Commissioner Of Income-Tax v. Cheran Transport Corporation Ltd. (And Vice Versa)

The Judgment of the Court was delivered by

Abdul Hadi, J.:— In all these tax cases under section 256 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the assessee is the same, it being Cheran Transport Corporation Limited, Coimbatore. It is a State Government undertaking in which the assets of the erstwhile undertaking, which was taken over by the State Government under the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973, came to be vested. Tax Case No. 226 of 1986 relates to the assessment year 1978–79. It arises out of the order of the Tribunal dated January 11, 1983, in ITA No. 677 (Mds) of 1982. Tax Cases Nos. 958 to 963 of 1984 arise out of the common order dated December 21, 1982 of the Tribunal. Tax Cases Nos. 958 to 960 of 1984 have been preferred by the Revenue in respect of the assessment years 1974–75 to 1976–77. Tax Cases Nos. 961 to 963 of 1984 have been preferred by the assessee in respect of the same assessment years 1974–75 to 1976–77.

2. The only question of law referred to this court in Tax Case No. 226 of 1986 filed by the Revenue is similar to the second question referred to this court in Tax Cases Nos. 961 to 963 of 1984, filed by the assessee. The above said sole question in Tax Case No. 226 of 1986 runs as follows:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the interest payable on the compensation due to the former owners of the transport undertaking which had been nationalised and vested with the assessee-corporation should be allowed as a revenue expenditure?”

3. The abovesaid similar question in Tax Cases Nos. 961 to 963 of 1984 runs as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 1,39,910 for the assessment year 1974–75 and Rs. 1,49,379 for each of the assessment years 1975–76 and 1976–77 payable to the private bus operators from whom the buses were taken, over, is not an accrued liability and, therefore, not an allowable expenditure under the Act?”

4. Thus, since the assessee has paid interest on the compensation it paid to its predecessor on the abovesaid taking over under the abovesaid Act, the question is whether the said interest could be allowed as revenue expenditure under section 37(1) of the Act. The Tribunal has held in its abovesaid order dated December 21, 1982, that the law by which the erstwhile undertaking was taken over, was struck down by this court in the decision in Kannappa Chetti (K.A) v. State of Tamil Nadu, [1973] II MLJ 212, and hence there is no liability on the part of the assessee to pay the abovesaid interest and hence not liable. No doubt, the Tribunal, in its abovesaid subsequent order dated January 11, 1983, held differently and allowed the abovesaid interest payment as revenue expenditure. Only because of these two differing decisions, Tax Case No. 226 of 1986 came to be filed by the Revenue and Tax Cases Nos. 961 to 963 of 1984 came to be filed by the assessee.

5. At any rate, learned counsel for the Revenue fairly points out that the abovesaid decision in Kannappa Chetti (K.A) v. State of Tamil Nadu, [1973] II MLJ 212, has been reversed by the Supreme Court in State of Tamil Nadu v. L. Abu Kavur Bai, (1984) 1 SCC 515 : AIR 1984 SC 326, which upheld the validity of the said Act. So, the said interest payments in each of the above referred to assessment years are liabilities incurred by the assessee.

6. So, the next question is whether it is a revenue expenditure or capital expenditure. In this regard also, learned counsel for the Revenue fairly submits that in view of the decision in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT, [1965] 56 ITR 52 (SC), as well as Commissioner Of Income-Tax v. Cheran Transport Private Ltd., [1986] 160 ITR 630 (Mad), the said interest payments have to be held only as revenue expenditure. The net result is, the only question referred to this court in Tax Case No. 226 of 1986 and the above referred to second question referred to this court in Tax Cases Nos. 961 to 963 of 1984 are answered against the Revenue.

7. In Tax Cases Nos. 958 to 960 of 1984, two other questions have been referred to this court. The first question relates to the assessment years 1974–75 and 1975–76 and the second question relates to the assessment years 1975–76 and 1976–77. With reference to the first of these two questions, both counsel are agreed that the said question has to be answered in the negative and against the assessee, in view of the order of this court dated December 22, 1994 in Tax Cases Nos. 630 to 635 of 1982 (Anna Transport Corporation Ltd. v. CIT, [1995] 215 ITR 800 (Mad)). Accordingly, the said question is answered. In so far as the second of the abovesaid two questions also, both counsel are agreed that the said question has to be answered in the affirmative and against the Revenue, applying the principles laid down by the Supreme Court in CIT v. Associated Cement Companies Ltd., [1988] 172 ITR 257 and Cit v. T.V Sundaram Iyengar & Sons (P) Ltd and Sons Pvt. Ltd., [1990] 186 ITR 276. Accordingly, the said second question is answered.

