Calcutta High Court
Commissioner Of Income-Tax vs Hindustan Motors Ltd. on 13 June, 1988
Equivalent citations: [1989]175ITR411(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. At the instance of the Commissioner of Income-tax, Central I, Calcutta, several questions of law have been referred to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1971-72, 1972-73 and 1973-74.
2. For the aforesaid three years, the following common question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of pension to Smt. Ginni Devi Churiwal and to Sri Mahadeo Maharaj by the assessee-company was an admissible business expenditure under Section 37(1) of the Income-tax Act, 1961 ?"
3. The facts relating to this question are stated hereafter :
The assessee-company is a manufacturer and dealer in motor cars, trucks, flanges, steel sheet castings, spare parts and also scrap. For each of the three assessment years, the assessee claimed expenditure on account of payment of pension to Smt. Ginni Devi Churiwal, wife of an employee, Shri K.D. Churiwal who died in 1961, and also to a retired employee, Shri Mahadeo Maharaj. The lady was paid pension of Rs. 15,000, Rs. 10,655 and Rs. 7,500 and the other retired employee received pension of Rs. 600 per year. According to the Income-tax Officer, the payments were not made according to service conditions but it was of a gratuitous nature. Therefore, the amounts were disallowed.
4. Being aggrieved, the matter was taken in appeal to the Appellate Assistant Commissioner who deleted the disallowances on the principle that the payments were made in order to create better relations with the employees.
5. On further appeal by the Income-tax Officer, the Appellate Tribunal upheld the Appellate Assistant Commissioner's decision with the following observations :
"At the hearing of these appeals, it has been brought to our notice that the question of allowing deduction in respect of the pension payments to the same persons came up for consideration before the Tribunal in the appeal of the Department for the assessment year 1970-71. A copy of the order of the Tribunal in the appeal for that assessment year has been placed before us. For the reasons mentioned therein, the Tribunal held that the pension payments to the aforementioned two persons were made on considerations of commercial expediency and was, therefore, allowable as a deduction under Section 37(1). It has also been brought to our notice that similar pension payments made to the same persons were allowed as deduction by the Income-tax Officer himself in the assessments for the assessment years up to the assessment year 1970-71. Our attention has further been drawn to the resolution dated September 21, 1961, passed by the board of directors of the assessee-company sanctioning payment of pension to Smt. Ginni Devi Churiwal with effect from September 1, 1961. Having regard to the reasons given in this resolution for sanctioning payment of pension to Smt. Ginni Devi Churiwal and on a consideration of the earlier decision of the Tribunal in the appeal for the assessment year 1970-71, with which we respectfully agree, we uphold the action of the Appellate Assistant Commissioner in allowing deduction in respect of the pension payments to these two persons for the three years now under consideration."
6. The short question which calls for determination is whether the expenditure claimed is laid out for the purpose of business and whether it is a legitimate business expenditure in the interests of the business. The existence of a general pension scheme is not always conclusive. Each case depends on its own facts. If the payment to the widow of a deceased employee or to a retired employee is found to be gratuitous and not on account of any practice or commercial expediency, the same will not be allowed. In the case of Gordon Woodroffe Leather Mfg. Co. v. CIT , three tests have been laid down by the Supreme Court in connection with the allowability of pension or gratuity. These tests are : (a) was the payment made as a matter of practice which affected the quantum of salary ; (b) was there an expectation by the employee of getting a gratuity ; and (c) was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. These tests are not cumulative. They are alternative and independent. If any one of these tests is satisfied, the expenditure has to be allowed as revenue expenditure. It may be mentioned that every ex gratia payment to a retired employee or to the widow of the deceased employee cannot be supported on grounds of commercial expediency. But, in the instant case, the Tribunal found that the pension payments to the two persons were made on considerations of commercial expediency. The Board resolution dated September 21, 1961, sanctioning payment of pension to Smt. Ginni Devi Churiwal, the widow of the deceased employee, indicated reasons for such payment. It is well settled that the legitimate business needs of an assessee must be judged from the point of view of the business. It is for the assessee to consider the business expediency and whether a particular expenditure should be incurred for the purposes of its business. Provisions for payment of pension to the widow of a deceased employee cannot be said to be either unusual or unnecessary. In CIT v. Indian Molasses Co. (P.) Ltd. [1987] 166 ITR 740, this court held as follows (at p. 757) :
"We also accept the contentions made on behalf of the assessee that a provision for payment of pension to the widow of an employee is neither unusual nor unnecessary. Such provisions are in consonance with the modern trend. Employees have generally come to expect such provisions "as their normal due for the services rendered to their employer. Even in Government service, provisions have been made for payment of pension to the widows of Government servants. The Income-tax Act, 1961, recognises this trend and has provided for superannuation funds for the benefit not only of the employees but also of their widows."
7. In our view, the benefit provided to the employee by way of pension to himself and after his death to his widow must be held to be reasonable on considerations of commercial expediency. As a matter of fact, the Income-tax Officer himself allowed the deduction of payment of pension to the persons concerned up to the assessment year 1970-71.
8. For the reasons aforesaid, we answer the aforesaid questions in the affirmative and in favour of the assessee.
9. The following question of law has also been referred to this court for the assessment year 1972-73 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to higher rebate on the cost of machineries newly installed for the manufacture of automobile ancillaries including those utilised by it in the assembling of its own cars and in that view allowing a higher rebate of 25% for the assessment year 1972-73 ?"
10. The controversy involved in the aforesaid question is concluded by the decision of this court in the case of the same assessee in respect of earlier assessment years where an identical question was considered and answered. The decisions are CIT v. Hindusthan Motors Ltd. (1981] 127 1TR 210 and CIT v. Hindusthan Motors Ltd. [1988] 170 ITR 431. Following the said decisions, we answer this question in the affirmative and in favour of the assessee.
11. For the assessment years 1972-73 and 1973-74, the following question of law has been referred :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee's claim for development rebate in respect of tube-well was justified and in that view in granting development rebate on tube-well brought into existence during the previous year relevant to the assessment years 1972-73 and 1973-74 ?"
12. The controversy involved in this question is covered by the decision of this court in the case of the same assessee in respect of the assessment year 1971-72, where an identical question was considered and answered. The said decision is CIT v. Hindusthan Motors Ltd. (1988] 170 ITR 431. Following the said decision, we answer this question in the affirmative and in favour of the assessee.
13. The last question is in respect of the assessment year 1971-72. The question is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that cash allowance paid to its employees by the assessee-company should not be taken into account for the purpose of Section 40(c)(iii)/40(a)(v) of the Income-tax Act, 1961, for the assessment year 1971-72 ?"
14. This question is also covered by the decision of this court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431. Following the said decision, we answer this question in the affirmative and in favour of the assessee.
15. There will be no order as to costs.
K.M. Yusuf, J.
16. I agree.