1969 PLP 603 (PTD)

MUHAMMAD SIDDIQ, J.‑This is an application under subsection (2) of section 66 of the Income‑tax Act, 1922, and has arisen in the following circumstances: During the assessment year 1959‑60, Messrs Frontier Sugar Mills, Takhat Bhai, Mardan, claimed a deduction of Rs. 20,000 out of which sum of Rs. 15,400 had been donated by the Company on the 29th of May 1959, to the Akbar Memorial College, Mardan, on the request of a Central Minister and the Divisional Commissioner, and a sum of Rs. 5,000 was donated on the 19th of June 1959, to the Commissioner, Peshawar Division, for the welfare activities. The Income‑tax Officer disallowed the deduction as they were in his opinion neither covered by section 10 (2) (xvi) nor by section 15‑D of the Income‑tax Act, 1922. The Company went in appeal to the Appellate Assistant Commissioner of Income‑tax who allowed these two items holding that the expenditure had been incurred on account of business expediency and was thus covered by section 10 (2)(xvi) of the Act. The Commissioner filed an appeal to the Income‑tax Appellate Tribunal which upheld the decision of the Appellate Assistant Commissioner of Income‑tax. The Commissioner moved the Income‑tax Appellate Tribunal under section 66 (1) for referring the following question arising out the decision for the determination of the High Court :‑ "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the donations paid under the behest of Civil authorities were admissible under section 10 (2) (xvi) of the Act?" This request was disallowed as the Tribunal was of the opinion that the question formulated by the Commissioner of Income‑tax was not a referable question of law. It is mentioned as follows in the orders of the Tribunal, dated the 20th of July 1966 :‑ "However, the point whether these amounts cannot be allowed on the ground that these donations had been made at the behest of some officers was neither raised nor discussed by the Tribunal. The Tribunal on a consideration of all the facts of the case held that this expenditure had been incurred wholly and exclusively for the purposes of business inasmuch as it was incurred with a view to earn goodwill of the officers and thereby facilitate the smooth conduct of the business. The Commissioner of Income‑tax has not chosen to contest the finding of the Tribunal that the expenditure was incurred wholly and exclusively for the purpose of business. The learned Departmental Representative tried to explain this away by asserting that the fact that the donations had been made under the directions of the civil authorities, in itself clearly implied that this expenditure was not solely for the purpose of business and hence did not fall within the purview of section 10 (2)(xvi). We are unable to accept this contention . . . . . . This is precisely the position in the instant case and the question as to, at whose instance, request or behest, the expenditure was incurred is irrelevant for the determination of the issue if it is held that the expenditure was incurred solely for the purpose of business . . . . ."

2. The relevant provisions for the purpose of reference to this Court are laid down in subsections (1) and (2) of section 66 of the Act. According to subsection (1) ibid, the assessee or the Commissioner may‑, by application m the prescribed form, require the Appellate Tribunal tee refer to the High Court any question of law arising out of such order, and the Appellate Tribunal shall draw up a statement of the case and refer it to the High Court. According to subsection (2) ibid if on any application made under subsection (1) the Appellate Tribunal (1) refuses to state the case, (2) on the ground that no question of law arises, the assessee or the Commissioner as the case may be, may apply to the High Court and the High Court may (1) if it is not satisfied with the correctness of the decision of the Appellate Tribunal (2) require the Appellate Tribunal to state the case and to refer it, and (3) on receipt of such requisition the Appellate Tribunal shall state the case and refer it accordingly.

3. It would appear from the above that the assessee or the Commissioner may suggest to the Tribunal a question of law arising out of the order for being referred to the High Court but the Tribunal is not bound to refer the same question but has itself to draw up a statement of the case for reference to the High Court. Again, according to subsection (2) the Tribunal is not justified in refusing to state the case on the mere ground that the question as suggested, does not arise but can "refuse to state the case on the ground that no question of law arises" and the High Court when moved under subsection (2) of section 66 of the Act has to satisfy itself as to whether the' decision of the Appellate Tribunal that "no question of law arises" is correct or not.

