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British Electrical & Pumps (P.) Ltd. v. Commissioner Of Income-Tax.
Structured Summary of the Legal Opinion (Deb, J.)
Factual and Procedural Background
This reference arises under section 256(2) of the Income-tax Act, 1961 concerning the assessment year 1965-66 (previous year ending 31 March 1964). The assessee is a manufacturer and seller of electrical pumps and motors who paid a total of Rs. 5,750 to various organisations for insertion of advertisements in souvenirs published by those organisations and claimed the payments as business deductions. The Income-tax Officer disallowed the claim. On first appeal the Appellate Assistant Commissioner allowed Rs. 745 but rejected the remainder, holding that the primary and dominant motive was charity. On second appeal the Tribunal partly allowed the claim but, under section 37(1) of the Income-tax Act, disallowed payments made to certain named organisations (American Women's Club Welfare Fund, Bharatiya Sanskriti Bhawan, West Bengal Pradesh Congress Committee and Moral Rearmament), affirming the Appellate Assistant Commissioner; the Tribunal later rectified certain mistakes under section 35. The Tribunal recorded that the assessee could not produce the souvenirs for inspection; it found as a fact that there was an element of advertisement in the insertions, but concluded that for some organisations the payments' primary and dominant motive was charity. It is admitted that the payments were actually made and their genuineness was not questioned by the revenue.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal had any material before it to hold that the amount of Rs. 5,750 paid by the company for advertisement in souvenirs was not laid out or expended wholly and exclusively for the purposes of the assessee's business (i.e., whether those payments were deductible under section 37(1) of the Income-tax Act, 1961).
Arguments of the Parties
Assessee's Arguments (Dr. Pal)
- The expenditures were laid out or expended wholly and exclusively for the purpose of the assessee's business and therefore deductible.
- The Tribunal had no material before it to conclude that the primary and dominant motive was to make charity; merely observing the names of the recipient organisations and the amounts paid did not justify that conclusion.
- The Tribunal erred in going into the motive of the assessee once it had found there was an element of advertisement; in that situation the payments should have been allowed under the law as explained in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax (1967) 63 ITR 207 (SC).
- Cited Commissioner of Income-tax v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) to support the position that, where genuineness is not questioned and no improper motive suggested, expenses must be regarded as incurred exclusively for the trade even if the recipient indirectly benefits.
- Relied on the observation of Viscount Cave in Atherton v. British Insulated & Helsby Cables Ltd. as authoritative on the relevant legal principle (as approved by the Supreme Court in Chandulal Keshavlal).
Revenue's Arguments (Mr. Sengupta)
- The Tribunal's factual finding that "the primary and dominant motive for the payment was charity" is binding and should lead to answering the reference against the assessee.
- The assessee failed to produce material to satisfy the Tribunal that the souvenirs reached an adequate number of persons with whom the assessee intended to establish business relationships; therefore the Tribunal was justified in treating the payments as charitable rather than commercial.
- Under section 37(1) the expression "wholly and exclusively for the purpose of the business" requires the assessee to prove that the expenditures were exclusively for business, which the assessee failed to do.
- The cases relied on by the revenue (described in the opinion as dealing with contributions or donations to political organisations) establish that such payments may be held to be ex gratia or charitable and therefore non-deductible; the revenue sought to distinguish advertisement payments from the authorities relied upon by the assessee.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1967] 63 ITR 207 (SC) | That expenditure not directly related to earning income may still be admissible as a deduction; primary motive need not be directly to earn income; expenditure laid out wholly and exclusively for purposes of trade can include indirect means to facilitate business. | The court held that the Tribunal failed to apply the law from this case; it relied on this principle to conclude that the advertisement payments could be deductible even if the benefit was indirect. |
| Commissioner of Income-tax v. Chandulal Keshavlal & Co., [1960] 38 ITR 601 (SC) | Supports the proposition that where genuineness of payment is not questioned and no improper motive suggested, expenses may be regarded as laid out wholly and exclusively for trade despite incidental benefit to recipients. | The court found the Tribunal did not follow this authority; it accepted the assessee's reliance on the case to show that documentary genuineness and absence of improper motive mean the payments should be treated as for business. |
| Atherton v. British Insulated & Helsby Cables Ltd., [1925] 10 TC 155 (HL) | Observation by Viscount Cave L.C. on the characterisation of business expenditures (quoted in Chandulal Keshavlal). | Cited by the assessee and accepted by the court as supporting the legal approach that the Tribunal should not have inferred a charitable motive where advertising element and genuineness existed. |
| Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax, [1968] 69 ITR 379 (Cal) | Held that the expression "commercial expediency" is not a term of art; it means everything that serves to promote commerce and includes every means suitable to that end. | The court agreed with this view and applied it to hold that advertisements issued to promote commerce fall within means that facilitate carrying on business and thus can be "wholly and exclusively" for business in absence of improper motive. |
Court's Reasoning and Analysis
The court's analysis proceeded along these principal steps, based exclusively on what is stated in the opinion:
- Statutory framing: The court noted that section 37(1) of the Income-tax Act speaks of expenditure "for the purpose of the business" and does not mention "motive" as a statutory criterion. Motive is relevant only where the genuineness of the payment is questioned or an improper/oblique purpose is alleged by the revenue.
