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Judgment
S.B. Majmudar, J.—A Division Bench of this court consisting of one of us, R. C. Mankad J., sitting with A. P. Ravani J., has by its order dated March 12, 1986,
referred this matter to a larger Bench for reconsideration of the decision of its earlier Division Bench of this court in the case of COMMISSIONER OF Income Tax,
GUJARAT-III Vs. DASCROI TALUKA CO-OPERATIVE PURCHASE AND SALES UNION LTD., . In order to appreciate the scope and ambit of this
reference, it will be necessary to note a few relevant introductory facts. The applicant, Karjan Co-operative Cotton Sales Ginning and Pressing Society, Baroda, is the
assessee. It is a co-operative society engaged in the business of marketing of cotton. It had filed its return under the Income Tax Act, 1961, for the assessment year
1974-75. In the return filed, it had claimed expenditure of Rs. 2,29,386 said to have been made in giving presents to the members of the society on the occasion of its
silver jubilee celebrations. The Income Tax Officer, in the assessment order, allowed these expenses, but the Commissioner of Income Tax, vide his order passed under
263 of the Act, considered the relief granted by the Income Tax Officer to be erroneous is so far as it was prejudicial to the interests of the Revenue as, according to
him, this was a non-business expenditure laid out towards the purchase of stainless steel tumblers for giving as gifts to shareholders and as such he issued a show-cause
notice. In reply, the assessee submitted that the society was registered in the year 1948. It completed 25 years of its existence in 1973 and as such it was decided to
celebrate its silver jubilee and that, in pursuance of the aforesaid decision, the managing committee resolved that two stainless steel cups (tumblers) be given as a token
of remembrance to every new member of the society enrolled after 1968 and it was also resolved that four such cups be given to its old members who were enrolled
before 1968. It was also submitted that this gesture of giving a token of remembrance was expected to lead to the development and progress of the assessee-co-
operative society. But the Commissioner of Income Tax was not convinced with the plea of the assessee. He set aside the order passed by the Income Tax Officer and
directed him to disallow the entire claim of Rs. 2,29,386.
The assessee carried the matter in appeal before the Income Tax Appellate Tribunal. The Tribunal, by its order dated December 28, 1979, agreed with the
reasonings and the conclusion of the Commissioner of Income Tax. At the request of the assessee-society a question was raised for reference to the High Court under
256(1) of the Income Tax Act, 1961. The said question reads as under :
Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 2,29,386 incurred by the assessee on distribution of presents to its shareholders on
celebration of its silver jubilee is an allowable business expenditure under 37(1) of the Income Tax Act, 1961 ?
When the referred question came up for consideration before the aforesaid Division Bench of this court, reliance was placed on behalf of the assessee on the earlier
Division Bench judgment of this court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-OPERATIVE PURCHASE AND
SALES UNION LTD., . In the view of the aforesaid Division Bench, the said decision required reconsideration and that is how the reference was made to the larger
Bench. Accordingly, by the order of the Hon''ble Chief Justice, this reference has been placed before us for decision.
Before we proceed to deal with the ratio of the decision of this court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-
OPERATIVE PURCHASE AND SALES UNION LTD., , it will be necessary to have a look at the relevant statutory backdrop in the light of the settled legal
position. The referred question has to be answered in the light of 37 of the Income Tax Act, 1961. The said provision is found in Chapter IV dealing with computation
of total income. Amongst the heads of income chargeable to Income Tax are found separate earmarked topics concerning these heads. One of such heads is
categorised as head D dealing with profits and gains of business or profession. 28 provides for chargeable income, under the head ""Profits and gains of business or
profession"" as mentioned therein. It is not in dispute that the income earned by the assessee-society out of its business of ginning and pressing of cotton and marketing
the same is chargeable to Income Tax. As per 29, income from profits and gains of business or profession as referred to in 28 has to be computed in accordance with
the provisions contained in s 30 to 43A. In that group of s is found 37 which reads as under :
General. - (1) Any expenditure (not being expenditure of the nature as described in s 30 to 36 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''.
