TMI Blog1962 (5) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ome communalists. In view of the unfortunate event, the directors passed a resolution on 5th June, 1950, resolving that a compensation should be paid to Mr. Cameron's widow. This resolution was on the footing that if any compensation was not paid there would be repercussion from other employees particularly in view of the circumstances of Mr. Cameron's death. The company had effected an insurance policy by which Mr. Cameron's life was covered to the extent of ₹ 1,20,000. In the board of directors meeting it was resolved that pending a decision as to what the full amount of compensation should be an interim payment of ₹ 1,20,000 should be made to Mr. Cameron's widow. On 22nd January, 1951, the board met to pass a resolution that the further and final payment of the aforesaid compensation would be ₹ 2,00,000 as that amount was fair and reasonable. In the resolution it was stated that this figure was arrived at after consultation with the company's auditors. Although the resolution was passed beyond the accounting year of the company, when the accounts were made up the amount was debited to the contingencies reserve account crediting the current l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , according to the method of accounting of the assessee the amount must be taken to have been incurred already in the accounting year 1950. It was also stated that the said Mr. Cameron was to render his services for about another year and the normal emoluments to him would have been ₹ 1,35,000. Mr. Cameron would have also enjoyed a pension which was not likely to be less than at the rate of ₹ 11,400 per annum continuously for 30 years. Thus, in the normal way the company would have to meet an expense of about ₹ 3,56,000 against which the compensation was only ₹ 3,20,000. Thus, it was only a normal business compensation paid in the circumstances. 5. The Tribunal held that in this case the liability for compensation was not ascertained and quantified in the year of account. The basis of the payment arose from the resolution dated 22nd January, 1951. In the opinion of the Tribunal, there could have been a case in which the basis was already established or was already known to the assessee and the actual working out of the amount according to the basis was made in the succeeding year, in which case the assessee could claim that the expenses had already been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case the said sum of ₹ 2,00,000 can be related as an expenditure to the year of account relevant to the assessment year 1951-52? 8. The draft statement was sent to the parties concerned. The assessee made certain suggestions some of which were appropriately incorporated. The other suggestions appeared to us to be not arising out of the order of the Tribunal. The Commissioner of Income-tax has suggested re-framing of the questions which has been done. The draft statement is finalised. Sachin Chaudhuri with Dr. D. Pal, for the assessee. E. R. Meyer with B. L. Pal, for the Commissioner. JUDGMENT G.K. MITTER J.--The main question which arises on this reference is whether a payment made to the widow of the chairman of the board of directors of the assessee company by way of compensation in view of the circumstances attending on the death of the said chairman was admissible as an expense under section 10(2)(xv) of the Indian Income-tax Act. Incidental thereto is another question as to whether the said payment was related as an expenditure to the year of account of the assessee relevant to the assessment year 1951-52. The facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are from the minutes of the board meeting. When exactly the auditors were consulted over this matter does not appear from the record but a letter dated December 9, 1955, from Messrs. Price Waterhouse Peat Co., the auditors of the assessee, addressed to the company shows that the question of fixation of compensation had been discussed prior to the date of the board meeting and that the auditors had opined that the sum of ₹ 3,20,000 based on approximately two years' total emoluments of the late Mr. Cameron was in the circumstances fair and reasonable. The Income- tax Officer disallowed the payment of ₹ 2,00,000 as an expenditure on the ground that it was merely gratuitous although connected with the employment of Mr. Cameron by the company. The Appellate Assistant Commissioner upheld that order of the Income-tax Officer and further held that the liability was not ascertained in the year of account and could not therefore be allowed as an admissible expense in that year. Before the Tribunal it was argued on behalf of the assessee that the payment had been made to satisfy the other employees against such risks of life and therefore the expense so incurred was solely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correctly taken in the accounts for the year ended on December 31, 1950. The auditors reasoned that the board of directors had decided to pay compensation to Mrs. Cameron on June 5, 1950, and that the payment of ₹ 1,20,000 was only an interim one pending a decision as to what the full amount of compensation should be. Further the commitment came into existence on June 5, 1950, although the balance of the quantum was not ascertained till a later date. The amount of the liability was known when the accounts for the year ended December 31, 1950, was prepared and in the opinion of the auditors the balance of the compensation of ₹ 2,00,000 was correctly included in those accounts in conformity with normal accountancy principles and in accordance with the mercantile system of accounting regularly employed by the company. The questions which have been referred to this court are as follows: (1) Whether, on the facts and in the circumstances of the case, the sum of ₹ 2,00,000 was admissible as an expense under section 10(2)(xv) of the Indian Income-tax Act? (2) If the answer to question No. 1 be in the affirmative then whether on the facts and in the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not bear the characteristics of a capital expense or personal expenses of the assessee the further question arises as to whether it is laid out or expended wholly or exclusively for the purpose of the assessee's business. To solve this a test of the following nature has to be applied, viz., has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration . If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure as the case may be. When the assessee places all the facts and circumstances before the revenue authorities the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the Tribunal could have arrived at such a conclusion. Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading.......in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. On behalf of the assessee reliance was placed on the above in support of the contention that once the Tribunal takes the view as it has done in this case that the amount paid to Mrs. Cameron was reasonable compensation based on business expediency alone and for no other purpose the finding was not open to review. It should be noted however that in a later case the authority of the above proposition has been considerably shaken. In Commissioner of Income-tax v. Royal Calcutta Tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 10(2)(xv) and any deviation would therefore amount to an incorrect finding based on a mis-appreciation of the law. It is significant to note that in Dharamvir Dhir v. Commissioner of Income-tax [1961] 42 I.T.R. 7; [1961] 3 S.C.R. 359 the Supreme Court came to a different conclusion from that arrived at by the Appellate Tribunal as also by the Patna High Court on a reference under section 66(1). It is not necessary to examine the facts of the case and it is sufficient to state that in the view of the Supreme Court the Tribunal and the Patna High Court had made an erroneous approach to the question. In effect this meant that the law had not been properly applied. In my view, these three cases are enough to dispose of the contention that the finding of the Tribunal in this regard is one of fact and not open to review. There is a close similarity between the law on this point in India and in England. The deductions permissible to a trader are not stated affirmatively in the English Income-tax Act of 1918 as they are in the Indian Act of 1922. Under the English Act they are to be ascertained by an examination of the deductions which are not allowed by rule 3 of the Rules appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Howard and an annuity to be paid to his widow, were all discussed and decided at the same time. Howard originally demanded a salary of 3,000 per annum but later agreed to accept 2,000 per annum provided that an annuity was secured to his widow. The articles of association of the company and the service agreement entered into by Howard provided for the payment to his widow of an annuity of 1,000 per annum so long as his legal personal representatives held at least 10,000 shares. The directors later considered that the obligation to pay this annuity would be detrimental to the company if it wanted to dispose of its business, and in 1943 Howard surrendered all rights to the annuity in consideration of the payment to him by the company of 4,500. The question which arose was whether a sum of 4,500 was allowable as a deduction in computing its profits for income-tax purposes. The Special Commissioners found against the company and this was upheld by Singleton J. Under the relevant rules of Schedule D of the English Income Tax Act in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of--(a) any disbursements or expenses, not bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioners....The way in which I look at the case is this. Mr. Alexander Charles Howard owned a business; he decided to hand that business over to a company upon terms as to remuneration for himself and his brothers as managing directors and upon terms as to dividend provided for in the agreement together with further terms as to commission, and one provision he wished to be made was a pension or annuity for his widow in the event of his death; and to that term his brothers agreed. The position, in my view, is different from the case of a company providing an annuity or pension for an employee, for the wife of Mr. Alexander Charles Howard had nothing whatever to do with the company. There were various reasons entering into the mind of Mr. Alexander Charles Howard as to why he wanted to provide for her in that way, but it cannot be said that in the event of the annuity becoming payable to her it would have been money wholly or exclusively laid out or expended for the purpose of trade. Mr. Meyer relied on the above in support of his contention that the payment to the widow of an employee can never be deductible as an expense under section 10(2)(xv). I doubt whether the propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his question is against the assessee. The Tribunal has held that the liability for compensation was not ascertained or quantified in the year of account and that the basis of the payment arose from the resolution dated January 22, 1951, that is to say, beyond the year of account. The contention of the assessee was that the liability arose under the resolution of June 5, 1950, and that the figure of ₹ 2,00,000 as compensation was determined when the accounts for the year ended December 31, 1950, were prepared and correctly included in conformity with normal accountancy principles. On the other hand it was contended on behalf of the revenue that before January 22, 1951, even the directors of the company had not quantified the payment beyond the sum of ₹ 1,20,000 already paid. It was argued that the directors might easily have fixed upon a higher or a lower figure as the amount to be paid to Mrs. Cameron and it could therefore be said that only on January 22, 1951, and not before the liability to pay further compensation had been ascertained. Two questions arise in this connection. First, whether it is necessary that the quantum of liability or at least the basis of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was exaggerated or fantastic the court proceeded upon the basis that they were correct. In Calcutta Company's case [1959] 37 I.T.R. 1; [1960] 1 S.C.R. 185 the Supreme Court cited with approval a passage from Simon's Income Tax, second edition, volume 2, page 204, under the caption accrued liability reading-- In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable ; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income tax purposes, is one which is actually existing at the time of making the deduction, and is distinct from the type of liability accruing in Peter Merchant Limited v. Stedeford [1953] 24 I.T.R. 454, which although allowable on accountancy principles, is not deductible for the purposes of income-tax . The Supreme Court held that once the liability accrued during the accounting year the fact that it was to be discharged at a future date was not material and observed that the liability would have to be estimated in order that under the mercantile system of accounting the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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