1. ' B.N. KIRPAL, J.---In respect of the assessm ent years 1971-72 and 1972-73, the appellant filed its return of income and claimed deduction of the counts paid by it to the Andhra Pradesh Welfare Fund, West Godavari ranch Eluru as a business expenditure under section 37(1) of the Income Tax Act, 1961 for short, "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'
4. 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 contribution 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)?"
5. ' 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?"
6. ' The High Court answered the questions of law in favor 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. The High Court, however, disallowed the deduction by coming to the conclusion that the payment of this amount was opposed to public policy.
7. ' It is contended by Shri 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 to appellant to the welfare fund could be equated with the giving of a bribe 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.
8. ' The District Welfare Fund had been established pursuant to a scheme which had been evolved by the rice millers association with the District Collector. According to this, each member of the association was to deposit an amount of fifty paisa per quintal of rice if he proposed to export the same from Andhra. Pradesh. This deposit was to be made in the Andhra Bank. The application for the export permit was required to be made in a form wherein the applicant had to state the amount of contribution deposited by him, giving the particulars of the bank, the challan number and the date. The High Court referred to the letter written to the Appellate Assistant Commissioner by the Collector in which it was stated as follows: "With reference to the representation of the Secretary, the West Godavari District Rice Millers'
9. Association, Tadepalligudem, I am to inform you that welfare fund at Rs,0.50 paisa per quintal is, being collected in respect of all rice and broken rice permits issued on trade to trade accounts."
10. ' A similar letter had also been written to the Income-tax Officer at time of assessment. From the aforesaid facts, the High Court came to the conclusion that the contribution was a compulsory one and was being collected from all the exporters of rice from the State of Andhra but the contribution so made, which was linked with the obtaining of permits, was opposed to public policy and, on this ground, could not be allowed as a deduction under section 37(1) of the Act.
11. ' The principles for determining whether such a payment can be regarded as being allowable as a business expense are, in our opinion, well titled. As long ago as in the case of Atherton v. British Insulated and espy Cables Ltd. (1925) 10 TC 155, 191 (HL), it was observed that "A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of trade".
12. The aforesaid observation was quoted with approval by is Court in Eastern Investments Ltd. v. CIT (1951) 20.ITR 1; SCR 594. Gain, in the case of CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601; SCR 38, a similar question arose for consideration. The assessee who was managing agent was entitled to commission. It, however, relinquished part of the commission which was receivable from the managing company, inter ia, for the reason that the financial condition of the managing company was satisfactory. The question arose whether the amount relinquished was deductible as an expenditure or not. While upholding the claim for education, this Court observed at page 50 (page 611 of 38 ITR) that: "Thus, in cases like the present one in order to justify deduction the sum must be given up for reasons of commercial expediency; it may be voluntary, but so long as it is incurred for the assessee's benefit the deduction would. Be claimable". What, therefore, is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction.
13. ' This Court in the case of CIT v. S.C. Kothari (1971) 82 ITR '794 as considering a case where the assessee had suffered loss in an illegal ransaction and the question arose whether the same could be set off under section 24 of the Indian Income Tax Act, 1922, against the profits and gains f speculative transaction. While allowing the set-off it was observed that if a business is illegal, neither the profits earned nor the losses incurred would be enforceable in law; but that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amounts which can be subjected to tax under section 10(1) of the 1922 Act. The Tax Collector, it was observed, cannot be heard to say that he will bring the gross receipts to th' without deducting losses and the legitimate expenses of the business.
14. ' Again in the case of CIT v. Piara Singh (1980) 124 ITR 40 (SC), a question arose with regard to the loss sustained by an assessee in the carrying on of an illegal business. The respondent therein carried on smuggling activities and was apprehended by the Indian police while crossing the border into Pakistan and Rs,65,000 in currency notes were recovered from him. This money was being taken to Pakistan for the purpose of purchasing gold which was to be smuggled into India.
15. This amount was confiscated. Thereupon, the Income-tax authorities came to the conclusion that the assessee, who was carrying on the business of smuggling, was liable to income-tax and he was accordingly assessed to tax. The assessee claimed deduction under section 10 of the 1922 Act of the loss of Rs,65,000 which had been confiscated by the Customs Authorities. While allowing this deduction it was held that the carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the Customs Authorities and consequent confiscation was a necessary incident of the said business and constituted a normal feature of such an operation. The confiscation of the currency notes was a loss which sprang directly from the carrying on of the business and was allowable as a deduction under section 10 of the 1922 Act.
16. ' Even though this Court has in the cases of Piara Singh (1980) 124 ITR 40 and S.C. Kothari (1971) 82 ITR 794 held that loss suffered while carrying on illegal business is allowable as a deduction, in the present case we find that the contribution which was made by the appellant could under no circumstances be regarded as illegal payments or payments which were opposed to public policy.
17. This is not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the District Welfare Fund had been established for the benefit of the general public. The payment to such a fund which was openly made by all the millers and which fund was being used for public benefit cannot be regarded as being opposed to public policy.
