Calcutta High Court
Commissioner Of Income-Tax vs Indian Molasses Co. (P.) Ltd. on 2 September, 1986
Equivalent citations: [1987]166ITR740(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. The relevant facts which have been found or are admitted and the earlier proceedings leading up to this reference are, inter alia, as follows :
The Indian Molasses Co. (P.) Ltd., the assessee, a private limited company, appointed one J.B.R. Harvey in its service some time in 1935. It was a term of the employment that the employee in normal course would retire on attaining the age of 55 years on September 20, 1955. It was also arranged or understood that the employee would be entitled to receive a pension from the assessee when he retired. J.B. Harvey ultimately became the managing director of the assessee. On September 16, 1948, the assessee executed a deed of trust appointing three trustees with the object of providing a pension to the employee. In the same year, i.e., 1948, the assessee set apart and made over a sum of Rs. 1,09,643 to the said trustees.
2. The assessee also decided to pay and 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 a deferred annuity policy with an insurance company on the life of the employee to cover an annuity of 720 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 611.12 annually.
3. 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 employee and his widow for an additional annuity of 186.14 per annum during the joint lives of the employee and his wife from the date when the employee attained the age of 55 years and for an increased annuity of 238.13 to the employee in the event of the death of his wife before the employee reached the age of 55 years, also an increased annuity of 238.13 per annum to the widow of the employee, in the event the employee died before attaining the age of 55 years.
4. In the assessment year 1949-50, the accounting year ending on December 31, 1948, the assessee in its income-tax assessment claimed deduction from its total income of the said amount of Rs. 1,09,543 paid to the trustees as an amount spent wholly and exclusively for the purpose of its business. In the subsequent assessment years also, the assessee claimed deduction of the said annual payment of Rs. 4,364 paid to the trustees in the subsequent years. The Income-tax Officer disallowed the claim for deduction.
5. The assessee preferred an appeal against the said assessments and ultimately the matter came up before the Supreme Court in CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474 (SC). The Supreme Court held that as the employee was due to retire on and from September 20, 1955, the assessee continued to retain some dominion or interest over the funds made over to the trustees and that there was a possibility that a trust might result in favour of the assessee. The Supreme Court held further that by merely setting apart the said amount in the hands of the trustees, the assessee had not incurred any expenditure within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922. The disallowance was confirmed.
6. J. B. R. Harvey, the employee, died in May, 1955, before he attained the age of 55 years and before his retirement. In the assessment year 1956-57, the accounting year ending on December 31, 1955, the assessee in its income-tax assessment claimed that the amount of Rs. 1,82,434 being the total amount paid by the assessee to the trustees under the original trust deed and the supplemental trust deed should be allowed to be deducted from its total income as a permissible expenditure in the computation of its business profits. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim of the assessee. On further appeal, the Tribunal allowed the claim of the assessee holding 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?"
7. 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 incurred was not in the nature of capital expenditure or personal expenditure of the assessee. The Supreme Court, however, held that a further enquiry was called for on the question whether the expenditure was wholly and exclusively laid out for the purpose of the business of the assessee. The Supreme Court noted that this point had not been agitated before the Tribunal properly and the Tribunal had failed to consider and decide whether the expenditure was laid out wholly and exclusively for the purpose of the business of the assessee. The Tribunal not having considered the relevant provision and there being no finding on this point, the Supreme Court held that it was not able to answer question No. 2 on the materials before it. The Supreme Court declined to answer the question and left it open to the Tribunal to dispose of the appeal under Section 66(5) of the Indian Income-tax Act, 1922, in the light of the observations in the judgment of the Supreme Court and after determining all the questions arising. The decision of the Supreme Court is CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474.
8. Pursuant to the said directions of the Supreme Court, the matter came up for disposal before the Tribunal. The Tribunal found that it was not possible for them to decide the appeal on legal arguments alone as the issue which had to be decided depended partly on facts.
9. The Tribunal remanded the matter to the Appellate Assistant Commissioner for a report and directed the latter to ascertain all relevant facts. The Appellate Assistant Commissioner was also directed to consider the claim of the assessee in the light of the judgment of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] 44 ITR 551 and also in the context of Section 10(4A) of the Indian Income-tax Act, 1922. The Appellate Assistant Commissioner was directed further to give an opportunity to the parties to place all facts before him.
10. Pursuant to the aforesaid, proceedings were had before the Appellate Assistant Commissioner who prepared and submitted a report dated March 4, 1972. The Appellate Assistant Commissioner noted the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551 as follows (at p. 555) :
"In our opinion, the proper test to apply in this case is, was the payment made as a matter of practice 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 indirectly to facilitate the carrying on of the business."
