Madras Race Club vs Commissioner of Income Tax

Ratnam, J.—The following three questions relating to the assessment years mentioned hereunder have been referred, at the instance of the

assessee, for the opinion of this court :

(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction on account of development rebate of Rs.

8,486 and Rs. 56,642, respectively, for the assessment years 1968-69 and 1970-71 ?

(2) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 3,42,539 and Rs. 7,22,411 were not includible in the total

income of the assessee for the assessment years 1969-70 and 1970-71, respectively ?

(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,556 incurred by way of legal charges for the assessment year

1971-72 was a properly allowable item of revenue expenditure ?

The circumstances giving rise to the reference under question No. 1 stated above are as under : The assessee is a company limited by guarantee

and registered under the Companies Act, 1913. In the original assessment for the year 1968-69, development rebate on air-conditioners has been

allowed by the ITO, though they were used in the office and in the residential premises of the assessee and as such not eligible for rebate under s.

33(6) of the I.T. Act, 1961 (hereinafter referred to as ""the Act""). In the reassessment made for the assessment year 1968-69, the ITO was of the

view that the development rebate had been wrongly allowed and added back Rs. 8,486. Later, other air-conditioning equipments valued at Rs.

2,58,219 had been installed and for the assessment year 1970-71, the ITO made an addition of Rs. 56,642, negativing the claim for development

rebate made by the assessee. On appeal, the AAC deleted the addition of Rs. 8,486 and Rs. 56,642 for the assessment years 1968-69 and

1970-71, respectively, on the ground that the clarification furnished by the assessee established that the place of installation of the air-conditioning

equipments was only the club house forming part of the business premises of the assessee and the equipments had also been used for its business

purposes. On further appeal to the Tribunal by the Department, the Tribunal applied its earlier decisions relating to the assessee in I.T. As. Nos.

1147 to 1149 (MDS)/1969-70 (C Bench) dated March 31, 1975, to hold that the premises where the air-conditioning equipments were installed

was used as place of meeting for the members for discussing racing events on race days and that the premises cannot be considered as anything

other than an office premises and, therefore, no development rebate could be allowed in respect of the air-conditioning plants installed in such

office premises under sub-section (6) of s. 33 of the Act. In this view, the Tribunal restored the order of the ITO adding back a sum of Rs. 8,486

and Rs. 56,642 for the assessment years 1968-69 and 1970-71, respectively. The question is whether this view of the Tribunal is correct.

The air-conditioning plant, according to the assessee, was installed in a conference room of the assessee used for deliberations and taking of

policy decisions regarding races and for discussion of racing events on race days and transactions of business by stewards and, therefore, the plant

should be taken to have been installed in a premises used for the purpose of the business carried on by the assessee and not in its office premises.

There is no dispute that the air-conditioning equipment is a plant. According to s. 33(6) of the Act, no deduction by way of development rebate

shall be allowed in respect of any machinery or plant installed after March 31, 1965, in any office premises or any residential accomodation

including any accommodation in the nature of a guest house. In other words, the question is, whether the place where the air-conditioning

equipment is installed is not office premises, as contended by the assessee. The assessee is a race club. The deliberations, shaping and adoption of

policy decisions in respect of all racing matters generally and discussion of racing events on specified race days would all be part of its official

work, which is carried on in the premises in question. The whole range of the racing activities of the assessee is thus deliberated upon, discussed,

formulated and executed in accordance with the decisions taken in that premises. The air-conditioning equipment, which is indisputably a plant, has

thus been installed in a room set apart and used for discussions and deliberations and taking decisions touching upon racing in all its aspects in the

premises of the assessee. No material has been made available by the assessee to show that this premises is used by the members of the club for

their other activities. The Tribunal in para. 35 of its order had observed that this question is covered by its earlier decision relating to the assessee in

I.T. As. Nos. 1147 to 1149 (MDS)/1969-70 (C Bench) dated March 31, 1975, for the assessment years 1965-66 to 1967-68. We have looked

into that order. We agree with the Tribunal that the air-conditioning equipment has been installed in the office premises of the assessee falling within

s. 33(6) of the Act and, therefore, the claim of the assessee for development rebate has been rightly negatived for the assessment years 1968-69

and 1970-71. We, therefore, answer question No. 1 in the negative and against the assessee.

