JUDGMENT Rajes Kumar, J.
1. At the instance of the Revenue, the Income Tax Appellate Tribunal, has referred the following two questions of law Under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "Act") relating to the assessment year 1981 -82 for opinion to this Court.
"1. Whether in law and in the circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 12,25,000/- paid to M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd.?"
2. Whether in law and in the circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was justified in holding that the payment of Rs. 12,25,000/- was not in the nature of ex-gratia payment nor diversion of income?"
2 . The brief facts of the case are as follows:-
The assessee/opposite party (hereinafter referred to as "assessee") was a Public Limited Company and engaged in the business of manufacturing and sale of Jute goods and also derived income from the interest on securities income and from house property business etc.
3. During the year under consideration, there was power cut and assessee Company availed of surplus capacity of electricity available with M/S J. K. Synthetics and M/S J. K. Iron and Steel Co. Ltd., with the approval of Kanpur Electricity Supply Administration. A resolution was passed by the Board of Directors on 18.4.1980 authorising the arrangement between M/S J. K. Synthetics Ltd and M/S J K, Iron and Steel Co. for transfer of unutilized power available with the above two Companies to the J. K. Central Sub Station. As per resolution passed in the meeting, the assessee Company was to meet the actual cost of consumption of power and pay electricity charges to K. E. S. A. in respect of diverted power consumed by the assessee Company. In addition, it was agreed to pay compensation of Rs. 1.75 Lacs per month to M/S J. K. Synthetics Ltd. and M/S J. K. Iron & Steel Co. and the same was to be shared equally by the assessee Company and by M/S J. K. Cotton Mills, who were also availing of the facilities of diverted power from M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. In this way, during the year under consideration, apart from the payment to K. E.S. A. for the actual power consumed, the assessee Company paid a sum of Rs. 12,25,000/- to M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. and claimed deduction of the said amount. The Income Tax Officer disallowed the assessee's claim mainly for the following reasons:-
(a) The selling of electricity is a constravention of Electricity Act and in his opinion, the payment of Rs. 12,25,000/- represented nothing, but sale price of electricity by J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd., to the assessee Company. This payment was, therefore, in contravention of law and could not bed allowed as business expenditure.
(b) That there was no pecuniary loss or damage to M/S J. K. Synthetics and J. K. Iron Co. Ltd., as a result of diversion of power by them to the assessee Company and to M/S J. K. Cotton Mills and so there could be no case for paying compensation to those Companies without any loss or damage to them. The payment made was otherwise than for business consideration and business expediency.
(c) The payment of compensation amounted to a pure and simple diversion of the income in favour of other two Companies in the same group without an overriding title. Such diversion by the assessee Company could not be allowed as a deduction. The payment of compensation was a mere facade for transfer of funds affected under the garb of resolution passed in the metting of Board of Directors, the resolution itself being a serving document.
4. The assessee being aggrieved with the above decision of the Income Tax Officer, preferred an appeal before the Learned C. I. T., (A), who sustained the addition with the observation that the "I. T. O. was absolutely correct in his statement that the above payment of Rs. 12,25,000/- actually represented a payment for transfer of electric power, which was not authorised under the U. P. Electricity' Act, 1977. Therefore, such an unauthorised payment cannot be allowed as legitimate business expenditure. In the alternative, it is seen that the amount paid by the assessee to M/S J. K. Synthetics and J. K. Iron & Steel Co. was in the nature of ex-gratia payments and such ex-gratia payment also does not constitute an admissible business expenditure 44 ITR 551 (SC), in the circumstances, the disallowance made by the I. T. O. was confirmed."
5. The assessee Company being dissatisfied with the decision of the learned C. I. T. (A), further took up the matter to the Income Tax Appellate Tribunal.
6. Tribunal allowed the appeal and deleted the addition. Tribunal held as follows:-
After carefully examining the facts of the case and after going through the various authorities and Acts, and the relevant correspondences placed on record by the assessee, we are convinced that who was paid by the assessee to J. K. Synthetics and J. K. Iron & Steel was the price for assignment of the right to consume electricity by these Companies to the assessee Company. No sale of electricity by the aforementioned Companies to the assessee is involved. In fact they could never sold electricity to the assessee Company for electricity never belonged to them. Supply of electricity was made by KESA and the price of electricity was held by the assessee Company to KESA directly. The transfer of the quota rights for consumption of electricity pertaining to J. K. Iron & Steel and M/S J. K. Iron & Steel and J. K. Synthetics Ltd. was made by the aforesaid two Companies to the assessee Company with the consent and concurrence of KESA. It was therefore, not authorised Act to transfer the quota right to consume electricity. The learned Departmental representative has not been able to show any provision in any of the aforesaid Acts or Order which might prohibit assignment of quota rights to consume electricity by one person to another after obtaining due approval of the Electricity Supply Undertaking. This being so, there is no justification, in our opinion, to hold that the payment was in contravention of law. The learned Departmental Representative made a straneous effort to bring the cases of M/S J. K. Synthetics and J. K. Iron and Steel Ltd. in the category of "Licensee" in defined under the Indian Electricity Act, 1810 of Electricity Supply Act, 1948, but the aforesaid attempt was not found to be in accordance with law. "Licensee" has been defined under the Indian Electricity Act, 1910 as follows:-
" Licensee means any person licensed under part II to supplyenergey."
