COMMISSIONER OF INCOME-TAX VS INDIA RADIATORS LTD, 2000 PTD-MADRAS-HIGH-COURT-INDIA 2503 (1997)

Income-tax--

----Business expenditure---Expenditure incurred for purposes of business---Contribution to Panchayat for upgrading school ---Asssurance by school management that children of assessee's employees would be given preference in admission to school---Amount spent for benefit of employees-- Expenditure was deductible---Indian Income Tax Act, 1961, S.37.

The assessee-company made a contribution of Rs.35,000 to the Panchayat where its factory was situated. It made the said expenditure for upgrading the elementary school of the Panchayat as High School. The assessee claimed the contribution made to the Panchayat as a revenue expenditure. The Income-tax Officer rejected the claim. The finding of the

Tribunal was that by making the contribution to the Panchayat for upgrading the elementary school, the assessee-company was assured by the school management that it would give preference in the matter of admission to the children of the employees of the assessee-company in the said school. It held that the expenditure was deductible. On a reference:

Held, that the employees of the assessee were given the satisfaction by the donation made by the assessee that their employers had taken care of the education of their wards and such a mental satisfaction on the part of the employees would generate goodwill and expenditure could be regarded as staff welfare expenditure and allowable as business expenditure. The fact that the benefit had percolated to the general public would not stand in the way of the assessee getting the necessary deduction once the expenditure was held to be business expenditure.

CIT v. Cheran Transport Corporation Ltd. (1996) 219 ITR 203. (Mad.) and Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101 (SC) ref.

S. V. Subramanian for C. V. Rajan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

N. V. BALASUBRAMANIAN, J.---Pursuant to the direction of this Court, the Appellate Tribunal has stated a case and referred the following question of law for the opinion of this Court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"):

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.35,000 being the donation paid to the Polal Panchayat for upgradation of the school into a High School .is an admissible deduction under section 37 of the Income Tax Act, 1961, in the assessment for the assessment year 1973-74?"

The assessee is a company, during the course of the previous year relevant to the assessment year 1973-74, the assessee made a contribution of a sum of Rs.35,000 to the Panchayat, where its factory and its premises are situate. The assessee made the said expenditure for upgrading the elementary school of the Panchayat as High School. The assessee claimed the contribution made to the Panchayat as a revenue expenditure. The Income tax Officer held that expenditure was not incurred wholly and exclusively for the purpose of the assessee's business and that the expenditure cannot be regarded as staff welfare expenditure on the basis that the school or the Panchayat, not only served the wards of the employees of the assessee but it was open to the general public as well.

The assessee's appeal before the Commissioner of Income-tax (Appeals) succeeded on the ground that the contribution to the Panchayat was a revenue expenditure. The Revenue preferred a further appeal before the Appellate Tribunal and the Appellate Tribunal also held that the donation to the Panchayat should be regarded as staff welfare expenditure and it is allowable as a business expenditure.

Mr. S. V. Subramanian, learned senior standing counsel appearing for the Department, submitted that the donation to the Panchayat cannot be regarded as a business expenditure at all as the school is open to the general public also. Mr. P. P. S. Janaratbana Raja, learned counsel appearing for the supported the order of the Appellate Tribunal.

We have heard the rival submissions. Under section 37 of the Act, any expenditure not being the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business of profession is allowable as business expenditure in computing the income chargeable under the head "Profits and gains of business or profession". It is not the case of the Department that the donation paid to the Panchayat was a capital expenditure nor can it be regarded as personal expenses of the assessee. The only question that has to be decided is whether the expenditure was incurred for the purposes of the business of the assessee. The finding of the Appellate Tribunal is that by making the contribution to the Panchayat for upgrading the elementary school, the assessee-company was assured by the school management that it would give preference in the matter of admission to the children of the employees in the said school. The Tribunal placed reliance on a letter, dated March 31, 1973, from the president of the building committee and parents teachers association of the school. It is well-settled that if a certain sum of money was expended for the education of the children of the employees of the assessee-company, it should be regarded as staff welfare expenditure, particularly in view of the fact that in these days it is very hard to get admission in educational institutions. The employees of the assessee are given the satisfaction by the donation made by the assessee that their employers have taken full care of the education of their wards and such a mental satisfaction on the part of the employees would generate goodwill and the expenditure can be regarded as staff welfare expenditure and allowable as business expenditure.

The question whether the expenditure incurred by the assessee by way of donation to the Flag Day Fund or the Chief Minister's Rehabilitation Fund can be allowed as business expenditure or not, came up for consideration before this Court in CIT v. Cheran Transport Corporation Ltd. (1996) 219 ITR 203 (in which one of us, viz., Abdul Hadi, J. was a party) and this Court has held that the said payments should be .regarded as payment made for business purposes and deductible as business expenditure.

The Supreme Court in a subsequent decision. viz., Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101, has also taken the same view. In that case, the Supreme Court held that where any contribution was made by the assessee to a welfare fund, which is directly connected with the carrying on of the business or which results in a benefit to the assessee's business, the expenditure has to be regarded as allowable deduction under the provisions of section 37(1) of the Act.

We have seen that the contribution made by the assessee to the Panchayat has resulted in a benefit to the assessee's business in the sense that the assessee's employees are the beneficiaries in getting preferential admission in the school. The fact that the benefit has percolated to the general public would not stand in the way of the assessee getting the necessary deduction once the expenditure is held to be business expenditure. Hence, we are of the opinion that the Appellate Tribunal has come to the correct conclusion that the expenditure incurred by the assessee was a revenue expenditure.

It should also be noted that the contribution made to the Panchayat was not in contravention of any law, nor was it opposed to public policy. In this view of the matter, we hold that the contribution made by the assessee to the Panchayat for the upgradation of the elementary school should be regarded as an allowable business expenditure under the provisions of section 37(1) of the Act.

Accordingly, we answer the question referred to us in the affirmative and against the Revenue. No costs.

M.B.A.14146/FCReference answered.