The assessee-society in its return for the relevant assessment year claimed as permissible expenditure the amount spent by it for purchasing the stainless cups
(tumblers) which were given to the members as presents on the occasion of its silver jubilee celebrations. The short question is whether this expenditure was a
permissible expenditure under 37 of the Act, not being an expenditure in the nature of capital expenditure or personal expenses of the assessee-society, and being out or
expended wholly and exclusively for the purpose of the business of the assessee-society ? The Income Tax Officer held it to be a permissible expenditure covered by
the said provision. The Commissioner of Income Tax and the Tribunal thought otherwise. The question is as to what is the real nature and characteristic of this
expenditure ? Is it covered by 37 or is it outside its scope and ambit ?
At this juncture, it will be profitable to have a look at the settled legal position on this aspect as flowing from various decisions of the Supreme Court and High Courts
to which our attention was invited by learned counsel appearing for the respective parties before us. In the case of Commissioner of Income Tax, Gujarat-I Vs. S.L.M.
Maneklal Industries Ltd., , a Division Bench of this court, consisting of B. J. Divan C. J. and P. D. Desai J., was concerned, amongst other things, with the question
whether an amount of Rs. 2,125 spent by the assessee-company in the relevant year for presentation of articles to the sales manager and other officials of the foreign
collaborator, SLM, was an amount which should be treated to be a permissible business expenditure allowable under 37 of the Act. Answering this question in favour of
the assessee and against the Revenue, B. J. Divan C. J., speaking for the Division Bench, held as under (headnote) :
Since the expenditure of Rs. 2,125 was incurred by the assessee-company for the purpose of establishing good image for itself and for keeping the relations with the
foreign collaborators working smoothly, it must be held that this amount was spent by the assessee-company for the purpose of business. For falling under 37 of the
Act, the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee. These presentations of articles could never be described as
capital expenditure nor were they personal expenditure of the assessee-company. It must be held that the sum of Rs. 2,125 was expended wholly and exclusively for the
purpose of the business and answered the tests laid down for the allowance of the claim under 37 of the Act.
In this connection, it was observed that S. L. M. and the assessee-company had to maintain good relations and by keeping the representatives of the foreign
collaborators in good humour, the work of the assessee-company vis-a-vis the foreign collaborators would be smoothened considerably, it was clearly an act of good
management and good managership to generate goodwill and such goodwill would help and was bound to help the assessee-company in keeping good relations with the
employees of the foreign collaborators working smoothly and on proper lines. Since this expenditure of Rs. 2,125 was incurred by the assessee-company for the
purpose of establishing a good image for itself and for keeping relations with the foreign collaborators working smoothly it must be held that this amount was incurred by
the assessee-company for the purpose of business.
In the present case, it is the contention of the assessee-society that these presents were given to the members to keep them in good humour as it was an occasion of
celebration of the silver jubilee of the assessee-society and in order to see that these members continue to supply their cotton for the purpose of ginning and pressing to
the assessee-society and for getting in marketed through it, this type of presents were found necessary for augmenting and maintaining the business prospects of the
society. It was submitted by learned counsel for the assessee-society that in these days of keen competition it was absolutely necessary for the assessee-society to
maintain amongst its members and to lure them to continue to do their business with the society. That income from the work of ginning and pressing the cotton of the
members and from marketing the same was the only source of income for the society and, for earning this income and for ensuring the same over future years, this type
of expenditure was found to be a prudent act of management on the part of the society, and, therefore, this expenditure must be treated as having been incurred solely
and exclusively for the purpose of the business of the society. We find considerable force in these contentions. The aforesaid decision of this court was sought to be
distinguished by learned counsel for the Revenue on the ground that, in that case, the assessee-company had to keep the foreign collaborators in good humour, that they
were outsiders while, in the present case, the articles of presents were distributed amongst its members by the society. In our view, this distinction does not detract from
the real ratio of the judgment centering round the scope of 37 of the Act.
