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TMI Blog1968 (11) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... , these employees had put in more than 25 years of service each and with the transference of the business they continued to work for the assessee-company. After they had worked for almost a year, on 16th February, 1949, agreements were entered into by the company with March and Dave separately. The agreements are in identical terms so far as both the employees are concerned and we would, therefore, only refer to the agreement with March for the purposes of the points arising in this reference. According to clause (1) of the agreement with March "the employee" was to remain in the service of the company for a period of three years from 1st July, 1948 (that being the date on which the transference of business from the firm to the company was to take effect). By clause (4) March was given a monthly salary of Rs. 3,000 plus bonus, and clause (8) provided that, notwithstanding anything to the contrary in the agreement, either party to the agreement could terminate the same by giving not less than six months' previous notice in writing to the other party of termination. The company further reserved the right to terminate the contract on payment of six months' salary to the employee. Clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny pension scheme covering all or any specific group of its employees. "The provision of a pension to one particular employee was therefore an unusual feature". 2. It was not proved that there was an agreement between the firm and March to pay him pension and the stipulation regarding it was made for the first time in the agreement of 16th February, 1949. 3. That "it is obvious that Shri March had even at the time when the agreement was entered into reached the superannuation age and the company had practically nothing to fear of him on account of his being employed elsewhere or being engaged either directly or indirectly in the business of the kind carried on by the company". 4. From his experience in handling cases of pharmaceutical companies the Income-tax Officer held that "the distribution of pharmaceuticals is by no means the monopoly of the assessee concern. Several concerns, local as well as foreign, have for long time past been engaged in this line of business in the taxable territories and it is well known that the market has continued to be well-supplied with, if not flooded with pharmaceuticals for quite some time now. It is, therefore, inconceivable that one particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated Portland Cement Manufacturers Ltd. v. Kerr (H.M.'s Inspector of Taxes). (2) It held that it was not the intention of the assessee to grant these pensions in recognition of past services; otherwise there was nothing to prevent it from saying so in the agreements. (3) That there was no covenant entered into with the employees for the payment of any pension after their retirement when they were initially taken into employment with the partnership W.T. Suren & Co. (4) When pensions are allowed to be drawn by employees subsequent to retirement, such restrictions, i.e., to abstain from engaging or being engaged in a rival business, are not placed upon the employees. (5) The prime motive of the assessee was that the said employees should not enter into competition with the business carried on by the assessee. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business, but it went to appreciate the whole of the capital asset and make it more profit yielding. It will be noticed that though the Appellate Assistant Commissioner as well as the Tribunal affirmed the final conclusion of the Income-tax Officer, they did so fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company's business so as to fall within section 10(2)(xv) and after their decision a further statement of the case should be submitted to this court after which we shall decide the second question referred to us". Accordingly, the Tribunal has drawn up a statement of the case on 9th August, 1968, after hearing both the parties. That supplementary statement was upon the question whether the payments made to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business, a question which the Tribunal had declined to hear them on. In this supplementary statement the Tribunal has held that the payment in question was wholly and exclusively laid out for the purposes of the assessee's business, so as to fall within section 10(2)(xv) of the Act of 1922. This finding being against the department was sought to be challenged before us by Mr. Joshi but then it was pointed out that the finding could not be challenged in the absence of any question being raised and referred to this court. Here it is necessary to set forth the two questions as they were originally framed and referred to this court : "1. Whether the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the payments made to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business ?" Mr. Kolah on behalf of the assessee also agreed to waive notice and urged that the question should straightaway be framed and decided by this court. In view of this consent of the parties we propose also to determine that question. Thus the following two questions arise for determination in this reference : "A. Whether the said 'payments' made for each of the four assessment years were in the nature of capital expenditure and as such inadmissible under the provisions of section 10(2)(xv) of the Income-tax Act ? B. Whether the payments to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business ?" The latter question arises upon the supplementary statement dated 9th August, 1968, and