The Delhi Cloth & General Mills Co. Ltd., Petitioner v. The Commissioner Of Income-Tax, New Delhi

Hardayal Hardy, J.:— An interesting question of law has been raised in a reference made by the Tribunal under Section 66 (1) of the Indian Income-tax Act, 1922. The question arises out of the order of the Tribunal dated 26-11-1965 for the assessment year 1952-53 and reads: —

“Whether on the facts and in the circumstances of the case, the payment of Rs. 22,951/- to the Vanaspati Manufacturers Association of India is a revenue deduction against the income of the previous year.?”

The petitioner which will hereafter be described as the assessee or assessee company, runs a number of mills including a mill for the manufacture of Vanaspati Oil. During the previous year ending 30th June 1951 the Vanaspati Manufacturers Association, Bombay of which the assessee is a member, debited the assessee with a total sum of Rs. 22851/-. This amount represented the assessee's share of propaganda expenses incurred by the Association. The letter sent by the Association intimatical to the assessee that the expenditure was not on research but on propaganda to counter the agitation against the industry for compulsory colourisation of Vanaspati Oil or for the imposition of a ban on the manufacture of Vanaspati itself. The letter however stated that had the agitation against the industry been allowed to go on unopposed, the industry would have been ruined. This amount was in addition to the expenditure incurred by the Association on research by contributions to the Council of Scientific & Industrial Research which was an approved scientific research institute.

In connection with assessment for the relevant year the Income-tax Officer disallowed inter alia, the assessee's claim with the observation that the amount represented the assessee's share for expenses on research etc. as arranged by the Association. The Income-tax Officer was of the view that as the assessee company had itself not incurred the expenditure on scientific research relating to its business the expenditure could not be considered as an admissible item under Section 10 (2) (xii) of the Income-tax Act, 1922. The Income-tax Officer also observed that as Vanaspati association for the purposes of section 10 (2) (xii) the question of admissibility of the amount did not arise for consideration. The Income-tax Officer was also of the view that the amount claimed did not fall under sub-section (2) (xii), (xiii) and 2 (xiv) of S. 10 which appropriately deal with expenditure relating to scientific research and as such the assessee's claim was inadmissible.

When the matter came up before the Appellate Assistant Commissioner the assessee company abandoned its plea on the ground of research and submitted that the amount claimed represented expenditure on propaganda. The Appellate Assistant Commissioner was of the view that the propaganda carried on by the Vanaspati Manufacturers Association was not for the preservation of the assests or the business of the assessee but was to counter the inquiry which had been made in public as well as in Parliament on the question as to whether Vanaspati ghee was bad for health and that some sort of colourisation of Vanaspati was necessary in order to distinguish it from pure ghee. The Appellate Assistant Commissioner was of the opinion that colourisation of Vanaspati did not mean extinction of the vanaspati business because even if vanaspati was coloured and the colour was of edible substance, the masses in the country who were too poor to purchase pure ghee, would have still to purchase Vanaspati, to get the necessary fat contents for their food. The Appellate Assistant Commissioner accordingly up-held the dis-allowance.

On second appeal before the Tribunal the assessee relied on the Annual Report of the Vanaspati Manufacturers Association of India for 1950-51 and observed that a campaign was carried on for compulsory colourisation of Vanaspati but at no time was there any question of its manufacture and sale being banned completely. The Tribunal was of the view that it was not as if the assessee would have had to wind up its business in Vanaspati and therefore some propaganda had to be made by some body to which the assessee had contributed its share of expenditure. On the other hand, the carrying on of Vanaspati business was not hampered at all by any order of the Government. The Tribunal therefore held that the expenditure in question was not an admissible deduction.

At the instance of the assessee, the question of law mentioned above has been referred to this Court.

