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PATNA HIGH COURT
V.Ramaswami and Raj Kishore Prasad JJ.
Commissioner Of Income Tax
Versus
Darbhanga Sugar Co.Ltd.
Miscellaneous Judicial Case No. 510 of 1954 ;
Decided On : APRIL 11, 1957
INCOME TAX - Deduction - Business expenditure - Contribution to trade association - Whether allowable - Held, yes - Contribution made to maintain price level and prevent uneconomic competition - Wholly and exclusively for the purpose of assessee's business.
Fact of the Case:
The assessee, a member of the Indian Sugar Syndicate, paid Rs. 53,759/- to the Syndicate as a contribution towards its expenses. The Income-tax Officer disallowed the deduction claimed by the assessee on the ground that the payment was not wholly and exclusively for the purpose of the assessee's business. The Appellate Assistant Commissioner and the Tribunal held that the payment was allowable as a deduction under Sec.10(2) (xv) of the Indian Income-tax Act.
Finding of the Court:
The court held that the payment of Rs. 53,759/- was made by the assessee to the Indian Sugar Syndicate "wholly and exclusively for the purpose of the assessees business", within the meaning of Sec.10(2) (xv) of the Indian Income-tax Act.
Issues: Whether the payment of Rs. 53,759/- made by the assessee to the Indian Sugar Syndicate was allowable as a deduction under Sec.10(2) (xv) of the Indian Income-tax Act.
Ratio Decidendi: The court held that the payment was allowable as a deduction under Sec.10(2) (xv) of the Indian Income-tax Act on the following grounds: * The payment was made in accordance with the Articles of Association of the Syndicate, which constituted the contract between the members and the Syndicate. * The payment was not made by the assessee ex gratia. * The main object of the Syndicate was to fix a basic sale rate of the sugar produced by the members of the Syndicate and to prevent an uneconomic competition between the members and to keep up the price level at a certain basic rate for promoting the business interests of all manufacturers of sugar. * The contribution of the amount of Rs. 53,759/- was made by the assessee to the Indian Sugar Syndicate "wholly and exclusively for the purpose of the assessees business", within the meaning of Sec.10(2) (xv) of the Indian Income-tax Act.
Final Decision: The court answered the question of law referred by the Income-tax Appellate Tribunal in favour of the assessee and against the Income-tax Department. The Income-tax Department was directed to pay the costs of the reference.
Ramaswami, J.
1. In this case the assesses is an incorporated Company owning two sugar factories at Lohat and at Sakri in the district of Darbhanga. The assessee is a member of the Indian Sugar Syndicate Ltd. (hereinafter referred to as the Syndicate) which was a trade organisation, the object of which was to promote the business interests of manufacturers of sugar and molasses. The Articles of Association of the Syndicate require that all the members should sell their entire output for each season to the Syndicate at a basic rate fixed by the Syndicate for this purpose. The members did not give actual delivery of the sugar to the Syndicate, but they were required to sell the stock of the sugar on behalf of the Syndicate and retain the price due to them by the Syndicate at the basic rate and pay the surplus to the Syndicate. Article 13 of the Articles of Association of the Syndicate is to the following effect:
"Notwithstanding anything to the contrary contained in these articles, the Board shall from time to time increase or decrease with retrospective effect the basic rates hereinbefore fixed so that the Syndicate will not at the end of the season earn a profit of more than one anna per maund on the entire quantity of sugar and molasses sold to and pooled by the Syndicate and direct all adjustment of accounts accordingly. Such increase or decrease shall be uniform for all the members."
Articles 24 (a) and (f) are also important. Article 24 (a) states as follows : "24(a). In case the selling rate of sugar or molasses is higher than its basic rate, the member shall, out of the sale proceeds appropriate to himself the price payable to him by the Syndicate for such sugar or molasses at the basic rate."
Article 24 (f) reads as follows : "24(f). In case the member is instructed to sell the sugar or molasses or any part at a lower rate than the basic purchase rate, the Syndicate will give credit for the difference to such member in respect of the quantity so sold."
The Syndicate did not anticipate that it would need more money for its expenses than contributions from its members at a rate of not exceeding one anna per maund of sugar sold by its members. But as a precautionary measure there is a provision in the Articles that the Syndicate had the right of calling for contributions of amounts in excess of one anna per maund, of the selling rate over the basic rate, if it should be in need. If the Syndicates expenses fell below one anna per maund, it could raise the basic rate retrospectively, and thus refund to the members a part of the difference between the original basic rate and the selling rate. The Syndicate had arranged its affairs in the past on the assumption that it need not pay any income-tax, but all of a sudden the Income-tax authorities made an assessment upon the Syndicate for the past 8 or 9 years.
The Syndicate had no funds with which to pay the taxes, and, therefore, it called upon the members to contribute pro rata. The assesses had to pay to the Syndicate Rs. 53,759/- in respect of the two factories which it owned. The assesses claimed a deduction of this amount in the computation of the taxable profits. The Income-tax Officer, however, disallowed the deduction claimed on the ground that the assessee need not bear the burden of taxation of somebody else. An appeal was taken by the assessee to the Appellate Assistant Commissioner of Income-tax. The appeal was dismissed and the Appellate Assistant Commissioner agreed with the income-tax Officer that the payment did not fall within the purview of Sec.10 (2) (xv) of the Indian Income-tax Act. The matter was taken before the Tribunal.
It was argued on behalf of the Income-tax Department that the demand made by the Syndicate was based on transactions which took place during the years long past. But the Tribunal rejected the argument on the ground that the occasion to make the demand arose and the liability of the members assumed a definite shape and became certa
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