The assessee has filed the appeals against the order of learned Commissioner (Appeals). Since the common issues are involved in the appeals, hence these are disposed of by a common order. - (1.)
(2.) For the assessment year 1994-95, the assessing officer has disallowed contribution of Rs. 9.49 lakhs towards Ryots Welfare Fund. The assessing officer in his order has mentioned that contribution paid to the Trust for the welfare of the Ryots is related to the business but since the Trust came into existence with effect from 20-7-1994, therefore, the expenditure is not allowable as deduction. For the subsequent years, the assessing officer observed that the fund was to be utilised for taking up various welfare measures and therefore, the fund is not for the cane development programme. The assessing officer mentioned that the company is eligible for deduction under section 80G if the trust satisfies the necessary conditions. The contribution made to the Trust was disallowed for the assessment years 1995-96 to 2001-02. Before the learned Commissioner (Appeals), it was submitted that the contribution made towards Ryots Welfare Fund has direct nexus with the business of the appellant. The Ryots (means farmers) of the area, where factory is situated are mostly sugarcane growers who supply raw material to the company. Sugarcane grown by the farmers is utilised for the production of sugar and it is a necessary raw material for the assessee. It was argued that there is a nexus between object of the trust and business of the company. Other members of the public also get benefit is incidental and that cannot be held against the assessee. The learned A.R. relied on the following decisions in support of his arguments before the learned Commissioner (Appeals). (i) CIT v. Kalyanii Mavii & Co. (1980) 122 ITR 49 (SC) (ii) Mysore Kirloskar Ltd. v. CIT (1987) 166 ITR 836 (Kar.) (iii) CIT v. Vazir Sultan Tobacco Co. Ltd. (1988) 169 ITR 139 (AP) (iv) Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 1013 (SC). 3.1 The learned Commissioner (Appeals) was of the view that the decisions of Karnataka High Court and Andhra Pradesh High Court were given prior to introduction of section 40A(9). In view of the section 40A(9), the contribution to the trust is not allowable unless the trust is for the purposes mentioned in section 40A(9). The learned Commissioner (Appeals) was of the opinion that the decision of Supreme Court in the case of Kalyanji Mavii & Co. (supra) was not on the issue under reference. In that case the issue was regarding the interpretation ' of current repair and other repair. The learned Commissioner (Appeals) further observed that the decision of Sri Venkata Satyanarayana Rice Mill Contractors Co. case (supra) is not applicable in the instant case as no commercial expediency has been established for the payment to be made to the trust. The learned Commissioner (Appeals) therefore upheld the order of the assessing officer. 3.2 During the course of proceedings before us, the learned authorised representative submitted that the Board of Directors of Mysore Sugar Company Limited at their meeting held on 15-7-1992 decided to create a trust for the welfare of the Ryots of the reserved area of the Mysore Sugar Co. Ltd., Mandya. The trust was created by mutual contribution of the company and the sugar cane suppliers. The objects of the trusts were (i) To provide financial assistance for developmental activity of educational institutions in the undeveloped reserved areas of Mandya District. (ii) To construct and supervise a fund for the benefit of Ryots and sugarcane suppliers of the area. (iii) To assist in Mysugar Hospital or to give medical aid and death relief to the Ryots. 3.3 As per learned authorised representative, the farmers particularly the cane growers supply the sugarcane to the appellant-company and are thus related to major part of the business activity of the company. They also reside in the area where the factory is located. Therefore, there is a nexus between the objects of the trust and business of the company. Other members of public are also benefited is only incidental and that should not be held against the assessee. The learned authorised representative also relied on the judgment of Supreme Court in CIT v. Associated Cement Co. Ltd. (1988) 172 ITR 257 (SC). The assessee also drew our attention to the decision of the Supreme Court in the case of CIT v. TV Sundaram Iyengar & Sons (P) Ltd. (1990) 186 ITR 276 (SC). 3.4 The learned Departmental Representative submitted that the contribution to any trust or fund is not permissible under section 40A(9) of the Income Tax Act. It was argued that there is no nexus between the contribution made to the trust and the business activity of the assessee. The learned Departmental Representative relied on the following judgments: (i) CIT v. Hindustan Hosiery Industries (1994) 209 ITR 383 (Bom.). (ii) CIT v. Industrial Development Corpn. of Orissa Ltd. (2001) 249 ITR 401 (Ori.) (iii) L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293, (SC) (iv) State Trading Corpn. of India Ltd. v. CIT (1974) 94 ITR 496 (Delhi) (v) CIT v. Gobald Motor Services (P.) Ltd. (1975) 100 ITR 240 (Mad.).
