M/S SRI VENKATA SATYA NARAYANA RICE MILL CONTRACTORS CO. vs. THE COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH- II

CIVIL APPEAL No. 5623/1983Supreme Court1996 INSC 122625 October 1996Bench: 2 JudgesAuthor: J.S. VERMA, B.N. KIRPAL SRI VENKATA SATYA NARAYANA RICE MILL A CONTRACTORS CO.12 pages
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What were the facts?

The assessee, M/s Sri Venkata Satyanarayana Rice Contractors Co., engaged in exporting rice from Andhra Pradesh, was required to obtain a permit from the District Collector. Obtaining this permit was conditional upon making a compulsory contribution to a State Welfare Fund, established under a scheme developed by the Rice Millers Association in consultation with the District Collector. The assessee claimed this contribution as a business expenditure under Section 37(1) of the Income Tax Act, 1961. The Income Tax Officer and the Appellate Assistant Commissioner disallowed the deduction. The Income Tax Tribunal, however, allowed it, holding the contribution was not opposed to public policy. The High Court, on reference, disagreed, ruling the payment was opposed to public policy, thus disallowing the deduction. This led to the present appeal.

What did the Supreme Court hold?

The Supreme Court held that any contribution made by an assessee to a public welfare fund, which is directly connected or related to the carrying on of the assessee's business or results in a benefit to the assessee's business, is an allowable deduction under Section 37(1) of the Income Tax Act. The Court found that the contribution to the District Welfare Fund, made with a view to securing benefit to the assessee's business, could not be regarded as opposed to public policy. It was not an illegal gratification or a payment to a private fund. The mere fact that making a donation for a public cause results in government patronage or benefit does not disqualify it from being a deductible business expenditure. The Court cited several precedents, including Atherton v. British Insulated & Helsby Cables Ltd. and Mis Patnaik & Co. Ltd. v. Commissioner of Income Tax, Orissa, to support its reasoning. The High Court's conclusion was reversed, and the questions of law were answered in favour of the appellant.

What were the issues?

1. Whether the contribution made to the welfare fund was opposed to public policy, and therefore not deductible under Section 37(1) of the Income Tax Act, 1961. 2. Whether the contribution made to the welfare fund was motivated purely by commercial consideration and was allowable as a business expenditure under Section 37(1) of the Income Tax Act, 1961. Assessee's arguments: The assessee contended that the contribution was directly related to carrying on its business and was therefore an allowable deduction under Section 37(1). They argued that the High Court erred in equating the contribution to a bribe or deeming it opposed to public policy, as it was a payment for a just cause that enabled them to obtain necessary permits for their business. Revenue's arguments: The revenue argued that the payment was opposed to public policy and therefore not deductible. The High Court's decision in favour of the revenue was based on this premise.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 256(1),Section 80-G

AI-generated summary — verify with the full judgment below

MIS SRI VENKATA SATYA NARAYANA RICE MILL A CONTRACTORS CO. v. THE COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH- II OCTOBER 25, 1996 B (J.S. VERMA AND B.N. KRIPAL, JJ.) I11come Tax Act, 1961-Sectioll 37(1)-I11come Tax Deductio11 u11der busilless-Claim of-Amou11t paid to State Welfare Fund, which was com- pulsory to get export pemzit-High Court concluded that the payment is op- C posed to public policy, hence deduction not allowed-Held, the payme11t, is allowable deductio11, since it is directly connected with carrying 011 of assessee's business or results in the benefit of assessee's business-And not opposed to public policy, since the Fund is for the use of public.

Appellant was carrying on business of exporting rice, from the State D of Andhra Pradesh, for which he required permit from District Collector.

The permit could be obtained only on compulsory contribution to State Welfare Fund, which was established pursuant to a Scheme, evolved by the Rice Millers Association in consultation with the District Collector. The appellant claimed deduction of the amount paid to the Welfare Fund, as E a business expenditure u/s 37(1) of Income Tax Act.

Income Tax Officer di

The order continues below.

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