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TMI Blog1986 (9) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... paid thereafter a sum of Rs. 4,364 per annum for six consecutive years to the trustees. It was recorded in the trust deed that the assessee was under an obligation to provide the employee with pension. The total amount paid to the trustees aggregated Rs. 1,34,827 which the trustees agreed to hold on trust and invest in deferred annuity policy with an insurance company on the life of the employee to cover an annuity of 720 pounds payable to the employee for life from the date of his attaining 55 years. It was further provided in the trust deed that if the employee died before he reached 55 years, his widow would receive a pension of 61.12 pounds annually. Subsequently, in 1954, the assessee agreed to grant an enhanced pension to the employee on account of increased cost of living and for the said purpose executed a supplemental trust deed on October 29, 1954. The trustees appointed earlier were also appointed trustees under the supplemental deed and the assessee paid a further sum of Rs. 47,607 to the trustees on the same terms, namely, that the trustees would receive the said supplemental amount on trust for the purpose of taking out a further life annuity policy in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the assessee holding that the that the said amount of Rs. 1,82,434 had been effectively disbursed during the accounting year and was, therefore, an admissible allowance in the computation of the business profits of the assessee. From the decision of the Tribunal, the Revenue initiated a reference before this court and the two questions referred were as follows: " 1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,82,434 was an expenditure effectively laid out or expended during the accounting year 1955 within the meaning of section 10(2)(xv) of the Income-tax Act ? 2. If the answer to question No. 1 is in the affirmative, then, whether the said expenditure of Rs. 1,82,434 represented a revenue expenditure ? " This court in CIT v. Indian Molasses Co. P. Ltd. [1968] 67 ITR 687 (Cal) answered both the questions in the affirmative and in favour of the assessee. The Revenue went up in appeal against the decision of this court before the Supreme Court. It was held by the Supreme Court that the said sum of Rs. 1,82,434 was an expenditure effectively laid out during the relevant accounting year. It was held further that the expenditure incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business." The Appellate Assistant Commissioner found and noted, inter alia, as follows : (a) When the employee concerned entered the service, it was arranged that he would get a pension when he retired. (b) In accordance with the said arrangement, the first trust deed was executed by the assessee in 1948 and the employee could thereafter reasonably expect that he would get a pension when he retired. Thus one of the tests laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551 was satisfied. (c) The employee was occupying a responsible and important position in the entire set up of the business of the company. (d) The pension was provided to the employee in the expectation of creating an impetus and also encouraging him to put in loyal and contented service for the assessee. (e) The amounts paid to the trustees were spent on the ground of commercial expediency and in order indirectly to facilitate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, section 10(4A) of the Act of 1922 was not otherwise attracted. Copies of the remand order of the Tribunal dated April 21, 1971, and the remand report of the Appellate Assistant Commissioner dated March 4, 1972, were not included in the paper book. Copies of the same were filed before us with leave and without any objection from the Revenue. The said copies are directed to be kept on record. After the said report by the Appellate Assistant Commissioner, the matter came back for hearing before the Tribunal. It was contended on behalf of the assessee before the Tribunal, inter alia, that the employee did not have any controlling interest in the assessee. The facts found by the Appellate Assistant Commissioner were reiterated. It was submitted that the legitimate needs of the business of the assessee had to be considered objectively from the point of view of businessmen and not of the Revenue to determine whether an expenditure was wholly or exclusively laid out for the purpose of business and whether such expenditure was commercially expedient. It was submitted that the services rendered by the employee were Sufficient to entitle him to a pension which was arranged for his b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1962] 44 ITR 551 was satisfied. The Tribunal also found that there was evidence on record to show that the cost of living had increased subsequent to 1948. The Tribunal held further that payment of the pension did not depend upon the business result of the assessee in any particular year and it was not necessary to establish that the employee had shown dissatisfaction about the amount of pension as originally awarded. The Tribunal held that it was immaterial whether the business of the assessee had shrunk during the post-war period and, in any event, the assessee had not ceased to carry on business. The Tribunal noted that the employee concerned was the only responsible person in the organisation of the assessee to look after the business and it would be denial of justice to deprive him or his widow from the legitimate pension which he was expecting. The Tribunal also held that the pension allowed was reasonable and commensurate with the service of the employee and the responsibilities undertaken by him. The Tribunal found that on the evidence as recorded in the report of the Appellate Assistant Commissioner, it was established that the expenditure was incurred to facilitate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of pension to the widow was contingent and not certain. It was submitted last that in the instant case, the employee concerned did not die during the course of discharge of his duties by accident or misadventure. If that was the case, the position might have been different. In support of his contentions, learned advocate for the Revenue cited and relied on the following decisions: (a) CIT v. Anderson Wright Ltd. (1962] 46 ITR 715 (Cal). In this case, the assessee entered into an agreement with its manager that the assessee would pay to the latter a pension for life on and from a particular date and in the event of his death provide for a similar pension for his wife. The employee would not, however, be entitled to a pension if he was dismissed. By a deed of trust, the assessee provided for such pension. In the accounting year, the assessee had paid a sum of Rs. 33,955 to the trustees. The question which was referred to this court was whether such payment by the assessee constituted expenditure within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held by a Division Bench of this court, following the decision of the Supreme Court in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on