18. Requiring payment to be made for a just cause which would entitle a businessman to obtain a licence or permit cannot be regarded as being against the public policy.
19. ' A case similar to the present one came up for consideration before the Madhya Pradesh High Court in the case of Addl. CT v. Kuber Singh agendas (1979) 118 ITR 379 (FB). In this case the Government of adhya Pradesh had under the Essential Commodities Act, 1955, passed an der which, inter alia, prohibited any person from exporting gram from adhya Pradesh except under and in accordance with the permit issued by State Government. The Madhya Pradesh Anaj Vyapari Maha Sangh, the association of food grain merchants of the State, addressed a representation to Food Minister to the effect that the stock of Gulabi Chana and other less was steadily deteriorating in quality because of want of market. The chief Minister of Madhya Pradesh thereupon informed the President of the aha Sangh that the Government had decided to allow liberally permits for export of Gulabi Chana and pulses outside the State. In the same letter, t e Chief Minister brought to the notice of the trading community that the sans and labourers were, undergoing untold hardship on account of drought c I editions resulting from the failure of the monsoon and, as the merchants are bound to earn rich profits, he appealed to the trading community that eye should contribute a portion of such profits to the Chief Minister's brought Relief Fund. This was followed by a letter written by the Joint S creamy of the Maha Sangh asking the merchants to deposit Rs,30 per quintal for the export of Gulabi Chana and Rs,5 per quintal for the export of p less into the State Bank of India or the State Bank of Indore to the credit of t e Chief Minister's Drought Relief Fund and to obtain duplicate receipt foil the bank. It was further directed that the originals of such receipts were t. Be sent along with the duly filled in application forms for permits to the aha Sangh at Bhopal.
20. Members were also required to send fifty paisa per quintal for meeting the administrative expenses of the said Maha Sangh. On t e application being received in accordance with the aforesaid documents the aha Sangh forwarded the same, including the application of the assessee, to t e relevant authorities of the Food. Department whereupon permits for e port of Gulabi Chana or pulses, as mentioned in the application, were issued to the merchants. In his Income-tax return, the assessee claimed a deduction on the contribution so made to the Chief Minister's Drough Relief Find. The contention of the assessee was that a permit for exporting Gulabi Cana could not be obtained without the making of such a contribution and, beefier, making of the said donation should be allowed as a deduction u der section 37(1) of the Act. The Income-tax Tribunal upheld the contention and at the instance of the revenue reference was made to the High Court under section 256(1) of the Act. An earlier reference, on the same is use, had been decided by a Division Bench of the Madhya Pradesh High Court in the case of Addl. CIT v. Badrinarayan Shrinarayan.Akodiya (1975) 1 1 ITR 817. As the correctness of the same was challenged, the Division Bench referred Kuber Singh's case (1979) 118 ITR 379 (MP) to a Full Bench. While holding that the decision in Akodiya's case (1975) 101 ITR 8 7 (MP) was not correctly decided the Full Bench held that any normal try der would have realised that there was greater prospect of getting a permit for carrying on the export business in case he made a donation as requested by the Chief Minister. The merchants had made the donations as a matter of commercial expediency to facilitate the obtaining of permits which were necessary for carrying on the export trade. The nature of the expenditure was such that benefit to a third party or charity had resulted but that did not disqualify it from being an expenditure in current wholly and exclusively for purposes of business. The Full Bench distinguished this Court's decision in Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 by observing that in the case before it the donations which were made by the traders did not contravene any law and nor were the donations made as penalty for infraction of any law. It, therefore, concluded that the Tribunal was right in holding that there was a direct nexus between the assessee's business and the donations made to Chief Minister's Drought Relief Fund and that the donations were allowable under section 37(1) of the Act and as expenditure incurred wholly and exclusively for purposes of the assessee's business.
21. ' In our opinion, the decision in Kuber Singh's case (1979) 118 ITR 379 (MP) (FB) correctly spells out the principle relating to the allow ability of such an expense which has been incurred with a view to the promotion of an assessee's business.