11. 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 carrying on of the business of the assessee.
(f) There was no extra-commercial consideration in providing for a pension to the employee and on certain contingencies to the widow.
12. The Appellate Assistant Commissioner also considered whether the expenditure was excessive or unreasonable within the meaning of Section 10(4A) of the Act of 1922 having regard to the legitimate business of the assessee and the benefit derived by or accruing to the assessee therefrom. It was found and noted, inter alia, as follows :
(a) The employee entered the service of the assessee in 1935 and became the managing director of the assessee very soon by reason of his ability and zeal.
(b) The employee was responsible for the proper functioning of the assessee's entire business and had to negotiate with the Governments of Bihar and West Bengal and, in particular, with the Excise Departments of the said Governments for procuring molasses and sale thereof. He also had to arrange for railway transportation of the goods purchased.
(c) The employee also had to control the staff employed at the assessee's installation as also at the head office and was in overall charge of the day-to-day management of the business of the assessee.
(d) The employee was in sole charge of the affairs of the company and bore the entire responsibility. Apart from the employee, there was only a clerk and a stenographer employed in the business of the assessee.
(e) The assessee was a 100% subsidiary of a British-company and the employee was holding only one share in the assessee as the nominee of the British company.
13. On the basis of the facts found as aforesaid, the Appellate Assistant Commissioner held that the pensionary benefits provided by the assessee for the employee, the senior executive of the assessee, and the amounts paid to the trustees to secure such benefit were neither excessive nor unreasonable having regard to the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee therefrom. It was also held that the decision of the assessee in 1954 to allow an enhanced pension to the employee was also reasonable in view of the increase in the cost of living in the post-war period. It was noted that when the amount was being claimed as expenses, the employee had ceased to be a director of the assessee and the pension was payable to his widow only and, therefore, Section 10(4A) of the Act of 1922 was not otherwise attracted.
14. 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.
15. 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 benefit.
16. It was contended on behalf of the Revenue that the business of the assessee had declined since the war and, therefore, the extra pension allowed to the employee was not justified. It was submitted further that the benefit derived by or accruing to the assessee's business from the expenditure had to be considered at the relevant time, i.e., when the employee concerned had died and, therefore, the assessee did not derive any benefit from the said expenditure in the year in which it was made.
17. It was further contended that the onus lay on the assessee to justify the benefits conferred on the employee, that such benefits were required having regard to the legitimate business needs of the assessee and that by providing such benefits to the employee, the assessee itself derived or obtained benefits of the service rendered by the employee concerned. The decision of the Supreme Court in the case of Nund & Samont Co. P. Ltd. v. CIT 11970] 78 ITR 268 was cited.
18. It was also contended on behalf of the Revenue that payment of a pension to the widow of the employee was not allowable either under Section 10(2)(xv) or Section 10(4A) of the Indian Income-tax Act, 1922. In support of this contention, the decision of this court in CIT v. Anderson Wright Ltd. [1962] 46 ITR 715 and the decision of the English Court in Alexander Howard and Co. Ltd. v. Bentley (H.M. Inspector of Taxes) [1948] 30 TC 334 (KBD) were cited.
19. In reply, on behalf of the assessee, other decisions of this court were cited before the Tribunal to show that this court had taken a view different from that taken in CIT v. Anderson Wright Ltd. [1962] 46 ITR 715 (Cal). It was contended that payment of pension to the widow of an employee should be considered to be a reasonable business expenditure in the context of the present socio-economic set up. Even the Income-tax Act, 1961, provided for payment of annuities to the employees and their widows, children or dependants through superannuation funds as in the Fourth Schedule to the Act.
20. The Tribunal accepted the facts as found by the Appellate Assistant Commissioner. The Tribunal held that as the employee had the expectation of receiving a pension after retirement on the day he joined the service of the assessee, such expectation continued throughout and, therefore, the test laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. v. 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 the carrying on of the business of the assessee indirectly and on the ground of commercial expediency.
21. On a consideration of the decisions cited, the Tribunal held that it could not be taken as settled law that pension paid to the widow of an employee would never be deductible as an expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
22. The Tribunal found further that the provision of pension for the widow of the employee was made a part of the agreement for providing pension to the employee himself. The widow was provided a pension with reference to the services and responsibilities of the employee jointly with the employee or alone under certain contingencies. The Tribunal held that the said expenditure of Rs. 1,82,434 was laid out or expended wholly and exclusively for the purpose of the business of the assessee and was, therefore, admissible as an allowance under Section 10(2)(xv) read with Section 10(4A)of the Indian Income-tax Act, 1922, and directed the deletion of the said amount from the total income of the assessee. The appeal of the assessee was allowed.
