TMI Blog1967 (1) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... dry-docked at the company's yard at Salkia, Howrah. When this was done, according to the practice followed on the river, all the crew of the launch excepting the serang and the engine driver was discharged. On 3rd June, 1955, at about 7-45 a.m. Mr. Baptist, along with the yard foreman, went to inspect the launch 'Celt' in order to assess the repairs required and to give the necessary instructions regarding the same. He then found that the discharged crew were still occupying the launch. When he directed them to vacate the launch, an altercation arose between him and the discharged crew in the course of which the latter assaulted Mr. Baptist and threw him overboard. As he lay prostrate on the ground, some of the crew hit him with crowbars, hammers, etc., as a result of which Mr. Baptist became unconscious and began to bleed profusely. He was removed to the P.G. Hospital in a precarious condition and he died at about 11-20 a.m. on the same day. On November 2, 1956, the board of directors of the assessee-company passed a resolution sanctioning a pension to the widow of their deceased employee, A.I.D. Baptist, in the following language (page 6 of the paperbook): Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of a similar nature made to any other employee of the company, who might have been murdered or injured during the performance of his duties or left the service of the company voluntarily. Thus, the present payment which is an ex gratia payment is a solitary payment made to an employee. This therefore cannot be considered as a payment which can inspire an incentive amongst the employees. I am therefore of the opinion that this ex gratia payment, both the pension and passage expenses, cannot be considered as wholly and exclusively laid out for the purpose of the appellant's business. As against the aforesaid order, the assessee-company appealed before the Income-tax Appellate Tribunal. The Tribunal also affirmed the order made by the Appellate Assistant Commissioner in the following language: ...All that has been urged before us is based purely on theoretical assumptions. It is a well-established principle of law that expenses incurred which may not even be found to have a direct bearing on the business, would still be allowable if the same had been incurred on grounds of commercial expediency and such expediency could only be gathered from the circumstances preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for us to quote the relevant portion of section 10 of the Indian Income-tax Act, 1922, which reads as follows: 10. (1) The tax shall be payable by the assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains in business, profession or vocation carried on by him. (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 clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The English Income Tax Act also contains a provision almost in pari materia with the section in the Indian Act. That section came up for consideration in the case of Atherton v. British Insulated Helsby Cables Ltd.* in which the respondent company claimed as a deduction, in computing its profits for income-tax purposes, a lump sum of 31,784, which it had contributed irrevocably as a nucleus of a pension fund established by a trust deed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax appealed before the Bombay High Court and lost before that court. On further appeal before the Supreme Court, Kapur J. observed (pages 610-11): 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. If the payment or expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party: Usher's Wiltshire Brewery Ltd. v. Bruce*. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. Commissioner of Income-tax **[1951] 20 I.T.R. 1; [1951] S.C.R. 594. But 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. In the present case the finding is that it was laid out for the purpose of the assessee's business and there is evidence to support this fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se that the respondent started the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses, its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessary calibre available. Therefore, any expenditure which was incurred for preventing the extinction of the respondent's business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction. In this case also, his Lordship referred to the view expressed by Viscount Cave L.C. (hereinbefore quoted) with approval. The third case on the point, which we need consider, is the case of Commissioner of Income-tax v. Chari and Chari Ltd. [1965] 57 I.T.R. 400, 405 (S.C.) In that case, the assessee, a private company, carried on business in hides, skins, minerals, tobacco and other commodities, with a turnover not very large, and also acted as the managing agent of three other companies. Three persons of whom two, T.M. Ayyadurai and T.M. Rangachari, were brothers were directors of the company, receiving a monthly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gachari are brothers, but that by itself is not sufficient to justify an inference that unreasonable or excessive remuneration was agreed to be paid. The person who was called upon to attend to a contract of this magnitude was required to have expert knowledge of the business, apply his time exclusively thereto, travel from time to time, maintain supervision and control at the stage of purchase, redrying, packing, transport and loading for shipment. Presumably, T.M. Ayyadurai was such a person, and that is why he was selected for earning for the respondent a large amount of commission by duly performing the contract...We are of the view that the contract with the Government was for the respondent an important contract requiring constant and vigilant application and supervision by a person well acquainted with the practical details of the business. If the management of the respondent as prudent businessman for advancing the interest of the respondent bona fide regarded 30 per cent. of the net profits as reasonable remuneration, the revenue authorities were not justified in reviewing their opinion and reducing the rate of remuneration. His Lordship also explained how far a questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an erroneous proposition to contend that as soon as an assessee established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purpose of the business. Although the payment might have been made, and although there might have been an agreement in existence, it would still be open to the Income-tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xv). The question as to whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. We need not multiply references to other decisions by the Supreme Court touching upon the point. It is now well-settled that the expression expenditure laid out or expended wholly and exclusively for the purpose of such business includes expenditure voluntarily incurred for commercial expediency and in order indirec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that context Chagla C.J. observed as follows: It is also suggested by the Attorney-General that the payment by the assessee is entirely gratuitous and no consideration has been proved by the assessee for this payment. In my opinion, the consideration is apparent on the face of the record before us. Once it is assumed, and I think we are justified in making that assumption, that the bonus was paid out of commercial considerations by the managed company, then in the payment of that bonus the assessee would be interested and when it shared that bonus it received part of the benefit which went to the managed company, and that part of the benefit would be the increased commission that the assessee would get by reason of the employees of the managed company being contented and having an impetus to work wholeheartedly and producing more profits for the employers. In our opinion, the above decision lays down a wholesome test. A payment made to employees in the expectation of creating impetus or encouraging them to put in selfless work for the employer is a payment made out of commercial considerations and/or commercial expediency. To have a body of contended and loyal workers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il to see how the payment can be said to be an expenditure incurred for the company's business. If Mr. Cameron had met his death in the course of a travel for the purposes of the company's business, the more so if the conditions in the country were so unsettled at the time as would lead one to hold that Mr. Cameron was taking a risk in the interest of the company, reasonable compensation paid to his widow for the loss of his life might be a justifiable expenditure. Nothing of the kind, however, happened here. Mr. Cameron's death had nothing to do with the object or purpose of the company. (Underlined* for emphasis). Relying upon the above-quoted observations Dr. Pal argued that, in the instant case, the employee was murdered in the course of his duty. To have ignored such an act of loyalty might have discouraged other employees to put in their best when faced with circumstances in which Baptist was murdered. Mr. A. Sabyasachi Mukherji, leaned counsel for the Commissioner of Income-tax, however, contended that the finding of fact arrived at by the Appellate Tribunal was not such as warranted any interference by this court. He did not dispute the proposition that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to give a payment of pension to the dependents of a murdered employee has no set legal form. The circumstances in which a resolution was adopted have to be considered as a whole. If, in such circumstances, it is reasonable to hold that the resolution was adopted for the purpose either of giving incentives to loyal workers or of creating confidence in the minds of workers, who need face risks to their lives in the discharge of their duties, that the employer would reward selfless loyalty, then the proper legal inference would be that the expenditure was laid out for business expediency. The fact that a general resolution, for making such payment to everybody who met with death in the discharge of their duties under the company, was not passed is not of great relevancy. If the company had passed such a resolution, that might have created a better atmosphere of incentive and confidence in the employees. But death in the discharge of duty may not be a very common occurrence and it may not be necessary to pass a general resolution of the type as was passed in the instant case. Nevertheless, the assessee-company might not have acted prudently, as a businessman, if it had ignored the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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