JUDGMENT [ENTITY], C.J.
1. This judgment shall also govern the disposal of [CASE NUMBER] ([PRECEDENT]).
2. In these cases the Income-tax Appellate Tribunal has referred the following common question for our opinion :
"Whether, on the facts and circumstances of this case, the Tribunal was in law justified in allowing deduction of the amount paid by the assessee as contribution to the Chief Minister's Drought Relief Fund by holding it as an admissible deduction under [SECTION] of the [ACT]?"
3. The present references arise on the following facts. In [CASE NUMBER], the respondent, M/s.[ENTITY], was being assessed to income-tax for the assessment year 1968-69 for which the accounting period ended in the Diwali of 1969. The respondent had paid an amount of Rs. 30,900 as a donation to the Chief Minister's Drought Relief Fund. Similarly, in [CASE NUMBER] the respondent-assessee had paid an amount of Rs. 7,110, towards the Chief Minister's Drought Relief Fund. The assessment year was 1968-69 for which the accounting period ended in the Diwali of the year 1969. The assessees claimed deduction of the said amounts of donations as business expenses under [SECTION] of the [ACT]. The Income-tax Officer did not accept the contention of the assessee and added the amounts of donations to the assessees' income. It was held that the said donations had no connection with the export permits of [ENTITY]. On an appeal to the Appellate Assistant Commissioner, the appellate authority substantially agreed with the finding of the Income-tax Officer that these contributions had no connection with the export permits of [ENTITY]. However, it was of the opinion that the assessees were entitled to deductions under [SECTION] of the [ACT], as donations towards charity. On the other hand, the Income-tax Appellate Tribunal came to the conclusion that the assessees were entitled to deduction of the said amounts of donations as business expenses under [SECTION] of the [ACT].
4. On application by the department, the Appellate Tribunal has referred the question noted above for our opinion under [SECTION] of the [ACT].
5. Therefore, the question for consideration is whether the assessee is entitled to deduction as business expenses under [SECTION] or as donation to chanty under [SECTION] of the [ACT].
6. The parties were at variance with respect to the nature of the donation. It was the contention of the assessee that the donations were compulsory and export permits were not at all given unless the assessees contributed some donations to the Chief Minister's Drought Relief Fund. The department's contention was that these donations were voluntary and deduction at the most could only be claimed as voluntary donation to charity under [SECTION] of the [ACT]. The departmental authorities have uniformly found that the donations were voluntary. In a reference under [SECTION] or [SECTION] of the [ACT], it is not the task of the High Court to reassess the material and come to its own findings. Therefore, we shall take the finding of the Income-tax Appellate Tribunal as final and binding to the effect that these donations were voluntary, although they may have some indirect connection with: the export permits of [ENTITY]. The Chief Minister's letter, dated 5th September, 1967 (annexure "D" at page 41 of the paper-: book in [CASE NUMBER]), was very clear in this behalf that the donations would be voluntary. It is true that some Ministers made contrary statements as is clear from the annexures on record. But it may. also be that the members of the so-called Madhya Pradesh Anaj Tilhan Vyapari Maha Sangh might have understood the action of the State, Government in some other light. It is not necessary for us to go behind the finding of fact and, consequently, we hold that the donations were voluntary.
7. It may be that by making such donations, the assessees expected export permits for [ENTITY] by way of goodwill in return. The assessees' contention that no permits were issued unless donations were announced would, therefore, be not tenable. There was material on record to show that at least some members of the Maha Sangh, who had not given donations, were actually granted permits. It is on these facts that we have to consider the question referred to us for our opinion.
8. Further, we may observe that on the assessees' own contention that the donations were compulsory and as a condition precedent to the grant of permit, the assessees would have no case. If that had been the position, the permits including the donations, would have been vitiated as being opposed to public policy and, therefore, void under [SECTION] of the [ACT]. Therefore, we have to ignore that assertion of the assessees.