Under the Electricity Supply Act, 1948 also licenses has been similarly defined as follows:-
"Licensee means a person licensed under part II of the Indian Electricity Act, 1910 to supply energy or a person who has obtained sanction under Section 28 of that Act, to engage in the business of supplying energy...."
In the present case, M/S J. K. Synthetics or J. K. Iron and Steel Co. Ltd. have not been licensed under part II of the Indian Electricity Act, 1910 to supply energy to anyone and so they are not "licensees" under the Indian Electricity Act, 1910. Similarly they have not obtained sanction Under Section 28 of the Indian Electricity Act, 1910 to engage in the business of supplying energy. Therefore, for this reason also, it would not be correct to hold them as licensee under the Electricity Supply Act, 1948, suh clause (6) of clause 2 thereof. This being so, the contention of the revenue has to be rejected. There was no infringment of law in the payment of Rs. 12,25,000/- by the assessee Company to MJs J. K. Synthetics and J. K. Iron & Steel Co. not a case of ex-gratia payment. There is no diversion of income involved with as in the present case what is under consideration is an item of expenditure and not an item of income being diverted by the assessee Company to the aforesaid two Companies. The orders of the authorities below are, therefore, hereby reversed and the claim of the assessee is accepted. The addition made accordingly stand deleted.'
7. Heard Sri Shambhu Chopra, learned Standing Counsel appearing on behalf of revenue and Sri R. S. Agarwal, learned Counsel appearing onbehalf of the assessee.
8. Learned Standing Counsel submitted that by adopting an illegal arrangement with an intent to divert the income, payment of Rs. 12,25,000/- was made by the assessee Company to M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd.as a premium to utilize the unused extra load electricity was in the nature of ex-gratia payment, inasmuch as, it was over and above, electricity" charges paid to the Electricity Department for the electricity consumed, therefore, it was not in the nature of business expenditure. Learned Counsel for the assessee relied upon the decision of Tribunal.
9. We have perused the assessment order, order of the C. I. T. (Appeals) and the Tribunal and also given our anxious consideration, to the submissions made by the learned Counsel for the parties.
10. There is no dispute that the arrangement made between the assessee Company and M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. for use of extra electricity load had a approval of KESA and it was with the consent of KESA, such arrangement was made, therefore, arrangement can not be said to be illegal or unauthorized. It is also not in dispute that the electricity which has been utilized against the sanctioned capacity of M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. were used for the business purposes, inasmuch as, the payment relating to the electricity charges made to KESA has been treated as business expenditure and has been allowed. Question for consideration is that the premium paid to M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. under the agreement for availing the quota right to consume electricity is a business expenditure.
11. Section 10(2)(xv) of the Act, 1922 and Section 37 of the Act, 1961 are synonymous. Section 37 of the Act reads as follows:-
(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 (and Section 80VV) 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."
12. In the case of Commissioner of Income Tax, Kerala v. Malayalam Planntation Ltd. reported in 53 ITR page 140 SC, the Apex Court interpreted the expression "for the purpose of the business" as follows:-
"The expression "for the purpose of the business" is wider in scope that 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 rationalization of its administration and modernization 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 satututory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. Howsever, wide the meaning of other expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business."
13. In the case of Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income Tax, Bombay reported in 56 ITR page 52 SC, the Apex Court held that the expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure, and wholly and exclusively for the purposes of the business. In considering whether expenditure is revenue expenditure, the court has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency, If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on the business, the expenditure may be regarded as revenue expenditure."
14. In the case of Commissioner of Income Tax, West Bengal v. Birla Cotton Spinning and Weaving Mills Ltd. reported in 82 ITR page 166, the Apex Court held as follows: -
"It is well settled by now that the deducibility of expenditure incurred in prosecuting the civil proceedings to resist the endorcement of a measure,, legislative or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measures is invalid, would, if other conditions are satisfied, be admissible as a deduction Under Section 10(2)(xv). Deductibility of such expenditure does not depend on the final outcome of those proceedings. However, wrong-headed, ill advised, unduly optimistic orover confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannotbe denied as a permissible deduction if it is reasonably and honestly incurred to promote the interest of the business. (See Sree Meenakshi Mills Ltd. v. Commissioner of Income Tax)."
15. In the case of Sassoon J. David and Co. P. Ltd.. v. Commissioner of Income Tax, Bombay reported in 118 ITR page 261 SC, the Apex Court has interpreted the expression wholly and exclusively as follows:-
"The expression" wholly and exclusively" used in Section 10(2)(xv) of the Income Tax Act, 1922, does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction Under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction Under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law."
