Case: Indian Hume Pipe Company Limited Vs. Deputy Commissioner of Income Tax & Others

S.J. KATHAWALLA, J.In the present appeal the appellant (assessee) has impugned before this Court the order passed by the Appellate Tribunal dated 27th May, 1999 pertaining to the Assessment Year 1985-86. The substantial question of law on which the appeal is admitted by this Court is as under:"Whether the Company was entitled to claim deduction as business expenses in respect of conditional donations made to an Engineering College to secure admissions to the children of the employees of the assessee company"The relevant facts arising in the present appeal are as under:i) The assessee is a company engaged mainly in the business of manufacture and sale of RCC pipes and steel pipes etc. required for water supply and drainage system. In its return of income for the Assessment Year 1985-86, the assessee had claimed deduction of Rs.10,00,000/- towards staff welfare expenses. According to the assessee, the said amount was paid by the assessee as a conditional donation to SAPDJ Pathshala, Solapur. (hereinafter referred to as the Trust). The said Trust is running Walchand Institute of Technology at Solapur.ii) It appears that the said Trust was entitled to give admissions to 18 students per year as per its discretion. The Trust had put up a proposal to the assessee for transfer of such rights of nomination for consideration of Rs.5,00,000/- per seat.iii) It is the case of the assessee that after receiving the said proposal of the Trust the assessee passed the following Board Resolution dated 18th June, 1984."RESOLVED that the Company shall pay forthwith a sum of Rs.10,00,000/- (Rupees Ten Lakhs only) to Shri A.P.D.J.JAIN PATHASHALA of Solapur to enable the company to acquire the right of nomination of two students every year for admission to the Walchand Institute of Technology, who shall be its employees or their children or any other relatives nominated by the employees and acceptable to the company or any other persons whose nominations are considered expedient and desirable in the interest of the company." (Emphasis supplied)iv) The assessee has relied on an agreement dated 28th July, 1986 executed between the Trust and the Assessee wherein it is recorded that the Government of Maharashtra by its Resolution No.TEM-3382/111836/(190)/TE-1(A) Education and Employment Department dated 21st May, 1983 had granted permission to open the said engineering college on principles and conditions mentioned therein. It is also recorded that as per condition no.8 of the said Resolution, the Management of the Trust at its discretion had a right to give admission to 18 students every year. It is further recorded that the assessee and the Trust had accepted the proposal by paying the amount of Rs.10,00,000/- to the Trust and reserved two seats for the assessee in the first year at the engineering college, namely, Walchand Institute of Technology, Solapur every year commencing from June, 1984 for a period of 15 years or until the Government withdraws the said condition no.8 of the Government Resolution.v) Clauses 1 and 2 of the agreement are relevant and reproduced hereunder."(1) As per the said proposal of the Trust accepted by the company the company has paid the sum of Rs.10,00,000/- (Rupees ten lakhs only) to the Trust (the payment and receipt whereof the Trustees do and each of them doth hereby admit and acknowledge."(2) In consideration of the said The Secretary for and on behalf of the Trust agree and undertake to reserve two seats in the first year engineering college namely the Walchand Institute of Technology, Solapur every year commencing from June, 1984 for a period of fifteen years or until the Government withdraws the said Condition No.8 of the said Government Resolution and shall give admission to two candidates nominated by the Company subject to the eligibility conditions for admissions and the Company will have unfettered power to nominate the candidates subject to the condition hereinabove mentioned." (Emphasis supplied)From the aforesaid agreement it is clear that the Assessee had a right to nominate two candidates in the first year of Walchand Institute of Technology, Solapur for a period of 15 years commencing from June, 1984 upto June, 1999. It is pertinent to note that the agreement makes no mention of the Resolution dated 18th June, 1984 passed by the Board of Directors of the Assessee Company nor is it mentioned in the agreement as to which students will be nominated by the assessee. The claim of the assessee, therefore, that the donation was made to secure admissions to the children of the employees of the assessee company is not supported by the agreement dated 28th July, 1986.iv) During the course of Assessment proceedings a query was raised about the deductibility of this expenditure and by its letter dated 17th December, 1987, the assessee company, inter alia, submitted that: "......it was, therefore, thought by the company that it would be in the interest of business of the company as also in the interest of its employees and other associates if the company could secure special privilege of nomination of two seats so that the deserving children of the employees would get chance of qualifying themselves in the engineering discipline. This sort of provision is bound to create an identity between the workers, staff on the one hand and the company on the other". The assessee had, therefore, in no uncertain terms stated that for the said two reserved seats every year in Walchand Institute of Technology they would be nominating two deserving children of their employees.v) The Inspecting Asstt.Commissioner of Income Tax, (I.A.C) by his order dated 30th March, 1988 disallowed the deduction of Rs.10,00,000/- on the ground that admittedly as the payment has been made as an employer for the welfare of the employees and their children, the payment of Rs.10,00,000/- made to the said Trust would come under the purview of section 40A(9) of the Income Tax Act.vi) Being aggrieved by the order dated 30th March, 1988 passed by IAC, the assessee preferred an appeal before the CIT (A). CIT(A) by his order dated 22nd August, 1991 recorded that it was claimed by the assessee who had debited the payment under the head "staff welfare expenses" that the payment was made for purchasing right of nomination of two seats in the Engineering College started by the Trust and this right of nomination was to be exercised by the assessee