[After setting out the statement of the case the learned, Judge continued.]
1. This is a reference under section 256(1) of the Income-tax Act, 1961, hereinafter called “the Act”, made at the instance of the Commissioner of Income-tax, Mysore. The question of law referred for the opinion of this court is:
“Whether, on the facts and in the circumstances of the case, the donation of cloth of the value of Rs. 6,834 given by the assessee-company was eligible for exemption under section 88 of the Income-tax Act, 1961?”
2. The assessment year is 1965-66, and the relevant accounting year is the calendar year 1964. The assessee is a public limited company carrying, on the business of manufacture and sale of woollen and cotton fabrics. During the relevant accounting year, the assessee-company donated cloth manufactured by it to various charitable institutions of the value of Rs. 6,834. The assessee claimed exemption in respect of the said amount under section 88 of the Act. The Income-tax Officer disallowed the claim as the donation was not made in cash, but in kind.
3. The Appellate Assistant Commissioner of Income-tax, Bangalore, on the appeal preferred by the assessee-company, allowed the claim of the assessee. The said order was affirmed by the Income-tax Appellate Tribunal, Bangalore Bench, following the decision of the Bombay High Court in Commissioner of Income-tax v. Associated Cement Co. Ltd. [1968] 68 I.T.R 478 Bom.. Sri Balakrishna, learned counsel for the department, relying on the language of section 88 of the Act as it stood at the relevant period, submitted that the decision of the Bombay High Court does not lay down the correct law. He urged that the expression used in section 88 is “any sums paid by the assessee in the previous year”, and that the said expression cannot comprehend within its ambit donations made in kind.
4. The learned counsel for the assessee invited our attention to the circular dated 14th March, 1960, issued by the Central Board of Revenue which, inter alia, states that:
“The Board has decided that when an assessee makes a donation out of his stock-in-trade, for example cloth in the case of textile mills or sugar in the case of sugar mills, the benefit of section 15B of the 1922 Act may be given to such donations also and that the value of the stock-in-trade donated should be included in the sale and the contra debit to the profit and loss account should be treated as the sum donated.”
5. Sri Balakrishna, learned counsel for the department, invited our attention to a subsequent circular of the Central Board of Direct Taxes dated 17th January, 1964, by which the circular dated 14th March, 1960, has been cancelled. The circular dated March 14, 1960, having been cancelled by the circular dated January 17, 1964, the learned counsel for the assessee is not entitled to rely on the earlier circular since the relevant year of accounting is the calendar year 1964. Sub-section (1) of section 88 of the Act as it stood at the relevant period read thus:
“88. Donations for charitable purposes, etc.—(1) Subject to the provisions of this section, the assessee shall be entitled to a deduction from the amount of income-tax on his total income with which he is chargeable for any assessment year—
(a) where the assessee is a company, of an amount equal to the income-tax calculated at the average rate of income-tax or at the rate of twenty-seven and a half per cent., whichever is less, and
(b) in the case of any other assessee, of an amount equal to the income-tax calculated at the average rate of income-tax,
on any sums paid by the assessee in the previous year—
(i) as donations to the National Defence Fund set up by the Central Government; or
(i-a) as donations to the Jawaharlal Nehru Memorial Fund referred to in the deed of declaration of trust adopted by the national committee at its meeting held on the 17th day of August, 1964;
(i-b) as donations to the Prime Minister's Drought Relief Fund;
(ii) as donations to any other fund or any institution to which this section applies; or
(iii) as donations to Government or to any local authority made on or after the 1st April, 1960, to be utilised for any charitable purpose.”
(Underlining* is ours).
6. The literal construction of the above provision undoubtedly supports the contention of the learned counsel for the department. But any such construction would lead to undue hardship in the case of business concerns which make donations out of their stock-in-trade at the request of the charitable institutions as in the instant case. Sri Balakrishna was unable to state as to why Parliament should have restricted the rebate to cases where donations are made in cash only and not to donations made in kind out of the stock-in-trade of the assessee. If the assessee had given a cheque as donation and for the same amount prepared a bill of sale, it could have obtained the benefit of section 88(1). The decision in Associated Cement Company's case, rendered on 5th October, 1967, has held the field all these years. The department did not take up the matter in appeal to the Supreme Court. The said decision was rendered subsequent to the Board's circular dated January 17, 1964, referred to above. So far as the State of Maharashtra is concerned, the Board's circular dated January 17, 1964, can have no validity and it is the decision of the High Court that prevails. As observed by the Bombay High Court, one has to look to the substance of the transaction and the purpose underlying section 88(1) of the Act and if that is done, we have no doubt that the assessee is entitled to the deduction of the sum of Rs. 6,834 which represents the value of the cloth donated to various charitable institutions.
7. In the result, for the reasons stated above, we answer the question in the affirmative and in favour of the assessee. The assessee is entitled to its costs. Advocate's fee Rs. 250.
8. Question answered in the affirmative.