At the very out-set it may be stated that the Tribunal's approach to the problem does not appear to us to be correct. While relying on a decision of the House of Lords in Morgan (Inspector of Taxes) v. Tate & Lvle Ltd. (26 ITR 195) (1) and a decision of the Bombay High Court in All India Reporter Ltd. v. Commissioner of Income-tax, Bombay City II (49 ITR 196) (2) and some other cases which have not been cited in the judgment, the Tribunal has observed that the cases cited on behalf of the assessee relate to expenditure incurred for the purpose of saving the business from extinction. In the present case however, it is not as if the assessee would have had to wind up its business in Vanaspati for which propaganda had to be made by some body. On the other hand, the carrying on of Vanaspati business was not hampered at all by any order of the Government. It is in this view of the matter that the Tribunal reached the conclusion that the expenditure in question was not one incurred by the assessee for carrying on its business.

It appears to us that this is a completely wrong approach to the problem.

In Morgan v. Tate (1) the company was engaged in sugar refining and it incurred expenses in a propaganda campaign to oppose the threatened nationalisation of the industry. The Commissioners for the General Purposes of the Income-tax found 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 from its profits for Income-tax purposes.” From this the Tribunal concluded that unless there was a threat of extinction of the industry or the business any money spent on a propaganda campaign to oppose that threat would not be “money wholly and exclusively laid out for the purposes of the company's trade.”

That does not seem to us to be the correct reading of that judgment. In that very case Lord Morton of Henryton has relied upon several decision in which that view has not been taken. In Mitchell v. B. W. Noble Ltd. (1927) 1 K.B 719) (3) a payment made to secure the retiral of a director was held to be deductible, both by Rowlatt J. and by the Court of Appeal. Sargent L. J. said “Now, first, as to the question whether this was a disbursement wholly and exclusively laid out or expanded for the purposes “at all to show that it was not so exclusively laid out. The object, as disclosed by paragraph 9 of the case, was that of preserving the status and reputation of the company, which the directors felt would be somewhat imperilled by the other director remaining in the business or by a dismissal of him against his will, involving proceedings by way of action in which the good name of the company might suffer. To avoid that and to preserve the status and dividend earning power of the company seems to me a purpose which is well within the ordinary purposes of the trade, profession or vocation of the company.”

It was specifically stated by Lord Morton that in the case decided by Rowlatt J. and the case before his Lordship he could see no distinction in principle between a payment made to preserve the status and dividend earning power of the company and a payment made to prevent seizure of the company's profit-earning assets. Lord Morton even went to the extent of observing that in W. Nevill & Co. Ltd. v. Federal Commissioners of Taxation (1937) 56 C.L.R 290 (4) the High Court of Australia had arrived at the same conclusion on similar facts when construing the narrower wording of Section 25 (e) of the Income-tax Act Assessment Act, 1922 — 32, “wholly and exclusively laid out or expanded for the production of assesable income.”

The case of Southern v. Borax Consolidated Ltd. (1941) 1 K.B 111) (5) is the other case cited in that judgment. There the company was in danger of losing a valuable asset not by confiscation but by legal proceedings attacking the company's title to that asset. Lawrence J. held that the expense of resisting those proceedings was deductible and said: “It appears to me that the legal expenses which were incurred by the respondent company did not create any new asset at all, but were expenses which were incurred in the ordinary course on maintaining the assets of the company and the fact that it was maintaining the title and not the value of the company's business does not, in my opinion, make it any different.”

The above decision was approved by the Court of Appeal in Associated Portland Cement Manufacturer Ltd. v. Kerr (1946) 1 All E.R 68 (6) and was applied by Croom-Johnson J. in Cooke v. Quick Shoe Repair Service (30 Tax Cases 460) (7).

In all these cases the expenditure was incurred for the purposes of carrying on propaganda not to prevent the complete closure or extinction of the business or industry but to preserve the status and reputation of the company.

There is also another way of looking at the problem. The expenditure to come within the purview of Section 10 (2) (xv) of the Income-tax Act, 1922 need not necessarily be to earn profits of the business. A sum of money may be 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, and yet it may be expended wholly and exclusively for the purposes of the trade, (see for instance the case of Usher's Wiltshire Brewery Ltd. v. Bruce (1915 Appeal Cases 433) (8) and Smith v. Incorporated Council of Law Reporting for England and Wales (1914) 3 K.B 674) (9) where the same view was taken).

