TMI Blog1976 (11) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture of pharmaceutical products. One A. L. Chandavarkar was the managing director of this company for nearly 19 years, that is to say, ever since its inception on April 1, 1940, till April 6, 1959, when he died. Under an agreement made between the assessee-company on the one hand and A. L. Chandavarkar on the other on December 16, 1951, for the work that he was to do as a managing director of the assessee-company, Mr. Chandavarkar was entitled to a remuneration of Rs. 30,000 per year plus a commission at 10% on the net profits of the company as mentioned in the agreement. It appears that he was also entitled to a car allowance of Rs. 250 per month. It further appears that from the commencement of the agreement, right up to the time he died, Mr. Chandavarkar, though he was entitled to the remuneration of Rs. 30,000 per year, he drew very much less in each of these years. During the financial year 1952-53, he drew only Rs. 21,600 having forgone Rs. 8,400. For each of the successive years 1953-54 up to 1957-58, he drew the remuneration of Rs. 14,400 having forgone Rs. 15,600 in each of the said years. For the year 1958-59, he drew Rs. 21,600 having forgone Rs. 8,400. In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was debited to the relevant account of the financial year 1962-63. In the assessment proceedings for the assessment year 1963-64, the assessee-company claimed the aforesaid payment as a proper deduction either under section 28(1) or section 37 of the 1961 Act. The Income-tax Officer as well as the Appellate Assistant Commissioner to whom the matter was carried in appeal by the assessee-company rejected the claim of the assessee-company and disallowed the deduction principally on the ground that there was no established practice in the company to pay such gratuities, that the company had no scheme for payment of gratuity and that there was no evidence to establish that the ex-managing director of the company had accepted a lower salary in expectation of gratuity on retirement or death nor could the payment be regarded as having been made out of considerations of commercial expediency for the purpose of facilitating the carrying on of the assessee's business. In support of this conclusion the taxing anthorities relied upon the decision of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. v. Commissioner of Income-tax [1962] 44 ITR 551 (SC). When the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irector as per the resolution of the board of directors passed on the 31st April, 1963 ; and (e) that the payment was really in the nature of ex gratia payment made to the widow out of sympathy and pity. Having regard to these aspects Mr. Joshi contended that the payment in question is not justifiable on the grounds of commercial expediency as the same could not be said to have been made for the purposes of facilitating the carrying on of the business of the assessee. In support of his contention strong reliance was placed by him upon the Supreme Court judgment in Gordon Woodroffe Leather Manufacturing Company v. Commissioner of income-tax [1962] 44 ITR 551 (SC). He also relied upon three more decisions, one of the Allahabad High Court in J. K. Woollen Manufacturers Ltd. v. Commissioner of Income-tax [1962] 46 ITR 1123 (All), the other of the Madhya Pradesh High Court in Lakhamichand Muchhal v. Commissioner of Income-tax [1963] 48 ITR 562 (MP) and the third of this court in Sassoon J. David Co. P. Ltd. v. Commissioner of Income-tax [1972] 85 ITR 83 (Bom). On the other hand, Mr. Munim appearing for the assessee has contended that the principal question that is required to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances in connection with that payment will have to be taken into account and, according to him, if regard be had to all the circumstances which obtained in the matter, the payment could be regarded as having been made out of considerations of commercial expediency and as such the deduction was perfectly permissible as expenditure which could be said to have been wholly and exclusively laid out for the purpose of the assessee's business. He supported the Tribunal's view that the tests laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Company's case [1962] 44 ITR 551 (SC) must be regarded as independent of each other or alternative tests and that any one of them will have to be applied to determine the question whether the payment could be treated as a permissible deduction or not. As against three or four decisions, on which reliance was placed by Mr. Joshi, Mr. Munim placed a strong reliance on the case of Commissioner of Income-tax v. Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711 (Guj). Before we deal with the facts pertaining to the payment of Rs. 24,000 made to the widow of the ex-managing director, in the instant case, we would first like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal clearly stated that the test about commercial expediency is not dependent on the other two tests and that even if there was no specific understanding that the lower salary would be compensated eventually and even if there is no regular scheme, the payment of gratuity to an employee or his legal heir may yet be one dictated by commercial expediency. Incidentally, we might observe that the Gujarat High Court in Commissioner of Income-tax v. Laxmi Cement Distributors P. Ltd. [1976] 104 ITR 711 (Guj) has also made this position very clear by stating that the tests laid down in Gordon Woodroffe's case [1962] 44 ITR 551 (SC) are independent or alternative tests and that any one of them can be applied to determine whether such payment could be treated as a permissible deduction or not. In the case of J. K. Woollen Manufacturers Ltd. v. Commissioner of Income-tax [1962] 46 ITR 1123 (All) payment was made to the widow of the general manager of the assessee-firm, an ex-employee of the business after the employee had died, and the payment was made as and by way of gratuity to the widow as the heir of the employee. The assessee's claim for deduction of such payment was