the former is the only question that survives from the original reference. The supplementary statement answered against the department the question whether the expenditure was wholly and exclusively laid out for the purposes of the assessee-company's business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the past services of the employees, the assessee-company stipulated to grant them such liberal pensions." On the other hand, in the supplementary statement the Tribunal has in paragraph 12 taken into account all the surrounding circumstances and these are: (1) that the agreement under which the payment was made is not challenged and the bona fides of the actual payment made to the employee are not in dispute; (2) that the employees to whom the payments were made have been in the service of the same business for a long time when it was a partnership as well as after it became a limited company, and that employers were also the same although they acquired a different legal character. Taking into account all the facts and circumstances, therefore, they held that the payment of the pension to the two employees was wholly and exclusively for the purposes of the assessee-company's business. We are unable to accept the contention that in determining the question whether the expenditure was in the nature of a capital expenditure or a business expenditure laid out wholly and exclusively for the purposes of the assessee-company's business we must confine ourselves only to the agreements b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s say that the pension was being given to the two employees in consideration of their past services or for other business considerations but it must also be said that it is a remarkable feature of these agreements that beyond the mere terms of the agreements there are no other recitals whether in the agreements such as are normally found in all agreements. There is no preamble and no introductory portion setting out the facts and circumstances under which the agreement is entered into or any reference to any past dispute which led to the agreement as is usually to be found in agreements of this nature. It seems that the draftsman of the agreements was merely content to put down the terms without reciting the previous history. The agreements with March and Dave contain a number of recitals which are clearly recitals to be found in an ordinary service agreement. The employees are charged with the duty to manage the affairs of the company and devote their whole time and attention and the utmost of their power, skill and ability to the business of the company. The employees are not to divulage or make public any the secrets, accounts, transactions or dealings of the company (clause (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement are certain other important facts and circumstances which must be taken into account. In the original statement of the case it has been pointed out in paragraph 3 that March and Dave were in the employment of the firm and that they had put in more than 25 years of service by the time the assessee-company took over the partnership business. Before the Income-tax Officer these facts were admitted as can be seen from the following passage in the order of the Income-tax Officer: "It is said by the assessee that Shri March had been in the employ of the assessee's predecessor-in-interest, namely, the partnership concern of M/s. W. T. Suren & Co., for over 25 years. The assessee adds that the business of the firm was taken over by the assessee with all benefits of the existing staff and the organisation. This is not disputed." Under these circumstances, we are not in agreement with the view which the Tribunal took in its first order that it was confined only to the agreements between the parties and "nothing can be imported into that". In our opinion, that view of the Tribunal was incorrect upon the authority of the decision in the Swadeshi Cotton Mills Co.'s case, to which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which came to be made contend the stipulation that these two employees would not engage in any rival business or be employed in such business. On the date on which the agreements were made, both March and Dave were still in the employment of the assessee-company and there was no question of their retirement in the near future. It has been held that they had at least another four years of service to put in. If under such circumstances as part of an agreement laying down the rest of the terms upon which these employees were to serve their former masters who had taken over the former business, a stipulation was also put in that they will be paid at pension but that, in that event, they must not work for a rival business, we cannot extract only that clause and consider it separately and hold that here was an acquisition of a capital asset, namely, the right to immunity from competition. We must view the agreement as a whole, and viewing it as a whole, it seems to us that this term was one of the terms of a purely business agreement made to cover the normal terms of service of an employee with his employer. In several of the cases to which we will presently refer, one of the grounds for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is not a decisive circumstance) see Indian Overseas Bank Ltd. v. Commissioner of Income-tax). We must, in fairness to the assessee, also say here that it was stated before us that a pension scheme has been undertaken by the assessee-company after the agreements with March and Dave. Apart from this, it seems to us that, in giving pension to these two employees, the company could well have treated them as on a special footing, for they were both