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Atlas Cycle Industries Ltd. v. Commissioner Of Income-Tax, Patiala.
Factual and Procedural Background
The assessee is a company engaged in the manufacture of cycles and spare parts. The company's board passed a resolution on 12 February 1968 sanctioning additional expenditure for construction of a temple “being built primarily and directly for the benefit of the employees,” and a further resolution on 28 February 1969 sanctioning a fixed monthly grant to the temple management committee. The temple was constructed within the factory premises (with one road opening on a municipal road) at a cost of Rs. 3,01,375 during the assessment year 1970–71.
The assessee claimed depreciation (Rs. 15,053) on the temple as a business asset and claimed maintenance/grant expenditure (Rs. 5,500) as deductible under s. 37 of the Income-tax Act, 1961. The ITO denied these claims and the Appellate Assistant Commissioner (AAC) confirmed the disallowance, reasoning that a temple is not included among buildings qualifying for special initial depreciation under s. 32(1)(iv) and that government policy (as reflected in s. 80G) excludes ordinary places of worship from certain concessions. The Income-tax Appellate Tribunal (Chandigarh Bench) dismissed the assessee's appeal principally on the ground that the authorities cited by the assessee did not support allowance of the claimed depreciation.
The Tribunal referred three questions of law to the High Court under s. 256(1) of the Act concerning (1) allowance of depreciation under s. 32 on the temple building, (2) deductibility of the Rs. 5,500 grant to the temple management committee under s. 37, and (3) allowance of Rs. 47,539 spent earlier on a dealers' “Monsoon Gift Scheme” where the assessee followed the mercantile system of accounting.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation under s. 32 on the building of the temple could not be allowed as it was not a business asset of the assessee?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 5,500 on account of grant to the temple management committee did not represent expenditure laid out or expended wholly and exclusively for purposes of the assessee's business?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not allowing the expenditure of Rs. 47,539 on monsoon gifts for the assessment year 1970–71?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The temple (called "Ram Mandir") was constructed primarily and directly for the benefit and welfare of the employees, and therefore such construction was a welfare measure that served the business interest (industrial peace, employee satisfaction) and should qualify as a business asset eligible for depreciation under s. 32(1)(iv) or otherwise be deductible as being laid out wholly and exclusively for business under s. 37.
- The periodic grant of Rs. 500 per month to the temple management committee was a business-related expenditure analogous to other welfare or recreational amenities provided for employees and thus deductible.
- With respect to the Rs. 47,539 spent on the Monsoon Gift Scheme, the assessee relied on its accounting system (mercantile), noting the expenditure had been incurred in an earlier assessment year; the claim for deduction in the current year depended on the accounting treatment and timing.
Respondent's (Revenue's) Arguments
- The revenue asserted that expenditure connected with a temple or place of worship is not the sort of building or item the statute contemplates for depreciation under s. 32(1)(iv), and pointed to s. 80G (and the exclusions in it) as indicative of governmental policy not to give revenue concessions for ordinary places of worship.
- The revenue further argued (novel argument) that once a temple is built and a deity installed, the temple becomes the property of the deity and amounts spent vest in the deity — a contention the court records as being newly advanced by the revenue in these proceedings.
- On the Monsoon Gift Scheme, the authorities below concluded that because the assessee followed the mercantile system and the amount had been spent in an earlier assessment year, the deduction could not be claimed in the assessment year in question.
- During argument, counsel for the revenue conceded that expenditure on a club for workmen would be deductible, distinguishing that from expenditure for a religious purpose (an argument the Court did not accept).
Authorities' Findings (AAC and Tribunal)
- The AAC found that the temple was not a building covered by s. 32(1)(iv) or by the special initial depreciation provisions, and expressly rejected a claim based on commercial expediency because the Act's enumerated list does not include temples or places of worship.
