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TMI Blog1979 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ir nominees by Sir Percival David, Lady David and Mr. V. P. David (hereinafter collectively referred to as " Davids "). The issued capital of the company consisted of 1,000 ordinary shares of the face value of Rs. 10,000 each. According to the valuation made by the auditors, the assets of the company were worth Rs. 155 lakhs as on December 31, 1955. At a meeting of the directors of the company held on December 2, 1955, a resolution was passed recommending that the employees of the company whose names were set out in the statement attached thereto be paid certain sums or annuity as set out against the names of each of them as and by way of retrenchment compensation and compensation for termination of employment and also for long and faithful services rendered by them to the company in the past and that their services might be terminated. It was also resolved to call an extraordinary general meeting of the shareholders of the company to consider and if thought fit to approve the recommendation made by the directors as stated above. Accordingly, an extraordinary general meeting of the shareholders of the company was held on January 17, 1956, but it was adjourned to January 25, 1956. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , former director, as per resolutions dated 2-12-1955 and 25-1-1956 16,885 Amount described as " compensation for loss of office of managing director, Mr. R. Mathalone 16,188 Total 1,64,899 It should be mentioned here that A.E. Joseph, the former director of the company, had to be paid as per the resolution of the company Rs. 16,885 by way of annuity during a period of five years commencing with 1956. During the assessment year 1957-58, the relevant previous year being 1956, the company claimed deduction of Rs. 1,64,899 referred to above before the ITO under s. 10(2)(xv) of the Indian Income-tax Act, 1922 (hereinafter referred to as " the Act "). During each of the three succeeding assessment years with which we are concerned, the company claimed deduction of Rs. 16,885 being the annuity paid to Mr. A. E. Joseph pursuant to the resolution. Daring the assessment year 1957-58, the claim in respect of the entire sum of Rs. 1,64,899 was disallowed by the ITO on the ground that the services of the directors and employees had been terminated not because of business expediency but because Tatas, the purchasers of the shares, made it a condition under the agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees and directors as compensation for termination of services. The circumstances leading to the payment of this compensation have been narrated in detail in the order of the Income-tax Officer. It is strongly urged that the termination of the services of the persons concerned was of great benefit to the company even considering the payment of the compensation since the establishment expenses were very substantially reduced as a result. From the information furnished to me, this statement is no doubt quite justified. However, it is seen that the termination of the services and the payment of compensation were not done wholly with a view to the business requirements of the company, but were bound up with the changing of hands of the shares of the company. According to the agreement, for the sale of all the shares of the company, the sellers had to arrange to terminate the services of all the employees and also arrange that all directors resigned their offices. It is expressly stated that this requirement was to enable the purchasers to appoint or elect all members of the staff and directors. As a matter of fact some of the persons to whom compensation had been paid for termination o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 66(1) the following question of law arising out of the orders of assessment for the assessment years 1958-59, 1959-60 and 1960-61 in respect of the annuity paid to Mr. A. E. Joseph : " Whether in computing the assessee's business income of the accounting years 1957, 1958 and 1959, relevant for the assessment years 1958-59, 1959-60 and 1960-61, the sum of Rs. 16,885 is an admissible deduction under section 10(2)(xv) of the Act ? " It is not necessary to refer to the other matters involved in the orders of assessment of the years 1958-59, 1959-60 and 1960-61 and to the various stages of the cases until they reached the High Court. Income-tax Reference No.58 of 1963 [Sassoon J. David and Co. P. Ltd. v. CIT--[1972] 85 ITR 83 (Bom)] arising out of the assessment proceedings of the year 1957-58 was heard by a Division Bench of the High Court of Bombay and decided on February 5, 1970. The High Court found that out of Rs. 1,64,399 referred to in question No. 1 only a sum of Rs. 21,200 which was commutation of liability for payment of pension to some retired employees and/or widows of such employees and a sum of Rs. 16,188 paid to Mr. Mathalone, managing director, in lieu of six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees of the company be paid certain sums or annuity set out against the names of each of them and their services should be terminated with effect from April 1, 1956 ; that an agreement was entered into between Davids and Tatas on March 23, 1956, regarding the sale of the shares in favour of the Tatas ; that the said agreement referred to the resolution passed at the meeting of the shareholders of the company ; that the company paid retrenchment compensation according to the said resolution and that the Tatas deducted from the purchase price the sum payable by the company in accordance with the resolution of the company from out of the consideration of Rs. 155 lakhs which they had agreed to pay under the agreement dated March 23, 1956, to Davids. Apart from the resolution of board of directors of the company dated December 2, 1955, the resolutions passed at the extraordinary general meeting of the shareholders of the company held on January 25, 1956, the agreement dated March 23, 1956, entered into between Davids and Tatas, the books of account of the company showing payments made by the company by way of retrenchment compensation and the fact that 9 of the 22 employees whose servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly been benefited while the company had to make payment in order to give effect to the agreement and, therefore, there was no commercial purpose involved in making the said payment. The Tribunal also held that even assuming that the company was benefited by payment of compensation by reason of reduction in its establishment