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v.
THE COMMISSIONER OF INCOME-TAX, MADRAS
(B. P. SINHA, c. J., J. L. KAPUR,
~L HmAYATULLAH, J.C. SHAH and
J.·R. MUDHOLKAR, ,JJ.)
Incom.-Ta.x-Gratuity-.Payment of nof. in pur.s1!'ance nf any scluime but 1;ol1tntaril.11 .for lonq and varu.rJblr. servicPsWhelher detlnclion can be claimed-Income-Ta. Act, 1922 ( 11of1.922), 8. 10 (2) (xv).
The company accepted the resignation of one of its directors and in appreciation of his long valnable services to the company, paict him a gratuity of Rs. 40,nOO/-. Tr.is amount was claimed as a·: deduction under s.10(2) (xv) of the Income.tax Act which was disallowed by the Income-tax Officer, on the ground that the appellant company had no pension scheme,; the payment was voluntary and that the entry in the assessec s boob clearly indicated it to be a capital payment.
Held,' that the payment does not fall within the provisions of'· I0(2)(xv) of the Act. The amount was paid not in pursuance· of any scheme of payment of gratuities nor was it an amount which the reripien t expected to be p<!id for long an<l faithful service but it Yla<; for a voluntary payment not with the object of facilitating carrying on the business o~ the appellant compan~1 or as a matter of commercial exped1ency but in recog-nition of long and faithful service. There Was no practice in the appellant company to pay such amounts to and did not affect the quantum of salary of the recipient.
To claim i' deduction unner s.10(2l(xv) of the Act the proper test to apply is, was that the payment made as a matter of practice which affected the quantum of salary or was there art 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 facilirate the carrying on of the busine~s .
.!. P. Hancok v. General Raversirma,r11 & Inv<Stmenf. Oo. L'd. (1918) 7 T. C. 358 and .T, W. Smith v. The Incorpornted Council of L"w Re.porting .fnr England and Wales, (!914) 6 T. C. 477, REFERRED TO.
CIVIL APPELLATE Jun1snrcTION: Civil Appeal No. 62 of 1961.
212 SUPREME OOURT REPORTS [1962] SUPP.
1961
(}.,.;,. W OD<ho.ff11 1-MIMr M anufaclurint Co., v, n. C..missto.., •f [PUolfU-IOX I M.aros
Appeal by special leave from tho judgment and order dated December 20, 1956, of the Madras High Court in Case Referred No. 85 of 1953, A. V. Viswanatha Sastri, R. Ganapatky Iyer and G. Gopalakri8hnan for the appellant. '
K. N. Rajagopal,a 81J81ri and P.D. Me'OO'fl for tho rEll!pondent.
li'.;tN J
KAPUR, J.-This appeal by special leave is directed against the judgment and order of the High Court of Judicature at Madras. The appellant is the as&e'l8ee and the respondent is the Commiseioner of Incom&-tax and the question raised is as to appli<)&bility of a. 10(2)(xv) of the Indian Income-tax Aot to a gratuity paid by the appellant to ono of its offioere on hie retir<>ment from B!'rvioo.
The appeal relates to the &88e88DJ~nt year HJ50·51. M/s. Gordon Woodroffee & Co. (Madl'llB) Ltd., was incorporated as a private limited company in 1922 and became the Managing Agent of a. public limited company M/e. Gordon Woodroffee Leather Manufacturing Company Ltd., which is the &BB!'SBOO. One J. H. Philips was €mployed in the Managing Agent Company from 1922 to 1935 and from 1935 he became an employee of the appellant company and became its Dirertor from 1940. On March 22, 1949, he wrote a letter to the appellant company exprcasing bis intention to resign from the Board of the Company ae from April 4, 1949, upon his retirement from the employment of the company and requested that his resignation be accepted. On March 24, 1949, the Board of Directors of the appellant Company p&Blled a resolution that his resignation be accepted and in appreciation of his long and valuable services to Company hebe paid a gratuity of Rs. 50,000/- out
2 S.C.R. SUPREME COURT REPORTS 213
1961
of which the appellant Company was to pay Rs. 40,000/and the Managing Agent Company the balance of Rs. 10,000/-. On April 4, 1949, this resolution of the Board of Directors was confirmed. On the saine date a resolution to the same effect was passed at an Extraordinary General Meeting of the Company and before the end of its accounting year i. e. October 31, 1949, this amount of Rs. 40,000/- was paid to Mr. J. H. Philips.