- Facts as found by the Tribunal: It was admitted and found by the Tribunal that the payments were actually made, that the genuineness of the payments was not questioned, and that there was an element of advertisement in the insertions published in the souvenirs.
- On the relevance of the Tribunal's motive-finding: Because the Tribunal itself found an advertising element and did not impugn genuineness or allege improper purpose, the court held that the Tribunal's reliance on the "primary and dominant motive" of charity was a conclusion based on irrelevant matters. The Tribunal went beyond the permissible enquiry by imputing motive from the names of the organisations and the amounts paid.
- Insufficiency of material cited by the Tribunal: The Tribunal had sought to inspect the souvenirs but the assessee could not produce them at the hearing. The court stressed that the Tribunal did not provide any factual account of the nature of the organisations to support its motive inference; the court refused to speculate on those organisations' nature and found no nexus between their names and the assessee's motive.
- On the legal test for deductibility: The court reviewed the authorities cited by the assessee (Sree Meenakshi Mills, Chandulal Keshavlal, Atherton) and found that the Tribunal did not apply that law. Those authorities establish that expenditure indirectly facilitating business can be "wholly and exclusively" for business even if the primary motive is not the immediate earning of income.
- On the authorities relied upon by the revenue: The court observed that the cases relied on by the revenue dealt with contributions or donations to political organisations and holding such payments to be charitable; the court considered those authorities inapposite because they were not on advertisements or publications of souvenirs.
- Commercial expediency and advertisements: The court accepted the view (from Indian Steel & Wire Products Ltd.) that "commercial expediency" is broadly construed to mean everything that serves to promote commerce. Advertisements are a recognised medium for traders to establish contact with customers and promote business. In absence of any improper or oblique purpose, expenditures on advertisements in souvenirs must be regarded as incurred to promote the business and hence as laid out wholly and exclusively for the trade.
- Conclusion on the Tribunal's findings: Given the admitted facts (payments made, genuineness not disputed, advertising element present) and applicable legal principles, the court concluded that the Tribunal's finding that the payments were primarily charitable could not be supported.
Holding and Implications
Holding:
The reference is answered in the negative and in favour of the assessee.
Implications:
- Direct effect on the parties: The court overturned the Tribunal's conclusion that the payments in question were not laid out or expended wholly and exclusively for the assessee's business. On the facts found (payments actually made, genuineness not disputed, element of advertisement found), the court held those expenditures were incurred for the purposes of trade and therefore should not have been disallowed by the Tribunal.
- Costs: The court made no order as to costs in the facts and circumstances of the case.
- Precedential note: The opinion applies established principles from previously decided cases (as cited in the Table of Precedents) to the facts; the court did not state that it was laying down a new legal principle beyond applying those authorities. The decision reverses the Tribunal's application of the law to the facts in this specific reference.
Judge(s): Deb, J.; Dipak Kumar Sen, J. agreed with the judgment.
The Judgment of the Court was delivered by
Deb, J.:— In this reference, under section 256(2) of the Income-tax Act, 1961, we are concerned with the following question of law:
“Whether, on the facts and in the circumstances of the case, the Tribunal had any material before it to hold that the amount of Rs. 5,750 paid by the company to various parties for advertisement of the company through the souvenirs published by the respective parties were not laid out or expended wholly and exclusively for the purposes of the business?”
2. The reference relates to the assessment year 1965-66. The previous year ends on March 31, 1964. The assessee is a manufacturer and seller of electrical pumps and motors. In the assessment year, the assessee advertised its products in souvenirs published by various organisations and institutions and claimed deductions of the sums paid to those organisations and institutions as charged by them for inserting those advertisements.