(3.) WE have heard both the parties. The assessing officer while passing the assessment order for the assessment year 1994-95 observed that the fund created for the welfare of the Ryots (Ryots in Kannada means farmers) is certainly related to the business. The fund is created with a matching contribution from the Ryots i.e., cane growers. The expenditure is being incurred for the welfare of the Ryots so as to make them more educated and healthy. This will in turn benefit the appellant in getting good quality of sugarcane. The appellant is a Government Company and there cannot be any other objective except to get the business benefit by contributing to the fund which is created for the welfare of the Ryots. In the case of Gobald Motor Services (P.) Ltd. (supra), the learned Madras High Court remanded the matter to the Tribunal to decide as to whether the expenditure was in the nature of capital expenditure. In the case of State Trading Corpn. of India Ltd. (supra), the Delhi High Court held that expenditure in the form of giving grant for the development of roads and parks cannot be said to have been incurred wholly and exclusively for the purpose of assessee's business as there was no finding that the road development was in respect of any road leading from the assessee's premises or from the mines where ore was to be obtained. However, in the instant case, the contribution made was to be utilised for the ryots residing in the area from where the appellant-company is getting sugarcane. In the case of LH Sugar Factory & Oil Mills (P.) Ltd. (supra), the Supreme Court held that the expenditure is allowable in respect of contribution towards construction of roads in and around the factory. However, the expenditure in respect of contribution for road and dam after construction was not allowed as deduction as no connection with the business of assessee was shown. The case law is of no help to revenue. The contribution made for meeting out the welfare expenses in the instant case has a direct nexus to the business of the assessee. The learned Bombay High Court in the case of Hindustan Hosiery Industries (supra) held that expenditure incurred for training of one of the sons of the partners is not an allowable expenditure as no nexus between the expenditure and the business of the assessee shown. Similary the learned Orissa High Court in the case of Industrial Development Corpn. of Orissa Ltd. (supra) held that donation of Chief Minister relief fund is not allowable as no evidence has been shown that the donation resulted in benefit to assessee's business. 4.1 The Punjab & Haryana High Court in the case of CIT v. Paniipat Co.-operative Sugar Mills Ltd. (2002) 256 ITR 371 (P&H) had an occasion to consider the allowability of expenditure on supply of pesticides to sugar cane growers at concessional. rates. The learned Punjab & Haryana High Court observed that the assessee is utilising sugar cane for production of sugar. The assessee has interest in growing of sugar cane so that the requisite quantity is available and the yield of sugar is good. The learned Punjab & Haryana High Court further pointed out that nothing has been pointed out to show that the assessee has any extra commercial consideration. The expenditure was held as allowable. In case there is a nexus between expenditure and the business activity, then the same is allowable. The learned Bombay High Court in the case of CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. (2002) 254 ITR 572 (Bom) had an occasion to consider the allowability of expenditure incurred for Samajik Vanikaran and Area Project. The learned Bombay High Court observed that it is a well known fact that the Karkhana pollute the surroundings of the factory. Tree plantation, therefore, is very important. Hence the expenditure was held as have been incurred for the purpose of business. The Bombay High Court in the case of CIT v. B.G. Shirke & Co. (2003) 264 ITR 83 (Bom) held that voluntary payment made by an employer for the general welfare and benefit of the employee on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income Tax Act. On the same analogy, voluntary payments made by the assessee for the general welfare and benefit of the cane growers will be an allowable expenditure. The learned Madras High Court in the case of CIT v. Madras Refineries Ltd. (2004) 266 ITR 170 (Mad) held that expenditure incurred to earn goodwill of local community is deductible. In this case, the amount was spent on bringing drinking water to the locality and aiding local school. The learned Madras High Court in the case of CIT v. Dynavision Ltd. (2003) 128 Taxman 406 (Mad) held that an oral trust is permissible in case of creation of a trust. A formal deed is not necessary to create a trust and to create a legal obligation to attach to the property transferred. In that case the expenditure was not held allowable as the trustees were having unfettered discretion in matter of application of funds though the trust was created for the benefit of the dealers. The expenditure was in the form of contribution to the trust. In the instant case, there is no such unfettered power in the case of the trustees. The Delhi High Court in the case of CIT v. J.K. Synthetics Ltd. declined to call for a reference in the case where the Income Tax Appellate Tribunal held that expenditure representing contribution to college building, school and test match tickets were business expenses. 4.2 Considering the ratio of law as laid down by the various High Courts, it is very clear that if the expenditure is incurred for deriving benefit for the purposes of business, then the same is allowable. In the instant case, the appellant-company is a Government Company and the expenditure is being incurred for the welfare of the ryots and cane growers are also contributing towards such expenditure. Expenditure incurred for the welfare of the ryots is beneficial to the appellant as it will help the appellant to get good quality of sugarcane and to have goodwill of the cane growers. Hence, the expenditure is held as allowable. On this issue the order of the learned Commissioner (Appeals) is reversed and the appellant gets relief to that extent.;