- The Tribunal dismissed the appeal primarily because the authorities (precedents) relied upon by the assessee did not, in the Tribunal's view, support allowing the claimed depreciation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 | The expression “for the purpose of the business” has a wide scope encompassing measures incidental to carrying on the business (e.g., modernization, preservation, administration); limits are implicit in that the expenditure must be incurred by the assessee in capacity as person carrying on the business. | Invoked to show that welfare measures for employees may fall within “for the purpose of the business” and thus support the assessee's claim that providing welfare/recreation (here, the temple) can be business-related. |
| CIT v. Chandulal Keshavlal & Co., [1960] 38 ITR 601 | In deciding deductibility, questions of commercial expediency and ordinary commercial trading are relevant; payments benefiting third parties can be deductible if incurred for the purpose of trade (citing Usher's Wiltshire Brewery Ltd. v. Bruce). | Used to support the principle that payments benefiting third parties (or measures that benefit employees) may still be deductible if they are commercially expedient and for the carrying on of the business. |
| Usher's Wiltshire Brewery Ltd. v. Bruce, [1914] 6 TC 399 (HL) | Illustrates that payments which inure to the benefit of a third party can still be deductible if incurred for the purpose of the assessee's trade. | Referred to (via Chandulal Keshavlal) as authority for the proposition that benefit to third parties does not preclude deductibility when the purpose is commercial expediency. |
| Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, [1951] 20 ITR 1 (SC) | Another authority supporting that transactions entered into as part of legitimate commercial undertaking to facilitate business are deductible even if a third party also benefits. | Relied upon to reinforce that commercial expediency and facilitation of business operations can render expenditures deductible. |
| CIT v. Delhi Cloth and General Mills Co. Ltd., [1978] 115 ITR 659 | Expenditure on conducting sporting tournaments that promoted the company's name was held to be an expenditure for promotion of the business. | Applied by the court as an example that activities (even not directly commercial) that tend to promote the business or its goodwill can be treated as business expenditure. |
| Teksons Pvt. Ltd. v. CIT, [1979] 120 ITR 745 (Bom) | Amounts spent on levelling ground used by labour as a playground were held to be permissible revenue expenditure. | Used as supporting authority that providing recreational facilities for labour is allowable as revenue expenditure. |
| CIT v. Laxmi Cement Distributors Pvt. Ltd., [1976] 104 ITR 711 (Guj) | Compensation or payments made to dependants of deceased employees (in certain circumstances) can be justified on grounds of commercial expediency to secure loyalty and confidence of employees, and thus deductible. | Relied upon to illustrate that gestures to secure the goodwill and loyalty of employees may be deductible as business expediency. |
Court's Reasoning and Analysis
The court proceeded by examining the statutory text and the factual findings. It noted that the AAC had accepted (for the purpose of its observations) that the temple was erected for the labour and as a welfare measure, although the AAC nonetheless denied depreciation relying on statutory exclusions and a reading of governmental policy in s. 80G. The Tribunal had declined to decide on that factual premise and instead dismissed the appeal on lack of supporting authorities.
The court analysed s. 32(1)(iv), which permits a special allowance (40% of actual cost) for newly erected buildings used solely or mainly for the welfare of employees, and provides an illustrative list including a recreational centre, canteen, library, etc. The assessee argued that the temple functioned as a recreational centre or welfare facility for employees and therefore fell within the purpose contemplated by s. 32(1)(iv) or more generally within expenditure incurred for business purposes.
The court surveyed authorities establishing that the phrase “for the purpose of the business” is broad (CIT v. Malayalam Plantations Ltd.) and that payments or facilities benefiting third parties (including employees) may be deductible if they represent commercial expediency or are properly entered into as part of legitimate commercial undertaking (CIT v. Chandulal Keshavlal & Co.; Eastern Investments Ltd.). The court also cited decisions holding recreational or welfare expenditures for labour to be revenue expenditures (Teksons) and examples where promotional or employee-related payments were deductible (Delhi Cloth and General Mills; Laxmi Cement Distributors).
Applying these principles, the court rejected the revenue's contention that the religious character of the temple per se excluded it from being regarded as a welfare or recreational facility when the provision of such facility had a direct nexus with the welfare of a class of the assessee's employees. The court emphasised that employee satisfaction can be advanced by varied forms of recreation, and there was no principled reason to discriminate against a form of recreation that is religious in nature if it directly serves employee welfare and business interests.
The court also rejected the revenue's novel contention that the temple became the property of the deity upon installation, noting that the assessee's conduct (including its claim for depreciation) evidenced that it did not relinquish title to the building.