3. The Income-tax Officer disallowed the claim of the assessee. On first appeal, a sum of Rs. 745 was only allowed by the Appellate Assistant Commissioner who rejected the rest of the claim by holding that the primary and dominant motive of the assessee in publishing the advertisements in the souvenirs of the Amercan Women's Club Welfare Fund, Indian National Trade Union Congress, West Bengal Pradesh Congress Committee, Moral Rearmament, 24-Parganas Zill Sanskriti Parishad, Rabindra Palli Sarbajonin Durgotsab Committee, Baranagar, Bharatiya Sanskriti Bhawan and Lorreto House was to make charity to those organisations and institutions.
4. The Tribunal, on second appeal, partly allowed the claim of the assessee, but disallowed, under section 37(1) of the Income-tax Act, 1961, the sums paid to the American Women's Club Welfare Fund, Bharatiya Sanskriti Bhawan, West Bengal Pradesh Congress Committee and Moral Rearmament by affirming the decision of the Appellate Assistant Commissioner and thereafter the Tribunal rectified certain mistakes in its order under section 35 of the Act.
5. At the time of hearing of the appeal the Tribunal wanted to see those souvenirs for the purpose of ascertaining the nature of the advertisements published in those sovenirs and to satisfy itself as to whether those souvenirs could reach the hands of an adequate number of persons with whom the assessee intended to establish business relationship through the media of those advertisements, but unfortunately those souvenirs could not be produced by the assessee as recorded by the Tribunal. The Tribunal found, as a fact, that there was an element of advertisement in all those insertions but disallowed the amounts paid to those organisations in the following terms:
“Looking into the nature of the organisation or institution concerned and the amount of payment we see that in some of the cases that will be mentioned shortly the primary and dominant motive for the payment was charity and the payments were not out of considerations of business.”
6. It is to be noticed here that the Tribunal allowed, amongst other claims, Rs. 250 paid to the Indian National Trade Union Congress, Rs. 50 paid to Rabindra Palli Sarbajanin Durgotsab Committee, Baranagar, and Rs. 100 to Loretto House, but disallowed Rs. 250 paid to the American Women's Club Welfare Fund, Rs. 1,000 paid to Bharatiya Sanskriti Bhawan, two sums of Rs. 1,000 and Rs. 1,000 paid to the West Bengal Pradesh Congress Committee and Rs. 1,000 paid to Moral Rearmament by the assessee.
7. It is an admitted fact that the assessee has actually paid those sums to those organisations and the genuineness of those payments has not been questioned by the revenue. It has been found by the Tribunal, as a fact, that there was an element of advertisement in making those insertions in those souvenirs and those advertisements were in fact published by those organisations.
8. The submissions made before us by Dr. Pal, the learned counsel for the assessee, are as follows: those expenditures were laid out or expended wholly and exclusively for the purpose of business of the assessee; the Tribunal had no material before it for holding that the primary and dominant motive of the assessee was to make charity to those organisations and by merely looking at the names and the amounts paid to those organisations no such conclusion could be reached by the Tribunal; in any event, the Tribunal erred in going into the motive of the assessee, for it has found that there was an element of advertisement and, therefore, it should have allowed those deductions in view of the law laid down by the Supreme Court in the case of Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, [1967] 63 ITR 207, 213, 215 (SC), in the following terms:
“Under section 10(2)(xv) of the Indian Income-tax Act as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction…… 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………
The High Court also thought that expenditure, to fall within the terms of section 10(2)(xv), must be one for the purpose of earning income, and there was no material on the record to show that the expenditure was so incurred. If it is intended thereby to imply that the primary motive in incurring the expenditure admissible to deduction under section 10(2)(xv) must be directly to earn income thereby, we are with respect unable to agree with that view.”
9. Dr. Pal also cited the case of Commissioner of Income-tax v. Chandulal Keshavlal & Co., [1960] 38 ITR 601 (SC), in support of his contention that since genuineness of those payments has not been questioned nor any improper or oblique motive has been suggested by the revenue it must be held that those expenses were incurred solely and exclusively for the purpose of the trade of the assessee and it does not matter in the least that those organisations might have been indirectly benefited by those payments. He also placed strong reliance on the well-known observation of Viscount Cave L.C in the case of Atherton v. British Insulated & Helsby Cables Ltd., [1925] 10 TC 155 (HL), which has been quoted with approval by the Supreme Court in the case of Commissioner of Income-tax v. Chandulal Keshavlal & Co., [1960] 38 ITR 601 (SC).
