax accrues as soon as sales are effected, is applicable in cases where there is no dispute about the liability. In our opinion, the same principle would apply where the liability in question is controversial and is being disputed by the assessee. Even if ultimately the assessee succeeds in this contention, the legal effect will be that the liability would be nil. But it cannot, for that reason, be said that so long as the liability is in dispute it is merely a contingent liability and so inadmissible. In our opinion, the assessee was entitled to a deduction under s. 37 of the I.T Act of a sum of Rs. 1,50,000 for which it had made provision in respect of sales tax liabilities.

59. The last submission on behalf of the assessee related to the assessment year 1968-69. The assessee-company seems to have made a donation of Rs. 7,000 to the Congress Party. Its claim for deduction has, however, been disallowed. For the assessee it was submitted that by making this donation to the political party in power, the assessee expects to get help from the Government in the normal running of its business. On facts, this has been negatived by the authorities below and we agree with them. Such a donation to a political party cannot be said to have been made by the assessee-company in its character as a trader. The amount of Rs. 7,000 was rightly disallowed.

60. On behalf of the Department the Tribunal has referred for our opinion three questions of law. The first question relates to the construction of the term “attributable” occurring in the different Finance Acts. We have already dealt with this aspect and have held that the profits received from the sale of import entitlements were attributable to the business activity of the company of export of carpets and so the assessee was entitled to the tax deductions on that basis. The first question has to be answered against the Department.

61. The second question relates to the assessee's claim for deduction of Rs. 12,852 payable to assessee's principals in London towards its share of liability of the central office expenses. It appears that in order to meet its share of liability, the assessee had to remit to its head office at London every year certain amount as per the debit note received from the principals. The debit note is in terms of pound sterling. The assessee remits the equivalent value in terms of rupees with the permission of the Reserve Bank. During the year 1966, while the sanction of the Reserve Bank was pending, the rupee was devalued and as a result thereof the assessee had to incur an additional liability of Rs. 12,852. There was a delay in obtaining the permission of the Reserve Bank and the same was cleared in the calendar year 1968. The assessee claimed the additional amount in the assessment year 1969-70, but the claim was disallowed by the ITO as well as by the AAC on the ground that the assessee was keeping its accounts on mercantile basis and since the devaluation came in the previous year relevant to the assessment year 1967-68, the assessee should have claimed the said liability in the assessment year 1967-68, and not in the assessment year 1969-70. In the appeal for the assessment year 1967-68, the assessee prayed for including an additional ground of appeal relating to this matter. The Tribunal, in its discretion, allowed the assessee to raise this additional ground. It, however, gave due opportunity to the Department to make its submissions on the additional ground. After hearing both the parties, it allowed the claim. There is no dispute about the allowability of the claim for deduction of Rs. 12,852.

62. The question referred by the Tribunal on this matter relates to the validity of the Tribunal's action in allowing the assessee to raise this additional ground for the first time in its appeal before the Tribunal when the ground was not raised either before the ITO or the AAC for the year 1967-68.

63. In our opinion, there is no bar to the Tribunal allowing an additional ground to be taken before it provided, however, both the parties are duly heard on that point. The Tribunal afforded proper opportunity to the departmental representative to make his submission on this point. In Kedarnath's case, [1971] 82 ITR 363, the Supreme Court has held that the entitlement to a deduction depends upon the provisions of law relating thereto. It is not dependent either on the existence or absence of entries in the books of account nor is the view that the assessee may take, decisive or conclusive in the matter. In this view, since the claim was clearly allowable, the Tribunal did not commit any error of law in permitting the assessee to raise the additional ground. It may be remembered that the assessee had pressed its claim for the year 1969-70 but it was held that it should have claimed the deduction in the assessment year 1967-68. Since the assessment proceedings for the year 1967-68 were pending in appeal before the Tribunal the assessee prayed for and was allowed to raise it as an additional ground of appeal. In our opinion, the Tribunal did not commit any error of law in permitting the assessee to do so.