The second decision to which our attention was invited is a decision rendered by the High Court of Bombay in the case of Commissioner of Income Tax Vs. Tata
Sons Pvt. Ltd., . In that case, an amount was spent by the managing agency company on the occasion of the golden jubilee celebrations of he managed unit being the
Ahmedabad Advance Mills, Ahmedabad. The question was whether this amount was a permissible business expenditure under 37 of the Act. It was held that this
expenditure was made by the managing agency company wholly and exclusively keeping in view the business interests of the assessee-company. It is obvious that if the
managed mills continue to run the managing agency, commission would get ensured.
The third decision to which our attention was invited by learned counsel for the assessee was rendered by the Madras High Court in the case of Amarjothi Pictures
Vs. Commissioner of Income Tax, Madras, . The Division Bench of the Madras High Court, speaking through Veeraswami J., in that case, was concerned with an
analogus provision in the earlier Indian Income Tax Act, 1922, being 10(2) (xv). In that case, the assessee was a partnership firm carrying on the business of distribution
and exhibition of films. It had taken the picture ""Kalyana Parisu"" for exhibition in the city of Madras from the products, Trinity Pictures, on a minimum guarantee of Rs.
70,000 on which fifteen per cent. was payable. If the collection exceeded that percentage, 50 per cent. was agreed to be paid. The picture ran for 25 weeks and that
was the occasion for celebration of the silver jubilee. On that occasion, the assessee-company spent Rs. 13,376 towards the celebration. The Income Tax Appellate
Tribunal disallowed the said expenditure as, according to it, there was no causal connection between the expenditure and the taking of further leases of the picture or
collections therefrom by the assessee-company. Disagreeing with the view of the Tribunal, the Division Bench of the Madras High Court, speaking through Veeraswami
J., held that the expenditure was clearly permissible under 10(2) (xv); that it was incurred in the course of carrying on the business of exhibition of films; that, on the
occasion of the celebration, there was presentation of shields to the theatres, artistes, and others. Twenty-five weeks of exhibition from the point of view of the assessee
was an important occasion in carrying on the business which required celebration. Evidently, the object of the celebration was publicity, and that publicity would only
have been with a view to step up the collections at a time when the collections might otherwise be dwindling.
The fourth decision relied on by learned counsel for the assessee in rendered by the Andhra Pradesh High Court in the case of Andhra Sugars Ltd. Vs.
Commissioner of Income Tax, . The Division Bench of the Andhra Pradesh High Court, in that case, was concerned with the question whether the assessee-company
which was a leading company manufacturing and selling sugar in Andhra Pradesh was entitled to claim Rs. 77,087 spent by it on giving mementoes to its shareholders
and directors on its silver jubilee. The Revenue contended that this expenditure was not incurred in connection with the business of the assessee-company. Allowing the
said claim, the Division Bench of the Andhra Pradesh High Court, speaking through Y. V. Anjaneyulu J., held that the shareholders (mostly sugarcane growers) could
not be considered distinct and separate from other persons having business connections with the company. Over a long period, the shareholders, by their conduct, had
contributed to the prosperity of the company and there was nothing uncommon in recognising the part played by them by giving small mementoes. As far as the directors
were concerned, they had worked for the company and played a significant part in the conduct of its business. Considering the magnitude of the income of the assessee
and the small expenditure of about Rs. 35 for each memento, it could not be said that the expenditure was not wholly and exclusively incurred for purposes of its
business.
The aforesaid decision squarely covers the question raised for our consideration in the present proceedings and wholly supports the case of the assessee. The
reasoning adopted by the Division Bench of the Andhra Pradesh High Court commends itself to us and we respectfully concur with the same.
We may now turn to two decisions of the Supreme Court on the point. In the case of Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., , the
assessee-respondent-company had spent certain amounts for discharging the estate duty liabilities on the death of its shareholder not domiciled in India. These amounts
were paid by the company under 84 of the Estate Duty Act, 1953. The question was whether these amounts were permissible expenditure covered by 10(2) (xv) of the
Indian Income Tax Act, 1922, as business expenditure. Answering the question against the assessee, the Supreme Court, speaking through Subba Rao J., held that
these payments had nothing to do with the conduct of the business of the company. The fact that, on its default, if any, in the payment of the dues, the Revenue might
realise the amounts from the business assets was a consequence of the default of the company in not discharging its statutory obligations but that did not make the
expenditure any the more expenditure incurred in the conduct of the business. The obligation of the company to pay estate duty under 84 of the Estate Duty Act, 1953,
was a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing
business in India. The Supreme Court, in that case, examined the scope and ambit of 10(2) (xv) of the Act and held that the expression ""for the purpose of the business
is wider in scope than the expression ""for the purpose of earning profits"". Its range is wide; it may take in not only the day-to-day running of a business but also the
rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets
and property from expropriation, coercive process or assertion of hostile title, it may also comprehend payment of statutory dues and taxes imposed as a precondition
to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the
expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business and the assessee shall incur it in his capacity as a person carrying on
the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.