Concerning the Rs. 5,500 periodic grant, the court treated this as connected to the same subject matter (the temple) and concluded that if the temple-related expenditure could be regarded as for the business purpose/welfare of employees, the periodic grant similarly qualified.
On the third question, the court noted the undisputed accounting facts: the assessee followed the mercantile system and the Rs. 47,539 had been expended in the earlier assessment year. For that reason, the court held that the claim for deduction in the later assessment year could not be allowed.
Holding and Implications
Core Ruling: Questions 1 and 2 were answered in the negative (in favour of the assessee and against the revenue); Question 3 was answered in the affirmative (in favour of the revenue and against the assessee).
Direct consequences for the parties:
- On Questions 1 and 2: The court found in favour of the assessee — the temple construction and the periodic grant were held to be capable of being treated as expenditure relatable to the business (employee welfare/recreation) and thus the denial by the AAC/Tribunal was set aside on those points.
- On Question 3: The court upheld the revenue — the Rs. 47,539 spent on the Monsoon Gift Scheme in an earlier assessment year could not be claimed as a deduction in the assessment year under consideration.
- The court ordered that there shall be no order as to costs.
The opinion does not purport to announce any broad new statutory precedent beyond the application of established principles to the facts; it resolves the three referred questions in accordance with the analysis recorded above.
M.R Sharma, J.:— The assessee is a company deriving income from manufacture of cycles and spare parts. The board of directors of the assessee-company passed a resolution on February 12, 1968, which reads as under:
“Resolved that further expenditure up to Rs. two lakhs on the construction of the temple being built primarily and directly for the benefit of the employees of the company, beyond the already sanctioned amount of Rs. one lakh, be and is hereby sanctioned, the total expenditure on temple not to exceed Rs. 3 lakhs in all.”
2. The cost of the temple which was constructed during the assessment year 1970–71 came to Rs. 3,01,375. This temple had been constructed inside the factory premises of the assessee-company, but one road to the temple also opened on the municipal road. The assessee put forth a claim before the ITO that the temple had been primarily built for the benefit of the employees of the company and it was a business asset entitled to a depreciation of Rs. 15,053 for the relevant assessment year. This contention was negatived by the ITO. The assessee went up in appeal. The AAC negatived the arguments raised on behalf of the assessee on this point with these observations:
“The building of ‘Ram Mandir’ is neither covered under the definition of assets on which normal depreciation is allowable, as it is not used for business, nor is it covered under the special cases in which an initial depreciation at 20% is allowed under s. 32(1)(iv). The appellant has argued for the allowance of depreciation on the ground that the temple building is for the welfare of the employees and that on account of commercial expediency the same should be allowable. However, since the Act has explicitly stated the nature of buildings, which will be admissible for the purpose of depreciation under s. 32(1)(iv) and has specifically not included a temple or a place of worship, it is clear that it is not the policy of the Government to allow concession to the buildings, which are used for religious worship. It is not denied that the temple has been erected for the purpose of labour and it is a measure to keep them happy. But since this particular item has always been explicitly excluded either for the purpose of depreciation or for the purpose of relief under s. 80G, it is clear that the Government is not interested in making concession in revenue where the expenditure has been incurred on any type of religion. While enumerating deductions admissible in respect of donations to certain funds, charitable institutions, etc., under s. 80G, it is specifically stated that only those sums will be eligible for relief, which have been paid as donations for the renovation or repair of any such temple, mosque, gurdwara, church or other place as is notified by the Central Govt. in the Official Gazette to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States. Thus, for the purposes of s. 80G, any ordinary temple, mosque, gurdwara or church has been excluded and only specific places of historic importance have been included. In view of the clear intention of the Government in this matter the ground of commercial expediency taken by the appellant will not be relevant. Therefore, the depreciation claimed on the temple building amounting to Rs. 15,053 will not be admissible. On the same reasoning, the expenditure incurred for the maintenance of temple amounting to Rs. 5,500 will not be admissible. The action of the ITO in adding back this amount is confirmed.”