23. On an application of the Revenue under Section 256(2), the Tribunal, as directed, had referred the following question, as a question of law arising out of its order, for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 1,82,434 was laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and was, therefore, admissible as an allowance under Section 10(2)(xv) read with Section 10(4A) of the Indian Income-tax Act, 1922?"
24. At the hearing, learned advocate for the Revenue submitted that the provision for payment of pension to the widow of an employee on the ground that the employee had died during the course of his employment by itself would not be an expenditure laid out or expended wholly or exclusively for the purpose of the business of the assessee. Learned advocate submitted further that the fact that the provision for payment of such pension had been made under an agreement between the employee and the assessee during the course of the former's employment did not also automatically import that such provision was commercially expedient or was made for commercial considerations.
25. It was next submitted that the provision for payment of pension to the widow was contingent and not certain.
26. 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.
27. 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 Indian Molasses Co. Private Ltd. v. CIT [1959] 37 ITR 66 (the first case of the assessee), that no expenditure had been incurred to meet any actual liability. The money paid to the trustees was for the purpose of being set apart for a contingent and future liability and as such the said amount was not allowable as deduction under Section 10(2)(xv). It was held further, following the English decision in Alexander Howard Co. Ltd. v. Bentley [1948] 30 TC 334(KBD), that there was no finding of fact to support the contention that the provision for payment of pension to the widow of the employee was wholly or exclusively for the purpose of business of the assessee. It was observed that the English case was an authority for the proposition that a provision for payment of pension to the wife of an employee was not an expenditure for the purpose of trade.
(b) Andrew Yule & Co. Ltd. v. C1T [1963] 49 ITR 57 (Cal). The facts of this case were that the chairman of the board of directors of the assessee while travelling, not on the business of the assessee, lost his life in a riot The board of directors, thereafter, passed a resolution to pay compensation to the widow of the deceased on the ground that if such compensation was not paid, the assessee would be subjected to unfavourable criticism and there would be repercussions from its employees. An interim payment of Rs. 1,20,000 was made and at a subsequent meeting it was finally decided by the board that Rs. 2,00,000 would be paid as such compensation.
The assessee claimed deduction of Rs. 2,00,000 as business expenditure. The Tribunal held that the compensation paid, considered against the emoluments received by the deceased from the assessee, was reasonable and based on commercial expediency. It was, however, held that the compensation was ascertained and liability for the same arose in the subsequent assessment year. On a reference, it was held by a Division Bench of this court that payment of this compensation to the widow of the deceased was not an expenditure laid out wholly for the purpose of the assessee's business as the death of the chairman had nothing to do with the object or business of the assessee. Except what was contained in the resolution of the board of directors, the Tribunal had given no reasons for the finding that the expenses were incurred wholly for the purpose of the assessee. It was contended 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 loyal body of employees. It was held that the expenditure on account of pension was laid out solely for the business of the assessee.
(d) Nund & Samont Co. P. Ltd. v. CIT . In this case, the question before the Supreme Court was whether the remuneration paid to the managing director and the deputy managing director of the assesses in accordance with the articles of association of the latter was excessive or unreasonable having regard to the legitimate business needs of the assessee and the benefit derived by, or accruing to, the assessee therefrom within the meaning of Section 10(4A) of the Indian Income-tax Act, 1922, and whether disallowance of a part of such remuneration was justified.
The Supreme Court observed as follows at (pages 271 and 272) :
"It is, however, for the taxpayer to establish by evidence that a particular allowance is justifiable. Apparently, no evidence was tendered by the assessee relating to the duties of the managing director and the deputy managing director, the services rendered by them, the manner in which the profits earned by the assessee were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the asses-see and the benefit derived by or accruing to, the assessee in consequence of the services rendered by the managing director and the deputy managing director. In the absence of any such evidence, the finding recorded by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner and the Tribunal must be accepted. We are unable to agree with counsel for the assessee that even if the taxpayer does not produce any evidence in support of the claim for allowance, the Income-tax Officer must independently collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee before the power under Section 10(4A) may be exercised."