8. Now, coming back to the first question in Tax Cases Nos. 961 to 963 of 1984, it is as follows:

“Whether, on the facts, and in the circumstances of the case, the Tribunal was right in law in holding that the amounts Rs. 5,000 for 1974–75 and Rs. 7,500 for each of the assessment years 1975–76 and 1976–77 paid towards Flag Day Fund and Rs. 1 lakh and Rs. 3,87,476 for the assessment years 1975–76 and 1976–77, respectively, towards Chief Minister's Rehabilitation Fund under the directions of the Government are not allowable expenditure?

9. Thus, this question relates to two types of expenditure, one to amounts paid for Flag Day Fund and another to amounts paid for the Chief Minister's Rehabilitation Fund, both under the directions of the Government. In relation to both the types of expenditure, the Tribunal, has, following its earlier decision in another case, held that there was no commercial expediency in such matters as regards public sector undertakings, disallowed the said expenditures as deductions under section 37(1) of the Act.

10. But, learned counsel for the Revenue, relying on a decision of the Andhra Pradesh High Court in CIT v. Kodandarama and Co., [1983] 144 ITR 395 which has been followed by CIT v. K. Subbaraju and Venkateswara Rao and Co., [1989] 175 ITR 307 (AP), contends that these payments were opposed to public policy and hence could not be allowed as business expenditure. On the other hand, learned counsel for the assessee contends that the said decision will not be applicable to the present case since there was no contravention of public policy in the present case and that at any rate, in view of several other decisions, particularly the decision of this court in Southern and Rajamani Transports (P.) Ltd. v. CIT, [1977] 107 ITR 470 (Mad), Addl. CIT v. Kuber Singh Bhagwandas, [1979] 118 ITR 379 (MP) [FB] and Goodlas Nerolac Paints Ltd. v. Commissioner Of Income-Tax, Bombay City-Ii., [1982] 137 ITR 58 (Bom), the expenditure should be allowed as deduction.

11. We have considered the rival submissions. The sole decision relied on by the Revenue is the above said CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP), since the other decision relied on by it, viz., CIT v. K. Subbaraju and Venkateswara Rao and Co., [1989] 175 ITR 307 (AP) simply follows CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP) without any discussion. In CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP) contributions were made by the assessee at specified rates to the Andhra Pradesh Welfare Fund for obtaining permits from the District Collector for export of rice to other States and the said contributions were found to be compulsory payments. Those payments were made by the assessees therein only because they were told that they would not get the export permits unless they made the contributions. Further, it was found that the regularity and systematic manner, in which the Contributions were made, showed that the contributions to the above said welfare fund was a pre-condition for the grant of the abovesaid export permits. In such a context, the Andhra Pradesh High Court held that those contributions were opposed to public policy, being in the nature of unlawful consideration for discharging an official duty, otherwise than according to law, that is, otherwise than on the merits. The relevant observations therein are as follows (at page 405):

“since the contribution is a pre-condition, ho feels obliged to comply with (he same, because he thinks, and rightly, that there is no other way of obtaining the permit and to carry on his business. This is not different from paying bribes—the difference, if any, may only be one of degree. It is true that, from the point of view of the assessee, such a payment is warranted by his business expediency; but, we are not prepared to agree with Mr. Anjaneyulu that every payment which is expedient in the interests of the assessee's business must be deducted under section 37. Any payment which is either opposed to any law, or is opposed to public policy, cannot be recognized, because it is well settled that infraction of law is not a normal incident of business. Similarly, payments which are opposed to public policy, being in the nature of unlawful consideration for discharging an official duty otherwise than according to law and merits, i.e, otherwise than on merits, cannot equally be recognized…

It would be short-sighted and myopic to hold that businessmen are entitled to conduct their business even contrary to law and that, so long as the payments made by them are justified by their business expediency, they should be allowed as business deductions, notwithstanding the fact that such payments are illegal, or opposed to public policy, or have pernicious consequences to the nation's life as a whole.”

(emphasis* supplied)

12. In the abovesaid Andhra Pradesh High Court case, Sassoon J. David and Co. P. Ltd. v. CIT, [1979] 118 ITR 261 (SC) and also the above referred to case CAT (Addl.) v. Ktdier Singh Bhagwandas, [1979] 118 ITR 379 (MP) [FB]. were considered. The contention before the Andhra Pradesh High Court based on Sassoon J. David and Co. P. Ltd. v. CIT, [1979] 118 ITR 261 (SC), was that ordinarily it was for the assessee to decide whether any expenditure should be incurred in the course of his business and that so long as it is incurred for promoting the business and to earn profits, the assessee is entitled to claim deduction of that amount, though there was ho compelling necessity to incur such expenditure. Dealing with the said contention, the Andhra Pradesh High Court observed thus (at page 411):

“While the said principle is unexceptionable, a line must be drawn where the expenditure is for a purpose which is forbidden by law, or is opposed to public policy. In this case ([1979] 1-18 ITR 261) the Supreme Court had no occasion to consider this aspect; and, therefore, we fail to see how this decision advances the assessees' case.”