9. Business expenses were allowed while calculating profits or gains as per [SECTION] of the [ACT]. The provision in the repealed Act was as follows:
"10. (1) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :
(xv) any expenditure (not being an allowance of the nature described, in any of the Clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation "
10. An analogous provision is now included in [SECTION] of the [ACT], which is as follows :
"37.(1) Any expenditure (not being expenditure of the' nature described in [SECTION] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. "
11. The necessary requirements of the section are that, (a) the item should not be an expenditure of the nature described in [SECTION]; (b) it should not be in the nature of capital expenditure; and (c) it should be laid out or expended wholly and exclusively for the purposes of the business or profession. Then only it is to be allowed as a deduction while computing the income chargeable under the head "Profits and gains of business or profession."
12. In our opinion, the phrase "for the purposes of the business" has a particular meaning, namely, either the expenditure must be necessary for the purposes of the business or it may have to be incurred on account of the practice prevailing in any particular trade or business. It will not include any voluntary donation made by an assessee for purposes of charity. Of course, an assessee would be able to claim deduction under [SECTION] of the [ACT], in respect of such charity. But the essential ingredient for deduction under [SECTION] is that such expenditure should be necessary for the purposes of the business. If a compulsory donation be extracted from an assessee as a condition precedent to the grant of some favour to him, such a practice would clearly be opposed to public policy. For the sake of convenience we may reproduce [SECTION] of the [ACT], which is as follows :
"80G. (1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, an amount equal to,
(a) where the assessee is a company, fifty per cent., and
(b) in the case of any other assessee, fifty-five per cent. of the aggregate of the sum specified in Sub-section (2). (2) The sums referred to in Sub-section (1) shall be the following, namely:-
(a) any sums paid by the assessee in the previous year as donations to-
(i) the National Defence Fund set up by the Central Government; or
(ii) the Jawaharlal Nehru Memorial Fund referred to in the deed of declaration of trust adopted by the National Committee at its meeting held on the 17th day of August, 1964 ; or
(iii) the Prime Minister's Drought Relief Fund j or
(iv) any other fund or any institution to which this section applies; or
(v) the Government or any local authority, to be utilised for any charitable purpose "
13. The assessees' case would be covered by Sub-clause (v) of Clause (a) of Sub-section (2) of [SECTION] of the [ACT].
14. Learned counsel for the assessee advanced lengthy arguments and cited numerous cases on the point as to what would be business expenses. We may in brief refer to some relevant cases on the point. In [PRECEDENT] their Lordships of the Supreme Court laid down that the real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the tenant for being let into possession. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. According to their Lordships, it would not be the form but the substance of the transaction that would matter for the purpose of deciding whether any amount would be a capital receipt or a revenue receipt and the nomenclature used may not be decisive or conclusive. After all, the court has to decide the question after taking into consideration all facts and circumstances to ascertain the real intention of the parties. Therefore, the court should not be misguided by any wrong phraseology used by the parties, but should look into the real nature of the transaction.
15. We may take note of the pronouncement of their Lordships of the Supreme Court in some more cases which would be a guideline for deciding the question. In [PRECEDENT].
their Lordships of the Supreme Court had to consider the question as to what would be business expenditure under [SECTION] of the [ACT], The facts were that in accordance with the managing agency agreement, the commission for the accenting year 1950 was Rs. 3,09,114, but at the oral request of the board of directors of the managed company, the assessee agreed to accept Rs. 1 lakh only as its commission. The Appellate Tribunal found that the financial position of the managed company was rather unsatisfactory, that the assessee had been remitting a part or whole of its commission in the past whenever the profits of the managed company were unsatisfactory, that the waiver was neither a bounty nor mala fide and that the business of the assessee was so linked up with the managed company that if the latter was put on a sounder position, the assessee would get a larger commission in future. It was held that the part of the commission remitted by the assessee was given up for reasons of commercial expediency and was business expenditure allowable under [SECTION] of the [ACT]. Their Lordships of the Supreme Court laid down that, in such a case, in order to justify deduction the sum must be given up for reasons of commercial expediency; although it may not be voluntary, but so long as it was incurred for the assessee's benefit the deduction was allowable. All the same, it would be a question of fact that the amount which was claimed as a deductible allowance under [SECTION] of the Indian Income-
Tax ACT, 1922, was laid out wholly and exclusively for the purpose of such business and if the fact-finding Tribunal came to the conclusion on evidence which might justify that conclusion, it being for them to find the evidence and give the finding then it will become an admissible deduction. In that particular case it was found that the relinquishment of commission by the assessee was for commercial expediency. Can it be said that giving a donation to some official fund or to some political organization would be a business need or a commercial expediency ? In our opinion, such a donation would be a voluntary one just to earn the goodwill of the Government authorities or the political party and nothing more. It can neither be described to be business necessity nor a commercial expediency.
