TMI Blog1976 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1961-62 and 1962-63, the Commissioner of Income-tax had passed orders under section 33B of the Indian Income-tax Act, 1922, and section 263 of the Income-tax Act, 1961. The appeals before the Tribunal arose out of these orders and in all these years the common question that arose for consideration was whether the amounts paid to the widow of the managing director was allowable as a deduction. Sir Vithal Narayan Chandavarkar was the managing director of the assessee-company which carried on business as the managing agents for some companies and also derived income from insurance agencies and interest on investments and advances. Sir Chandavarkar became the managing director of the assessee-company on March 23, 1937, and continued as such till his death on January 28, 1959. At the time of his death he was acting as managing director pursuant to an agreement dated April 18, 1957, between the asseseee-company and himself. Under this agreement Sir Chandavarkar was appointed as managing director of the assessee-company for a period of five years commencing from April 1, 1957, determinable as provided in the agreement. It was one of the obligations of Sir Chandavarkar under the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly payment of Rs. 1,500 in the event of the company ceasing for any reason whatsoever to act as managing agents or secretaries and treasurers, of the Mysore Spg. Mfg. Co. Ltd., Minerva Mills Ltd. and the Modern Mills Ltd. or any of them. " Sub-clause (ii) of clause 14 provided for payment of certain amounts there in mentioned to the heirs, executors and administrators of the managing director in the event of the wife of the managing director predeceasing him during the currency of the agreement. During the year ended February 28, 1959, the assessee-company paid in accordance with clause 14 the sum of Rs. 45,458 to Lady Chandavarkar. In the other years, the company paid her pension at the rate of Rs. 1,500 per month. The amounts paid as pension, etc., were claimed as deduction in the respective years. For all these years the Income-tax Officer allowed the claim made by the assessee. For the assessment years 1961-62 and 1962-63 the Commissioner of Income-tax took up proceedings under section 33B of the Indian Income-tax Act, 1922, and under section 263 of the Income-tax Act, 1961, respectively, as in his view the Income-tax Officer had come to an erroneous conclusion prejudici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Calcutta High Court in Anderson Wright Ltd.'s case [1962] 46 ITR 715 (Cal) was also relied upon. The Tribunal by its order followed the decision of the Calcutta High Court in Anderson Wright Ltd.'s case [1962] 46 ITR 715 (Cal). Even independently it also considered the question whether the payment was made out of consideration of commercial expediency. The Tribunal pointed out that except for a bare statement made by the counsel there was no evidence produced with a view to show that the services of Sir Chandavarkar would not have been available to the company but for this provision. The mere fact that the payment was justified under the terms of the agreement was not sufficient to show that it was motivated by commercial expediency. The Tribunal found that there was no evidence led with a view to show that commercial expediency required payment of a pension to Lady Chandavarkar who had rendered no services to the company. The Tribunal emphasised the fact that when pension was not contemplated for payment to Sir Chandavarkar after the period of the agreement, the whole idea behind the payment was only to make some extra commercial benefit to Lady Chandavarkar. Ultimatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andavarkar in case he rendered services as managing director for the full duration of the agreement, showed that the remuneration payable to Lady Chandavarkar under clause 14 of the agreement cannot be regarded as motivated by commercial expediency. Section 10 of the Indian Income-tax Act, 1922, lays down how computation of the profits and gains of a business is to be done for the purpose of assessment of tax. Under sub-section (2) such profits or gains have to be computed after making the allowances set down seriatim in clauses (i) to (xiv). The legislature felt that there might be other expenses which ought in reason to be allowed although not specifically covered by the said items. Section 10(2)(xv) provides for the deduction of " 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 or exclusively for the purposes of such business, profession or vocation ". To merit exemption under clause (xv) it is essential that the expenditure should not be in the nature of a capital one or personal expenses of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sir Chandavarkar dying during the pendency of the agreement occurred. Such payment is sought to be justified under clause 14 of the agreement by using the words that such payment is to be made " in consideration of the long and faithful services rendered by the managing director to the company ". It was sought to be urged by Mr. Kaka that, as such payment is to be made under the terms of the agreement, it should automatically be regarded as one being motivated by commercial expediency. However, our attention has not been invited to any decision which supports this omnibus contention. The question that has to be considered is whether payments of the various sums under this agreement to Lady Chandavarkar in consideration of long and faithful services rendered by Sir Chandavarkar to the company are to regarded as