13. Then, dealing with CIT (Adcll) v. Kuber Singh Bhagwandas, [1979] 118 ITR 379 (MP) [FB], the Andhra Pradesh High Court in CIT v. Kodandarama and Co., [1983] 144 ITR 595 observed as follows (at page 412):

“The court (Full Bench of the Madhya Pradesh High Court in CIT (Addl.) v. Kuber Singh Bhagwandas, [1979] 118 ITR 379) further observed that, in making the donations, the assessee did not contravene any law;. It is significant to notice that the question whether the payments made were opposed to public policy was not raised or considered in the said decision… We are, therefore, unable to see the relevance of the said decision on the question referred to us.”

14. We may also add that in Southern and Rnjamani Transports (P.) Ltd. v. CIT, [1977] 107 ITR 470 (Mad) also, the abovesaid public policy aspect was not considered, though the donation made by the assessee therein was to a political party and what was held therein was only that there was no nexus or link between the donation and the business carried on by the assessee and hence it was disallowed. Likewise in Goodlas Nerolac Paints Ltd. v. Commissioner Of Income-Tax, Bombay City-Ii., [1982] 137 ITR 58 (Bom) also, the aspect of public policy was not considered, even though it was a case of payment by the assessee, of “secret commissions.”

15. In the light of the abovesaid decisions, let us now see the facts found in the present case, which could be seen from the relevant observations of the first appellate authority, viz., the Commissioner of Income-tax (Appeals). In relation to the abovesaid contribution to the Chief Minister's Drought Relief Fund, the observations are as follows:

“In response to an appeal for contribution to the Chief Minister's Drought Relief Fund, the Tamil Nadu Bus Owners’ Federation has passed a unanimous resolution that each member of that body would contribute to the fund an amount calculated at the rate of Rs. 1,000 for each stage-carriage plied by him and a memorandum was issued by the Home Department of the State Government to the effect that the District Transport Officers should arrange for the collection of the contributions given in conformity with the resolution, in the respective areas under their jurisdiction… the memorandum makes it clear that the contributions were to be voluntary…” Thus, we find that in so far as the abovesaid contribution to the Chief Minister's Drought Relief Fund is concerned, the contribution was only in response to an appeal, and was to be voluntary and was not a condition precedent for getting any favour from the Government as it was factually found in the abovesaid CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP). So, it cannot be said that the contribution was made in contravention of any law or is opposed to public policy.

16. No doubt, in the earlier portion of the order of the first appellate authority, it is stated in relation to the contribution to both the Flag Day Fund and the Chief Minister's Drought Relief Fund, that the contention was that “even if it were to be assumed that the contributions were voluntary, it would still have been imprudent on the company's part not to give them, since that would have entailed incurring the displeasure of the Regional Transport Authorities, whose goodwill was required for the smooth and profitable running of the business carried on by the company.” From this contention alone, it cannot be concluded that the abovesaid contributions, both for the Flag Day Fund and the Chief Minister's Drought Relief Fund were in contravention of any law or opposed to public policy. It is also seen from the same order of the first appellate authority that in one case, the assessee was one of the five applicants for the grant of a stage-carriage permit to ply one town bus on the Udumalpet town service route, and the permit was eventually granted to one U.G Kanakaraj, a private operator. The same order also says that several other such instances have also been brought to the said officer's notice of permits being given to private operators in preference to the assessee. From this also, it can be concluded that the abovesaid contributions were hot actually opposed to public policy. Therefore, our view in the present case is that, certain relevant factual features, which were present in CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP) are not present in the present case and hence CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP) is not applicable to the present case. Therefore, there is strictly no necessity to assess the correctness of the said decision. However, we may incidentally add that the Supreme Court, while dealing with a business loss as distinguished from a business expenditure has laid down, approving the earlier decisions, including that of the Orissa High Court in CIT v. Industry and Commerce Enterprises (P.) Ltd., [1979] 118 ITR 606 that where Government bonds, as securities, were purchased by the assessee with a view to increase his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as business loss. In that case, according to the statement of case drawn up, the assessee was told that if it subscribed for the Government bonds, preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government Departments. However, it must be stated that the aspect of contravention of public policy or contravention of any law, was not considered in the abovesaid Supreme Court case also. Anyway, in view of the factual differences between CIT v. Kodandarama and Co., [1983] 144 ITR 395 (AP) and the present case, we reiterate that CIT v. Kodandarama and Co., [1983] 144 ITR 395 (A.P) is not applicable to the present facts.

17. In so far as the nexus or link between the abovesaid expenditure incurred by the assessee and its business, we should say that it stands established in view of the abovesaid factual observations made by the Commissioner of Income-tax (Appeals). Therefore, the above referred to first question in Tax Cases Nos. 961 to 963 of 1984 is answered in the negative and in favour of the assessee. No costs.