1986 (9) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1,82,434 was an expenditure effectively laid out or expended during the accounting year 1955 within the meaning of section 10(2)(xv) of the Income-tax Act.
2. Whether the said expenditure of Rs. 1,82,434 represented a revenue expenditure.
3. Whether the expenditure was wholly and exclusively laid out for the purpose of the business of the assessee.
4. Whether payment of pension to the widow of an employee was allowable under section 10(2)(xv) or section 10(4A) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Expenditure Effectively Laid Out:
The assessee, a private limited company, claimed deduction of Rs. 1,82,434 paid to trustees for providing pension benefits to its employee, J. B. R. Harvey, and his widow. The Tribunal initially allowed this claim, but the Supreme Court remanded the matter to ascertain whether the expenditure was effectively laid out for the business. The Appellate Assistant Commissioner (AAC) found that the pension provision was a part of the employment agreement and was commercially expedient. The Tribunal accepted these findings, concluding that the expenditure was effectively laid out during the accounting year 1955.

2. Revenue Expenditure:
The Supreme Court had previously held that the sum of Rs. 1,82,434 was not in the nature of capital expenditure or personal expenditure of the assessee. The AAC confirmed that the expenditure was neither excessive nor unreasonable, considering the employee's significant contributions and responsibilities. The Tribunal upheld this, noting that the expenditure was reasonable and commensurate with the employee's service, thus confirming it as revenue expenditure.

3. Wholly and Exclusively for Business:
The Supreme Court directed further inquiry on whether the expenditure was wholly and exclusively for business purposes. The AAC applied the tests from Gordon Woodroffe Leather Manufacturing Co. v. CIT, finding that the pension was a reasonable expectation of the employee and was provided to encourage loyal service. The Tribunal agreed, noting that the expenditure facilitated the carrying on of the business indirectly and was commercially expedient. The Tribunal also considered the socio-economic context, affirming that such provisions were in line with modern business practices and expectations.

4. Payment of Pension to Widow:
The Revenue contended that payment to the widow was not allowable under section 10(2)(xv) or section 10(4A). However, the Tribunal found that the provision for the widow's pension was part of the original agreement and was commercially expedient. The Tribunal cited decisions where similar payments were considered reasonable business expenditures. The Tribunal held that the expenditure was laid out wholly and exclusively for the business, considering the legitimate business needs and the benefit derived by the assessee. The Tribunal's decision was supported by the socio-economic trend of providing for employees' dependents, aligning with modern business practices and statutory provisions in the Income-tax Act, 1961.

Conclusion:
The Tribunal concluded that the expenditure of Rs. 1,82,434 was laid out wholly and exclusively for the business of the assessee and was admissible under section 10(2)(xv) read with section 10(4A) of the Indian Income-tax Act, 1922. The High Court affirmed this decision, noting that the provision for pension to the widow was neither unusual nor unnecessary and was in consonance with modern business practices and statutory provisions. The question referred was answered in the affirmative and in favor of the assessee.