very old servants of the business which the company had taken over and to compensate such persons for their past services is not in any way unusual even without a pension scheme. At any rate, from that circumstance we cannot infer that, therefore, the payment was made in order to safeguard the company against competition by these servants. Taking all the circumstances into account, as we have set them forth, and even considering the contention that there is no recital in the agreements, we cannot see how the finding given by the Tribunal that the payment to the two employees was in consideration of the past services rendered by them to the firm and, therefore, to the assessee-company is incorrect. We agree with that finding and hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that payment of pension was apparently thought of as a business expediency in the interests of the assessee's business." In the present case also we have shown that the history of these two employees is one which would well justify the payment. The payment moreover was also made while the two employees were in the service of the assessee and had still 3 to 4 years to put in. Therefore, too much emphasis cannot be made upon the absence of any pension scheme or proof of any practice of payment of pension to other employees. A case was sought to be made out on behalf of the department on the sole ground that in the Indian Overseas Bank's case there was a clear recital in the written agreement that the pension was as part of the terms of service and it was urged that in the present case there is no such recital. We have already shown that there were a sufficient mumber of other facts and circumstances to show that that must have been the consideration for the payment of the pension to the two employees in question before us. At any rate, the inference which the Tribunal has drawn at the second hearing does not appear to us to be at all unreasonable. We do not think that the mere circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the original statement of the case. A consideration of this case serves to highlight the distinction with the present case and the grounds upon which it cannot be held here that the expenditure was in the nature of a capital expenditure. In the Associated Portland Cemment Manufacturers' case two lump sum payments were made of pound 20,000 and pound 10,000 to two retiring directors. One was a managing director and the other an ordinary director. The managing director's agreement of service was due to terminate on 31st December, 1939, but he intimated his desire to retire from the service of the company some months prior to that date. The other person, who was a director, also gave notice some time before January, 1939, of his desire to resign his position with the company on 30th September, 1939, though there was no written service agreement in this case. Both of them had been with the company since its formation in 1900. The payments given to them were claimed by the company as deductions on account of business expenditure, but the claim was disallowed on the ground that it was expenditure in the nature of capital expenditure. The reasons given for so holding pointedly distinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the expenditure was a capital expenditure. We have already analysed the terms of the agreement and we have shown that the consideration for the grant of the pension was not the stipulation that they shall not be employed in a rival business but the totality of the terms of the agreement, which was essentially a service agreement, was to set down the terms of service. Its object was not to acquire what has been called "advantage of an enduring nature for the benefit of the business of the assessee". Apart from this, upon the facts also, Sitalpur Sugar Works' case is completely distinguishable. While we have held that in our opinion the payments made to the two employees were in the nature of a business expenditure for the purposes of the business of the assessee-company and not of a capital nature, we must notice here an argument on behalf of the assessee that, even assuming that this expenditure was laid out for the protection of the goodwill of the company, still if it did not result in the company acquiring any new asset the expenditure would still partake of the nature of a business expenditure. It appears upon authority that this distinction has been drawn and adverted to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the payment was in respect of capital, but as the capital asset of the respondent-company in, my opinion remained absolutely unaltered, that payment is properly attributable to revenue." (Underlining is ours). This principle was referred to and affirmed by the Court of Appeal in the case to which we have already referred, namely, Associated Portland Cement Manufacturer's case. Lord Greene in his judgment in that case, at page 118, referred to the case of Southern v. Borax Consolidated Ltd. and observed : " The money that you spend in defending your title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure. There, again, there is all the difference in the world between defending your assets against the claim of somebody who has no claim against them, and acquiring a new asset or adding to an existing asset. If you acquire the benefit of a covenant which improves the value of your goodwill, in my opinion, you have acquired a capital asset, even though the goodwill has no value set upon it in the balance-sheet." (Underlining is ours). And then Lord Greene referred to the same passage from the judgment of Lawrence J. in the Borax case to which we ha ..... 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