We now proceed to consider the second question referred and the circumstances giving rise to that question. For the assessment year 1969-70,

the assessee claimed as deduction a sum of Rs. 3,42,539 on the ground that amount represented charities made during the year out of proceeds of

two charity race days. The races were held on March 19, 1969, and March 26, 1969, and the gross collection amounted to Rs. 7,61,199 out of

which deducting the expenses of Rs. 4,18,660, the balance of Rs. 3,42,539 was arrived at. The assessee claimed that the races held on March 19,

1969, and March 26, 1969, were specially held for the purpose of charity as decided and made known long prior to the actual holding of the

events and, therefore, the collections on those days belonged to the charities. According to the assessee, there was a diversion of income from the

races conducted on March 19, 1969, and March 26, 1969, even before its accrual and this was also supported by a resolution of the

extraordinary general body meeting of the assessee held on March 21, 1969. Similarly, for the assessment year 1970-71, the assessee claimed

that the races held on March 19, 22 and 29, 1970, were for the benefit of charity, the collections of the first two days being on behalf of the

Madras Race Club Charitable Trust and on the last day for the benefit of the Madras Cricket Association. The net collection of Rs. 7,22,411 had

been paid by the assessee to those institutions and the assessee claimed that even as regards these amounts, there had been a diversion of income

before its actual accrual. The ITO negatived the claim of the assessee that these amounts did not constitute its income and included these amounts

in its total income. On appeal by the assessee, the AAC confirmed the additions on the view that there was no charge on the receipts from the

races conducted on these days, but the collections had been utilised or appropriated by the assessee for the charitable purpose after the amount

became the assessee''s income. However, a direction was given that relief under s. 80G of the Act to the extent available may be given to the

assessee. On further appeal to the Tribunal, it was contended by the assessee that it was made widely known and all concerned persons were fully

aware that the proceeds of the races conducted on these days were to go for charities and the committee of management was also authorised by a

resolution of the general body to contribute amounts to charitable institutions and the assessee had no right to use the proceeds of the races held on

these days or the net surplus for any of its purposes and, therefore, these amounts did not constitute the income of the assessee. On the other hand,

the Department contended that the income accrued to the assessee and was thereafter applied or spent by the assessee for charitable purposes. It

was also the stand of the Revenue that none of the race-goers could compel the assessee to spend the collections for any particular or specific

purpose and, therefore, there was no legal obligation on the assessee to apply the collections only to any particular or specific purpose. The

Tribunal, after taking into consideration the resolution passed at an extraordinary general body meeting of the assessee held on March 21, 1969,

took the view that there was no element of compulsion with reference to the spending of the amounts on charity, but that a discretion had been left

to the committee to spend or not to spend on charity, so that it may even be open to the assessee and, under those circumstances, a legal diversion

by overriding title cannot be spelt out at all but that only a discretionary spending on the part of the committee backed by the resolution of the

general body meeting alone could be made out. Adverting to the circumstance that persons who contributed to the races on those days cannot

enforce either the setting apart or the application of the collections for charity or even the spending thereof for such purposes and taking note of the

inability of the beneficiary also to enforce such expenditure on charities by the assessee, the Tribunal found that it cannot be said that there was an

overriding title by which the proceeds or the net income or those race days have been diverted before they became the income of the assessee.

The Tribunal also found that even assuming that there was an obligation and the obligation was enforceable by the outsider, he could not have

known whether his payment to the assessee was within the sum referred to in resolution and, therefore, it cannot be held that the amount will not be

the contribution and, therefore, it cannot be held that the amount will not be the contribution made to the assessee for carrying on the business of

racing. In this view, the Tribunal rejected the claim of the assessee in respect of the assessment years 1969-70 and 1970-71, respectively.

