The Judgment of the Court was delivered by
K. Jagannatha Shetty, J.:— The Tribunal, by these references under section 256(1) of the Income-tax Act, 1961 (the “Act”), has referred the following three questions for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case, and on a proper interpretation of sections 35 and 43(1), capital assets which are purchased for and continued to be utilised in scientific research would qualify for depreciation allowance under section 32 in the year other than the year of installation where the entire amount has been allowed under section 35(2)?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax payable under the Companies (Profits) Surtax Act, 1964, was inadmissible as a deduction in computing the total income of the assessee?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the assessee's claim for deduction of 61.1 per cent, of Rs. 62,000 donated by it to Mysore Kirloskar Education Trust?”
2. We may straightaway dispose of questions Nos. 1 and 2 since the answers to them present no problem. In view of the amendment to section 35(2) of the Act by the Finance (No. 2) Act, 1980, retrospectively brought into force from April 1, 1962, counsel on both sides submitted that question No. 1 has to be answered in the negative and in favour of the Revenue. We accordingly answer the same. So far as the second question is concerned, counsel again submitted that a similar question has been considered by this court in Commissioner Of Income-Tax, Karnataka v. International Instruments (P.) Ltd., [1983] 144 ITR 936 and in the light of the decision, we may answer the question in the affirmative. There, this court has observed (headnote):
“The surtax levied on the chargeable profits under the C.(P.) S.T Act, 1964, is nothing but an additional tax on the profits and gains of an assessee's business. The total income computed under the I.T Act undergoes a further process of computation under the C.(P.) S.T Act, to arrive at the chargeable profits, but, none the less, the surtax remains ultimately a charge on the profits and gains of the business of companies. Therefore, an assessee is not entitled to claim deduction of surtax payable by it in computing its total income under the I.T Act.”
3. Following the above decision, we answer the question in the affirmative and against the assessee.
4. This takes us to question No. 3. To answer this question, we may set out some relevant facts:
The assessee is a public limited company engaged in the manufacture and selling of tools, lathes, etc. The assessment year is 1976-77. By a deed dated August 15, 1958, the company has constituted a trust called the “Mysore Kirloskar Education Trust”. Clause (3) of the trust deed is relevant and it reads:
“The Trustees shall hold the trust funds and the income thereof upon trust to apply the same for the promotion and encouragement of education principally of the children of the employees and ex-employees of the settlor at Harihar by providing or by establishing, conducting and continuing or by arranging or procuring the establishment, conduct and continuance of places of instruction of all kinds whatsoever including primary, secondary or technical schools, colleges, imparting higher or university education or academics or by any other ways and means whatsoever or otherwise howsoever.”
5. At the constitution of the trust, the settlor has contributed a sum of Rs. 5,000 with the intent that the same shall be dedicated in perpetuity for the promotion and encouragement of education principally of the children of the employees and ex-employees of the company.
6. The primary object of the trust, therefore, is to provide education for the children of employees and ex-employees of the settlor of the trust. Harihar is not a developed city. The assessee has, however, established its industry there. It has to attract technocrats and men of managerial skill. They would not come to settle there unless there are facilities for them and for their children's education. That was, perhaps, the object with which the trust was constituted.
7. In furtherance of the above object, the trust has established a school at Harihar. To that school, the children of the employees, ex-employees of the assessee and also from the public are admitted.
8. It is said that the assessee-company has been donating every year a certain sum to meet the expenditure of the school. In the accounting year relevant to the assessment year, the assessee has donated Rs. 62,000 and claimed out of it 61.1 per cent, by way of deduction under section 37(1) of the Act. That claim was based on the ground that 61 per cent, of the school children are the children of the employees and the ex-employees of the assessee. The Income-tax Officer did not allow the exemption as claimed. He, however, allowed 50 per cent, of the donation as deduction under section 80G of the Act.
9. The assessee appealed to the Appellate Assistant Commissioner who also agreed with the view taken by the Income-tax Officer on the question of allowance claimed under section 37(1) and dismissed the appeal. He has, however, granted certain other reliefs with which we are not concerned in these cases. The assessee preferred further appeal to the Income-tax Appellate Tribunal. The Tribunal also did not accept the contention of the assessee. It has given two reasons to reject the claim of the assessee under section 37(1) of the Act. The reasons at para 10 of the order are as follows:
“Having considered the rival submissions, in our opinion, the claim of the assessee for deduction of donation made to the trust under section 37 cannot be sustained. This is for two reasons, each one of which is fatal to the admission of the assessee's claim. The first one is that when there is a special provision dealing with deduction of donations—in this case it is section 80G—the principle of generalia specialibus non derogant would apply. It was not disputed, nor could it be disputed, on the facts that the provisions of that section are squarely applicable to the donations made to the trust in this case because the trust satisfies all the conditions necessary for donation under that section in respect of donations made to it. On the above principle, since section 80G is clearly applicable to the facts of the case, section 37 could not, on the basis of the above principle, be held to be applicable to this case. Secondly, in our opinion, it cannot be said that the expenditure is incurred wholly and exclusively for the purpose of the assessee's business. The school run by the trust is open to the children of persons who are not employees of the assessee-company. In other words, it is not a school exclusively for the children of the assessee's employees. Although the trust has been intended primarily for the educational benefit of the children of the assessee's employees, there is nothing in the trust deed which would prevent it, at some stage or other, from having a larger number of students in the school or educational institution run by the trust who are children of non-employees of the company than the number of children of the assessee's employees studying in the school. The very claim that 61% of the donations should be allowed because 61% of the students were children of the employees of the assessee-company shows that a sizeable chunk of the students of the school has nothing to do with the company or its employees. In these circumstances, in our opinion, it cannot be said that the expenditure is incurred wholly and exclusively for the purpose of the assessee's business even if one were to hold that section 37 is applicable to the facts of the case. On each of these grounds, the claim of the assessee should fail.”