16. In [PRECEDENT] their Lordships of the Supreme Court had to consider whether wealth-tax paid by the assessee would be an allowable deduction under [SECTION] of the [ACT]. Their Lordships laid down that in determining such a question, the consideration should be whether the amount expended by the assessee is deductible under [SECTION] of the Act. For that purpose the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. In a case of voluntary donation, the character of the donor would be merely as owner of assets and not as a trader.
17. In [PRECEDENT] their Lordships had to consider the question whether the expenses incurred by the assessee for engaging eminent lawyers and conducting appropriate proceedings before the Investigation Commission in connection with its case relating to the assessment years 1941-42 to 1947-48 and also in courts where the vires of the statute under which the Commission was constituted were being challenged were business expenses. Their Lordships of the Supreme Court laid down that such expenses for the preservation and protection of the assessee's business from any process or proceedings would certainly be business expenses allowable under [SECTION] of the [ACT]. Thus, what their Lordships laid down was that any expenditure for the preservation of the business would be business expenses. In that case there was direct connection between the expenses and the character of the assessee as a trader. Similarly, in [PRECEDENT] their Lordships of the Supreme Court laid down that any expenses incurred by the assessee challenging restrictions on its business would be expenses for the purpose of its business and would be deductible under [SECTION] of the [ACT]. Their Lordships laid down that for attracting the provision it is not necessary that the primary motive in incurring the expenses must be directly to earn income thereby. What would be sufficient would be protection and preservation of the business.
18. Next, we may consider some decisions of different High Courts wherein the principles laid down by their Lordships of the Supreme Court in the said case have been followed, In [PRECEDENT] a Division Bench of the High Court had to consider a case where the assessee had paid an amount of Rs. 16,977 as salary to the assessee's sister's son who was only a young undergraduate studying for the B. Sc. degree. He was appointed as a secretary and he possessed no knowledge of commercial accountancy, nor any experience in business administration. The appointment was motivated by considerations which could not be said to be relevant to the business. Their Lordships laid down that [SECTION] of the [ACT], could not be attracted. For attracting the provision it would not merely be sufficient to establish the truth of the payment; it has to be further shown that the amount so paid was laid out or expended wholly and exclusively for the purpose of the assessee's business. Thus, ultimately it was held that the payment was in the nature of a bounty to a near relation which had no business expediency and, therefore, it was not allowable as a deductible expense.
19. In [PRECEDENT] a Division Bench of the Andhra Pradesh High Court had to consider the question whether bad debts written off by the assessee would be allowable deduction. The profits arising from those transactions were earlier shown as income and had been assessed to tax. The income-tax authorities made enquiries from the debtors who did not respond to the correspondence. The assessee could not produce any evidence to prove that the parties were unable to pay or even refused to pay. Their Lordships of the High Court laid down, considering the facts of the case, that the debts in question, which were incurred in the course of the trade, were notional profits subjected to tax earlier and hence they were liable to be deducted as bad debts since they were not realised. Thus, the amounts in question were directly concerned with the trade or business and for that reason they could be deducted as allowable business expenses.
20. In [PRECEDENT] the question for consideration was whether a contribution to a political party, namely, the Indian National Congress, was an allowable expenditure under [SECTION] [ACT]. Their Lordships of the Calcutta High Court laid down that it could only be a voluntary donation and would not be an allowable expenditure under the said provision.