The learned counsel for the assessee contended that even prior to the holding of the races on the days in question, it had been made widely

known, any even declared, that the collections at the races on those days had been earmarked for charitable purposes and this was also further

strengthened by the resolution of the extraordinary general body meeting of the assessee on March 21, 1969, and thus the assessee was in order in

claiming that the amounts of Rs. 3,42,539 and Rs. 7,22,411 were not includible in the total income of the assessee, as those amounts were not

received by the assessee as its income, but there was a diversion by an overriding title in favour of the charities. Reliance, in this connections, was

placed by the learned counsel on the decisions in Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., , Commissioner of

Income Tax (Central), New Delhi Vs. Bijli Cotton Mills (P.) Ltd., , Fatehchand Murlidhar and Another Vs. Commissioner of Income Tax,

Calcutta, and The Commissioner of Income Tax, Kerala, Ernakulam Vs. The Travancore Sugar and Chemicals Ltd., .

On the other hand, the learned counsel for the Revenue submitted that at the time of making the collections on the days in question, the

collections were not subject to any legal obligation for being applied to specific or stated purposes and the collections partook the character of the

usual collections and constituted the income of the assessee which was appropriated by the assessee in the manner authorised as well. The learned

counsel drew attention to the circumstances that the so-called beneficiaries had really no enforceable legal rights against the assessee with reference

to the collections and, therefore, there could be no question of diversion by overriding title. The resolution relied upon by the assessee in respect of

the assessment year 1969-70, according to the learned counsel for the Revenue, was one which merely enabled the assessee to appropriate the

collections in a particular manner. It was also further pointed out that there was no reference to the net collections in the resolution and, therefore,

the idea of contributing the collections at the races on these days after defraying the expenses to charitable institutions could not have been

contemplated at all. The discretion vested by the resolution in the committee of management to contribute to such charitable institutions such sums

as the committee may think fit was also relied upon as negativing the annexation of any definite legal obligation at the inception to the collections at

the races on these days for any particular or specific purpose and to contend that there was no case of diversion at all, on the facts and in the

circumstances of the present case. With reference to the assessment year 1970-71, the learned counsel emphasised the absence of a resolution

even to submit that the Tribunal was right in holding that the collections at the races held on March 19, 22 and 29 1970, should be included in the

total income of the assessee. In support of these contentions, our attention was drawn to Royal Calcutta Turf Club v. Secretary of State for India

in Council [1921] 1 ITC 108 , The Commissioner of Income Tax, Bombay City II Vs. Shri Sitaldas Tirathdas, , CIT v. Vyas and Dhotiwala :

[1959]35ITR55(SC) and Ratilal B. Daftari Vs. Commissioner of Income Tax, Bombay City II, .

Even though the assessee claimed that it has earlier declared and made it widely known that the collections at the races on March 19, 1969,

March 26, 1969, and March 19, 1970, March 22, 1970, and March 29, 1970, were for the benefit of charity even long before the holding of

those events, before the authorities below, no material to support such an unequivocal declaration or intention on the part of the assessee was

made available and, therefore, it was the claim of the assessee which came to be examined in the light of the resolution relied on by the assessee.

With reference to the claim made by the assessee for the assessment year 1969-70, the resolution passed at an extraordinary general body

meeting held on March 21, 1969, was to the effect that the committee of management was authorised to contribute to such charitable institutions or

organisations such sums as it may think fit not exceeding Rs. 7 lakhs from out of the proceeds of the two extra days'' races held on March 19 and

March 26, 1969. This resolution cannot be pressed into service by the assessee to claim that the collections were earlier subjected to any legal

obligation for being applied to specific or stated purposes and the obligation was of such a nature as to render the collections not part of the

income of the assessee. The very idea of dealing with and disposing of the collections appears to have been entertained and put in the form of a

resolution only on March 21, 1969, two days after the holding of the first of such events on March 19, 1969. Therefore, in so far as the collections

referable to the racing event on March 19, 1969, were concerned, the resolution merely enabled the committee of management to appropriate

those collections by making contributions to charitable institutions and other organisations. Even such an application by contribution was made a

matter of discretion to be exercised by the committee of management as seen from the terms of the resolution. No reference to the availability of

net collections for distribution amongst charitable institutions and organisations has been made in the resolutions and this would indicate that there

was no earlier earmarking of the collections or net proceeds for any particular purpose. With reference to the racing event held on March 26,