10. To put it shortly, the first reason given by the Tribunal is as to the applicability of section 80G of the Act in respect of the donation made by the assessee. According to the Tribunal, if section 80G is applicable for computing the income by giving deduction in respect of the donation in question, then section 37 stands excluded. The second reason given by the Tribunal is that since the school run by the trust is also open to the children of persons who are not exclusively the employees of the company, the expenditure incurred by the assessee cannot be said to have been incurred wholly and exclusively for the purpose of the assessee's business.
11. Sri Sarangan, learned counsel for the assessee, urged that both the above reasons given by the Tribunal are unsound and unsustainable. He contended that the donation claimed as an allowance was nothing but an expenditure incurred for the purpose of the assessee's business and it falls under section 37(1) of the Act. On the second reason given by the Tribunal, counsel urged that one must look into the primary object of the trust and the school that is run, and if the primary object was to provide facilities to the children of the employees and ex-employees of the assessee, section 37(1) of the Act would be attracted to the expenditure incurred thereon.
12. In order to appreciate the contentions, we may examine the relative scope of sections 80G(2) and 37(1) of the Act.
13. The substance of section 80G of the Act:
In computing the total income of the assessee, section 80G(2)(iv) provides for deduction in respect of donations to certain funds, charitable institutions, etc. It allows deduction to the extent of 50 per cent, of the sum donated. This deduction is allowable even if the donation has no nexus with the business of the assessee. It shall be allowed, regardless of any business activity or of any commercial expediency. But the allowance claimed under section 37(1) is quite different and has a different connotation.
14. Section 37(1) of the Act:
“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.”
15. To be an allowance within section 37(1), barring the exceptions mentioned therein, “the money paid out or away must be paid out wholly and exclusively for the purpose of the business”. The assessee can claim the whole of it for deduction in computing the income chargeable under the head “Profits and gains of business or profession”.
16. The basic requirements for invoking sections 37(1) and 80G are, therefore, quite different, but none the less, the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied. But such money must be “laid out or expended wholly and exclusively for the purpose of business”. The word “wholly” refers to the quantum of expenditure and the word “exclusively” refers to the motive, object or purpose of the expenditure.
17. There is yet one more thing to be remembered while applying section 37(1). The expenditure claimed therein need not be “necessarily” spent by the assessee. It might be incurred “voluntarily” and without any “necessity”, but it must be for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. In Sassoon J. David and Co. P. Ltd. v. CIT, [1979] 118 ITR 261, the Supreme Court observed (at pages 275 and 276):
“It is relevant to refer at this stage to the legislative history of section 37-of the Income-tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the. Income-tax Bill of 1961 to lay down the ‘necessity’ of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read ‘any expenditure… laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed…” The introduction of the word ‘necessarily’ in the above section resulted in public protest. Consequently, when section 37 was finally enacted into law, the word ‘necessarily’ came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law.”
18. Again, the words “for the purpose of business” used in section 37(1) should not be limited to the meaning of “earning profit alone”. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1) of the Act. It may also be stated, as observed by the Supreme Court in the aforesaid case, that the fact that somebody other than the assessee is also benefited or incidentally takes advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. But, nevertheless, it must be an “expenditure” allowable as deduction under the Act.
19. The question that, however, still remains is whether the donation claimed by the assessee for deduction can be said to be an “expenditure” as contemplated under; section 37(1) of the Act. “Expenditure” primarily denotes the idea of “spending” or “paying out or away It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. Some of these principles have been explained by the Supreme Court in Indian Molasses Co. (Private) Ltd. v. CIT, [1959] 37 ITR 66, wherein it has been observed (at pages 75 and 76):
“The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax law does not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.”
20. In the light of these principles, we may again revert to the reasons given by the Tribunal for rejecting the claim of the assessee. The first reason given by the Tribunal is that section 80G is a special provision and if it applies to the assessee's case, then section 37, which is a general provision, stands excluded. This reason appears to be not sound. We have stated that section 80G and section 37 are not mutually exclusive. If the sum claimed by way of deduction even if it is a donation, could be considered as an expenditure falling under section 37, the assessee could claim it as an allowance in its entirety. The second reason given by the Tribunal is equally untenable. The establishment of the school was primarily to provide facilities for the education of the children of the employees and ex-employees of the assessee. Any expenditure incurred in connection therewith could be claimed as deduction. Merely because some children other than those of the employees and ex-employees are also admitted to the school, the expenditure incurred in connection with the activities of the school cannot be disallowed under section 37(1). Both the reasons given by the Tribunal, therefore, cannot be sustained. But we cannot answer the question without a finding recorded by the Tribunal as to whether the donation in question can be considered as an “expenditure” in the sense which we have explained.
21. We, therefore, decline to answer question No. 3 and direct the Tribunal to dispose of the appeal in accordance with law and in the light of the observations made.