In the present case, a member of the Constituent Assembly of India had introduced a Bill in the Legislative part of the said Assembly to provide for prohibition of manufacture and import of hydrogenerated vegetable oils. The Bill itself was to be called The Prohibition of Manufacture and Import of Hydrogenerated Vegetable Oils Act, 1949. The object of the Bill was to prohibit the manufacture and import of Hydrogenated Vegetable Oils popularly known as Vanaspati Ghee. Section 3 provided that it was expedient in the public interest that the manufacture and import in the Indian Union of hydrogenerated vegetable oils popularly known as Vanaspati Ghee, be prohibited. The Bill itself was therefore for complete prohibition of manufacture and import of Vanaspati Ghee. If the Bill had been passed the Vanaspati industry would have been completely closed. The propaganda campaign was therefore started by an Association of Vanaspati Manufacturers at Bombay. The petitioner being a manufacturer of Vanaspati Ghee was a member of that Association. So even on the Tribunal's own reasoning there was a threat for the winding up of the petitioner's business. If the petitioner therefore contributed money to meet the expenditure of the propaganda, it cannot be said that “the carrying on of Vanaspati business was not hampered at all by any order of the Government.” It is true that the Government had not passed any order but if the Bill had been allowed to become a law the threat would have been real. As there was lot of agitation in favour of the Bill, it was circulated for eliciting public opinion and it transpired that one of the ways was not to impose a total ban on the manufacture of Vanspati Ghee but also to make a provision for compulsory colourisation of Vanaspati. That would have impaired the trade, although there would have been no complete ban on its manufacture and sale. In order to preserve the status and reputation of Vanaspati Ghee industry if propaganda had to be carried on it cannot be said that the expenditure of money was not exclusively laid out for the business of the company.

Counsel for the Revenue cited several cases which may now be noticed. The case of Joseph L. Thomson & Sons Ltd. v. Chamberlain (H. M. Inspector of Taxes) (40 Tax Cases 657) (10) is one on which strong reliance was placed by the learned counsel. The appellant company which carried on business as ship-builders, was a member of a trade association for the protection of the general well-being of the ship-building industry. The association, with the company's approval, made annual contributions to the general funds of a body called the Economic League whose primary objects were to promote the knowledge of economics and other industrial and social subjects from the stand-point of the preservation of personal freedom and free enterprise and opposition to force which sought to under-mine the security of Britain in general and British industry in particular. The contributions were held by the General Commissioners as not laid out wholly and exclusively for the purposes of the company's trade, and their conclusion was approved by the High Court of Justice.

It is apparent that the payments were made and applied for the general purposes of that body. Those purposes were not confined to the company's trade, they extended not only to ship-building industry but to industry in general and even include general national purposes. The purposes of the Economic League were not the purposes of the company's trade. It followed that no part of those payments was made exclusively for the purposes of the company's trade. The case is therefore distinguishable on facts.

The next case cited by the learned counsel for the Revenue is a decision of the Court of-Appeal in England in The Thomas Merthyr Colliery Co. Ltd. v. Davis (H. M. Inspector of Taxes) (17 Tax Cases 519) (11). The appellant company carried on the business of colliery proprietors and was a member of the Manmouthshire and South Wales Coal Owners' Association. This Association was formed by a deed dated July 1, 1890, certain provisions whereof were subsequently amended. The deed (as amended) provided that the member should be associated together for the purposes of rendering mutual assistance to each other in working their collieries and of indemnifying members, as therein provided. In particular the Association was empowered to take any steps it considered necessary for, inter alia restricting the out-put by any colliery and/or to direct a stoppage of work at any colliery in certain circumstances, in which event the association might direct notice to be given by the member terminating his contracts with his workmen.

