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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 ..... armaceuticals manufactured by a British company--the Teddington Chemical Factory Private Ltd. They were also importing and selling sundry other goods. In the employment of the firm were two persons, C. R. March and G. D. Dave. When the firm transferred its business to the limited company, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the course of the assessment for the following years, however, the Income-tax Officer disallowed the claim of the company to the pension payment of Rs. 20,069 made to March. The findings of the Income-tax Officer in this respect are briefly as follows : 1. That the assessee did not have any 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, loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... United Steel Companies Ltd. v. Cullington. He disallowed the payments made both to March and Dave on the ground that they were payments in the nature of capital expenditure. The Tribunal has confirmed this view of the Appellate Assistant Commissioner : (1) The Tribunal relied on the decision in Associated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he department and therefore by our order dated 3rd February, 1968, we called for a fresh statement of the case. The exact order which we had passed was "the Tribunal will hear the parties and decide the question whether the expenditure was wholly and exclusively laid out for the purposes of the assessee-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 challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed on behalf of the assessee to the department amending their notice of motion dated 4th November, 1968, and including the prayer that a further question of law arising upon the supplementary statement should be raised and decided. That question, it has been agreed on all hands would be as follows : "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 ?" 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrelevant and ought not to have been looked at. It will be noticed that that was also the view which the Tribunal took in their earlier order. In paragraph 6 of their order they said : "The terms of the agreement are clear enough and nothing can be imported into them. As such it cannot be said that in recognition of 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. We will discuss the question whether it is wholly or exclusively laid out for the purposes of the assessee's business separately. It is no doubt true, and that was the principal point made against the assessee, that clause (11) of the agreement, or for that matter the agreements dated 16th February, 1949, do not in terms 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are business agreements and must be read as a business man would read them unless there is some contrary indication in the agreement itself. In our opinion, there is nothing to indicate that clause (11) is a special provision by itself and apart from the rest of the provisions of the agreement. Coupled with the terms of the 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 circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company. Therefore, there was continuity in the employer also. So far as the employees are concerned, the same employees were taken over by the limited company and on the date of the agreements, in addition to their past services, had already served the limited company for about a year. It is in this context that the agreements 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother circumstance which has been urged is that there was no general pension scheme in the assessee-company and that the payment of pension, therefore, to the two individual employees was not out of business consideration. Where pension is in fact paid to two employees, the mere circumstances that there is no general scheme in the company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the payment of pension to Sri A. Subbiah was resolved upon even during the currency of his service. Having regard to the history of this gentleman's service before he came to join the assessee and during his service with the assesee and how the management itself looked upon his services, it is not difficult to appreciate, as we think, 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 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se circumstances are present in the case before us and it seems to us that the decision in Gordon Woodroffe's case would for that reason be distinguishable. Almost similar to Gordon Woodroffe's case is the decision of the English Court of Appeal in Associated Portland Cement Manufacturers Ltd. v. Kerr--the case upon which the Tribunal relied in 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 agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantage of an enduring nature for the benefit of trade. It was urged that the company in the present case acquired an advantage of an enduring nature for the benefit of that trade when they got the covenant from the two employees that they would not be engaged directly or indirectly in a rival business and that, therefore, it should be held that 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 beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion), for treating such an expenditure as properly attributable not to revenue but to capital." Then Lawrence J. distinguished the case before him as follows: "So here if it could be said that this expenditure had in any way altered the original character of the capital asset which was acquired by the respondent-compny should have taken the view that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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