16. It is also relevant to refer the facts of the case and observations made by Apex Court:-
Shares of the appellant, an investment company, were held by the Davids. Its assets were worth Rs.155 Lakhas as on December, 31, 1955. On December 2, 1955, its directors proposed that the services of 22 employees, the managing director and a director be terminated and that they be paid compensation; and on January 25, 1956, the shareholders accepted the directors' proposal. Under an agreement dated March 23, 1956, the Davids agreed to sell to the Tatas all the shares in the appellant company for Rs.155 lakhs, the sum voted for payment of compensation to the employees being deductible therefrom. The agreement also provided that the Davids should arrange to terminate the services of all employees with effect from March 31, 1956, and arrange to have all directors resign their offices so that the Tatas would be entitled to appoint their own directors or employees. Aftger the take over, the appellant re employed 9 of the 22 employees. There was a substantial reduction in the wage bill as a consequence of the retirenchment The appellant paid Rs, 1,64,899 during the calendar year 1956 relevant to the assessment year 1957-58 which amount, inter alia included Rs. 16,188 paid to the managing director in lieu of six months' notice, Rs. 21,200 paid inwards compensation for termination of pension allowance and Rs. 16,885, the first of five annual payments as compensation to the director. The appellant claimed deduction of the sum of Rs. 1,64,899 as business expenditure Under Section 10(2)(xv). The Appellate Tribunal held that the expenditure had been incurred by the appellant and for the purpose of the business but purely as a result of the bargain between the Davids and the Tatas and that, even assuming the payments were beneficial to the appellant, no deduction could be allowed since they had been made to benefit third parties. On a reference, the High Court held that only the two amounts of Rs.21,200 and Rs. 16,188 were allowable as deductions and that the balance of Rs. 1,27,511 paid to the employees and a director was not allowable as a deduction since the expenditure had not been incurred by the company for commercial reasons.
Held, "even assuming that the motive behind the payment of the compensation was that the terms of the agreement between the Davids and the Tatas for the sale of the shares should be satisfied, as long as the amount of Rs. 1,27,511 was laid out wholly and exclusively for the purpose of the business of the appellant there was no reason for denying the benefit of Section 10(2)(xv). The appellant company continued to. function even after its control passed on to the Tatas and the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of the Tatas who were only its shareholders. As a result of the expenditure, the appellant company was in fact benefited by reduction in its wage bill. It could not be said that the Tatas were in any way benefited financially because of the deduction in the consideration payable by them for the shares. The sum of Rs. 1,27,511 was expended by the appellant on the ground of commercial expendiency and in order indirectly to facilitate the carrying on of its business and was, therefore, allowable as a deduction.
17. In the case of Commissioner of Income Tax, Delhi v. Delhi Safe Deposit Co. Ltd., reported in 133 ITR page 756 SC, the Apex Court has held as follows:-
"The expenses incurred by the assessee to avoid any adverse effect on its reputation to protect the managing agency, which was an income carrying apparatus, and for retaining it with the reconstituted firm in which the interest of the assessee was the same os before. Therefore, the expenditure was laid out on purely business consideration and wholly for the purpose of the assessee's business. It has been held that 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 makaing it pay and not in any other capacity than that of a trader."
18. In the case of Commissioner of Income Tax v. Rajaram Bandekar reported in 203 ITR page 503, the assessee was carrying on the business of mining. Mining concession owned by the partner. Disputes arose between the partner and his brother with regard to the mining concession. Dispute was settled on paymem of money under terms of settlement by the assessee. The Division Bench of Bombay High Court has held that the amount paid was incidental to the business of the assessee and held that the amount paid was deductible Under Section 37 of the Act.
19. In the case of Sri Venkaya Satyanarayana Rice Mill Contractors Co. v. Commissioner of Income Tax, reported in 223 ITR page 101 SC, the Apex Court held as follows: -
"Any contribution made by an assessee to a public welfare fund which is directly connected or related to the assessee's business has to be regarded as on allowable deduction Under Section 37(1) of the Income Tax Act, 1961. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and such a view tosecure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground in deny the assessee a deduction of that amount Under Section 37(1) of the Act when such payment had been made for the purpose of the assessee's business."
20. Royalty paid for use of trademark for a specified number of years, held revenue expenditure as the same was for an improvement in the operations of its existing business and its efficiency and profitability. (Vide C.I.T. v. Ashoka Mills Ltd., (1996) 218 I. T. R. 526 (Guj.), Bhakti Mala Beedi Factory v. C.I.T. C.I.T. v. Raipur Manufacturing Company; (1998) 2311 .T.R. 598 (Guj.).
21. Fact of the present case shows that Company was in need of electricity, as their sanctioned load was not sufficient to get the required supply. In the circumstances, in the absence of power supply, the Company had to suffer for production. As a prudence business man and for the business expendiency, if the Company had undergone an arrangment with M/S J. K. Synthetics and M/S J. K. Iron & Steel Co. Ltd. to get their electricity load to consume electricity after obtaining approval of Kanpur Electricity Supply Undertaking on payment of certain premium to those Companies, such payment was in the interest of the Company for the purposes of business, thus allowable as business expenditure Under Section 37 of the Act. Tribunal has rightly held that there was no diversion of income involved in the present case and what has been paid was towards the expenditure and not of the income being diverted by the assessee Company to the aforesaid Companies,
22. In view of the foregoing discussions, questions referred above, are answered in affirmative i.e. in favour of assessee and against the revenue. However, there shall be no order as to costs.