The aforesaid decision of the Supreme Court, relied on by learned counsel for the Revenue, instead of helping the Revenue on the facts of the present case,
supports the case of the assessee-society as the expenditure incurred by the society in giving presents to its members on the occasion of its silver jubilee was wholly and
exclusively incurred with a view to running its business profitably in the future. In any case, the said expenditure was incurred with a view to preserving the business and
for protecting it. It was incurred by the society as a person carrying on the business of ginning, pressing and selling cotton supplied by its members.
The next decision of the Supreme Court is in the case of Commissioner of Income Tax, Delhi Vs. Delhi Safe Deposit Company Limited, . In that case, the assessee-
company along with V and L were partners in a managing agency firm with 50 per cent., 25 per cent., and 25 per cent. shares, respectively. At the instance of V, a
large sum of money was advanced by the managed company to another firm at Calcutta. When the demand for repayment was made, the Calcutta firm repudiated the
claim and, out of the loss of Rs. 1,90,092 to the managed company, the sum of Rs. 95,092 was agreed to be borne by L, the assessee-company, and R, the brother of
V, who was inducted into the managing agency firm as a partner in place of V. The assessee''s claim to have the sum of Rs. 9,500, which was paid by it to the managed
company during the previous year relevant to the assessment year 1962-63 in partial discharge of its liability of Rs. 47,500, deducted as business expenditure, was
disallowed by the Income Tax Officer and the Appellate Assistant Commissioner confirmed the order of the Income Tax Officer on the ground that the amount was
actually the loss of a firm had not claimed the loss in its return. The Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and allowed the
assessee''s claim. The High Court, on reference of the question, held that the assessee was entitled to the deduction claimed. On further appeal the Supreme Court by
the Revenue, the Supreme Court, speaking through Venkataramiah J., upheld the decision of the High Court and the claim of the assessee. While deciding the said
question, the Supreme Court made the following pertinent observations (at page 760) :
The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the
purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader.
The observations of Subba Rao J., in the earlier Supreme Court decision in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., , were also
pressed into service and thereafter it was further observed that the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect
the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before.
It was likely that, but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been
terminated. The expenditure incurred on the preservation of a profit-earning asset of a business has always been held to be a deductible expenditure by courts. In the
circumstances, it is difficult to hold that the expenditure incurred by the assessee whether gratuitous or one incurred outside the trading activities of the assessee. The
expenditure was, therefore, rightly held to be deductible under 37.
The aforesaid decision of the Supreme Court also clinches the issue in favour of the assessee and against the Revenue. The expenditure in question was incurred by
the assessee for preservation of its business and to see to it that its members continue to deal with the society in future in the same way they had been doing in the past
25 years. The silver jubilee afforded an occasion for the society to incur this expenditure for keeping the members in good humour solely with the object of preserving
and bettering its business prospects in the future. Such expenditure is, therefore, covered by 37 of the Act, as authoritatively ruled by the Supreme Court in the aforesaid
decisions.
We may now turn to another decision of this court in the case of Commissioner of Income Tax, Baroda Vs. Navsari Cotton and Silk Mills Ltd., . The Division
Bench of this Court, consisting of M. P. Thakkar J., and one of us, R. C. Mankad J., in that case, had to consider the question whether money contribution made to the
municipality for providing underground pipe line for disposal of effluents is an allowable business expenditure under 37 of the Income Tax Act, 1961. Answering the
question in the affirmative in favour of the assessee, the Division Bench, speaking through M. P. Thakkar J., as he then was, laid down the scope and ambit of 37 of the
Act as under (at page 554) :
Before an expenditure can be claimed under 37 of the Act, the following essential conditions will have to be satisfied, namely :
It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure.