64. Learned counsel for the Revenue relied upon the Supreme Court decision in Addl. CIT v. Gurjargravures (P.) Ltd., [1978] 111 ITR 1. There neither the claim was made before the ITO nor was there any material on record to support the claim. The Supreme Court held that the claim could not validly be allowed to be taken up in appeal merely because similar claims bad been allowed in subsequent years because for that reason alone it could not be assumed that the prescribed conditions for justifying a claim for exemption were also fulfilled. The case is clearly distinguishable. In the present case all relevant materials were present on record. Further, there was no dispute as to the justification for allowing the deduction. The only feature adverse to the assessee was that initially it was advised that the case was admissible for the year 1969-70, and not for the year 1967-68. In the appeal, the AAC did not uphold this view. The assessee then took the claim in proceedings for the year 1967-68, but by that time, the proceedings were pending in appeal before the Tribunal. This decision is hence not helpful. This question also is answered against the Department.

65. The last submission on behalf of the Revenue relates to donation made by the assessee-company to Khamariah Higher Secondary School and Adarsh Vidyalaya Higher Secondary School, for the assessment years 1966-67, 1967-68 and 1969-70. The assessee claimed these donations as admissible business expenditure under s. 37 of the I.T Act. Its submission was that both the schools had been set up by the assessee-company with a view to provide educational facilities to the labourers and their children. Some of the directors of the company were on the management of the schools. It was pleaded that this was for purposes of facilitating the smooth running of their business. The Tribunal held that though part of the donations were made for purposes of constructing buildings for the schools yet that was no ground for a disallowance because by making the donations the assessee has not brought into existence any asset of enduring nature in so far as it was concerned. In our opinion, the donations were made by the assessee-company in its character as a trader with a view to facilitate the smooth running of its business. It is obvious that an expenditure to give facilities to the labourers and their children was motivated by considerations of commercial expediency. The donations were rightly held to be allowable expenses.

66. Coming to the actual questions, the Tribunal has referred the following questions:

Questions for the year 1964-65 (assessee):

“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profits from the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to tax concession provided under section 2(5)(a)(i) of the Finance Act, 1964?

(2) Whether, on the facts and in the circumstances of the case, the income-tax Appellate Tribunal is right in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that Orient Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary, was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the higher rebate of super-tax as provided in clause (iii)(A) of Para. D of Part II of the First Schedule of the Finance Act. 1964?

(3) Whether, on the facts and in the circumstances of the case, the higher rebate granted under clause (iii)(A) of para. D of Part II of the First Schedule of the Finance Act, 1964, can be withdrawn on the ground that there was an error apparent on the face of the record?”

Questions for the year 1965-66:

“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profits from. the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to tax concession provided under section 2(5)(a)(i) of the Finance Act, 1965?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that Oriental Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the higher rebate of income-tax as provided in clause 1(b)(ii)(b) of the proviso to paragraph F of Part I of First Schedule to the Finance Act of 1965?’

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mrs. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income-tax Act 1961?”

Questions for the year 1966-67:

“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profits from the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to the tax concession provided under s. 2(5)(i) of the Finance Act, 1966?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that Orient Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary, was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the concessional rate of income-tax as provided in clause 1(A)(1)(H) of the proviso to paragraph F, Part I of the First Schedule to the Finance Act of 1966?

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mrs. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income-tax Act, 1961?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 12,000 is a capital expenditure and hence not allowable under section 37(1) of the Income-tax Act, 1961?”

Questions for the year 1967-68:

“1 Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profit from the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to the tax concession provided under section 2(4)(a)(i) of the Finance Act, 1967?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that Orient Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary, was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and consequently not entitled to the concessional rate of income-tax as provided in clause 1(A)(1)(ii) of paragraph F of Part I of the First Schedule to the Finance Act, 1967?