Gordon TV oorlro.f!tt Leather llfanufactu.ri11g Co v. The CommiJsir,ner vf Income·tax, JJ1adras
!(apur J.
This amount was claimed as a deduction under s. 10 (2)(xv) of the Income-tax Act which ~eads :·-
Section 10(2) "Such profits or gains shall be computed after making the following allowances, namely:
. . . . . . . . . . . . . ............. ~ ............................... .
(xv) any expenditure (not being a'.l allowance of the nature described in any of tho clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession er vocation."
The amount was disallowed by the Income· tax Officer as well as by the Appellate Assistant Commissioner on the ground that the appellant Company had no pension scheme; the payment was voluntary an.d that the entry in the assl,ssee's books clearly indicated it to be a capital payment. Against this order the appellant Company took an appeal to the Income-tax Appellate Tribunal which upheld the order of the Appellate Assistant Commissioner. It held that a 0Cording to the resolution the gratuity was paid "for long and valuable sen,ices to the Company" ; that there was nothing to indicate that Mr. J. 1!. Philips had accepted a lower salar.Y in expectation of get.ting a gratuity at the end of his service ; that there
214 SUPREME COURT REPORTS (1962] SUPP.
llltJ
llltJ was no such praotice in the appellant Company c.,... w ..,/to.ff,, and that during the course of his service he WaR
Lu,.,, being remunerated at a graduated scale of salary MG11Mjactu i11g Co. .. and a commit!sion of 2 !% on the profits; that n.. CommissiclU< of there was no •·expectancy" that at the end of the 1,.1ox, MUros service thero would bo a recompense for faithful /C-J. and efficient service that he had been suitably n·warded by being given a commission on the profits "in order to whip up his enthusiasm". It was also mentioned that in the books of the appellant Com· pany tho amount had not been debited in the profit and loSB axPunt but was debited to the appropriation account thereby indicating that it was an extra payment or a payment made in the nature of a capita.I expe118e. Taking all these circumstances into consideration the Tribllnal came to the con· clusion that it was difficult to hold that the expen, dituro was not in the nature of a ctpital expendi· ture or tha,t it wa11. expended wholly and exl'IU· sively for the purpose of the a88Cll8ee'11 busin888. At the instance of the appellant Company the case was stated to the High Court under e. 66( l) of the Income-tax Act and the following question was referred:-
"W1ether the sum oi H~. 40,000/- paid to Mr. J. H. Philips on hill retirement from tho service of the CJompany was not an ~issi ble deduction under Section 10(2Xxv) of the Income-tax .Act, 1922."
The High Court answered tlie question against the appellant Company. It held that in order thi.t s. J 0(2) (xv) be applicable it had to be proved that the amount was laid out or expended wholly and exclusively for purposes of the company's buain888. In this case the amount was paid on retirement and for valuable servioee rendered by Mr. J. H. Philips ; there wall no evidonoo that he expected to receive this amount or the Company contemplated its payment at any time before ; the paym~
2 s.c.R. SUPREME COURT REPORTS 215
was voluntary and there was no evidence to show that it was in the future interest of the business of the Company that the expenditure was incurred. The High Court observed :-
"In the case of a payment of a gratuity t•l a retiring employee recognition of his past services, wirh nothing more cannot, in our opinion satisfy the requirements of Section IO(:l){xv), even if those requirements are judged from the view point of commercial expediency, as it always should be when a olaim arises under Section 10(2)(xv). Was the expenditure incurred in the future interest of the business of the assessee ? Was there any connection between the purpose of the payment and the further conduct of the business of the assessee ? These are the tests to be satisfied before it could be said that in paying the gratuity money was laid out or expended wholly and exclusively for the purpose of the business of the Company. These tests the assessee did not satisfy in this case."
1961
Gordon Woodrojfee LeatMr Manufacturing Co, v. The Commissioner Income-tax, 111.adra Kapur J,
Against this judgment and order the appellant Company has brought this appeal by special leave.