The question was whether or not the subscriptions paid by the company were proper deductions in computing the profits of the company for assessment to Income-tax. Lord Hanworth, M. R. observed that these contributions were not made for the purposes of some thing arising out of and in the course of the ordinary working of the mines and seeking of gains. They were expenses incurred by the wisdom of the directors but they did not ensure to secure a part of the trade as being carried on, but to supply a deficiency at a time when there was no trade being carried on. The case has therefore very little bearing on the question before us.

Counsel for the Revenue then cited certain cases relating to litigation expenses incurred by the assessees in those cases. In Lochgelly Iron and Coal Company Ltd. v. Crawford (Surveyor of Taxes) (6 Tax Cases 267) (12) the company which was a member of the Coalowners' Association claimed allowance for certain contributions representing levies made by the Association and expended (1) in defraying expenses of the Conciliation Board, (2) in paying subscriptions to the Mining Association of Great Britian and (3) in experimenting with coal dust. The Court of Session of Scotland held that so far as the levies were applied in defraying the expenses of the Conciliation Board they were an admissible, deduction in arriving at the liability of the company but so far as they applied to the other two purposes they were not admissible.

It was urged by the learned counsel for the Revenue before us that if subscriptions to the Mining Association of Great Britian and for experimenting with coal dust were not admissible much less can the subscriptions for contributions made by the assessee in the present case be to the Vanaspati Manufacturers Association. We hardly find any parallel between the two types of contributions. Subscriptions to the Mining Association of Great Britian or for experimenting with coal dust were held to be inadmissible because it was said that it was an expense to an association whose object was to keep a watchful eye on the proceedings, no doubt in the interest of mining of coal generally, but without that character of particular service which was prominent in the case of proceedings before a Conciliation Board. Similarly with regard to the amounts spent on the experiments in coal dust, it was explained that the experiments were made on the explosive properties of coal dust at the instigation of Home Secretary who wished certain experiments made before embarking on new legislation. It was a voluntary and very proper act of the company to help the Home Secretary in the matter, but not an expense which they undertook for the purpose of earning more profit during that or any other year. It was just a helping hand to the legislation of the country and had nothing to do with the trade of the company.

The other case which again deals with litigation expenses is a decision of the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras (63 ITR 207) (13). Certain yarn belonging to the appellant company was attempted to be seized by the Textile Commissioner under the Cotton Cloth and Yarn (Control) Order, 1945. The company filed a petition in the Madras High Court under Section 45 of the Specific Relief Act for an order directing the Provincial Textile Commissioner to desist from seizing the yarn. The petition was dismissed and the company's appeal therefrom was also dismissed by the Privy Council. The Privy Council also held that the petition was incompetent as the acts in respect of which relief was asked for took place outside the limits of the ordinary civil jurisdiction of the High Court. In prosecuting those proceedings the company spent Rs. 20,035/- and it had also to pay Rs. 9,512/- as costs of the Government on its un-successful appeal to the Privy Council. In computing its income, the company claimed deduction of these amounts as expenditure wholly and exclusively laid out for the purpose of its business. It was held by the Supreme Court that expenditure incurred to resist in a civil proceeding the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction under Section 10 (2) (xv). In order that an expenditure may be admissible as a deduction under Section 10 (2) (xv) it is not necessary that the primary motive in incurring it must be directly to earn income thereby.

The case of Cooper (H. M. Inspector of Taxes) v. Rhymney Breweries Ltd. (42 Tax Cases 509) (14) is another case which illustrates that the expenditure incurred by an assessee will be allowable if it is incidental to the carrying on of the company's business. The respondent company which carried on a brewery business, owned 680 tied houses in Wales and Manmouthshire. Prior to the passing of the Licensing Act, 1961 (which allowed the question of Sunday opening to be decided by a poll in each county and county burough), licensed public houses had not been permitted to open on Sundays in Wales since 1881 nor in Manmouthshire since 1915. The company and its predecessors had kept up a continuous pressure against these restrictions. In thee year 31st March 1962, the company contributed £5,500 to the expenses of its trade association in stimulating interest and obtaining signatures for the requisitioning of polls under the Act of 1961. The company claimed that the aforesaid sum of £5,500 was liable for deduction. For the Crown it was contended that it was an expenditure of a capital nature. The Special Commissioners found that the expenditure was merely one of the incidents of carrying on the company's business and was on revenue account. The High Court held that the Commissioners' decision was correct.

