1970 (2) TMI 50 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Termination of employees and payment of retrenchment compensation.
3. Commercial expediency and the purpose of expenditure.
4. Payment of gratuity and commutation of pension liability.
5. Legal liability for compensation in lieu of notice.

Detailed Analysis:

1. Deduction of Expenditure under Section 10(2)(xv)
The primary issue was whether the aggregate expenditure of Rs. 1,64,899 incurred by the assessee-company for the assessment year 1957-58 could be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal rejected the claim, stating the expenses were not incurred for business expediency but were part of the transaction of selling the company's shares and transferring management to Tata Sons Ltd.

2. Termination of Employees and Payment of Retrenchment Compensation
The assessee-company terminated the services of 22 employees, the manager, and the managing director, paying them retrenchment compensation. The termination was a condition in the agreement for the sale of shares to Tata Sons Ltd. The Income-tax Officer and subsequent authorities held that the termination was not for business purposes but to fulfill the terms of the sale agreement.

3. Commercial Expediency and Purpose of Expenditure
The assessee argued that the expenditure was for commercial considerations and expediency, aiming to reduce revenue expenditure and effect economy. However, the authorities found that the termination and compensation payments were not solely for business requirements but were bound up with the change of ownership.

4. Payment of Gratuity and Commutation of Pension Liability
The assessee claimed that the payments were in line with the company's practice of paying gratuity to retiring employees. However, the authorities noted that there was no established practice or legal obligation for such payments. The Supreme Court's test in the case of Gordon Woodroffe Leather Mfg. Co. v. Commissioner of Income-tax was applied, which requires proving that the payments were a matter of practice affecting salary expectations or were commercially expedient.

5. Legal Liability for Compensation in Lieu of Notice
The payment of Rs. 16,188 to the managing director in lieu of six months' notice was considered a discharge of an existing legal liability under his employment contract. Similarly, the commutation of pension liability amounting to Rs. 21,200 was recognized as a discharge of an existing liability.

Conclusion:
The court concluded that except for the amounts of Rs. 21,200 (commutation of pension liability) and Rs. 16,188 (compensation in lieu of notice to the managing director), the rest of the expenditure (Rs. 1,27,511) was not incurred wholly and exclusively for the business purposes of the company. Therefore, the claim for deduction of Rs. 1,64,899 was largely rejected, except for the two specified amounts.

Judgment:
1. Question No. 1: Answered in the negative for Rs. 1,27,511, excluding Rs. 21,200 and Rs. 16,188.
2. Question No. 2: Answered in the affirmative for Rs. 1,27,511, excluding Rs. 21,200 and Rs. 16,188.
3. Question No. 3: Answered in the affirmative.

Each party was ordered to bear its own costs.