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was Tight in holding that the amounts paid to Mr. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income-tax Act. 1961?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 56,306 is a capital expenditure and hence not allowable under section 37(1) of the Income-tax Act, 1961?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,50,000 being the provision for the sales tax liability was not a permissible deduction?”

Questions for the year 1968-69:

“(1) Whether the Tribunal was right in holding that the asses-see was not entitled to the concessional rate of income-tax as provided in clause 1(A)(1)(H) of the proviso to Paragraph F of Part I of the First Schedule to the Finance Act, 1968?

(2) Whether the Income-tax Appellate Tribunal was light in holding that the assessee is not a company as is mentioned in section 108(b) on the ground that the Orient Carpet Manufacturers Ltd., London, of which the assessee is a subsidiary, was not a company in which the public are substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961, and, consequently, not entitled to the concessional rate of income-tax as provided in clause 1(A)(1)(ii) of the proviso to Paragraph F of Part I of the First Schedule to the Finance Act, 1968?

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mr. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income tax Act, 1961?

(4) Whether the Income-tax Appellate Tribunal was right in holding that the sum of Rs. 7,000 paid as donation to the Congress Party was not a business expenditure within the meaning of section 37 of the Income-tax Act, 1961?”

Question for the year 1969-70:

“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profits from the sale of import entitlements were not profits derived from the export of goods by the assessee and accordingly not entitled to the tax concession provided under section 2(5)(a)(i) of the Finance Act, 1969?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amounts paid to Mrs. Martin and Mrs. Wallis, widows of the ex-directors of the company, were not laid out wholly and exclusively for business purposes and were not permissible business expenditure under section 37 of the Income-tax Act, 1961?”

Department's questions (consolidated):

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the assessee-company should be deemed to be mainly engaged in the manufacture or processing of goods within the meaning of Explanation I to Paragraph D of Part II of the First Schedule to the Finance Act, 1964, or Explanation I to Paragraph F of Part I of the First Schedule to the Finance Act, 1965, or that the assessee-company was an ‘Industrial Company’ within the meaning of section 2(7)(d) of the Finance Act, 1966, and the Finance (No. 2) Act, 1967, or section 2(6)(d) of the Finance Act, 1968, or section 2(6) of the Finance Act, 1969, so as to be entitled to the concessional rates of tax in the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69 and 1969-70?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing the assessee to raise an additional ground regarding the claim of Rs. 12,852, being payment to Central Office, London, for the assessment year 1967-68, when the same was not raised either before the Income-tax Officer or the AAC in that year?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing donations made to Khamariah Higher Secondary School and Adarsh Vidyalaya Higher Secondary School as business expenditure under section 37 in the assessment years 1966-67, 1967-68 and 1969-70?”

67. Our answer to the first question referred at the instance of the assessee for all the six years is in the affirmative, in favour of the assessee and against the Department.

68. Our answer to question No. 2 referred to us for the first five years is in the affirmative, against the assessee and in favour of the Department.

69. No arguments were addressed to us on question No. 3 for the year 1964-65 and so the same is returned unanswered.

70. Question No. 3 for the years 1965-66, 1966-67, 1967-68 and 1968-69 and question No. 2 for the year 1969-70 relate to the matter of pension to the directors' widows. Our answer to these questions are in the affirmative, in favour of the Department and against the assessee.

71. Question No. 4 for the years 1966-67 and 1967-68 relating to the question of repairs are answered in the negative, in favour of the assessee and against the Department.

72. Question No. 5 for the year 1967-68 relates to sales tax liability. This question is answered in the negative, in favour of the assessee and against the Department.

73. Question No. 4 for the year 1968-69 relating to donation to the Congress party is answered in the affirmative, in favour of the Department and against the assessee. All the three questions referred to us at the instance of the Department are answered against the Department and in favour of the assessee.

74. In view of the divided success, the parties may bear their own. costs.