1970 (2) TMI 23 - HC - Income Tax

Whether the sum paid by the assessee to secure a pension to the director on his retirement is a permissible deduction in the computation of the assessee s business income - it was a liability incurred before the date of employee s retirement - incurred wholly and exclusively for the purpose of the business - deductible as business expenditure

Summary

Issues:
1. Deductibility of pension payment in the computation of business income.

Analysis:
The judgment by the High Court of Andhra Pradesh dealt with the issue of whether a sum of Rs. 88,000 paid by an assessee to secure a pension for a director on his retirement is a permissible deduction in the computation of business income under the Income-tax Act, 1961. The assessee, a UK-based company operating in India, intended to retain the director, who had rendered invaluable services, for an additional three years after his due retirement in 1957. Resolutions were passed to modify the director's service agreement, securing a pension of pound 750 per annum for ten years. The company later resolved to pay a pension of Rs. 10,000 per annum for ten years to the director, who eventually retired in 1960. The liability for the pension payment was entrusted to the Life Insurance Corporation by making an outright payment of Rs. 88,000. The income tax authorities rejected the deduction claim, stating that the pension was paid in appreciation of past services, not for securing future services. However, the High Court disagreed, emphasizing the resolutions modifying the service agreement and the commercial expediency of securing the director's services for an additional period. The court held that the payment was not gratuitous but a permissible deduction incurred wholly and exclusively for the business purpose. The court relied on the Supreme Court's criteria of commercial expediency and employee expectation to support the deductibility of the pension payment.

The High Court analyzed the resolutions passed by the company, highlighting the intention to retain the director's services for a further period and the modification of the service agreement to include a pension payment. The court emphasized that the payment was not a mere gratuity but a liability incurred for commercial expediency to facilitate the business operations. The court rejected the income tax authorities' argument that the pension was paid solely in appreciation of past services, emphasizing the importance of securing the director's services for an extended period. The court also distinguished between pension and gratuity payments, noting that the pension was part of the modified service agreement and not a gratuitous payment. The court concluded that the payment to secure the director's services was a permissible deduction in the computation of business income, aligning with the criteria of commercial expediency and employee expectation set by the Supreme Court.

In conclusion, the High Court ruled in favor of the assessee, allowing the deduction of the pension payment in the computation of business income. The court emphasized the commercial expediency and employee expectation criteria, highlighting the modification of the service agreement and the importance of securing the director's services for the business. The court held that the payment was not gratuitous but a permissible deduction wholly and exclusively for the business purpose. The assessee was awarded costs, including advocate's fee, in the judgment.