disallowed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the company to Tata Sons Ltd., and under clause 6 of the deed of sale the assessee-company agreed to arrange for the termination of services of all its employees ; the board of directors of the company passed a resolution terminating the services of its employees on payment of retrenchment compensation. The company also paid a sum of Rs. 21,200 in commutation of pension to its employees and an amount of Rs. 16,188 was paid to its managing director in lieu of six months' notice to which he was entitled. The company claimed the aggregate of these sums amounting to Rs. 1,64,899 as business expenditure, which claim was rejected by the Tribunal and on a reference the company contended that a part of the sum paid was gratuity to its employees. This court took the view that the fact that the wage bill had been reduced by means of the payments was insufficient to arrive at the conclusion that they were made for commercial considerations. In the administration of the company there was no practice of payment of gratuity and no legally enforceable claim for such payment against the company. The payments had been described as retrenchment compensation and had been effected not for purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) are independent or alternative tests and that any one of them can be applied to determine whether such payment could be treated as a permissible deduction ; and Thirdly, it has observed that in applying the tests of commercial expediency, the question of the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. On the facts of the case, the Gujarat High Court held that though there was no scheme or past practice or antecedent obligation to pay compensation to the next of kin of an employee of the assessee-company who died in harness, that circumstance, though relevant, was not decisive of the matter ; for, even in the absence of such practice or obligation, the payment could still be treated as a permissible deduction if the test of commercial expediency was satisfied. The Tribunal had found as a matter of fact in that case that the payment was made to maintain good relations between the employer and employees and to engender confidence in the management, and that finding had become conclusive and that even apart from that, when compensation was given in circumstances such as those which obtained in that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial dispute is not ordinarily conceivable. However, as we have said on the facts and particularly in view of the finding that had been recorded by the Tribunal itself, the Gujarat High Court rightly took the view that the payment made to the daughter of the deceased secretary was a permissible deduction Under section 37 of the Act. Moreover, there are one or two aspects indicated by the Gujarat High Court with which we are in complete agreement. For instance, the Gujarat High Court has clearly stated that though in that case the resolution sanctioning the amount stated that the payment was in recognition of the past service of the deceased employee, too much emphasis could not be placed on the wording of the resolution and that the circumstances in which the resolution was adopted will have to be considered as a whole and, on a consideration of such circumstances, the relevant question will have to be decided. Similarly, the Gujarat High Court has further observed that in applying the test of commercial expediency, the question of reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. These observations of the Gujar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as managing director, late Chandavarkar drew as his annual remuneration, amounts which were considerably less than the amount to which he was entitled and while narrating the facts we have pointed out that during all these seven years as against the total remuneration of Rs. 2,10,000 to which he was entitled, he had drawn remuneration to the tune of Rs. 1,15,000 and had forgone a large amount aggregating to Rs. 94,800. It is not unusual to find a managing director forgoing a part of his remuneration during the formative years of the company in which he is working as a managing director but in the instant case it is significant to observe that even during the last two years, i.e., 1957-58 and 1958-59, though the assessee-company made profits to the tune of Rs. 1,76,161 and Rs. 1,69,220 respectively, late Chandavarkar had forgone Rs. 15,600 in the first year and Rs. 8,400 in the second year. Not only had he forgone a large part of his annual remuneration but he had also forgone total commission of Rs. 34,538 to which he was entitled as the company had made profits in those two years. In other words, it cannot be disputed that during the last 7 years of his career as managing dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis but it had been worked out on the basis of 15 days' salary for each completed year. Lastly, the amount that was agreed to be paid to the widow will have to be regarded as most reasonable from the businessman's point of view having regard to the extent of sacrifice which late Chandavarkar made for the assessee-company and the profits made by it during the relevant year. It is having regard to these facts and circumstances which emerge very clearly on the record that one has to consider the question as to whether the payment in question could be supported on the ground of commercial expediency. In this behalf the Tribunal has categorically observed that though the 1961 Act has specifically made provision for allowing payment of gratuity, provided there is an approved scheme for gratuity, even payments outside the scheme would also become eligible for deduction if the condition of commercial expediency is satisfied and after making this observation the Tribunal has gone to record a finding that a payment which was made to the widow of a managing director who had devoted the best years of his life in the service of the company, who had also sacrificed a good portion of his rem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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