for the benefit of the students and dependents of the employees of the company. It is further recorded that para 7 of the assessment order states that the agreement between the assessee and the Trust does not stipulate as to whom the company can nominate for admission and apparently there is no contractual obligation on the assessee to nominate for the two seats only the children or dependents of the assessees employees. CIT (A) in paragraph 6.3 of his order recorded that the contentions advanced on behalf of the appellant and evidence produced have been considered by him. He has recorded that the resolutions passed by the Board of Directors does not necessarily restrict nominations for the two seats in the engineering college to the relatives and dependants of the employees. He has, therefore, held that it is difficult to see any direct nexus between the assessees business requirements and the contribution made to the Trust. CIT(A) was also of the view that provision of section 40A(9) was wide enough to cover the kind of contribution which was made by the assessee, in the present case, to an educational Trust. CIT(A) thus held that there was no ground to interfere with the disallowance made.vii) Being aggrieved by the order of CIT(A) dated 22nd August, 1991, the assessee preferred an appeal before the Appellate Tribunal being ITA No.8506/Bom/1991.viii) Before the Tribunal the Departmental Representative made the following submissions which are recorded in para 6 of the Tribunals order and are reproduced hereunder."The learned Departmental representative, on the other hand, contended that the said Trust comes under the same management as that of the assessee company. The payment has been made to the Trust not for the sole consideration of the assessee company but for the group companies, as well. Right of nomination is solely not restricted to the employees of the assessee company; but the same is general in nature. The assessee has failed to produce any evidence to show that the nominations made by the company are in conformity with the business expediency as contended by the assessee. According to him, there is no element of business expediency involved and in the absence of any material to come to a conclusion that the payment was made solely for business consideration, the order of the CIT(A) is well reasoned." (Emphasis supplied)ix) The Tribunal by its order dated 27th May, 1999 held that the payment made by the asseessee to the Trust was not covered by section 40A(9). The Tribunal also held that the assessee company has not produced sufficient material to establish direct nexus between the business interest between the appellant company and payment made.The Tribunal was, therefore, of the view that the Company has not been able to reasonably establish the nexus between payment made and furtherance of business interest of the company.The Tribunal held that even otherwise the payment had resulted in the right of enduring nature to be utilised for 15 years and consequently it to assume the character of revenue nature.vii) Being aggrieved by the order of the Tribunal dated 27th May, 1999 the assessee filed the above appeal which was admitted on the substantial question of law as set out in para 1 above.2.We have heard the Advocates appearing for the assessee as well as the Department at some length. It is clear from the Board Resolution dated 18th June, 1984 that the assessee had reserved the right of nomination not only for his employees or their children or any other relatives nominated by the employees and acceptable to the company but also for "any other person whose nominations are considered expedient and desirable in the interest of the company" Under the agreement dated 20th July, 1986 the assessee Company has not mentioned at all as to whom the company can nominate for admission but have instead stated that the company will have unfettered power to nominate the candidates.3.Both the IAC as well as CIT(A) have noted that in the agreement the assessee has not stipulated as to whom the company can nominate for admission. Before the Tribunal the Departmental Representative has categorically submitted that right of nomination is solely not restricted to employees of the assessee company but the same is general in nature and the assessee has failed to produce any evidence to show that the nominations made by the company are in conformity of the business expediency as contended by the assessee. It was, therefore, submitted by the Department that there is no element of business expediency involved and in absence of any material to come to the conclusion that payment was made solely for business considerations, the order of the CIT(A) was well reasoned. It is obvious that in lieu of such wide and general rights given to the company to nominate two candidates and in absence of any mention in the agreement as to whom the assessee can nominate, the assessee could have satisfied the CIT(A) and the Tribunal that the payment made by the company was for furtherance of the business interest of the company, only by showing that the nominations made by the company are in conformity with the business expediency as contended by the assessee. Though an express contention was raised by the departmental representative before the Tribunal that the assessee has failed to produce any evidence or material pertaining to the nominations made by the company, the assessee admittedly did not produce any material pertaining to the nominations made by it.4.It is pertinent to note that the order of the Tribunal is dated 27th May, 1999 and the 15 years period under the agreement was getting over only in June, 1999. By this time, the assessee had made 28 nominations and only two of the nominations were pending. However, assessee chose not to produce any material before the Tribunal to show that the nominations made by it were in conformity with the business expediency. The assessee, therefore, miserably failed to satisfy the CIT(A) as well as the Tribunal qua the assessees contention that the donation made by the assessee was to secure admissions to the children of the employees of the assessee company. The Tribunal was, therefore, right in rejecting the appeal of the assessee on the ground that assessee has not produced sufficient material to reasonably establish the nexus between the payment made and the furtherance of business interest of the company. The Tribunal has, therefore, correctly disbelieved the