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1971 Supreme(Guj) 133
IN THE HIGH COURT OF GUJARAT
P.N. Bhagwati, B.J. Divan, JJ.
Commissioner of Income-Tax, Gujarat II - Petitioner
Versus
Raipur Manufacturing Company Ltd. - Respondent
Income-tax Reference No 9 of 1970
Decided On : 15-09-1971
For the Petitioner:K.H. Kaji with R.M. Gandhi, Advocates
For the Respondent:J.P. Shah, Advocate
An expenditure incurred by an assessee-company to avoid strike, stoppage of work and rowdyism in its mill premises, which is made out of commercial expediency, is an allowable deduction under section 37 of the Income Tax Act, 1961.
Headnote:
INCOME TAX - Deduction - Expenditure incurred by assessee-company to liquidator of co-operative society sponsored by assessee for benefit of its employees - Payment made to avoid strike, stoppage of work and rowdyism in mill premises - Held, expenditure was made out of commercial expediency and was allowable deduction under section 37 of the Income Tax Act, 1961.
Fact of the Case:
The assessee-company, a public limited company, carried on the business of manufacturing and dealing in textiles. In the relevant assessment year, the assessee paid a sum of Rs. 76,161 to the liquidator of the Raipur Mills ' Employees ' Co-operative Credit Society Ltd. (the society), which was sponsored by the assessee and was registered under the Bombay Co-operative Societies Act, 1926. The society went into liquidation and the liquidator started misfeasance proceedings against some persons, including some members of the managing committee, and held them liable for the amount misappropriated. The assessee entered into an agreement with the liquidator and paid the said sum to avoid strike, stoppage of work and rowdyism in the mill premises.
Finding of the Court:
The Tribunal held that the expenditure in question was incurred by the assessee-company only with a view to preserve peace in its business and was, therefore, allowable deduction under section 37 of the Income Tax Act, 1961.
Issues: Whether the expenditure incurred by the assessee-company to the liquidator of the co-operative society was an allowable deduction under section 37 of the Income Tax Act, 1961.
Ratio Decidendi: The court held that the expenditure incurred by the assessee-company was made out of commercial expediency and was allowable deduction under section 37 of the Income Tax Act, 1961. The court observed that the assessee-company had two alternatives before it: (i) to stick to its legal rights and resist the demands of the workers, which could lead to strike, stoppage of work and rowdyism in the mill premises, resulting in substantial loss in production; or (ii) to make some sacrifice and purchase peace so that the company could continue its production and make profits with the cooperation of its workers. The court held that the assessee-company chose the second alternative, which was more conducive to its business interests.
Final Decision: The court answered the question referred to it in the affirmative, holding that the expenditure incurred by the assessee-company was allowable deduction under section 37 of the Income Tax Act, 1961.
JUDGMENT :
B.J. Divan, J.
This reference has been made at the instance of the Commissioner of Income-tax and the following question has been referred to us :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to deduction of Rs. 76,161 ?"
2. The facts giving rise to this reference are as follows : The assessee is a public limited company and is carrying on business of manufacturing and dealing in textiles. The relevant assessment year is 1963-64 and the previous year was accounting year 1962 (calendar year). It appears that in the year of account in question in pursuance of an agreement, dated March 1, 1962, the assessee paid a sum of Rs. 76,161 to the liquidator of the Raipur Mills ' Employees ' Co-operative Credit Society Ltd. (hereinafter called "the society") and this society was for the benefit of the employees of the assessee-company and the members of the society were the employees of the assessee. This society was sponsored by the assessee and was registered as a co-operative society under the provisions of the Bombay Co-operative Societies Act, 1926. The managing committee of the society consisted of the officers of the assessee-company nominated by the assessee and some elected representatives of the members. In 1952, a sum of Rs. 2,35,268 was found to have been misappropriated from the funds of the society. One Ranchhodlal Parshottamdas was involved in this misappropriation. Thereafter, criminal proceedings were instituted against the said Ranchhodlal Parshottamdas and in 1966 he was convicted and sentenced to undergo a certain term of imprisonment. Fixed deposits aggregating to Rs. 1,15,248 were lying with the society and out of this amount Rs. 1,02,648 belonged to the employees of the assessee. The society went into liquidation and the liquidator started misfeasance proceedings against some persons including some of the members of the managing committee and he held them liable for the amount misappropriated. Some of the members preferred an appeal against the decision of the liquidator and during the pendency of the appeal, the matter was compromised and an agreement between the liquidator of the society and the assessee-company was arrived at on March 1, 1962 ; and under that agreement, the company paid the said sum of Rs. 76,161 to the liquidator. In the assessment proceedings to income-tax, the assessee claimed deduction of this amount of Rs. 76,161. The Income-tax officer rejected the claim of the assessee and held that it was purely an ex gratia payment and as such not liable to be deducted under section 37 of the Income Tax Act, 1961. Against this order of the Income-tax officer, there was an appeal and the Appellate Assistant Commissioner dismissed the appeal. The matter was then taken in appeal to the Tribunal and the Tribunal upheld the contention of the assessee and held that there was sufficient evidence on the record to show that the expenditure in question was incurred by the assessee-company only with a view to preserve peace in its business. The
3. Tribunal held that, though the payment by the company resulted in benefit to some of the members of the managing committee, the expenditure was incurred by the company for the purpose of its business. The Tribunal, therefore, held that the assessee was entitled to deduction of this amount of Rs. 76,161. Thereafter, at the instance of the revenue, the above-mentioned question has been referred to us.
4. In order to appreciate the background against which the agreement, dated March 1, 1962, came to be entered into, it is necessary to set out certain further facts. On October 20, 1956, the board of directors of the assessee-company passed a resolution setting out the facts of the defalcation committed by Ranchhodlal Parshottamdas and it was further stated in the resolution that the members of the society were the workers of the company and this act of misappropriation on the part of Ranchhod
