9911796707
TMI Blog1956 (12) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... decided to retire from service with effect from 4th April, 1949. He resigned his directorship. At the meeting of the board of directors dated 24th March, 1949, it was resolved, "to accept Mr. Phillip's resignation with regret and to place on record the keen appreciation of the board of his long and valuable services to the company". It was further resolved to convey to Mr. Phillips the best wishes of the directors and the staff in his retirement from India. It was also resolved to recommend at the forthcoming extraordinary general meeting that Mr. J.H. Phillips be paid a gratuity of ₹ 50,000, and to recommend further that the parent company should be asked to contribute a portion of this sum. These recommendations were accepted. ₹ 50,000 was paid as a gratuity to Mr. Phillips, of which, however, the assessee-company paid only ₹ 40,000. The balance was paid by the parent company. This payment of ₹ 40,000 was claimed by the assessee as an allowable deduction in the assessment year 1950-1951. The claim was disallowed by the Department and the Tribunal agreed with them. The Tribunal held as recorded in paragraph 6 of the statement of the case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Commissioners decided that it was not. That decision was confirmed by Scrutton, J., when the Crown appealed. The learned Judge pointed out that the Commissioners had found as a fact that £ 1,500 was money wholly and exclusively laid out or expended for the purpose of the trading and proceeded to determine the question, was there evidence upon which they could find that. The learned Judge observed, "What they find is that though the reporters have no legal right to payment on retirement, it has been the habit of the respondents to give a gratuitous pension or to make a gratuity of a lump sum on retirement to a reporter after long service. One cannot help using one's ordinary knowledge of human nature to know that in some cases the expectation of gratuities may materially affect the amount of salary...When I find that the Commissioners have found that it is the habit of these employees to give their reporters gratuitous pensions or gratuities of lump sums, I cannot help seeing that there is evidence upon which the Commissioners, judging from facts, may find that those payments were made in the way of their trade, because they at any rate may affect the amount of ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a gratuity of a lump sum on retirement to a reporter after long service. No precedent for the payment of such a gratuity was proved by the assessee-company before the Tribunal. During the course of arguments before us, we offered an opportunity to learned counsel for the assessee to produce evidence, if any, of similar payments having been made in the past either by the assessee-company or by its parent company. Had any such evidence been forthcoming, we would have considered the desirability of allowing the assessee to place that material before the Tribunal and to call for a further statement of the case. But no real evidence of similar payments in the past was forthcoming. Of course, a precedent for such a payment would only be one of the relevant factors to be taken into consideration with its proper probative value. We should not be understood to lay down that in the absence of precedents a claim under section 10(2)(xv) of the Act must necessarily be disallowed. Every company has to make a beginning, and a first payment of its kind does not cease to be deductible if it satisfies the requirements of section 10(2)(xv). What was the nature of the payment made to Mr. Phillips is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different category from a lump sum set aside to establish a pension fund similar to that in Atherton's case [1926] AC 205. But even payments of the former class may be made in circumstances so exceptional that their admissibility as deductions is liable to be challenged by the revenue authorities." Learned counsel for the Department invited our attention to a passage from Gunn's Commonwealth Income Tax Law & Practice, Fourth Edition. Section 51 of the Australian Act provided "losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income shall be allowable deductions except to the extent to which they are losses or outgoings of capital……." Though not in pari materia with section 10(2)(xv) of the Income-tax Act one of the tests imposed by section 51 is that the expenditure should be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In paragraph 1195 at page 421 the learned authors stated: "A payment to an employee on his retrenchment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value of the shares was considerably above its face value, because the shares paid a dividend of 677%. Circumstances arose in 1920 and 1921, in which the company might have been justified in dismissing one of the directors. But to avoid publicity injurious to the company's reputation it entered into a negotiated settlement with the director, under which he retired from the company and the company paid him £19,200. The company's claim to deduct this payment was allowed. Rowlatt, J., held, "……..Although the largeness of the figures and the peculiar nature of the circumstances perplex one …….this is not more than a payment to get rid of a servant in the course of the business and in the year in which the trouble comes. I do not think it is a capital expense; and I have held that it is an expense incurred in the conduct of the business." Lord Hanworth, M.R., agreed that the payment should be treated as a revenue item, and not as a capital item. He observed at page 420: "It seems to attain more closely to Hancock's case (supra ) and The Law Reporting case ( supra) than to other cases……….It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry and recorded, "In these circumstances, it is idle to contend that the payment made on resignation of the employee was in return for long and faithful services rendered." We are really unable to appreciate the scope of these observations or discover what the basis for them was. As we said, that the company acted in good faith was never really in dispute. The genuineness of the payment was not in dispute. That Mr. Phillips rendered valuable serivces to the assessee company and that the company was conscious of that and was justly grateful to him for that were not matters in dispute either. As the learned counsel for the assessee pointed out, the Tribunal failed to understand the scope of the payment: it failed to view it from the view point of commercial expediency. The Tribunal then referred to the fact that the expenditure was not debited to the profit and loss account, but was debited to the appropriation account, thereby strongly indicating that it was an extraordinary payment or a payment made in the nature of capital expenditure. Every extraordinary payment is not necessarily an expenditure of a capital nature. Entry in the accounts by itself may not conclude the q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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