10. Mr. Sengupta, the learned counsel for the revenue, on the other hand, by drawing our attention to the conclusion of the Tribunal to the effect that “the primary and dominant motive for the payment was charity and the payments were not out of considerations of business” has submitted before us that these findings are binding on us and, therefore, the question must be answered against the assessee. His other contentions are as follows: The assessee did not produce any material to satisfy the Tribunal that those souvenirs reach the hands of an adequate number of people with whom the assessee intended to do business and, therefore, the Tribunal was right in holding that the primary and dominant motive of the assessee was to make charity to those organisations; and as section 37(1) of the Act uses the expression “wholly and exclusively for the purpose of the business” the assessee had failed to prove that those expenditures were laid out or expended wholly and exclusively for the purpose of the business of the assessee.
11. It is true that on the facts and circumstances as found by the Tribunal we are to decide whether there is any material to hold that those expenditures were laid out or expended wholly and exclusively by the assessee for the purpose of its business as contended by Mr. Sengupta but the matter does not rest here, for Dr. Pal has argued that the Tribunal could not at all go into the motive and in any event there is no material to hold that the primary and dominant motive of the assessee was to make charity to those organisations and not for the purpose of the business of the assessee as held by the Tribunal and, therefore, we will have to decide these contentions.
12. Section 37(1) of the Act does not speak of any motive. It says “For the purpose of the business”. Motive is only relevant if the genuineness of the payment is questioned or any improper or oblique purpose is suggested by the revenue. But, neither the genuineness of those payments nor any improper or oblique purpose was at issue before the Tribunal and, therefore, it must be held that its conclusion is based wholly on irrelevant matters, namely, the purported primary and dominant motive of the assessee.
13. Further, the admitted and undisputed facts stated by the Tribunal in the statement of the case and also in its order including the rectification order forming part of the statement of the case lead to an irresistible conclusion that the Tribunal was not justified in going into the question of motive of the assessee in view of its finding of fact that there was an element of advertisement in making those insertions in those souvenirs of those organisations.
14. The Tribunal has said that it looked into the nature of those organisations, but it did not say anything as to their nature. To say anything on their nature on our part will be a matter of speculation and conjecture and, therefore, we refrain from saying anything on it. That apart, there is no nexus between the names of those organisations and the motive of the assessee. Moreover, the Tribunal did not put the Indian National Trade Union Congress, Rabindra Palli Sarbajanin Durgotsab Committee, Baranagar, and Loretto House into a separate group for the purpose of disallowing the payments made to the American Women's Club Welfare Fund, Bharatiya Sanskriti Bhawan, West Bengal Pradesh Congress Committee and Moral Rearmament. Therefore, the motive imputed by the Tribunal must be kept out of the field.
15. Furthermore, the amounts paid to those organisations, in view of the documentary evidence on the record, do not prima facie establish the motive imputed to the assessee by the Appellate Assistant Commissioner and the Tribunal. No oblique or improper purpose has been found by the Tribunal and the Tribunal has found that there was an element of advertisement in making those insertions in those souvenirs. It is not in dispute that advertisements are always made by the businessmen to push their products in the market. It is a well-recognised media through which the traders establish contact with the customers.
16. The Tribunal, in our opinion, did not apply its mind to the law laid down by the Supreme Court in the cases cited by Dr. Pal and, therefore, the conclusion reached by the Tribunal, namely, that those expenditures were not laid out or expended wholly and exclusively for the purpose of the business of the assessee cannot be supported.
17. The cases cited by Mr. Sengupta are not on advertisements or publication of souvenirs but on contributions or donations to political organisations and it was held that the payments were made ex gratia or by way of charity. Hence, they are wholly irrelevant for the purpose of determining the instant reference before us. But, at the same time, we agree with the view expressed in the case of Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax, [1968] 69 ITR 379 (Cal). In that case it has been held that the expression “commercial expediency” is not a term of art and it means everything that serves to promote commerce and includes every means suitable to that end.
18. Advertisements are issued to promote commerce and, therefore, in the absence of any improper or oblique purpose in issuing those advertisements in the souvenirs of those organisations it must be held that they were issued to promote the business of the assessee irrespective of their result because the advertisements facilitate the carrying on of the business. Hence, it must be held that those expenditures were incurred or laid out by the assessee wholly and exclusively for the purpose of its trade and, therefore, we overrule the contentions of Mr. Sengupta.
19. In the premises, our answer to the question is in the negative and in favour of the assessee.
20. In the facts and circumstances of the case, we make no order as to costs.
Dipak Kumar Sen, J.:— I agree.
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