2018 (4) TMI 746 - HC - Income Tax

Business expenditure u/s 37 - amount paid to the widow of the former Managing Director of the company who passed away - payment of pension - Held that - AO failed to understand the meaning of the expression Dying in harness . The Assessing Officer has confused this expression with that of Dying in the course of employment . The Assessing Officer should have known that Died in Harness would mean that a person dies while he was in service and does not mean that while on duty. This erroneous interpretation has led to an erroneous Assessment Order. Unfortunately, the CIT (A) also did not take note of the factual position that a resolution was passed by the Respondent Board and came to the conclusion that the payment given to the widow of Mr.K.R.Sundaram is purely discretionary and not a pension. There is a resolution, which has been passed by the Board of the Assessee company recognizing the service rendered by Mr.K.R.Sundaram for over 30 years. The Commissioner of Income Tax (Appeals) while considering the decision in the case of Lucas Indian Service Ltd. 1997 (2) TMI 23 - MADRAS High Court has made a hair-splitting exercise of the facts of the said case and sought to distinguish the judgment by observing that initially there was a resolution passed, which was modified by another resolution granting pensionary benefit to the employee and thereafter to his wife for a fixed period of 10 years. Unfortunately, CIT-A has lost its sight that the ratio decidendi in the case of Lucas Indian Service Ltd., is that it is sufficient that the company passes a resolution granting monetary benefit to the legal heir of a former employee and such resolution is sufficient even if the company does not have a pension scheme. The said resolution was taken into consideration and the claim by the Assessee therein that the payment made was business expenditure was accepted. Therefore, the reasons assigned by the Commissioner of Income Tax in not applying the decision in Lucas Indian Service Ltd. is not acceptable. - Decided in favour of the assessee

Summary

Issues:
Interpretation of 'Dying in harness' vs. 'Dying in the course of employment' for tax deduction.
Validity of payment to widow of Managing Director as a deduction.
Application of commercial expediency in granting pension to legal heirs.
Comparison with previous judgments on similar cases.

Interpretation of 'Dying in harness' vs. 'Dying in the course of employment' for tax deduction:
The High Court analyzed the distinction between 'Dying in harness' and 'Dying in the course of employment' for tax purposes. The Assessing Officer's misunderstanding of the term 'Dying in harness' led to an erroneous Assessment Order. The Court clarified that 'Dying in harness' refers to a person dying while in service, not necessarily on duty. This misinterpretation influenced the initial rejection of the claim by the Assessee.

Validity of payment to widow of Managing Director as a deduction:
The case involved the Assessee company's decision to pay a minimum pension to the widow of a former Managing Director. The Board's resolution considered the deceased's significant contribution to the company's growth and decided to provide financial support to his widow. The Assessing Officer initially rejected this claim, but the Tribunal reversed this decision, emphasizing the commercial expediency of the payment.

Application of commercial expediency in granting pension to legal heirs:
The Court referred to past judgments, such as Commissioner of Income Tax Vs. Lucas Indian Service Ltd., to support the Assessee's position. The Court highlighted that the payment to legal heirs, even without a formal pension scheme, could be considered a business expenditure if made out of commercial expediency. The resolution passed by the company to provide financial support to the deceased employee's widow was seen as a gesture of goodwill and employee welfare, promoting a positive employer-employee relationship.

Comparison with previous judgments on similar cases:
The Court cited previous decisions, including those by the Bombay High Court and the Gujarat High Court, to support the Assessee's claim. These judgments emphasized that payments to legal heirs, even without a specific pension scheme, could be allowed as business expenditures if made for commercial reasons. The Court found that the Tribunal's decision aligns with established legal principles and upheld the allowance of the payment to the widow of the Managing Director.

In conclusion, the High Court dismissed the Revenue's appeal, stating that the Tribunal's decision did not warrant interference. The Court ruled in favor of the Assessee, emphasizing the commercial expediency and business nature of the payment to the deceased Managing Director's widow. The judgment highlighted the importance of legal precedents and the application of commercial considerations in determining tax deductions related to payments to legal heirs.