PETITIONER:
GORDON WOODROFFEE LEATHER MANUFACTURING CO.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
20/12/1961
BENCH:
KAPUR, J.L.
BENCH:
KAPUR, J.L.
SINHA, BHUVNESHWAR P.(CJ)
HIDAYATULLAH, M.
SHAH, J.C.
MUDHOLKAR, J.R.
CITATION:
1962 AIR 1361 1962 SCR Supl. (2) 211
CITATOR INFO :
R 1979 SC1441 (15,20)
ACT:
Income-Tax-Gratuity-Payment of not in
pursuance of any scheme but voluntarily for long
and valuable services-Whether deduction can be
claimed-Income-Tax Act, 1922 (11 of 1922), s. 10
(2) (xv).
HEADNOTE:
The company accepted the resignation of one
of its directors and in appreciation of his long
valuable services to the company, paid him a
gratuity of Rs. 40,000/-. This 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 assessee's books clearly
indicated it to be a capital payment.
^
Held, that the payment does not fall within
the provisions of s. 10(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 recipient expected to be paid for long and
faithful service but it was for a voluntary
payment not with the object of facilitating
carrying on the business of the appellant company
or as a matter of commercial expediency but in
recognition 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 a deduction under s. 10(2)(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 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.
J. P. Hancok v. General Raversionary &
Investment Co. Ltd. (1918) 7 T. C. 358 and J. W.
Smith v. The Incorporated Council of Law Reporting
for England and Wales, (1914) 6 T. C. 477,
REFERRED TO.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 62 of 1961.
212
Appeal by special leave from the judgment and
order dated December 20, 1956, of the Madras High
Court in Case Referred No. 85 of 1953.
A. V. Viswanatha Sastri, R. Ganapathy Iyer
and G. Gopalakrishnan for the appellant.
K. N. Rajagopala Sastri and P.D. Menon for
the respondent.
1961. December 20. The Judgment of the Court
was delivered by
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 assessee and the respondent is the
Commissioner of Income-tax and the question raised
is as to applicability of s. 10(2)(xv) of the
Indian Income-tax Act to a gratuity paid by the
appellant to one of its officers on his retirement
from service.
The appeal relates to the assessment year
1950-51. M/s. Gordon Woodroffee & Co. (Madras)
Ltd., was incorporated as a private limited
company in 1922 and became the Managing Agent of a
public limited company M/s. Gordon Woodroffee
Leather Manufacturing Company Ltd., which is the
assessee. One J. H. Philips was employee in the
Managing Agent Company from 1922 to 1935 and from
1935 he became an employee of the appellant
company and became its Director from 1940. On
March 22, 1949, he wrote a letter to the appellant
company expressing his intention to resign from
the Board of the Company as 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 passed 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
213
of which the appellant Company was to pay Rs.
40,000/- and the Managing Agent Company the
balance of Rs. 10,000/- April 4, 1949, this
resolution of the Board of Directors was
confirmed. On the same 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.
This amount was claimed as a deduction under
s. 10 (2)(xv) of the Income-tax Act which reads :-
Section 10(2) “Such profits or gains shall be
computed after making the following allowances,
namely:
………………………………………
..
………………………………………
…
(xv) any expenditure (not being an
allowance of the nature described in any of
the claused (i) to (xiv) inclusive, and not
being in the nature of capital expenditure or
personal expenses of the assesee) laid out or
expended wholly and exclusively for the
purpose of such business, profession or
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 and that the entry in the assessee’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 according to
the resolution the gratuity was paid “for long and
valuable services to the Company”; that there was
nothing to indicate that Mr. J. H. Philips had
accepted a lower salary in expectation of getting
a gratuity at the end of his service; that there
214
was no such practice in the appellant Company and
that during the course of his service he was being
remunerated at a graduated scale of salary and a
commission of 2-1/2% on the profits; that there
was no “expectancy” that at the end of the service
there would be a recompense for faithful and
efficient service that he had been suitably
rewarded 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 Company the amount had not been debited
in the profit and loss account but was debited to
the appropriation account thereby indicating that
it was an extra payment or a payment made in the
nature of a capital expense. Taking all these
circumstances into consideration the Tribunal came
to the conclusion that it was difficult to hold
that the expenditure was not in the nature of a
capital expenditure or that it was expended wholly
and exclusively for the purpose of the assessee’s
business. At the instance of the appellant Company
the case was stated to the High Court under s.
66(1) of the Income-tax Act and the following
question was referred :-
“Whether the sum of Rs. 40,000/- paid to
Mr. J. H. Philips on his retirement from the
service of the Company was not an admissible
deduction under Section 10(2)(xv) of the
Income-tax Act, 1922.”
The High Court answered the question against
the appellant Company. It held that in order that
s. 10(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
business. In this case the amount was paid on
retirement and for valuable services rendered by
Mr. J. H. Philips; there was no evidence that he
expected to receive this amount or the Company
contemplated its payment at any time before; the
payment
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
to a retiring employee recognition of his
past services, with nothing more cannot, in
our opinion satisfy the requirements of
Section 10(2)(xv), even if those requirements
are judged from the view point of commercial
expediency, as it always should be when a
claim 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.”
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 Company had acted not with any
oblique motive and
216
its good faith was not in doubt and in support of
the contention several cases were relied upon.
In our opinion on the findings as given the
payment in dispute does not fall within the
provisions of s. 10(2)(xv). The amount was paid
not in pursuance of any scheme of payment of
gratuities nor was it an amount which the
recipient expected to be paid for long and
faithful service but it was 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 was no practice in the appellant company to
pay such amounts and it did not affect the quantum
of salary of the recipient. The two cases strongly
relied upon by the appellant Company were J. P.
Hancok v. General Reversionary & Investment
Company Ltd.(1) and J. W. Smith v. The
Incorporated Council of Law Reporting for England
and Wales(2). In the former case the assessee
Company sought to charge as a trade expense a lump
sum which it had paid for the 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 was held to be an
expense admissible in computing the Company’s
profits assessable to income-tax. But in that case
it was the practice of the assessee company to
grant pensions to its servants after a
considerable period of service and this practice
was known to the employees and affected the rate
of salary paid by the Company in that the
employees were willing to serve the Company at
lower rates than they otherwise would have by
reason of the expectation of the pension at the
end of their service, In the latter case there was
a practice of granting gratuities and that was the
ground for holding the amount to be a proper
deduction.
217
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. But this has not been shown
and therefore the amount claimed is not a
deductible item under s. 10(2)(xv)
The appeal therefore fails and is dismissed
with costs.
Appeal dismissed.