1969, the assessee''s reliance upon the resolution, referred to earlier, is of no avail as the resolution merely enables the committee of management

to indulge in a discretionary, appropriation of the collections from the events held limiting such appropriation to Rs. 7 lakhs. The resolution is

merely in the nature of an authorisation and not a mandate and does not compel the committee of management to spend amounts on charities. In

other words, if the committee of management chose to spend Rs. 7 lakhs or much less or nothing even on charities, its action could not be

questioned. An element of compulsion in the matter of spending the amounts on charities is significantly absent in the resolution. That coupled with

the discretion vested in the committee to spend or not to spend the amounts on charity, may enable the committee of management to make

available amounts for the use of the assessee. The resolution does not, therefore, assets the assessee to establish that the collections on the

specified days were ab initio burdened with an obligation to be applied for specific or stated charitable purposes and that the assessee had acted

merely as a conduit pipe in making such collections. For the claim made by the assessee for the assessment year 1970-71, there was no resolution

even and it was rested on the mere assertion made by it that the proceeds of the race meets conducted on March 19, 22 and 29, 1970, were for

the benefit of the Madras Race Club Charitable Trust and the Madras Cricket Association, respectively. We do not see how in the total absence

of necessary and relevant materials, the assessee can claim that the collections made by it on March 19, 1970, March 22, 1970, and March 29,

1970 were ab initio impressed with the character of charity funds creating a benefit in those collections in favour of certain charities.

The character of the collections in the hands of the assessee may now be looked at from the point of view of those who made the contributions

and the beneficiaries. It does not appear that the contributions when made were earmarked or subjected to a legal obligation for application to

specified charities. The charities were not known. Indeed, the race-goer''s concept of charity and the race club''s ideas in that regard may not be

the same or similar. Thus, the collections made by the assessee on the days when these events were held, were of the same kind and character as

the collections made on an ordinary racing day. The beneficiary also could not have compelled the assessee to made available amounts stated to

have been set apart for its benefit. In this case, the assessee did not know who the beneficiaries were and the beneficiaries were unaware that they

were the beneficiaries when the collections were made. Looked at from any point of view, the collections made by the assessee cannot be stated

to have been stamped in its hands with a legal obligation to apply such collections to particular or stated charities, either at the time of making the

collection or even before, so as to enable the assessee to claim that the collections were not its income by invoking the principle of diversion by

overriding title.

We may now refer to The Commissioner of Income Tax, Bombay City II Vs. Shri Sitaldas Tirathdas, . In that case, the assessee sought to

deduct amounts paid by him as maintenance to his wife and children under a decree of court whereunder no charge on any property of the

assessee was created, in computing his total income for purposes of Income Tax. All the authorities including the Tribunal did not accept the claim

for a deduction made by the assessee. On a reference, the High Court took the view that the income of the assessee to the extent of the decree for

maintenance must be taken to have been diverted to the wife and children of the assessee and never became income in the hands of the assessee.

In considering the correctness of this view and in laying down the tests for the applicability of the principle of diversion by overriding title, the

Supreme Court observed thus (at page 374 of 41 ITR) :

In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no

doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a

person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the

assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied

to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment

which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one''s own income, which

has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does

so, not as part of his income, but for and on behalf of the person to whom it is payable.

