Gordon Woodroffee Leather Manufacturing Co. v. The Commissioner of Income-Tax, Madras

Incom.~-Ta.x-Gratuity-.Payment of nof. in pur.s1!'ance nf any scluime but 1;ol1tntaril.11 .for lonq and varu.rJblr. servicPs-Whelher 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 com-pany, 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 provi-sions 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 Appeal by special leave from tho judgment (}.,.;,. W OD<ho.ff11 and order dated December 20, 1956, of the Madras

1-MIMr High Court in Case Referred No. 85 of 1953, M anufaclurint Co., n. v, A. V. Viswanatha Sastri, R. Ganapatky Iyer and

C..missto.., •f [PUolfU-IOX G. Gopalakri8hnan for the appellant. '

I M.aros K. N. Rajagopal,a 81J81ri and P.D. Me'OO'fl for tho rEll!pondent.

1961. December 20. The Judgment of the Court was delivered by 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 appel-lant 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 com-pany 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 of which the appellant Company was to pay 1961 Rs. 40,000/- and the Managing Agent Company Gordon TV oorlro.f!tt the balance of Rs. 10,000/-. On April 4, 1949, this Leather resolution of the Board of Directors was confirmed. llfanufactu.ri11g Co v. On the saine date a resolution to the same effect The CommiJsir,ner vf was passed at an Extraordinary General Meeting Income·tax, JJ1adras of the Company and before the end of its account- !(apur J. ing year i. e. October 31, 1949, this amount of Rs. 40,000/- was paid to Mr. J. H. Philips.

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:

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. . . . . . . . . . ............. ............................... .

~ (xv) any expenditure (not being a'.l allow-ance 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 expen-ded 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 reso-lution the gratuity was paid "for long and valu-able 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 c.,... llltJ was no such praotice in the appellant Company

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·ward-

ed 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 appropria-tion 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 contemp-lated its payment at any time before ; the paym~ was voluntary and there was no evidence to show 1961 that it was in the future interest of the business of Gordon Woodrojfee the Company that the expenditure was incurred. LeatMr The High Court observed :- Manufacturing Co, v. "In the case of a payment of a gratuity The Commissioner Income-tax, 111.adra t•l a retiring employee recognition of his past services, wirh nothing more cannot, in our Kapur J, 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 Com-pany. These tests the assessee did not satisfy in this case."

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 ren-dered 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 em-ployees to give their best to the employer and if it was so then the payment was a matter of commer-cial prudence, It was also submitted that the Com· pan;Y had acted not with any oblique motive and

1~1 its good faith was not in doubt and in support of Gordo• Woad,.Jfu the contention several caseH were relied upon.

Uallo" In our opinion on the findings given the pay-Ma••f"''"'i"' Co. &H n,·c.:,;.;,,;,,..., of ment in dispute <loes not fall within the prodsiuns 1,,,..,,.,.,,, l(.,., MaJr'" of s. 10(::'.)(xv). The amount w11s paid not in pur-

J. suance of any scheme of payment of gratuities nor 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 facilita-ting 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