It must be laid out or expended wholly and exclusively for the purpose of the business or profession.
It must not be of the nature described in s 30 to 36 and 80VV (which is enforced with effect from April 1, 1976).
Subject to these three basic conditions being satisfied, some tests can be evolved on first principles. The tests can be divided into two categories, namely, (1) Positive
tests, (2) negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do in order to affirmatively hold that the expenditure is a
business expenditure, inter alia, incurred on account of commercial expediency.
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Positive tests Negative tests
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If the expenditure is incurred : If it is incurred :
With a view to bring profits 1. for a mere altruistic
or monetary advantage either consideration.
today or tomorrow.
to render the assessee immune 2. Mainly in order to satisfy his
from impending or reasonably philanthropic urges.
apprehended litigation.
Explanation. - Factors (1) and (2)
are laudable but the altruistic or
philanthropic urges can be
satisfied at one''s own cost or
sacrifice, not at the cost of
public exchequer or other
taxpayers and those living below
the poverty line.
In order to save losses in 3. mainly in order to win applause or
foreseeable future. earn garlands or public
appreciation.
for effecting economy in 4. for illegal, immoral or corrupt
working which may pay dividends purposes or by any such means or
today or tomorrow. for any such reason.
for increasing efficiency in 5. mainly in order to oblige a
working. relative or an official.
for removing inefficiency in 6. mainly in order to earn the
the working. good-will of a politic al party or a
politician.
where the expenditure incurred 7. mainly in order to show off or
is such as a, (i) wise, (ii) impress others with his affluence
prudent, (iii) pragmatic, (iv) or for ostentatious purposes.
ethical, man of the world of
business would conscientiously
incur with an eye on promoting
his business prospects subject
to the expenditure being genuine
and within reasonable limits.
where it is incurred solely by 8. apparently, for a factor listed
as
way of a civil duty owed by the a positive factor in the left side
assessee to the society, having column but in reality for one of
regard to the nature of his the obnoxious purposes listed
business which brings him profits herein-above.
but results in some detriment to
the public at large either by
way of health hazard or
ecological pollution or serious
inconvenience to the citizens
with a view to mitigate the
aforesaid evil consequences and
consequences of a like nature,
subject to its being genuine and
within reasonable limits.
on a nebulous plea or pretext by
way of an alibi in the name of
winning profits in remote future
or promoting business prospects
but really for one or the other of
the above-mentioned purposes.
it must not be a bogus, fictitious
or sham transaction.
it must not be unreasonable and
out of proportion.
it must not be an expenditure
merely with a view to avoid tax
liability without any genuine
purpose or reason in good faith.
the advantage to be secured by
incurring the expenditure must not
be of the nature of a remote
possible advantage depending on
''ifs'' and ''buts'', and if at all,
to be secured at an uncertain
future date which may be
considered too remote.
As we pointed out earlier :
(1) one of the positive test must be attracted, whereas,
(2) none of the negative tests should be attracted.
Applying the aforesaid ratio of the Division Bench of this court to the facts of the present case, it comes clear the expenditure in question has attracted at least two
of the positive tests being tests Nos. 1 and 7. The expenditure was incurred with a view to bringing profits or monetary advantage either today or tomorrow and it was
also expenditure incurred as a wise, prudent, pragmatic, ethical man of the world of business would conscientiously incur with an eye on promoting his business
prospects, subject to the expenditure being genuine and within reasonable limits. It is not the contention of the Revenue that this expenditure was not genuine or was not
within reasonable limits. It is not the contention of the Revenue that the expenditure was not genuine or was not within reasonable limits. None of the negative tests also
gets attracted. So far as the disputed expenditure is concerned, it would, therefore, remain a permissible deductible expenditure under 37 of the Act even in the light of
the ratio of the aforesaid Division Bench decision of this court.