assessees contention that the payment made by the assessee was towards staff welfare expenditure and, therefore, in furtherance of the business interest of the assessee. If the assessee would have produced the relevant papers before the Tribunal to show that nominations made by the company were in conformity with the business as contended by them, surely, the assessee would have been entitled to the deductions pertaining to the said expenditure.5.Mr.Sathe, learned Advocate appearing for the assessee has relied on several decisions of the Honble Supreme Court as well as of this Court and other High Courts in support to point out that the expenditure made towards the staff welfare should be treated as a business expenditure and consequent deduction should be allowed. We have no dispute on this proposition. However, in the instant case, as set out above, the assessee has admittedly not produced any evidence to show that the nominations made by the company were in conformity with the business expediency more so because the Board Resolution of the assessee company was general in nature and the agreement entered with the Trust by the Assessee company was silent with regard to the students who could be nominated by the assessee for the first year engineering studies in Walchand Institute of Technology. Even at the time of arguments though we were not required to we asked Mr.Sathe to submit a compilation of the relevant documents showing that the nominations made by the company were in conformity with the business expediency as contended by the assessee. Mr.Sathe after more than a month filed an affidavit stating that the matter is very old and he is unable to produce all the details. Mr.Sathe has in Annexure I to the affidavit set out only four names of students who had enrolled in Walchand Institute of Technology, Solapur in the years 1989-90 and 1992 as against the 30 names nominated by the assessee. Except for setting out the names no documentary evidence is produced even in respect of the said names provided by the assessee/appellant. In any event the assessee ought to have and could have produced all the papers/material pertaining to the nominations made upto the year 1999 before the Tribunal but failed to do so. We do not agree with the Tribunal that even otherwise the payment has resulted in a right of enduring nature to be utilised for 15 years because of which the expenditure becomes capital in nature. However, since we have held that the appellant for aforestated reasons have failed to satisfy that the amount donated by them was towards staff welfare expenditure and, therefore, in furtherence of their business interest, we are not going into a detailed discussion pertaining to the above stated view taken by the Tribunal.

Decision:
0[ds]It is clear from the Board Resolution dated 18th June, 1984 that the assessee had reserved the right of nomination not only for his employees or their children or any other relatives nominated by the employees and acceptable to the company but also for "any other person whose nominations are considered expedient and desirable in the interest of the company" Under the agreement dated 20th July, 1986 the assessee Company has not mentioned at all as to whom the company can nominate for admission but have instead stated that the company will have unfettered power to nominate theis obvious that in lieu of such wide and general rights given to the company to nominate two candidates and in absence of any mention in the agreement as to whom the assessee can nominate, the assessee could have satisfied the CIT(A) and the Tribunal that the payment made by the company was for furtherance of the business interest of the company, only by showing that the nominations made by the company are in conformity with the business expediency as contended by the assessee. Though an express contention was raised by the departmental representative before the Tribunal that the assessee has failed to produce any evidence or material pertaining to the nominations made by the company, the assessee admittedly did not produce any material pertaining to the nominations made byTribunal was, therefore, right in rejecting the appeal of the assessee on the ground that assessee has not produced sufficient material to reasonably establish the nexus between the payment made and the furtherance of business interest of the company. The Tribunal has, therefore, correctly disbelieved the assessees contention that the payment made by the assessee was towards staff welfare expenditure and, therefore, in furtherance of the business interest of the assessee. If the assessee would have produced the relevant papers before the Tribunal to show that nominations made by the company were in conformity with the business as contended by them, surely, the assessee would have been entitled to the deductions pertaining to the saidhave no dispute on this proposition. However, in the instant case, as set out above, the assessee has admittedly not produced any evidence to show that the nominations made by the company were in conformity with the business expediency more so because the Board Resolution of the assessee company was general in nature and the agreement entered with the Trust by the Assessee company was silent with regard to the students who could be nominated by the assessee for the first year engineering studies in Walchand Institute of Technology. Even at the time of arguments though we were not required to we asked Mr.Sathe to submit a compilation of the relevant documents showing that the nominations made by the company were in conformity with the business expediency as contended by thefor setting out the names no documentary evidence is produced even in respect of the said names provided by the assessee/appellant. In any event the assessee ought to have and could have produced all the papers/material pertaining to the nominations made upto the year 1999 before the Tribunal but failed to do so. We do not agree with the Tribunal that even otherwise the payment has resulted in a right of enduring nature to be utilised for 15 years because of which the expenditure becomes capital in nature. However, since we have held that the appellant for aforestated reasons have failed to satisfy that the amount donated by them was towards staff welfare expenditure and, therefore, in furtherence of their business interest, we are not going into a detailed discussion pertaining to the above stated view taken by the Tribunal.