behalf of the Revenue that payment to the widow of an employee could never be deductible as an expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. G. K. Mitter J., as his Lordship then was, in his judgment, expressed a doubt whether a proposition in such wide terms was justified. (c) Calcutta Landing Shipping Co. Ltd. v. CIT [1967] 65 ITR 1 (Cal). In this case, the board of directors of the assessee sanctioned, payment of, pension to the widow of an employee of the assessee who was murdered while performing his duties in the service of the assessee. Such pension was payable at graded rates for a number of years and payments to the widow of other amounts, inter alia, for travel to England were also sanctioned. Deduction of the said payments was claimed in the income-tax assessment of the assessee. The claim was rejected by the Income-tax officer, the Appellate Assistant Commissioner and the Tribunal. On a reference, a Division Bench of this court held that the decision to pay pension to the widow of the deceased employee was taken by the assessee, a commercial concern, out of commercial considerations. The main object was to have a satisfied and loya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the death of the managing director during the currency of the agreement, the assessee would pay to his widow, if she survived, the following sums: (a) Rs. 36,000. (b) One-half of the sum equivalent to 2 annas in the rupee of the net profits of the assessee for the completed financial year of the assessee immediately preceding the date of death of the managing director to be calculated in an agreed manner. (c) Rs. 1,500 per month as long as the widow remained alive. The assessee would, however, be at liberty to discontinue such monthly payments in the event the assessee ceased to act as managing director or secretary or treasurer of three other limited companies. On the death of the managing director, the assessee paid to the widow the stipulated amounts as also the amount payable monthly at the agreed rate. The question arose whether the amounts paid to the widow were allowable as deduction under section 10(2)(xv) of the Income-tax Act, 1961. On a reference, it was held by a Division Bench of the Bombay High Court that there was no possibility of the business of the assessee being adversely affected if the payments were not made to the widow nor was the interest of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence on record on the basis of which the Tribunal could and did come to the conclusion that the said amount of Rs. 1,82,434 had been laid out or expended wholly and exclusively for the purpose of the business of the assessee and was admissible as allowance under section 10(2)(xv) and section 10(4A) of the Act of 1922. Learned advocate submitted further that in the instant case, it has been found that the employee involved had served the assessee long and faithfully, that the employee was in a key position in the business organisation of the assessee and that his contribution to the business of the assessee was significant. It has also been found that from the inception of his service and thereafter at all material times, the employee expected that he would be entitled to pension on his retirement. The arrangements for his pension were finalised in 1948 and thereafter enhanced in 1954. The widow of the employee was also allowed a pension in the event she survived the employee and if the employee died before the age of superannuation. Payment of pension to his widow in the event of his death was also in the expectation of the employee. It was submitted that arrangements prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement entered into by and between Howard and the taxpayer recorded that an annuity of 1,000 pounds per annum would be paid to the widow of Howard as long as the legal personal representatives of Howard held at least 10,000 shares in the taxpayer company. Subsequently, by an arrangement, Howard surrendered his rights to the annuity in consideration of payment of a lump sum of 4,500 pounds by the taxpayer. In its assessment to income-tax, the taxpayer claimed deduction of the said amount of 4,500. pounds On these facts, it was held by the learned judge of the King's Bench accepting the finding of the Commissioners that neither the provision of 1,000pounds per annum to be paid to the widow nor the lump sum of 4,500pounds paid to Howard for surrender of annuity were disbursements or expenses wholly and exclusively laid out and expended for the purpose of trade. The liability to pay the annuity to the widow was in any event a contingent liability. (b) Gordon Woodroffe Leather Manufacturing Company v. CIT [1962] 44 ITR 551 (SC). In this case, the question before the Supreme Court was whether an amount paid by the assessee to its employee by way of gratuity on his retirement was an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudent businessman. The term 'benefit' to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pounds, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of reasonable and honest person in business." (d) CIT v. Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711 (Guj). In this case, an employee of the assessee, sent abroad for training, died. Thereafter, the board of directors of the assessee passed a resolution to pay some compensation to the daughter of the deceased in recognition of the past services of the latter. The amount paid byway of such compensation was claimed as a deduction under section 37 of the Income-tax Act, 1961. The claim of the assessee was rejected by the Income-tax Officer and the Appellate Assistant Commissioner on the ground that there was no scheme for, or practice of, such payments and that the assessee was not obliged to pay the same. The Tribunal, however, held on further appeal that the expenditure incurred was laid out wholly and exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been disputed or challenged, it appears that the assessee can well contend that it has satisfied at least two of the tests laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Company [1962] 44 ITR 551. It has been found that the employee at the inception of his service was given to understand that he would be entitled to pension when he would retire. Thereafter, the arrangements for pension were finalised and in the final arrangements, a provision was also made for payment of a pension to the widow of the employee. This, the employee was aware of and it must be held that the employee came to expect the same. Facts showing the nature and the extent of the service rendered by the employee concerned to the assessee have been found and recorded. In that background, the benefit provided to the employee by way of pension to himself and, after his death, to his widow does not appear to us to be either unreasonable or excessive. We do not read Alexander Howard's case [1948] 30 TC 334 (KBD) as was done in Anderson Wright Ltd.'s case [1962] 46 ITR 715 (Cal). In Alexander Howard's case [1948] 30 TC 334 (KBD) as in N. Sirur Co. (P.) Ltd.'s case [1977] 109 ITR 432 (Bo ..... 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