22. ' The same principle as was followed in Kuber Singh's case (1979) 118 ITR 379 (MP) (FB) has been applied, in somewhat different circumstances, by other High Courts and the same has been approved by this Court. In CIT v. Middle East Construction Equipment's (1979) 117 ITR 382, the Orissa High Court had to deal with a case where the assessee carried on the business of supplying machines to the Government Departments. The State Government decided tp give preferential treatment in the matter of placing of orders for supply of materials to parties holding State Government Loan Bonds. The assessee borrowed money for purchase of Government Loan Bonds and claimed deduction of interest paid on such borrowed money. The Tribunal found that the bonds had been purchased in order to boost the sales of the assessee and that the Bonds, which were sold within a year, had not been held as investment and had allowed the claim of the assessee. On reference being made at the instance of the Revenue, the Orissa High Court allowed the said deduction by observing that the loan had been taken for purchasing bonds for the purpose of boosting of the assessee's business and, therefore, the payment of interest was rightly allowable as a deduction. A similar question once again arose before the Orissa High Court in the case of CIT v. Industry and Commerce Enterprises (P.) Ltd. (1979) 118 ITR 606. The assessee which had purchased Government Loan Bonds had sold the same and had incurred a loss. This loss was claimed as a deduction. The Tribunal held that the assessee had acquired business from the Government by the purchase of the securities and, although the relevant correspondence did not speak of any condition precedent to the grant of the business to the assessee, yet because of the coincidence of the date of purchase of the bonds and the business allotted to the assessee which was of an equal sum, there was a direct nexus between the business secured by the assessee and the purchase of the securities. The Tribunal, accordingly, allowed the said deduction. On a reference being made the High Court upheld the decision of the Tribunal which had allowed the said deduction. Before the Madras High Curt Addl. CIT v. B.M.S. (P.) Ltd. (1979) 119 ITR 321, also a similar question arose where an assessee, carrying on road transport business, scribed to Government bonds carrying 4.5 per cent. Interest. Those bonds re purchased at the instance of the Road Transport Authorities and for this tiptoes the assessee had borrowed money at the rate of ten per cent. This I wills done, according to the assessee, with a view to keep the Road Transport throaty in good humor under the bona fide belief that it was necessary to so in order to carry on its business. Subsequently, the assessee sold the nods at a loss of Rs,3,127 and claimed this amount as a business loss. This claim was allowed by the Tribunal who found that the motor vehicle inspector had handed over the necessary forms to the assessee for purchasing Government bonds, that the assessee was under an obligation to purchase the bonds for the smooth running of the transport business especially when the Mandate for the purchase. Of the bonds came from the inspector and, therefore, the loss was allowable as deduction. While upholding the decision 4 the Tribunal, the Madras High Court observed "subscribing tool government loans as in the present case is not, in our opinion, opposed to public policy, and we are of the opinion that the Tribunal has rightly found t at the assessee was obliged to sell the bonds before they became ripe for payment only to stop incurring further loss as the money with which the subscription for the Government bonds had been made had been borrowed by the assessee from a bank at ten per cent. Interest while the bonds carried interest only at 4.5 per cent.". A similar question again arose for consideration before the Madras High Court in CIT v. Dhandayuthapani Foundry (Private) Ltd. (1980) 123 ITR 709. In that case, as a result of the persuasion of the sales tax authorities who were making assessments on the assessee and who also had the control over Form No,XX which are delivery notes to be issued by them for the dispatch of goods, the assessee was Obliged to subscribe to certain Government securities. However, instead of directly purchasing these securities and then selling them, the assessee paid certain margin ,money to the brokers which represented the difference between the issue price and the market price for the securities. The assessee Claimed a loss of Rs,1,900. This claim was upheld by the Appellate Assistant commissioner and the Tribunal. The High Court following its decision in the case of B.M.S. (P.) Ltd. (1979) 119 ITR 321 upheld the decision of the Tribunal to the effect that these' securities were purchased and sold in order to retain the goodwill of the sales tax authorities which was necessary and essential for the smooth carrying on of the business by the assessee.
23. ' The aforesaid decisions of the Orissa High Court in Industry and Commerce Enterprises (P.) Ltd.'s case (1979) 118 ITR 606 and of the Madras High Court in B.M.S. (P.) Ltd.'s case (1979) 119 ITR 321 and Dhandayuthapani Foundry's case (1980) 123 ITR 709 (Mad.) were cited with approval by this Court in Patnaik & Co. Ltd. v. CIT (1986) 161 ITR 365. In that case the assessee was told that if he subscribed to the Government loan, preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government Departments and the assessee would further benefit by an advance from the Government up to fifty per cent. Of the value of the orders placed.
24. The Tribunal found that the investment in the purchase of Government bonds was made in order to boost its business and as the investment had been made by way of commercial expediency for the purpose of carrying on its business, the loss suffered by the assessee on the sale of the bonds must be regarded as a revenue loss. The High Court, however, decided the question in favour of the Revenue. While reversing the judgment of the High Court, and upholding the conclusions arrived at by the Tribunal, this Court held that the investments made by the assessee were not a capital asset and the loss suffered by it was allowable as a deduction. It then observed as follows (at page 369): "It was held by the Orissa High Court in CIT v. Industry and Commerce Enterprises (P.) Ltd. (1979) 118 ITR 606 and by the Madras High Court in Addl. CIT v. B.M.S. (P.) Ltd. (1979) 119 ITR 321 and again in CIT v. Dhandayuthapani Foundry (P.) Ltd. (1980) 123 ITR 709, that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss."
25. ' From the aforesaid discussion it follows that 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 benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount and section 37(1) of the Act when such payment had been made for the purpose of the assessee's business.
26. ' For the aforesaid reasons, we hold that the conclusion of the High Court arrived at in the present cases was not correct. The question of law referred by the Tribunal are accordingly answered in favour of the appellants who will also be entitled to costs.