4. In our opinion, the order of the Income‑tax Appellate Tribunal does give rise to a question of law. The Company had claimed protection for two items which could be covered by section 10 (2) (xvi) or by section 15‑D of the Income‑tax .Act. Since the donee institutions had not been approved by the Central Government for the purpose of section 15‑D; no protection was claimed under section 15‑D. The sole question for determination before the Income‑tax authorities, therefore, was as to whether or not these two items of expenditure could properly fall within the scope of section 10 (2) (xvi) of the Act. This requires an interpretation of the aforementioned legal provision, the relevant part of which protects "any expenditure . . . . . expended wholly and exclusively for the purpose of such business . . . . ." The language suggests a direct relationship between the expenditure and the purpose of the business of the assessee. In other words, the destination of the expenditure should be visible and in the service of the purpose of the business of the assessee. This seems to have been emphasised by the Statute by using the word "wholly" and the Legislature was not content with this word alone and had to make its meaning much clearer by adding the words "and exclusively". The plain language of this clause would, therefore, indicate that the Legislature did not contemplate and did not tolerate any part of the expenditure being disbursed on items other than the business of the assessee. As against this, the stand taken up by the Appellate Assistant Commissioner of Income‑tax and the Income tax Appellate Tribunal was that there may be no visible connection between the item and how it was expended, if it can be said that it was spent as a business expediency. This would mean that the Legislature and the functionaries entrusted with the administration of the Act, will not at all know how the amount was expended and still protection is claimed for the amount on the ground that it was expended wholly and exclusively for the purpose of the business. In other words, the frontiers of this clause are intended to be enlarged and expanded so as to include items which might indirectly serve the purposes of the business either by procuring the goodwill of some important authority in, the State or by protecting the business from possible mischief that may result if the said functionary is disappointed by the refusal and gets disposed towards creating nuisance. It will be a question of law as to whether clause (xvi) of section 10 (2) of the Act can be properly extended to cover such items of expenditure. And if it can be so extended, it will be necessary to define the new boundaries for the operation of this clause and the matter cannot be left to the whims of the Income‑tax authorities and the Appellate Tribunal etc. There should be some indication as to which functionary of the State is to be accommodated, under what circumstances and to what extent. Learned counsel for the assessee submitted that the question as suggested by the Commissioner impliedly conceded that such donations if they were made voluntarily were properly covered by sec tion 10 (2) (xvi) of the Act. Learned counsel for the Commis sioner refuted this suggestion and submitted that the position of the Department was that clause (xvi) ibid extends only to such items of expenditure which are expended wholly and exclusively as well as directly for the purpose of the business of the assessee. Counsel's further submission was that the assessee‑Company had not claimed these two items as having been spent for the purpose of the business of the assessee and its only claim was that they were spent indirectly for the purpose of their business as items of business necessity to win the goodwill of certain important authorities or perhaps to save their business from the consequences of their ill‑will. The two items were allowed to the Company by the Appellate Assistant Commissioner as well as by the Income‑tax Appellate Tribunal, not because they had been spent directly for the purpose of the business of the Company but because they were items of business expediency. It was for this reason, according to the learned counsel, that the question suggested to the Tribunal for reference was formulated, so that the new scope of clause (xvi) to accom modate items spent on business expediency, may be got defined through an authoritative pronouncement of this Court. In our opinion, the order of the Tribunal has given rise to a question of law with regard to the interpretation of section 10 (2) (xvi) of the Act and it is to be determined as to whether clause (xvi) of section 10 (2) is restricted to items which are spent directly for the purposes of the business or can extend to items of expenditure which have no visible connection with the purpose of the business, but which can be termed as expenditure on account of business expediency. If such items of business expediency are to be permitted m this clause, it would be useful to consider if some guidelines can be laid down to determine the scope and extent of this protection.

5. In the result, we are not satisfied of the correctness of the decision of the income‑tax Appellate Tribunal in refusing to state the case and to refer it to this Court and we hereby require the Appellate Tribunal to state the case and to refer it to this Court in terms of subsections (1) and (2) of section 66 of the Income‑tax Act. The parties are left to bear their own costs. Reference answered accordingly.