21. A similar question was required to be considered by a Division Bench of the Delhi High Court in [PRECEDENT]. In that case the assessee claimed deduction of Rs. 1 lakh contributed to the Congress Party as an expenditure laid out wholly and exclusively for the purposes of its business. The contentions advanced were that its factory was situated at a place far away from Calcutta and other places and the supply of coal, packing bags and cement entailed problems which were solved by the Government ruled by the Congress Party and that the Government had given to the assessee an interest-free loan of Rs. 50 lakhs and had also subscribed for Rs. 40 lakhs worth of preference capital in the company and had also agreed to buy the entire cement for Hirakud Dam and since the Congress Party was the ruling party, the payment was motivated by commercial considerations. Their Lordships of the Delhi High Court ruled that the expenditure could not be allowed as a deduction because the assessee failed to show the link between its business and contribution made to the Congress Party. Their Lordships also further laid down that an expense incurred voluntarily but wholly and exclusively for the expender's trade might, in certain circumstances, be a permissible deduction even though it may enure to some extent to a third party's benefit. They also conceived that sometimes payments for political purposes might be for the purposes of the trade; but, according to the Division Bench, a link between the trade and the payment must be established. Therefore, ordinarily voluntary donations may be to political parties or to Government sponsored funds would not be deductible expenses, but they might, at the most, be claimed as deductible expenses in the nature of voluntary donation to charity. They cannot be claimed as business expenses.
22. In [PRECEDENT] a Division Bench of the Delhi High Court had to consider the question whether the expenses incurred by the Vanaspati Manufacturers' Association, of which the assessee was a member, for carrying on propaganda to counter agitation in the country against the industry for imposition of a ban on the manufacture of Vanaspati itself or compulsory colourisation of Vanaspati oil, would be a deductible expenditure under [SECTION] of the [ACT]. Their Lordships laid down that the amount was laid out by the assessee wholly and exclusively for the purpose of its business and was an allowable deduction in the computation of its profits. We may observe that such expenses incurred for protection or preservation of business or trade would certainly be an allowable deduction under [SECTION] of the [ACT], or even under [SECTION] of the [ACT]. But such expenses would stand on a footing altogether different from voluntary donations to political parties or Government sponsored funds for the remote purpose of gaining the goodwill of the authorities or the political parties.
23. Lastly, we may advert to a Division Bench case of the Punjab and Haryana High Court, viz., [PRECEDENT]. There the assessee, a transport company, was challenging the Government notification affecting nationalisation of transport business. The transport companies formed a union to prevent nationalisation and all transport companies contributed funds to the union. They also made donations to different political parties. The said political parties exercised their weight with the Government and ultimately total nationalisation was prevented. On account of that, the assessee got an extension of seven years for its route permits. The assessee claimed the expenses as deductible expenses under [SECTION] of the [ACT]. Their Lordships of the Punjab and Haryana High Court held that it was a deductible expenditure. We may observe that if the assessees in such circumstances formed an association or a union and embarked on legal processes or some movement for self-preservation or for protecting their trade or business, the expenses would undoubtedly be deductible expenses under [SECTION] of the [ACT]. But we have grave doubt whether donations to political parties for such purposes would be deductible expenses. We may observe that what is necessary is that direct connection should be established between the expenses and the character of the assessee as a trader. As already observed by us earlier, any donations to political parties or Government sponsored funds with the object of gaining some advantage in future would not be a deductible expense; but we would certainly be inclined to hold that such an action would be opposed to public policy. Therefore, we would agree with the view of the Division Bench of the Punjab and Haryana High Court to the limited extent and not in its entirety.
24. To conclude, we are of the opinion that the Appellate Assistant Commissioner had rightly held that the donations by the assessee to the Chief Minister's Drought Relief Fund could not be allowed as business expenses under [SECTION] of the [ACT], but that they could properly be allowed as voluntary donations under [SECTION] of the [ACT]. In our opinion, the learned Members of the Appellate Tribunal were in error in allowing the sum as business expenses under [SECTION] of the Act.
25. As a result, we would answer the question referred to us as follows :
"That, on the facts and circumstances of the case, the Tribunal was not in law justified in allowing deduction of the amount paid by the assessee as contribution to the Chief Minister's Drought Relief Fund by holding it as an admissible deduction under [SECTION] of the [ACT]."
26. However, under the circumstances, we direct that there shall be no order as to costs of these references.