Holding that the payments made for the maintenance of wife and children of the assessee, who contained to remain members of the family,

would really be a case of application of a portion of the income to discharge an obligation and not a case in which, by an overriding charge, the

assessee became only a collector of another''s income, the Supreme Court reversed the decision of the High Court. From the aforesaid decision of

the Supreme Court, it is clear that the test is whether the assessee collected the proceeds of the racing events on its own behalf or on behalf of the

charitable institutions or organisations to whom, according to the assessee, those amounts belonged even at the time when collected by the

assessee. Earlier, it had been seen how the collections of these racing events were never intended to be collected on behalf of charities, but were

received by the assessee in the ordinary course of such racing events and were merely permitted to be applied in discharge of other obligations

according to the discretion of the committee of management. We are, therefore, of the opinion that the present case is one of application by the

assessee of a portion of its income to discharge certain obligations and not a case, where, by an overriding charge in favour of the charities, the

assessee became a mere collector of the charities income.

We may now refer to the decision relied upon the learned counsel for the assessee. In Commissioner of Income Tax, West Bengal Vs.

Tollygunge Club Ltd., on appeal from Commissioner of Income Tax Vs. Tollygunge Club Ltd., , the Supreme Court has to consider the nature of

surcharge collections made by the assessee-club on sale of printed tickets showing that the surcharge was for purposes of local charities. The

Supreme Court pointed out that the line of enquiry in ascertaining the true character of the collections should be to find out whether it involved an

application by the assessee of a part of its income to local charities or was it an allocation of receipt for local charities before it became the income

in the hands of the assessee. In so holding, the Supreme Court referred to the passage extracted earlier from the judgment in The Commissioner of

Income Tax, Bombay City II Vs. Shri Sitaldas Tirathdas, and ultimately held that the surcharge having been impressed ab initio with a legal

obligation to be applied for the benefit of the local charities never reached the assessee as part of its income. This decision, far from supporting the

assessee, would negative its claim. In the surcharge tickets, in that case, it was clearly printed that the surcharge of eight annas was for local

charities. On the facts of that case, there was a definite and clear earmarking of the surcharge collections at its inception for purposes of local

charities and, therefore, such collections became impressed with an obligation in the nature of a trust in the hands of the collector, viz., the

assessee, to be applied to specific local charities. The Supreme Court, therefore, concluded that it was a case of diversion by overriding title, as

the money was collected at the Tollygunge Gymkhana Races on behalf of the charities and the collections were also held under an obligation to

apply those collections for local charities. The decision is, therefore, clearly inapplicable to the present case, where, as noticed earlier, there is

absolutely nothing whatever to indicate that there was any clear earmarking of the collections of the racing events on the days specified with an

obligation of such a nature annexed thereto as to render the collections not the assessee''s income. Further, in this case, there was only a resolution

to apply the collections for such charities as the committee of management thought fit in the exercise of its discretion. This cannot be, therefore,

equated to a case of collections ab initio impressed with a legal obligation to hold such collections for and on behalf of charities and to apply those

collections for any particular or specific charitable objects.

In Commissioner of Income Tax (Central), New Delhi Vs. Bijli Cotton Mills (P.) Ltd., relied on by the assessee, a private company carrying

on the business of manufacturing and selling yarn, realised certain amounts on account of Dharmada from its customers on sales of yarn and bale of

cotton at the rate of one anna per bundle of 10 lbs. of yarn and two annas per bale of cotton, and in the bills issued to the customers, these

amounts were separately itemized under the head of Dharmada. A separate account of these amounts was maintained and styled as Dharmada

account. The question arose whether these amounts could not be regarded as having been received or held by the company as a trust for

charitable purpose. All the authorities below did not accept the contention of the assessee that the Dharmada collections were held in trust having

been earmarked for charity and were not its income from business, liable to tax. On a reference, the High Court took the view that the collections

were not the income of the assessee liable to tax as the customers had specifically paid those amounts on account of Dharmada and the assessee

also never treated those amounts as trading receipts or surcharge on the sale price. It was also further held that the assessee was merely acting as a

conduit pipe for the passing of the amounts to the objects of charity. On further appeal to the Supreme Court, the Supreme Court upheld the

decision of the High Court. The Supreme Court pointed out that the payments for ""Dharmada"" made by customers or brokers were clearly

earmarked for charity right from the inception and the amounts were received and held by the assessee under an obligation to spend them for

