IMPORTANT POINT
Any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee s business or which results in the benefit to the assessee s business has to be regarded as an allowable deduction u/s 37(1) of the Income-tax Act.

JUDGMENT

Kirpal, J.-In respect of the assessment years 1971-72 and 1972-73 the appellant filed its return of income and claimed deduction for the amounts paid by it to the Andhra Pradesh Welfare Fund, West Godavari (Branch Eluru) as a business expenditure under Section 37(1) of the Income-tax Act, 1961 (for sort the Act ).

2. The case of the appellant was that it was carrying on the business of exporting rice from the State of Andhra Pradesh. This rice could not be exported without the appellant s obtaining a permit from the District Collector. The permits were given only if payment was made to a welfare fund which had been established. The Income-tax Officer, however, disallowed the deduction by holding that the said payment was neither mandatory, nor statutory but was only discretionary. He further observed that the welfare fund had not been approved by the Commissioner of Income-tax under Section 80-G of the Act and, therefore, contribution to it could not be deducted.

3. The appeals filed by the appellant before the Appellate Assistant Commissioner met with no success. Thereupon, second appeals were filed before the Income-tax Tribunal. The appeals were heard by a Full Bench of the Tribunal which, while allowing the appeals, came to the conclusion that though there was no compulsion on the appellant to make a contribution to a welfare fund still the contributions made in pursuance of a scheme which was evolved by the Rice Millers Association in consultation with the District Collector would show that an advantage would ensue on the payment of the contribution and, therefore, the deduction was allowable under Section 37 (1) of the Act. The Tribunal further held that such contributions could not be held to be opposed to public policy. Against the order of the Tribunal disposing of the appeals the department filed four applications under Section 256 (1) of the Act whereupon the following question of law was referred :

"Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified to hold that the contribution made to the welfare fund was not opposed to public policy and that the same was motivated purely by commercial consideration, and that the deduction was allowable under Section 37 (1)?"

At the instance of the assessee the following question of law was referred :

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the sum of Rs. 9, 164/- paid by the assessee towards contribution to the District Welfare Fund for getting permits from the Government of Andhra Pradesh for export of rice, did not constitute business expenditure within the meaning of Section 37 of the Income-tax Act, 1961 ?"

4. The High Court answered the questions of law in favour of the respondent. It referred to the establishment of the welfare fund and the payment of money which used to be made and came to the conclusion that the contribution to the welfare fund was a pre condition for the grant of export permits and, therefore, the appellant was right in contending that the contribution was a compulsory payment extracted from it as a price for granting export permits. High Court, however, disallowed the deduction by coming to the conclusion that the payment of this amount was opposed to public policy.

5. It is contended by Sh. A. Subba Rao, learned counsel for the appellant that on the facts as found by the Tribunal the appellant was entitled to deduction under Section 37 (1) of the Act. He further submitted that the High Court erred in coming to the conclusion that the contribution which was made by the millers like the appellant to the welfare fund could be equated with the giving of a bride and, therefore, opposed to public policy, as was sought to be suggested by the High Court while holding that the said contribution was contrary to public policy.

6. The district welfare fund had been established pursuant to a scheme which had been evolved by t