(e) N. Sirur & Co. Pvt. Ltd. v. CIT [1911] 109 ITR 432 (Bom). In this case, the assessee appointed a managing director in 1937 who continued to act as such till his death in 1959, At the relevant time, the managing director was acting under an agreement dated April 18, 1957, entered into by and between himself and the assessee for a period of five years on and from April 1, 1957. Under Clause 14 of the said agreement, it was provided that in the event of 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.
28. 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.
29. 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 assessee likely to be enhanced if such payments were made. The High Court noted that the object of the agreement was not to benefit the employee in view of his long and faithful services inasmuch as no benefit by way of pension or otherwise had been provided to the employee. The High Court rejected the contention of the assessee that from the fact that the payment was being made to the widow pursuant to the agreement and in consideration of the service rendered by the employee, it followed automatically that such payment was being made out of commercial expediency and the expenditure was incurred wholly and exclusively for the purpose of the business. A distinction was drawn by the High Court in respect of cases where the employee died while discharging his duties in the course of the employer's business. There, payment of reasonable compensation to the widow for the loss of the employee's pension could be held to be a reasonable expenditure. The High Court held that where a pension was paid to the widow simply because the employee had died during the tenure of his agreement, the same would not be an expenditure laid out wholly and exclusively for the purpose of business.
30. Learned advocate for the Revenue also drew our attention to another decision of this court in Eastern Scales (P.) Ltd. v. CIT [1979] 117 ITR 477, where the decision of Supreme Court in Nund & Samont Co. P. Ltd. [1970] 78 ITR 268 was applied.
31. Learned advocate for the assessee contended, on the other hand, that in the instant case, the matter was remanded by the Supreme Court to the Tribunal for decision of the very question involved in this reference, viz., whether the expenditure incurred in providing for pension to the widow was an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee within the meaning of Section 10(2)(xv) read with Section 10(4A) of the Indian Income-tax Act, 1922. The Tribunal, in turn, remanded the matter to the Appellate Assistant Commissioner so that all relevant facts could be ascertained and gone into. The Appellate Assistant Commissioner had made an exhaustive enquiry into the facts and had recorded his finding thereon. The facts found by the Appellate Assistant Commissioner were accepted by the Tribunal. None of the said findings has been challenged by the Revenue and they have become final. There was sufficient 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.
33. 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.
34. It was submitted that arrangements providing for pension to the employees, their widows and their dependants were not unknown in the commercial world. In fact, in modern times, they have come to be recognised as ordinary and usual amenities provided to the employees. The Income-tax Act, 1961, also recognised and allowed deduction of payments made to superannuation funds set up for providing annuities for employees on their retirement or incapacitation and also for their widows, children or dependants. He referred to the provisions made in the Fourth Schedule to the Income-tax Act, 1961.
35. Learned advocate for the assessee submitted that the decision of the Bombay High Court in N. Sirur & Co. (P.) Ltd.'s case [1977] 109 ITR 432, was distinguishable on facts. In that case no pension at all was provided for the employee but it was provided that if the employee died during the currency of the employment, then only his widow would be paid a pension and certain other amounts. The Bombay High Court laid stress on that fact and its decision was based thereon.
36. Learned advocate submitted further that the decision of this court in Anderson Wright Ltd.'s case [1962] 46 ITR 715, where, construing Alexander Howard & Co. Ltd. [1948] 30 TC 334 (KBD), it was held that the said case was an authority for the proposition that a provision for payment of pension to the wife of the employee was not an expenditure for the purpose of trade had not been accepted or approved in subsequent decisions. It was submitted that the facts in Alexander Howard's case [1948] 30 TC 334 (KBD) were different from the facts here and, in any event, Alexander Howard's case [1948] 30 TC 334 (KBD) was not an authority for the wide proposition that provision for pension to the widow of an employee could never be an expenditure for the purpose of trade.
37. In support of his contention, learned advocate for the assessee cited the following decisions :
(a) Alexander Howard & Co. Ltd. v. Bentley [1948] 30 Tax Cases 334 (KBD). In this case, the taxpayer company was constituted in 1933 with the object of taking over a business carried on by A.C. Howard. After the assessee was constituted, Howard became its governing director. Initially, Howard demanded a higher salary for his services but later agreed to accept a lower salary on condition that an annuity would be provided for his widow. The articles of association of the taxpayer as also the agreement entered into by and between Howard and the taxpayer recorded that an annuity of 1,000 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 by the taxpayer.