We may now turn to the decision of the Calcutta High Court in the case of ANDREW YULE and CO. LTD. Vs. COMMISSIONER OF Income Tax,
CALCUTTA., , on which strong reliance was placed by learned counsel for the Revenue. In that case, the assessee-company found itself in a predicament in which the
then chairman of the board of directors of the assessee lost of his life by the action of a riotous crowd while travelling otherwise than on the assessee''s business. In the
light of the said tragedy, the board of directors resolved to pay compensation to the murdered chairman''s widow feeling that if compensation was not paid, there was
the likelihood of unfavourable criticism of the company and repercussions from their employees. Pending a decision as to the full payment of compensation, the board
resolved to pay an interim payment of Rs. 1,20,000 and by a further resolution an additional amount of Rs. 2,00,000 was paid as final payment by way of
compensation. The assessee-company claimed deduction of the sum of Rs. 2,00,000 as business expenditure for the calendar year 1950. This claim was rejected by
the Income Tax Officer on the ground that it was gratuitous. The Appellate Assistant Commissioner upheld the order of the Income Tax Officer. The Appellate Tribunal
held that the amount paid can be treated to be a reasonable compensation based on commercial expediency alone. But as the liability for compensation was ascertained
by and arose from the resolution dated January 22, 1951, it could not be allowed as an expenditure for the year 1950. On reference of the question arising out of the
Tribunal''s order, the Calcutta High Court took the view that on facts the payment of compensation to the chairman''s widow was not expenditure laid out wholly or
exclusively for the purposes of the assessee''s business as the chairman''s death had nothing to the with the object or purpose of the company. We fail to appreciate as
to how this decision can be of any avail to learned counsel for the Revenue. The facts of the present case giving rise to the expenditure in question are entirely different.
Any amount paid ex gratia and gratuitously and which had nothing to do the business activities of the company would obviously not get covered by the sphere of 37 of
the Income Tax Act, 1961. Such are not the facts in the present case.
It is now time for us to turn to the Division Bench decision of this court which has been made the subject-matter of the present reference to the Bench. In the case
COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-OPERATIVE PURCHASE AND SALES UNION LTD., , on almost parallel
facts, the question had arisen whether the expenditure incurred by the assessee-co-operative society in connection with travelling for purchase of certain articles and for
the purchase of these articles which were to be presented to its members on the occasion of the silver jubilee celebration was a permissible business expenditure as per
37 of the Act. The Division Bench of this court, consisting of B. J. Divan C. J., and one of us (S. B. Majmudar J.), answered this question in the affirmative in favour of
the assessee. It was noted that the presentation of articles to its members having transactions was on the occasion of the silver jubilee celebrations and the expenses
incurred in connection with travelling for the purchase of the articles were expenses in the course of and for the purpose of the business and were intended as an
incentive or encouragement to those members in the course of the business activities or transactions. In the light of these admitted facts as noted by the Tribunal, the
Division Bench, speaking through B. J. Divan C. J., held, placing reliance on the earlier decision of the Division Bench of this court in the case of Commissioner of
Income Tax, Gujarat-I Vs. S.L.M. Maneklal Industries Ltd., , that this expenditure was a permissible expenditure covered by 37 of the Act. In this connection, it was
further observed that since this expenditure was incurred by the assessee-society for the purpose of establishing a good image for itself and for keeping the relations with
members smooth, it must be held that this amount was incurred by the assessee-society for the purpose of business. Reliance was also placed in this connection on the
decision of the Madras High Court in Amarjothi Pictures Vs. Commissioner of Income Tax, Madras, and the decision of the Bombay High Court in Commissioner of
Income Tax Vs. Tata Sons Pvt. Ltd., . Applying the ratio of the decision in these cases to the facts of the case before them, the Division Bench proceeded to observe
further as under (at page 416) :
In our opinion, the principle laid down by this High Court in Commissioner of Income Tax, Gujarat-I Vs. S.L.M. Maneklal Industries Ltd., , and by the Bombay and
the Madras High Courts in the above two decisions would apply to the facts of the case before us. The utensils were distributed only amongst its members-individual
members as well as other co-operative societies who were members of the assessee-society. Under these circumstances, the amounts of the silver jubilee could be said
to be expenditure incurred wholly and exclusively for the purpose of its business since this amount was spent for keeping alive its good image amongst its members and
ensuring the goodwill and ensuring the continuity of business with the member-societies as before.