expenses, since the payment had been made as a result of the bargain between Davids and Tatas, it could not be allowed as a deductible expenditure. It should be stated here that the Tribunal did not reverse the finding of the AAC that the company had been benefited by such payment. In fact, it did not go into the question whether the payment had really resulted in any benefit to the company. The High Court, however, in the course of its judgment, found that on account of the retrenchment of the employees and re-employment of only 9 of them, the yearly wage bill of the company for salaries was reduced from Rs. 1,14,197 in 1955 to Rs. 67,268 in 1956 and thereafter in 1957 and 1958, respectively, to Rs. 54,124 and Rs. 54,960. In the instant case, it is necessary to bear in mind that the company was neither dissolved nor was its business undertaking sold. It conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 40,000 under s. 10(2)(xv) of the Act. The ITO as well as the AAC disallowed the said claim on the ground that the company had no pension scheme ; that the payment was voluntary and that the entry in the assessee's books clearly indicated that the payment was a capital payment. The Tribunal upheld the order of the AAC. It held that according to the resolution the gratuity was paid for " long and valuable services to the assessee ", that there was nothing to indicate that Mr. J. H. Philips had accepted a lower salary in expectation of getting a gratuity at the end of his service ; that there was no such practice in the assessee-company ; that during the course of his service, he was being remunerated at a graduated scale of salary and a commission of 2 1/2 % on the profits ; that there was no," expectancy " that at the end of the service there would be recompense for faithful and efficient service and that he had been suitably rewarded by being given a commission on the profits " in order to whip up his enthusiasm ". It was also found by the Tribunal that in the books of the assessee, the amount had not been debited in the profit and loss account but was debited to the appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bill was foreign to the decision taken by the company to terminate the services of the employees and to pay them retrenchment compensation and observed that the purpose of the payment so far as could be ascertained from the contents of the resolutions of the board of directors and the company when read with the relevant contents of the agreement for sale was the carrying out of the obligation arising under the agreement. It also held that the fact the expenses became reduced was insufficient to record a finding that the amount of retrenchment compensation was paid for commercial considerations or expediency. From the perusal of the judgment of the High Court, it becomes clear that the High Court placed more emphasis on the motive with which the amount was expended than the fact that the expenditure had been incurred in connection with the business of the company and that such expenditure resulted in the reduction of the annual wage bill of the company in the future years. In, order to claim deduction under s. 10(2)(xv) of the Act, an assessee has to show that the expenditure in question, (i) was not an allowance of the nature described in any of the cls. (i) to (xiv) of s. 10(2), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the words ' wholly and exclusively ', and if the Crown's contention is unsound it is not disputed that the disbursement in question falls within section 137(a). To succeed in their contention the Crown must establish two matters. In the first place it must show that the liquidation involved a discontinuance of the trade carried on prior to it by the respondent company and the subsequent operation of a new trade carried on by House of Fraser. In the second place it must show that the expenditure in question was laid out for the purposes of the new trade. Without both these steps its argument fails. In my opinion neither step in the argument is made out. " In the present case also, it is seen that the company continued to function even after its control passed on to the hands of the Tatas and the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of Tatas who were only the shareholders of the company. We cannot overlook the distinction between the company and its shareholders. As a result of the expenditure in question, the company was in fact benefited and it was possible for it to earn more profits as a consequence of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 280 and in CIT v. Patel Cotton Co. P. Ltd. [1977] 108 ITR 846 (Bom) have also understood the principle underlying the decision of this court in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] 44 ITR 551 (SC) in the same way. The High Court was, therefore, in error in holding that the amount involved in the case did not satisfy the test applicable to the expenditure allowable under s. 10(2)(xv) of the Act. The next contention urged on behalf of the department was that since Davids and Tatas were indirectly benefited by the retrenchment of the services of the employees of the company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company. It has to be observed here that the expression " wholly and exclusively " used in s. 10(2)(xv) of the Act does not mean " necessarily ". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sively for the purpose of trade or business of the assessee. " In the instant case, it was the case of the company that many of the employees were old and superfluous and the business could be carried on with a smaller number and the only way in which they could reduce the number was to terminate the services of all the employees by paying them compensation and thereafter re-employing some of them only. If the company felt that that was a method which would inure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency. The High Court, therefore, erred on the facts and in the circumstances of the case in holding that the sum of Rs. 1,27,511 was not deductible under s. 10(2)(xv) of the Act and in answering questions Nos. (1) and (2) referred to it in Income-tax Reference No. 58 of 1963 arising out of the assessment order for the year 1957-58, against the assessee and in favour of the department to the extent of Rs. 1,27,511. Similarly, it erred in disallowing the claim made in respect of Rs. 16,885 for each of the three succeeding assessment years. We, therefore, allow these app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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