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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 ..... , is the appellant in all these cases and the assessment years are 1957-58, 1958-59, 1959-60 and 1960-61, the relevant calendar years being 1956, 1957, 1958 and 1959, respectively. The company is an investment company and its shares were originally held either directly or through their 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 25-1-1956 1,04,626 Amount described as " additional retrenchment compensation and compensation for termination of employment and also for long and faithful services ", as per resolution No. 2 Dated 25-1-1956 6,000 Compensation for termination of pension allowance. 21,200 Annuity of Shri A. E. Joseph, 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 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n though he was of opinion that the company had by the termination of services of the directors and the employees by payment of gratuity and/or compensation been benefited. The relevant part of his order was as follows : " The only contention remaining to be considered is that the Income-tax Officer was wrong in disallowing a sum of Rs. 1,64,899 paid to certain employees 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had no commercial purpose behind it ? (3) Whether, in any event, the sum of Rs. 16,188 paid to the managing director by way of pay in lieu of six months' notice was allowable as a deduction under section 10 of the Indian Income-tax Act, 1922 ?" Accordingly, the Tribunal drew up a statement of the case and referred the above questions. Later on, the Tribunal referred 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 hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, its assets were worth Rs. 155 lakhs as on December 31, 1955 ; that at a meeting of the directors held on December 2, 1955, it had been resolved that the services of 22 employees should be terminated by paying retrenchment compensation ; that on January 25, 1956, at the extraordinary general meeting of the shareholders of the company, it was resolved that the employees 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax. The Tribunal, while deciding the question whether the sums paid by way of compensation were deductible or not, observed that the fact that a reference to payment to the staff of compensation had been made in the agreement led to the inference that such payment was a part of the bargain between Davids and Tatas ; that on account of such payment, the purchasers had actually 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le services to the assessee, he be paid a gratuity of Rs. 50,000 out of which the assessee was to pay Rs. 40,000 and its managing agent was to pay Rs. 10,000. Subsequently, the resolution was approved at the extraordinary general meeting of the assessee. Accordingly, a sum of Rs. 40,000 was paid by the assessee to Mr. J. H. Philips. The assessee claimed deduction of the said sum of 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," expecta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of service. It also rejected the case of the company that the amount involved had been expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the company even though it observed that the yearly wage bill of the company was reduced after such payment. The High Court held that the consideration of reduction of the wage 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e primarily for the benefit of that company. The Commissioners, however, decided that the deductions claimed were allowable. Upholding the findings of the Commissioners, the Lord President observed at page 156 : " In my opinion the contention put forward by the Crown is unsound and the Special Commissioners were correct in rejecting it. Admittedly in this case no question arises in regard 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to facilitate the carrying on of the business of the assessee have to be read disjunctively and if they are so read, the present case which satisfies the third test should be held as falling under s. 10(2)(xv) of the Act. The High Court of Gujarat in CIT v. Laxmi Cement Distributors P. Ltd. [1976] 104 ITR 711 and the High Court of Bombay in CIT v. Fairdeal Corporation P. Ltd. [1977] 108 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby (Eastern Investment Ltd. v. CIT [1951] SCR 594 ; 20 ITR 1(SC). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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