The aforesaid decision clearly covers the facts the present case, however, learned counsel for the Revenue submitted that the present reference has been made to a
larger Bench by the earlier Division Bench for reconsidering this decision. We have given our anxious consideration to this aspect. In our view, the ratio of the decision
of this court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-OPERATIVE PURCHASE AND SALES UNION LTD., , does
not require reconsideration, nor can it be said to be contrary to the established legal position. We have already discussed the true scope and ambit of 37 of the Income
Tax Act, as culled out from various other decisions of this court as well as other High Courts and by the decision of the Supreme Court which have authoritatively
pronounced on the subject. In the light of the settled legal position, therefore, it has to be held that if any expenditure is wholly or exclusively incurred by an assessee
businessman with a view to preserving and augmenting his business prospects in future, such expenditure would be allowable, permissible expenditure as per 37 of the
Income Tax Act, 1961. The view taken by the Division Bench of this court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-
OPERATIVE PURCHASE AND SALES UNION LTD., , runs parallel to the aforesaid legal position and dose not appear to be erroneous from any angle.
Consequently, there remains no occasion to reconsider the said decision. We fully concur with the ratio of the decision of the Division Bench in that case. The stand of
the Revenue that expenditure incurred by the society in giving presents to its own members would amount to expenditure for itself or application of its income amongst
its members, also cannot be countenanced as the society is entirely a separate entity functioning under the provisions of the Gujarat Co-operative Societies Act, 1961,
and is distinct from its members. "" 37 of the Gujarat Co-operative Societies Act, 1961, provides that a society, on its registration, shall be a body corporate by the
name under which it is registered, with perpetual succession and a common seal and with power to acquire, hold and dispose of property, to enter into contracts, to
institute and defend suits and other legal proceedings, and to do all such things as are necessary for the purpose for which it is constituted. As per 96 of the Act,
disputes can be contemplated even between the society on the hand and its members on the other. Thus a society is a separate legal entity having its own business and
business income. In the course of augmenting its business and maintaining it is the society as a corporate body decides to give presents to its members and to
commemorate silver jubilee celebrations, it cannot be said that the society is not doing something as a prudent businessman"". We may state in fairness that learned
counsel for the Revenue submitted that it is not his contention that amounts spent in this type of presents on the occasion of silver jubilee celebrations can be treated to
be either dividend or rebate. So far as the term ""dividend"" is concerned, 2, sub- (8), of the Gujarat Co-operative Societies Act lays down that ""dividend"" means the
amount paid, out of the profits of a society, to a member in proportion to the shares held by him. In the present case, the resolution of the society which has been
reproduced in the order of the Tribunal lays down that two steel glasses are to be given to members who joined the society after October 31, 1968, and four glasses
are to be given to members who joined earlier and that the accounts be closed after adjusting the profits and losses of the current year. Thus, the money value of the
stainless steel cups is not dependent upon the proportion of shares held by the concerned members, but on the contrary, it is linked up with the seniority of the members.
It was, therefore, rightly not contended that this expenditure would be treated as divided nor can it be treated as ""rebate"" as rebate is defined by 2(16) to mean any
payment made in cash or kind, out of the profits of a society, to a member or any other person, on the basis of his contribution to the business of the society. In fact, the
value of the articles of presentation is in no way linked up with the contribution of the concerned recipient to the business of the society. Consequentially, the contention
of behalf of the Revenue that this expenditure is not permissible business expenditure cannot be accepted. As a result of the aforesaid discussion, it is held that the ratio
of the decision of the Division Bench of this court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. DASCROI TALUKA CO-OPERATIVE PURCHASE
AND SALES UNION LTD., , lays down good law. The question referred for the opinion of this court in the present reference, therefore, will have to be answered in
the affirmative, in favour of the assessee and against the Revenue. Order accordingly.
Pronounced in the open court today.