In its assessment to income-tax, the taxpayer claimed deduction of the said amount of 4,500. 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 1,000. per annum to be paid to the widow nor the lump sum of 4,500 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 . 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 admissible deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court held that as the amount was not paid pursuant to any scheme for payment of gratuity, as the amount was not something which the employee expected to be paid for long and faithful service and further as the payment was a voluntary payment made without the object of facilitating the carrying on of the business of the assessee or as a matter of commercial expediency but only made in recognition of the long and faithful service of the employee, the same was not deductible under Section 10(2)(xv) of the Act of 1922. The Supreme Court laid down the tests to be applied in such cases in the following language (at page 555) :
"In our opinion, the proper test to apply in this case is, was the payment made as a matter of practice 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 indirectly to facilitate the carrying on of the business."
This observation has been noted earlier.
(c) CIT v. Edward Keventer (Private) Ltd. . In this case, the question before a Division Bench of this court was whether disallowance of a part of the remuneration or commission paid to the four directors and an employee of the assessee under Section 10(4A) of the Indian Income-tax Act, 1922, was justified. It was held that whether the said Section 10(4A) of the Act of 1922 has been properly or correctly applied has to be decided in the light of the facts of each case. The Division Bench noted that in exercising the powers under the said section, the Income-tax Officer had to take into consideration (a) the legitimate business needs of the company ; and (b) the benefit derived by or accruing to the company. The Division Bench observed as follows (at page 381) :
"The legitimate business needs of the company must be judged from the view-point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Income-tax Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived by or accruing to the company must also be considered from the angle of a 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 a 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 by way of such compensation was claimed as a deduction under Section 37 of the Income-tax Act, 1961. The claim of the assesses 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 exclusively for the business purpose of the assessee in order to maintain good relations between the employer and the employees and engender confidence in the management. Therefore, the said deduction was admissible under Section 37. On a reference, a Division Bench of the Gujarat High Court affirmed the decision of the Tribunal and observed as follows (at page 720) :
"In the last place, the concept of commercial expediency in the context of any payment made in similar circumstances must change with changing times and the problem deserves a fresh look. As earlier pointed out, payment by way of retirement benefits or family pension is a well-accepted concept in modern times and if an employer makes a beginning and voluntarily expends money on payment of gratuity or pension or compensation to one or more of his employees or their dependants, without there being any compulsion, statutory or otherwise, taking notice of the altering pattern of the employer-employee relationship, then, the expenditure cannot but be treated as having been made to earn greater co-operation and loyalty of his employees in whose mind such a gesture would generate a legitimate expectation of being similarly treated. Law cannot take leave of realities and, under conditions prevalent in the mid-sixties, such expenditure must be taken to have been incurred wholly and exclusively for the purposes of the employer's business."
(e) CIT v. Edward Keventer (Private) Ltd. [1978] 115 ITR 149. This is a judgment of the Supreme Court affirming the decision of this court in Edward Keventer Private Ltd. [1972] 86 ITR 370.
(f) Sassoon J. David & Co. (P.) Ltd. v. CIT . Here, the Supreme Court reiterated the three tests laid down by it in its earlier decision in Gordon Woodroffe Leather Manufacturing Company [1962] 44 ITR 551. The Supreme Court held further that the said tests had to be read disjunctively. In the case before the Supreme Court, it was held that only one of the tests as laid down was satisfied, and, therefore, the assessee was entitled to claim the benefit of Section 10(2)(xv) of the Act of 1922.
(g) Calcutta Art Studio (P.) Ltd. v. CIT . Here, another Division Bench of this court followed and applied its earlier decision in Edward Keventer (Private) Ltd. [1972] 86 ITR 370.
38. In the facts as have been found by the Tribunal which have not 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 fine 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.
39. 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.
40. 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 (Bom) no pension was provided for the employee. The condition for payment of the pension to the widow was the continued shareholding in the employer by the legal representative of the employee. Further, the deduction claimed was for the payment for surrender and not payment of the pension during the lifetime of the employee when the wife of the employee had not become entitled to claim the pension.
41. In the conspectus of the facts, it appears to us that it has been established that the amount provided for the payment of pension to the employee and after his death to his widow had been laid out or expended wholly and exclusively for the purpose of the business of the assessee.
42. Legitimate business needs of an assessee must be judged from the point of view of the business and not from the point of view only of the Revenue. With respect, we follow the decision of this court in Edward Keventer Pvt. Ltd. [1972] 86 ITR 370, which has been affirmed by the Supreme Court. 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.
43. For the reasons as above, we have no reason to interfere with the decision of the Tribunal. We answer the question referred in the affirmative and in favour of the assessee. There will be no order as to costs.
44. Leave is given to the advocate for the assessee to file her vakalatnama within a fortnight from date.
Monjula Bose, J.
I agree.