It was argued on behalf of the appellant that the amount had been paid as a matter of commercial expediency and in the interest of the Company as an inducement to other employees that if they rendered service in a similar manner with efficiency and honesty they would be similarly rewarded. Decisive test., it was submitted, was whether such payments of gratuity were likely in future also and was the payment made as an incentive to the employees to give their best to the employer and if it was so then the payment was a matter of commercial prudence, It was also submitted that the Com· pan;Y had acted not with any oblique motive and
:!W SUPREME COURT REPORTS [1962] SUJ:>J·.
11 its good faith was not in doubt and in support of Gordo• Woad,.Jfu the contention several caseH were relied upon. Uallo" Ma••f"''"'i"' Co. In our opinion on the findings &H given the payn,·c.:,;.;,,;,,..., of ment in dispute <loes not fall within the prodsiuns 1,,,..,,.,.,,, MaJr'" of s. 10(::'.)(xv). The amount w11s paid not in pursuance of any scheme of payment of gratuities nor l(.,., J. was it au amount which the recipient expected to be paid for long and faithful service but it was a voluntary payment not with the object of facilitating the carrying on of the business of the appellant Company or as a matter of commercial expediency but in recognition of long and faithful service of Mr. J. H. Philips. There V£&S no practice in the appellant Company to pay such amounts and it <lid not affect the quantum of sal.iry of the recipient. The two cases Htrongly relied upon by the appellant Company were J. ,P; Hancol: v. General Reversioruiry & Investment Oompany Ltd.(') and J. W. Smith v. Tli,e, lncorporalR.d Council of Law Reporting for Eng/,and and Wales('). In the former case the a.ssessee Company sought to chargA as a trade expense a lump sum which it had paid for tho purchase for the benefit of a former actuary, of an annuity equal in amount to the pension which the Company had resolved to pay him. This wu.s held to be an expense admissible in computing the Company's pro. fits assessable to iucome·tax. But in that case it was the practice of the assessee company to grant pemions to its servant!! after a ooniderable period of service and this practice was known to the em· ployeesand affcted the rate of salary paid by the Company in that the employees wore willing to serve tho Compa11y at lower rates than they other. wise would have by reason of the expectation of the pension at the end of their service. In the latter case there was a praotioo of granting gratuities and th~t WM the ground for holding th" amount ·to be a proper dedqction:
(I) (1918) 7 T. C. 358.
(2) (1914) 6 T. C. 477.
2 S.C.R. SUPH.l<:ME COURT REPORTS ryl~ • I
1961
In our opinion the proper test to apply in this case is, was the payment m:ide as a matter of prac· ticc which 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 in· directly to facilitate the carrying on of the business. But this has not been shown and therefore the amount claimed is not a deductible item under s. 10(2)(xv).
Gordon W11udroj/ie Le(Jt/ie1 lll anuja .. Juring Co, v. The Cemmissio11er of Income~fa.'I: M1,.dros
Kapur J,
The appeal therefore fails and is dismissed with costs.
Appeal dismissed.
NEW BANK OF INDIA LTD.
v.
PEAREY LAL
( B. P. SINHA, c. J., J.L. KAPUR, M. !ImAYATULLAH, J. c. SHAH and J. R. MUDHOLKAR, JJ.)
1961
December 20,
Bank-Mon<y delivered by constituent-;--Special instruction to await direction for deposits-If held by the bank as trustee-Scheme for settlement of bank's liabilittes sanctionedAmount, if subject to it.
The respondent delivered certain sums of money to the appellant-bank at Lahore for transmission to Calcutta, with instructions to await his directions regarding the opening' of accounts for keeping the money in fixed deposit in the Calcutta Branch of the bank which was proposed to be opened in the near future. The respondent did not however give any instruction for opening any account, fixed deposit or otherwise in regard to the amounts after they reached Calcutta. Within a few days after the opening of the Calcutta branch of the bank it ceased making payments and a moratorium for a. limited period was declared under an ordinance issued by the Governor General restraining the bank from making payments to its depositors. After the expiry of the period of the moratorium the Calcutta branch of the bank raised objections to the respondent's application for withdrawal of the amount
New Bank of India Ltd.
Pearey Lal
B. P. Sinha
J. L. Kapur
M. Fayatullah
J. C. Shah
J. R. Mudholkar
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
