Dilly-Dallying On Deductibles

No definite view in this regard is possible as such claims are mostly decided on the basis of the specific facts and circumstances of each case. However, even in identical cases, the courts seem to have sometimes taken varied views regarding tax treatment of such expenditure.

In CIT vs Bombay State Road Transport Corporation (1977), the Bombay High Court decided that contributions made by a State Transport Corporation out of its revenue to a Third Party Liability Fund under the provisions of the Road Transport Corporation Act and the rules made thereunder, was an admissible deduction, as the provision was being made under a legal obligation cast on it by a statutory rule.

 

But a different view has been expressed by the Madras High Court in CIT vs Pallavan Transport Corporation Ltd (1997). The assessee company was a state government undertaking engaged in providing passenger transport. It contributed a certain amount to the insurance fund and claimed deduction on the ground that the payment was in accordance with the statutory provisions of the Motor Vehicles Act 1939. However, the income tax department contested this view, saying that the liability was a contingent liability. Thus, the issue ultimately went to the high court for its opinion.

The high court rejected the assessees view. The fact that the assessee had created the fund for fulfilling a statutory obligation imposed on it by the Motor Vehicles Act, and contributed the amount which was payable only on the happening of an event, would not entitle the assessee to ask for deduction of the amount as admissible revenue expenditure as it was only a contingent liability, the court said.

In another case Colaba Central Cooperative Consumers Wholesale & Retail Stores Ltd vs CIT (1997) the share capital of the assessee, a cooperative society, had been contributed by the government. For repayment of such capital, the assessee was required to set up a government share capital redemption fund. Hence, the assessee claimed deduction of such amount in the computation of its total income. The claim was disallowed by the high court on the ground that such a deduction cannot be claimed either under section 37(1) or section 28(1) of the Income Tax Act 1961, as the amount transferred to the redemption fund is not an expenditure which is what is paid out or away, and is irretrievable.

Provisions made for statutory reserves have also been considered inadmissible in the case of Vellore Electric Corporation Ltd vs CIT (1997). In this decision, contributions made to the contingency reserve, development reserve, and tariff and dividend control reserve under the Electric (Supply) Act for the purpose of distribution of power, have been held to be inadmissible in computing taxable income of the company. It is interesting to note that a favourable view concerning the allowance in regard to the contingency reserve was taken in the earlier case of Darbhanga Laheria Sari Electric Supply Corp Ltd vs CIT (1979), and also in few others.

Also, voluntary payments made to harness goodwill of higher authorities have been held to be allowable. In CIT vs Kanyakumari Distt Cooperative Supply and Marketing Society Ltd (1996), contribution made by a marketing society to District Welfare Fund for the purpose of garnering the District Collectors goodwill, has been held to be an allowable deduction. In Addl. CIT vs Kuber Singh Bhagvandas (1979), donations to Chief Ministers Drought Relief Fund, where the object of such donations was to obtain permits to enable merchants to earn profits, have been held as admissible deductions.

This decision has recently been affirmed by the Supreme Court in the case of M/s. Srivenkata Satya Narayana Rice Mills Contractors Company vs CIT AP JT 1996. In this case, the assessee was in the business of exporting rice from Andhra Pradesh. This rice could not be exported without obtaining a permit from the District Collector. The permit was given only after a certain amount was paid to a Welfare Fund established by the Collector. The Supreme Court has ruled that such contributions to such welfare funds are admissible deductions in computing taxable income.

The foregoing discussion brings out the position that in cases of statutory obligations, the claim would depend on whether the liability claimed has crystallised, or is merely in the nature of a reserve which may or may not be required to be discharged. While the former type of claims would be allowed for deductions, those falling in the latter category would be inadmissible.

In cases of administrative levies, the issue will have to be decided on considerations of commercial expediency (barring illegal payments). The expression commercial expediency has been considered by the Supreme Court in the case of Shazada Nand & Sons vs CIT (1977). It has been said that commercial expediency in business has to be judged not in the light of 19th century laissez faire doctrine but in the context of current socio-economic thinking. In another earlier decision reported in (1961) Act ITR 671 (SC) also, it was observed by the apex court that commercial expediency must be viewed in the light of the requirement of business. Hence, prima facie, a liberal not stringent view has to prevail where payments under administrative orders/practices are to be considered for tax purposes.