3. The assessee filed a second appeal before the Income-tax Appellate Tribunal (Chandigarh Bench)(hereinafter referred to as “the Tribunal”), which was also dismissed primarily on the ground that the authorities cited on behalf of the assessee did not lend any support to the proposition that the assessee could legally claim the aforementioned amount of depreciation. The board of directors of the assessee had passed another resolution on February 28, 1969, to the following effect:
“The matter of monthly payment for expenses to the temple management committee of Shri Ram Mandir, Sonepat, was considered and it was:
Resolved that payment of a fixed monthly grant of Rs. 500 (Rupees five hundred only) to the temple management committee of ‘Shri Ram Mandir’ built primarily and directly for the benefit of the employees of the company, for expenses with effect from February, 1969, be and is hereby sanctioned. Resolved further that the grant to the said committee be revised after one year.”
4. In terms of this resolution, an expenditure of Rs. 5,500 was incurred and this amount was claimed under s. 37 of the I.T Act, 1961 (hereinafter referred to as “the Act”), on the ground that the said expenditure had been incurred for the benefit of the employees and was laid out or expended wholly and exclusively for the purpose of the assessee's business. This contention also did not find any favour with the authorities below.
5. The assessee had instituted a scheme for giving gifts and prizes to its dealers by way of special “Monsoon Gift Scheme” to push up its sales. A sum of Rs. 47,539 had been spent by the assessee in connection with this scheme during the earlier assessment year ending on December 31, 1968. Since the assessee followed the mercantile system of accounting and since this amount had been spent during the relevant assessment year, the authorities below did not allow this amount to be deducted out of the taxable income of the assessee.
6. On an application filed by the assessee under s. 256(1) of the Act, the Tribunal has referred the following three questions of law to this court for its opinion:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation under s. 32 on the building of the temple could not be allowed as it was not a business asset of the assessee?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 5,500 on account of grant to the temple management committee did not represent expenditure laid out or expended wholly and exclusively for purposes of the assessee's business?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not allowing the expenditure of Rs. 47,539 on monsooon gifts for the assessment year 1970–71?”
7. We have heard the learned counsel for the parties.
8. The observations made by the AAC, extracted above, show that it was not disputed before the said authority that the temple had been erected for the purpose of the labour and it was a measure to keep them happy. The AAC rejected this claim primarily on the ground that since such an item of expenditure has not been excluded under s. 80G of the Act, it showed that the Government was not interested in making a concession in revenue where the expenditure had been incurred on any type of religion. As noticed earlier, the Tribunal did not consider this matter on the premises that the temple had been erected for the purpose of the labour, but nonsuited the assessee only on the ground that the authorities cited on its behalf did not support the proposition that this item of expenditure could be deducted from its taxable income.
9. The assessee can be allowed depreciation in respect of an old building only if its case falls under s. 32(1)(iv) of the Act, which reads as under:
“32. (1)(iv) in the case of any building which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head ‘Salaries’ is ten thousand rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch-room, a sum equal to forty per cent, of the actual cost of the building to the assessee in respect of the previous year of erection of the building; but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii) of sub-section (1).”
10. It has been argued on behalf of the assessee that “Ram Mandir” was in fact a recreation centre for its employees and the same had been constructed by the assessee in the interest of industrial peace, which in turn advanced the interests of its business. In CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140, speaking for the Supreme Court, K. Subba Rao C.J observed as under (p. 150):
“The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property, from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory…”
11. In CIT v. Chandulal Keshavlal & Co., [1960] 38 ITR 601, it was held (p. 610).
“In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce, [1914] 6 TC 399 (HL)). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, [1951] 20 ITR 1 (SC)).”
12. In CIT v. Delhi Cloth and General Mills Co. Ltd., [1978] 115 ITR 659, a Division Bench of the Delhi High Court held that the amount spent by an assessee for conducting an All India tournament in hockey and football to which teams from various parts of the country were invited, was an expenditure incurred for the promotion of the business of the company, because the said tournaments tended to make the name of the company a household word.
13. In Teksons Pvt. Ltd. v. CIT, [1979] 120 ITR 745 (Bom) amounts spent on levelling ground which was used by the labour as a playground was held to be a permissible item of revenue expenditure.
