Pathak, J. - (1.) THE assessee is a private limited company and carries on the business of the manufacture and sale of sugar. During the previous year relevant to the assessment year 1964-65, the assessee contributed a sum of Rs. 24,000 to the Development Council, Siswa Bazar, pursuant to a scheme for intensive cane development in the area. THE scheme was launched by the State Government on the recommendation of the Sugar Industry Advisory Committee, and the object of the scheme was to develop intensively an area of four thousand acres around the assessee's sugar mill for a period of three, years with a view to raising the average yield of sugarcane per acre. THE scheme contemplated that the total cost would be borne by the factory, the canegrowers of the area, the State Government and the Government of India. THE share of the sugar mill was determined at Rs. 24,000. THE assessee paid the amount, and it claimed a deduction of the payment against its business income for the assessment year 1964-65. THE Income-tax Officer rejected the claim in the view that it brought into existence an enduring benefit and was, therefore, capital in nature. THE Appellate Assistant Commissioner affirmed the view taken by the Income-tax Officer. A second appeal filed by the assessee was dismissed by the Income-tax Appellate Tribunal. THE Tribunal observed that the assessee had no control over the actual expenditure under the scheme and the cane growers were not obliged to sell the sugarcane to the assessee alone nor would the mill close down in case the development was not undertaken in accordance with the scheme. On all those considerations the Tribunal treated the expenditure as outside the legitimate purposes of the assessee's business.
(2.) AT the instance of the assessee the Tribunal has referred the following question of law for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the contribution of Rs. 24,000 made by the assessee to the Development Council was not an allowable deduction under the Income-tax Act ? " This is Income-tax Reference No. 261 of 1968. In accordance with the conditions of the scheme the assessee made a similar contribution of Rs. 24,000 to the Development Council during the previous year relevant to the assessment year 1965-66. As before, be claimed a deduction of the amount in the assessment proceedings for that year. The Income-tax Officer did not accept the claim and the Appellate Assistant Commissioner also rejected it. On second appeal, the Tribunal took into consideration certain further material on the record and held that the claim should have been allowed. The Tribunal examined the terms and conditions of the scheme and deduced therefrom that the canegrowers were bound to sell their produce to the assessee, that full accounts of the expenses incurred by the Development Council were maintained and the assessee joined the scheme not under any compulsion but of its own volition. In the circumstances, the Commissioner of Income-tax had obtained a reference of the following question of law : " Whether, on the facts and in the circumstances, the Tribunal was right in holding that the contribution of Rs. 24,000 made by the assessee to the Development Council was an allowable deduction under the Income-tax Act, 1961 ?"
(3.) THAT is Income-tax Reference No. 60 of 1969. Considering the facts pertaining to the reference concerning the assessment year 1964-65, it seems to us that the Tribunal has erred in law in holding that the deduction claimed could not be allowed. The considerations which have prevailed with the Tribunal are that the payment was made at the instance of the governmental authorities and it could not be said with certainty how the money was spent by the Government, if at all, and there was nothing to show that pursuant to the scheme the canegrowers were obliged to sell the sugarcane to the assessee alone and also that it was not established that the mills would be closed down if the development was not carried out under the scheme. These considerations, in our opinion, do not warrant the conclusion to which the Tribunal has come. The scheme was formulated by the Government, but because of that it is not possible to infer that in making the payment the assessee did something which was not expected to benefit its business. Whether or not the money was spent by the Government, and how it was spent, was not a circumstance which could justify rejection of the claim made by the assessee. It is sufficient that the assesses made the payment and made it in circumstances which indicated that it would benefit from the payment. In that belief the payment was clearly made, and there is nothing to show that at the time of making the payment the assessee thought otherwise. In fact, when the Income-tax Officer rejected the claim he did not doubt that the payment was made by the assessee for the purpose of benefiting its business. He rejected the claim on the ground that it brought into existence an enduring benefit and the expenditure was, therefore, capital in nature. The Appellate Assistant Commissioner observed : " If the yield of sugarcane increases, the factory will get benefit through increased supplies and better recoveries. " ;