Counsel for the Revenue invited our attention to some Indian decisions where contributions to political parties were held to be inadmissible as business expenditure and contended that the propaganda carried on by the Vanaspati Manufacturers Association fell in that category. Its object was to persuade the political parties to desist from banning Vanaspati ghee or to oppose its colourisation. In J. K. Cotton Spg. and Wvg. Mills Co. Ltd. v. Commissioner of Income-tax, U.P (62 ITR 813) (15) the assessee company paid a sum of Rs. 56,000/- to the Congress Parliamentary Board for its expenditure in the General Elections and claimed it as a business expenditure on the ground that with the changing pattern of the economic structure of society it was in the interest of the company to keep the ruling party in power. It was held that as there was no direct nexus between the business of the company and the contribution, the amount of Rs. 56,000/- paid to the Congress Parliamentary Board was not allowable as business expenditure.

Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax, W. Bengal (69 ITR 379) (16) the assessee claimed, inter-alia the deduction in respect of Rs. 150,000 paid to the Indian National Congress. The Income-tax Officer allowed the deduction, but the Appellate Assistant Commissioner and the Tribunal dis-allowed the same. On a reference, the view of the Tribunal was up-held. It was said that assuming that there was some connection between this kind of expenditure and the earning of profits, the connection was too remote. One of the cases mentioned by Banerjee J. who wrote the judgment of the court is Travancore Titanium Products Ltd. v. Commissioner Of Income Tax Kerala (60 ITR 277) (17) where the Supreme Court observed: —

“. . . . the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader.”

To the same effect are the observations of the Supreme Court in another case Sree Meenakshi Mills Ltd. v. Commission of Income-tax (62 ITR 207 SC) (13) where the Supreme Court went a step forward and observed: —

“Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business, is therefore, expenditure laid out wholly and exclusively for the purposes of the trade.”

In the present case, there can be no doubt that the expenditure on propaganda was incurred by the assessee-company not only with a view to the direct and immediate benefit for purposes of commercial expediency but also indirectly to facilitate the carrying on of the business. Such expenditure can in the words of the Supreme Court be obviously said to have been laid out wholly and exclusively for the purposes of the trade.

In the case of Joseph L. Thomson & Sons Ltd. v. Chamberlain (H. M. Inspector of Taxes) (40 Tax Cases 657) (10) on which great reliance was placed by the learned counsel for the Revenue, the expenditure incurred by the appellant-company was in the form of contributions to a trade association for the protection of the general well-being of the ship-building industry in addition to certain other contributions made by the trade association itself. The company's payments to the trade protection association were allowed as deductions in computing its profits for tax purposes but not on the contributions made by the association to the Economic league. Although the contributions made to the trade protection association were not an expenditure incurred by the appellant company itself for protecting its trade, they were rather made to the association and the expenditure was incurred by the association itself. Yet this division between the appellant company and the association did not stand in the way of the expenditure being treated as laid out wholly and exclusively for the purposes of the company's trade. The argument of the learned counsel for the Revenue that the expenditure must be incurred by the assessee itself in order that it may be an allowable expenditure therefore does not hold water. What is actually required is that the expenditure should have a nexus with the trade. The ruling in Cooper v. Rhymney Breweries Ltd. (14) was again a case of sharing of expenditure with, other companies but because it had a nexus with the trade, the expenditure was allowed.

In the result therefore, the expenditure of Rs. 22,851/- incurred by the assessee company by paying the said amount to the Vanaspati Manufacturers Association of India is a revenue deduction against the income of the previous year and should therefore have been allowed. The question is therefore answered in favour of the assessee company. The assessee will also have its costs. Counsel's fee Rs. 300/-.

Reference answered accordingly.