Commissioner of Income Tax, Bombay City-III vs Khandelwal Laboratories Private Ltd.

Desai, J.—In this reference, which is under s. 256(1) of the I. T. Act, 1961, the following question of law has been referred to us for our consideration :

"Whether, on the facts and in the circumstances of the case, the donations in the shape of medicines of the value of Rs. 44,945 were rightly allowed as donations u/s 88 of the Income Tax Act, 1961 ?"

The assessee is a private limited company, which carries on the business of manufacture and sale of pharmaceutical goods. The assessment year with which we are concerned is the year 1964-65, for which the assessee claimed that it should get a rebate under s. 88 of the I.T. Act, 1961, in respect of the contribution in the shape of medicines of the value of Rs. 44,945, which it had donated to the National Defence Fund. The ITO die not mention anything about this claim by the assessee in his order but merely disallowed the same. The assessee then appealed to the AAC. The AAC referred to letter F. No. 69/8/63-IT dated 21st January, 1963, of the Central Board of Revenue to the Federation of the Indian Chambers of Commerce & Industry, wherein it was stated as follows :

"Where an assessee makes donations to the National Defence Fund it kind out of his stocks, there will be no objection to treat the donation as having been made constructively in cash if the value of the goods donated is included in the sales and a contra-debit is made to the profit and loss account to represent the sum donated."

Accordingly, the AAC allowed the appeal and directed the ITO to allow the rebate on the full amount of Rs. 44,945.

The revenue, being dissatisfied with the order of the AAC, appealed to the Income Tax Appellate Tribunal and submitted that the aforesaid circular of the Central Board of Revenue on which the AAC had placed reliance had been withdrawn from the assessment year 1964-65. It was further submitted that the case was required to be decided by applying the wording of s. 88 and that, if strictly interpreted, that section exempted only donations as were made in cash. The departmental representative referred to the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., , and submitted that the same was distinguishable on facts. The assessee, on the other hand, had established before the that the assessee had contacted the National Defence Fund Department and, at their request, manufactured medicines were supplied against bills but no cash was received in respect of the same. It was further urged that the position was that instead of taking cash from the defence department and giving the same back to the department, the assessee did not take any cash and, therefore, it could be said that the donation was in fact in cash. The accepted the submissions as made by the assessee and, relying on the aforesaid decision of this High Court, viz., Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., , held that the donations were rightly allowed as a deduction by the AAC.

At the bar it was pointed out that the aforesaid decision in Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., has been applied by the Madras High Court in Addl. CIT v. Abhai Maligai [1978] 113 ITR 737 , where the Madras High Court has expressed its agreement with the view of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., , that what should be looked into is the substance of the transaction. The aforesaid judgment of the Madras High Court also refers to Commissioner of Income Tax Vs. Amonbolu Rajiah, , where a particular view has been expressed of the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., . We had occasion to consider the Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., and Commissioner of Income Tax Vs. Amonbolu Rajiah, in the decision given by us Income Tax Application No. 106 of 1977 Commissioner of Income Tax v. Traub (India) Private Ltd. - decided by Chandurkar and Desai JJ. on 23rd November, 1977 - since reported in Commissioner of Income Tax, Bombay City-V Vs. Traub (India) P. Ltd., . We had occasion in that case to point out some fallacies in the decision of Andhra Pradesh High Court in Commissioner of Income Tax Vs. Amonbolu Rajiah, . We also referred to Commissioner of Income Tax, Mysore Vs. Banglore Woollen, Cotton and Silk Mills Co. Ltd., , where the Mysore High Court (as it then was) had followed the Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., , observing that the said case has held the field all these years and the department had not cared to take the same in appeal to the Supreme Court. Accordingly, in Commissioner of Income Tax, Bombay City-V Vs. Traub (India) P. Ltd., , the application made by the Commissioner under s. 256(2) for referring a similar question was rejected although rule had already been issued and at that stage we had delivered a fairly substantial judgment dealing fairly extensively with the view of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Amonbolu Rajiah, . The view which this court has expressed in Commissioner of Income Tax, Bombay City I Vs. Associated Cement Co. Ltd., and reaffirmed in Traub (India) Private Ltd.''s case (income tax Application No. 106 of 1977 - since reported in Commissioner of Income Tax, Bombay City-V Vs. Traub (India) P. Ltd., has been followed by the Mysore High Court (as it then was) and by the Madras High Court. On the principles laid down in the aforesaid decisions (which, in our opinion, must govern this reference), the question referred to us is answered in the affirmative and in favour of the assessee.

The parties, however, will bear their own costs of the reference.

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