1968 (11) TMI 40 - HC - Income Tax

Assessee taking over business as going concern - payment made towards pension to some employees who had served for long - expenses were made to protect their goodwill(capital asset) and defending it against possible competition - even if expenditure was made to protect their capital assets, still it can be classed as a business expenditure

Summary

Issues Involved:
1. Whether the payments made to the two ex-employees were in the nature of capital expenditure.
2. Whether the payments to the two ex-employees represented expenditure wholly and exclusively laid out for the purposes of the assessee-company's business.

Detailed Analysis:

Issue 1: Nature of Expenditure (Capital vs. Business)
The primary issue was whether the amounts paid by the assessee-company as pensions to two of its erstwhile employees, March and Dave, were capital expenditures or expenditures for business purposes. The Income-tax Officer initially allowed the pension payments as business expenditure for the assessment year 1955-56 but subsequently disallowed them for the following years, arguing that the payments were not made in the ordinary course of business but were ex gratia payments. The Appellate Assistant Commissioner and the Tribunal later disallowed the payments on the grounds that they were in the nature of capital expenditure, meant to protect the goodwill of the company by preventing competition from the retired employees.

The Tribunal relied on the decision in Associated Portland Cement Manufacturers Ltd. v. Kerr and held that the payments were not for past services but to prevent competition, thus benefiting the company's capital assets. However, the High Court disagreed with this view, stating that the agreements must be read as a whole and not in isolation. The court emphasized that the agreements did not explicitly state that the pensions were for past services but noted the longstanding service of the employees with the firm and the continuity of the business and employers. The court concluded that the payments were primarily in consideration of past services and were, therefore, business expenditures, not capital expenditures.

Issue 2: Expenditure Wholly and Exclusively for Business Purposes
The second issue was whether the payments made to the ex-employees were wholly and exclusively for the purposes of the assessee-company's business. Initially, the Tribunal refused to consider this contention from the department, but upon direction from the High Court, it re-examined the issue and concluded that the payments were indeed wholly and exclusively for business purposes.

The High Court agreed with the Tribunal's supplementary statement, which considered the long service of the employees and the continuity of the business and employers. The court noted that the payments were made while the employees were still in service and had several years left before retirement. The court also dismissed the department's argument that the absence of a general pension scheme indicated a lack of business consideration, citing similar cases where payments to individual employees were deemed reasonable even without a general scheme.

The court referenced the Indian Overseas Bank Ltd. v. Commissioner of Income-tax case, where payments to retiring employees were considered business expenditures due to their long service, despite the absence of a general pension scheme. The court also distinguished the present case from Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income-tax, where a lump sum gratuity was paid after the employee's resignation, indicating a capital expenditure.

The High Court concluded that the payments were business expenditures, made in consideration of the employees' long service and not for acquiring any new capital asset. The court also noted that even if the payments were to protect the company's goodwill, they did not alter the company's capital assets and were therefore business expenditures.

Conclusion:
1. The payments made for each of the four assessment years were not in the nature of capital expenditure and were admissible under the provisions of section 10(2)(xv) of the Income-tax Act.
2. The payments to the two ex-employees represented expenditure wholly and exclusively laid out for the purposes of the assessee-company's business.

The Commissioner was ordered to pay the costs of the assessee, with no order as to costs on the notice of motion.