14. In CIT v. Laxmi Cement Distributors Pvt. Ltd., [1976] 104 ITR 711 (Guj), the court was concerned with a case in which the assessee had sent one of its employees to receive training in the U.S.A The employee suddenly died there. The assessee paid a compensation of Rs. 12,000 to the daughter of the deceased. The claim of the assessee for deduction of this amount was upheld. Speaking for the Bench, Divan C.J observed (p. 718):
“That apart, when compensation is given in circumstances such as those which prevail in the present case, it would not be unreasonable to uphold the claim of the employer that the predominant motive behind the gesture was to demonstrate the interest which he took in the ultimate well-being of his employees and their dependants with the end in view of securing the loyalty and devoted services of all his employees without whose whole-hearted co-operation his business cannot possibly be carried on with efficiency and profit. Such payment would generate in the mind of other employees a sense of confidence that these dependants would be well looked after if their life was cut short while still in service and such sense of security would motivate them to put in their best for the good of the employer. We are conscious that in the present case the resolution sanctioning the amount appears to have stated that the payment was made in recognition of the past services of the deceased employee. However, too much emphasis cannot be laid on the wording of the resolution. The resolution giving compensation to the dependants of an employee who has died in harness has no set formula. The circumstances in which the resolution was adopted have to be considered as a whole and, if on a consideration of such circumstances, the Tribunal came to the reasonable conclusion that the payment was made to maintain good relations and to engender confidence of all the employees in the management of the assessee-company and that it was, therefore, justified on the ground of commercial expediency, then the Tribunal could not be said to have misdirected itself in law.”
15. It cannot be disputed that a satisfied worker is a great asset to the business and the satisfaction of the worker not only depends upon the packet which he receives at the end of the month, but also on the other amenities provided to him by his employer. When questioned, the learned counsel for the revenue conceded that if the assessee had incurred some expenditure on the erection of a club for the workmen, it would have been entitled to claim a deduction from its taxable income, but he submitted that since the amount had been spent for a religious purpose, the assessee could not claim any benefit unless its case fell squarely within the ambit of s. 80G of the Act. We are unable to accept this contention. If the workers can overcome their boredom by playing cards in a club, we see no reason for holding that they cannot achieve the same result by singing hymns in a temple. Besides, we see no reason to place any curbs on the discretion of the assessee to provide the type of recreation, which, according to it, would best advance the interests of its business. What we have to see is whether the recreation provided, even if it be in the nature of religious activity, has a direct nexus with the welfare of a class of the workers engaged by the assessee or not. If the answer to this proposition is in the affirmative, it is wholly immaterial if the recreation provided is directly or indirectly connected with the religious tenets of a section of the society. The deductions envisaged in s. 80G of the Act form a class by themselves and can be claimed whether they have any nexus with the business of the asssessee or not. They are claimed because the law allows them to be claimed regardless of any business activity and not because the amount has been spent as a measure of business expediency. Faced with this situation, Mr. Awasthy raised a novel argument. According to him, as soon as the assessee built a temple and installed a deity therein, the temple became the property of the deity and the amounts spent on the temple likewise came to vest in the deity. This is an entirely new case which is being set up on behalf of the revenue in these proceedings and the same cannot be allowed. Even otherwise, there is abundant evidence on the record to show that the assessee did not relinquish its title to this property. The fact that it has claimed depreciation for the building itself shows that it treated the building as belonging to it and there had never been any intention on its part to vest the title of the building in the deity.
16. For the reasons aforementioned, we answer the first question in the negative, i.e, in favour of the assessee and against the revenue.
17. Since the amount of Rs. 5,500 was in the nature of a periodic grant for the item covered by the first question, we also answer the second question in the negative, i.e, in favour of the assessee and against the revenue.
18. The third question offers no difficulty. Admittedly, the assessee had adopted the mercantile system of accountancy and the amount in question had been spent in the earlier assessment year. Apparently, the assessee's claim regarding its deduction from its taxable income for the current assessment year, cannot be allowed. The third question is, therefore, answered in the affirmative, i.e, in favour of the revenue and against the assessee. There shall be no order as to costs.
B.S Dhillon, J.:— I agree.
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