charitable purposes only with the result that those amounts were not the trading assets of the assessee. It was also further held that the payments

towards ""Dharmada"" could not be regarded as part of the price or surcharge, as such a payment was made by the customer in addition to the price

of the goods and the purchase of the goods was merely the occasion for the payment and not the consideration for the amount paid and, therefore,

the Dharmada amount was not a part of the price, but payment for the specific purpose of being spent on charitable purposes and, therefore,

cannot be regarded as trading receipts of the assessee. In this case also, there has been a clear and unequivocal earmarking of the amounts paid

either by customers or brokers even at the time of payment, which was also further supported by separate itemisation relating to Dharmada in the

bills issued by the assessee. Such is not the case here. Therefore, this decision also does not in any way assist the assessee.

In Fatehchand Murlidhar and Another Vs. Commissioner of Income Tax, Calcutta, , the assessee was a partner of a firm, A, and he entered

into a sub-partnership (firm B) with his sons and grandson. Under the deed relating to the constitution of firm B, the profits and losses of the

assessee in firm A should belong to the sub-partnership and should be borne and divided in accordance with the shares specified therein, while the

capital and assets and liabilities belonged to the assessee exclusively. The sub-partnership was also registered. For the assessment years 1952-53,

1953-54 and 1955-56, the assessee''s share in firm A was assessed in the individual assessment of the assessee overruling the objection of the

assessee that there was a diversion of income by overriding interest as a result of the sub-partnership. The AAC and the Tribunal also agreed with

this view. On a reference, the High Court also held that the creation of the sub-partnership was only a device for the diversion of the income of the

assessee after it had accrued to him and not a diversion at source by any overriding interest. On further appeal, the Supreme Court held that having

regard to the creation of sub-partnership, the income of the assessee from firm A was received by him not only on his behalf, but also on behalf of

the sub-partnership and that would create a superior title and divert the income from the main firm A before it became the income of the assessee.

This decision lays down that the share of profits of a partner in a firm can be subjected to diversion by overriding title by entering into a sub-

partnership, which renders the receipt of the share of profits by the main partner as one on behalf of the sub-partners also and the entire share of

profits cannot be considered as income in the hands of the principal partner alone for purpose of tax treatment depending upon the terms of the

sub-partnership agreement having come into force. The decision was primarily based on the terms thereof having become operative prior to the

receipt of the share of profits by the partner in the principal business. That case also cannot, therefore, be pressed into service by the assessee. The

decision in The Commissioner of Income Tax, Kerala, Ernakulam Vs. The Travancore Sugar and Chemicals Ltd., lays down the principle that

income can be said to be diverted when such diversion is at source, so that when it accrues, it is not really the income of the assessee but that of

somebody else and that where, by an obligation income is diverted before it reaches the assessee, it is deductible, but where such income is

required to be applied to discharge an obligation after such income reaches the assessee, it is merely a case of application of income to satisfy an

obligation of payment and, therefore, not deductible. We have earlier pointed out how in this case there has been no collection by the assessee for

and on behalf of the charities and, therefore, no diversion by clear earmarking or setting apart of the collections on the specified days of the racing

events for purposes of charity and, therefore, this decision also is of no assistance to the assessee.

Royal Calcutta Turf Club v. Secretary of State for India in Council [1921] 1 ITC 108 , relied on the Revenue, dealt with the question whether

the Calcutta Turf Club carried on business within the meaning of s. 2 of the Excess Profits Duty Act (X of 1919) and as such liable to pay excess

profits duty in respect of income derived from payments made by persons other than the members of the club under certain heads. In holding that

the club was carrying on ""an adventure or concern in the nature of trade"" and, consequently, was carrying on a business within the meaning of s. 3

of the Excess Profits Duty Act, the Calcutta High Court pointed out that the fact that the members of the club had not received any profit out of the

activities carried on by the club and the surplus had been used up for purposes of subscribing to charities was not really material, as the test was

whether the moneys were received by the club from the non-members of the club and in exchange for something which was given by the club and