payments out of commercial expediency, simply because such payments are to be made in the event of his death occurring during the currency of the agreement. In order to determine the question, we have to consider whether there was any likelihood of the business being adversely affected in case such payment was not made or whether there was any likelihood of the interest of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept pound 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 pound 1,000 per annum so long as his legal personal representaives 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 pound 4,500. The question arose for consideration whether a sum of pound 4,500 was allowable as a deduction in computing its profits for income-tax purposes. The Special Commissioners found against the company and their decision was upheld by Singleton J. The Special Commissioners found : (1) the obligation undertaken by the company to pay the annuity was not part of the consideration for the purchase of Mr. Howard's business. To quote the exact words of the Commissioners 'the sale agreement provides for a consideration which was a proper price based on the value of the assets as shown in a balance-sheet, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndavarkar was an expenditure incurred wholly or exclusively for the purpose of business. Reference can be had to a decision of the Calcutta High Court in the case of Andrew Yule Co. Ltd. v. Commissioner of Income-tax [1963] 49 ITR 57 (Cal). The head-note of the case precisely lays down the facts and the decision given by the court. The assessee in that case was a company which kept its accounts in the mercantile system and its accounting year was the calendar year. On March 26, 1950, C, the then chairman of the board of directors of the assessee, lost his life by the action of a riotous crowd while travelling otherwise than on the assessee's business. On June 5, 1950, the board of directors resolved to pay compensation to C's widow, feeling that if compensation was not paid there was the likelihood of unfavourable criticism of the company and repercussion from their employees. Pending a decision as to the full amount of compensation, the board resolved to pay an interim payment of Rs. 1,20,000. At a further meeting of the directors held on January 22, 1951, the board referred to the earlier meeting and resolved to make a further and final payment of Rs. 2,00,000, which it consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ath in the circumstances attending it was a great tragedy. The loss of this valuable life certainly affected both the assessee and Mr. Cameron's dependants very seriously. It cannot be denied that the payment of the compensation was likely to engender a feeling in the minds of other servants of the assessee that the company would look after the dependants if anything untoward happened to them. However this may be, I fail to see how the payment can be said to be an expense 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 expense. Nothing of the kind however happened here. Mr. Cameron's death had nothing to do with the object or purpose of the company." The ratio of this decision is clearly applicable to the facts of the present case. Under clause 14 of the agreement payment of compensation or pension to the widow is not dependent upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax v. Indian Molasses Co. Private Ltd. [1968] 67 ITR 687 (Cal). In the first case the Calcutta High Court took the view 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 indirectly to facilitate business. It is immaterial if a third party benefits thereby. The expression " commercial expediency " is an expression of wide import and expenditure in commercial expediency includes such expenditure as a prudent man may incur for the purpose of business. 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 commercial expediency and has to be regarded as an expenditure incurred wholly and exclusively for the purpose of the business. In that case the board of directors of the assessee-company, whose employee was murdered while on the company's business, sanctioned payment of pension to his wife on graded rates for a number of years as also passage money and railway fare for her and children to proceed to Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case it is held that it cannot be laid down as an abstract and invariable rule of law that expenditure for payment of pension to the widow of an employee cannot be business expenditure. One thing is clear from the decisions which have been referred to at the Bar that if payment to the widow was by reason of the death of the employee while discharging his duties in the course of the company's business, such payment of reasonable compensation to the widow for the loss of his pension may be a reasonable expenditure but there is nothing in any one of the cases cited at the Bar to show that payment to the widow by way of pension for her life simply because the managing director died during the tenure of the agreement, is an expenditure laid out wholly and exclusively for the purpose of business. This would be more so in a case where the managing director himself who had served faithfully for the entire duration of the agreement was not likely to get anything more nor was his widow in case of his death after the duration of the agreement entitled to any payment. Thus, in our opinion, the payment of Rs. 1,500 per month to Lady Chandavarkar under the provisions of clause 14 of the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
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