1979 (5) TMI 3 - SC - Income Tax

Termination of services of directors and employees - compensation - assessee-company continued to function even after it was taken over - by termination, company was benefited by a reduction in its wage bill - payment of dompensation was on ground of commercial expediency - allowable as business expenditure

Issues Involved:
1. Deductibility of Rs. 1,64,899 as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Evidence supporting the Tribunal's finding that the payment was made to effectuate the agreement between shareholders and had no commercial purpose.
3. Deductibility of Rs. 16,188 paid to the managing director as pay in lieu of six months' notice.

Detailed Analysis:

Issue 1: Deductibility of Rs. 1,64,899 as Business Expenditure
The company sought to deduct Rs. 1,64,899 as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. This amount included payments to employees and directors for retrenchment compensation and termination of employment. The Income-tax Officer (ITO) disallowed the claim, stating that the termination was not due to business expediency but was a condition imposed by Tatas, the purchasers of the company's shares. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this decision, reasoning that the payments were part of a bargain between the old and new shareholders and not for the company's business purposes.

The High Court of Bombay partially allowed the deduction, approving Rs. 21,200 as commutation of pension liability and Rs. 16,188 as pay in lieu of notice to the managing director, but disallowed Rs. 1,27,511. The High Court held that the expenditure did not meet the criteria of commercial expediency or business consideration.

The Supreme Court, however, found that the company continued to exist as a juristic entity and the expenditure resulted in a substantial reduction in the wage bill, benefiting the company. The Court emphasized that the expenditure was laid out wholly and exclusively for the company's business, satisfying Section 10(2)(xv). The Court disagreed with the High Court's reliance on the motive behind the expenditure and held that the deduction should be allowed.

Issue 2: Evidence Supporting Tribunal's Finding
The Tribunal concluded that the payments were motivated by the agreement between Davids and Tatas, not by business considerations. The High Court concurred, stating that the payments were made to fulfill the terms of the share transfer agreement. The Supreme Court, however, noted that the company was benefited by the reduction in the wage bill and that the expenditure was incurred for the company's business, not for the shareholders' benefit. The Court held that the Tribunal and High Court erred in focusing on the motive rather than the commercial benefit to the company.

Issue 3: Deductibility of Rs. 16,188 Paid to the Managing Director
The company claimed Rs. 16,188 paid to the managing director as pay in lieu of six months' notice as a deductible expense. The ITO, AAC, and Tribunal disallowed this claim, treating it as part of the overall transaction between Davids and Tatas. The High Court allowed this deduction, recognizing it as a legitimate business expense.

The Supreme Court upheld the High Court's decision, affirming that the payment was made for commercial expediency and was deductible under Section 10(2)(xv).

Conclusion:
The Supreme Court allowed the appeals, holding that Rs. 1,27,511 was deductible under Section 10(2)(xv) during the assessment year 1957-58 and that Rs. 16,885 was deductible for each of the three succeeding assessment years. The Court emphasized that the expenditure was incurred wholly and exclusively for the company's business, satisfying the criteria for deduction under the Act. The department was ordered to pay the costs to the appellant. Appeals were allowed.

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