in respect of which profit was made. In other words, the circumstance that the resulting surplus out of the collections arising from the activities

carried on by the club is applied to charities, would not really be material as the receipt is by the club for purposes of the club. In this case, as

pointed out already, in the absence of anything to indicate that the collections of the racing events on the specified days were impressed ab initio

with a legal obligation to apply the collections in a particular manner, such collections would partake the character of usual collections made by the

club on other days when similar racing events took place and the circumstance that the net collections were applied to charities would not alter the

position. We have already referred to the decision of the Supreme Court in The Commissioner of Income Tax, Bombay City II Vs. Shri Sitaldas

Tirathdas, , and noticed how the tests laid down in that decision are not satisfied in the instant case.

That leaves for consideration the decisions in CIT v. Vyas and Dhotiwala : [1959]35ITR55(SC) and Ratilal B. Daftari Vs. Commissioner of

Income Tax, Bombay City II, . In the first case, the question arose whether any income accrued to M/s. Vyas and Dhotiwala as a result of their

associating themselves as financiers in the scheme for the distribution of standard cloth and if so, whether such income was assessable in their

hands. Under the scheme, the assessees were to open and operate bank account and the orders for the cloth were to be placed by Government

and on arrival of the consignment, the assessee were to pay the Deputy Commissioner the value of the consignment together with 6 1/4 per cent. of

the ex-mill price. The consignment was thereupon to be checked and delivered to the assessee. The Deputy Commissioner would pay 4 1/2 per

cent. of the ex-mill price to the assessee out of the amount paid by the latter for contingent expenses of working the scheme, which were not,

however, to exceed 3 per cent. The distribution of the cloth had to be made through a shop to be opened by the assessees and the Deputy

Commissioner had to fix the sale price. The Deputy Commissioner was also made responsible to the assessees for the sale proceeds and provision

was made in an agreement for the utilisation of the profits resulting from the scheme for such charitable purposes as may be decided by the Deputy

Commissioner in consultation with the Advisory Committee appointed to supervise the scheme. For the assessment years 1945-46 and 1946-47,

the books of the assessees showed certain amounts as profits earned in working the scheme which the ITO assessed to tax after rejecting the only

contention of the assessees that they were exempt from taxation under s. 4(3)(ia) of the I.T. Act. On appeal to the Tribunal, it was held that the

scheme was completely under the control of the Deputy Commissioner and the assessees were merely the financiers and managers to carry out the

scheme and, therefore, the profits that resulted from the working of the scheme, did not represent the income of the assessees and they could not

be assessed to tax. The court, on a reference, held that the assessees neither received nor could be deemed to have received the income or profit

from the scheme and that the assessees were not assessable to Income Tax. On further appeal to the Supreme Court, the court pointed out that

the real question was whether the income had accrued to the assessees and the profits from the scheme formed the income of the assessees and

stated that the working of the scheme resulted in the production of profits which belonged to the assessees and they were liable to be taxed

thereon, since the assessees made the profits, whether they agreed to make profits or not, and the circumstance that the Deputy Commissioner

was in control of the scheme did not prevent the working of the scheme by the assessees as a business carried on by them. The Supreme Court

further pointed out that the scheme considered as a business was not carried on on behalf of any religious or charitable institution and, therefore,

the profits from the scheme were not exempt from taxation under s. 4(3)(ia) of the I.T. Act. Dealing with clause 14 of the scheme referred to

earlier, the Supreme Court observed as follows (p. 60) :

The provision that the profits would be devoted to charity to be decided by the Deputy Commissioner, would indicate that without it the profits

would have been utilisable by the assessees. The profits belonged to the assessees and, hence, the necessity for this agreement so that the

assessees might be made to spend them on charity.

We have earlier seen how the collections on the several racing events in this case were not ab initio earmarked or impressed with any legal

obligation as to render the collections not part of the income of the assessee and, therefore, the collections really belonged to the assessee as its

income. The resolution for application of a portion of those collections to charity clearly indicated that the collections really belonged to the

assessee and without such a resolution authorising the expenditure on charities, the assessee could have used up the entire collections for its own

benefit and purposes. Ratilal B. Daftari Vs. Commissioner of Income Tax, Bombay City II, , emphasises the need to ascertain the real income of

the assessee from his share in the profits of a partnership business and to exclude what is really not his income in the sense that a portion of profits

having been diverted by overriding title as a consequence of the operation of the terms of a sub-partnership. We have earlier pointed out that

having regard to the facts and the circumstances of the present case, the assessee had secured the collections in the usual manner in which such

collections are made on ordinary racing days and cannot claim that there was a diversion by overriding title of the whole or any portion of such

collections for purposes of charity. We, therefore, answer the second question referred to us against the assessee for the assessment years 1969-

70 and 1970-71.

We shall now take up question No. 3. For the assessment year 1971-72, the assessee claimed allowance in a sum of Rs. 6,556 towards legal

charges incurred in connection with the amalgamation of the Ooty Race Club with the assessee. This was disallowed as capital expenditure by the

ITO and an addition Rs. 6,556 was made. However, on appeal, the AAC took the view that the merger of the Ooty Race Club with the assessee

was effected in furtherance of the business interests of the assessee, as in its wake, it brought into being a better, more effective and economical

way of conducting the affairs of the assessee. Therefore, the expenditure was considered to be a business expenditure and was allowed resulting in

the deletion of Rs. 6,556. The Tribunal disagreed with the view of the AAC and concluded that this expenditure represented capital expenditure

and on that conclusion, the ITO''s order was restored.

While the assessee contends that this expenditure had been incurred for the business of the assessee and should be regarded as an item of

normal revenue expenditure, the Revenue would claim that the amount had been expended towards legal expenses leading to an advantage of a

lasting nature benefiting the business of the assessee. We are relieved of the need to deal with these submissions at length in view of the recent

decision in COMMISSIONER OF Income Tax, TAMIL NADU-I Vs. BUSH BOAKE ALLEN (INDIA) LTD., . In that case, two limited

companies, engaged in the manufacture and marketing of perfumery compounds, aromatic chemicals and essences, etc., amalgamated, resulting in

the liquidation of one company and its assets and liabilities being taken over by the assessee-company. The assessee-company claimed an

allowance of the expenses incurred in connection with the amalgamation as revenue expenditure and this was negatived by the ITO as well as the

AAC. The Tribunal, however, allowed the claim holding that the amalgamation was to effect savings and economy and eliminate duplication of

overhead expenses and achieve greater profits. This court, on a reference, held that the expenses were incurred in meeting the legal charges and

the court expenses, though such expenses were connected with the amalgamation of the two business concerns, and the legal expenses were,

therefore, allowable as an item of revenue expenditure. In so holding, the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 601

ITR 52, to the effect that the legal expenses incurred by the assessee for borrowing money, irrespective of whether the borrowing went in for a

revenue purpose of for a capital purpose, must be necessarily regarded as an item of revenue outgoing, was applied. Besides, reliance was also

placed on Commissioner of Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., . In that case also, the assessee claimed an allowance of legal

charges representing the fees paid to the Registrar of Companies for increasing the capital of the company. The Revenue contended that the

expenditure attributed to the increase in the capital of the company could not be allowed as a revenue item. But this contention was negatived

following the decision of the Supreme Court in India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , and it was held that the money

was spent only for the purpose of the business and there was no element of capital in the expenditure and that merely because the fees paid to the

Registrar of Companies related to the raising of the company''s capital, the amount could not be classified as capital expenditure. In this case also,

the amount had been expended by the assessee to bring about the amalgamation of the Ooty Race Club with that of the assessee and the expenses

had been incurred by way of legal expenses for the purpose of the business of the assessee. We are, therefore, of the view that the sum of Rs.

6,556 would be an item of revenue expenditure and would be properly allowable as such. We answer the third question referred to us in the

affirmative and in favour of the assessee.

There will be no order as to costs.