TMI Blog1976 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... . The amount was accordingly paid to the daughter of the deceased employee. In the course of its assessment proceedings for the assessment year 1965-66, the assessee-company claimed a deduction under section 37 of the Income-tax Act, 1961, for the amount so paid on the ground that it was expended wholly and exclusively for the purpose of its business. The claim was negatived by the Income-tax Officer on the ground that there was no gratuity or pension scheme and that the assessee-company was not under any obligation to pay such amount. Besides, it was not shown that like compensation was paid previously in such circumstances to the heirs of any deceased employee or that there was any practice to pay such amount under similar circumstances. In appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In further appeal, the Income-tax Appellate Tribunal took a contrary view and held that the expenditure incurred by the assessee on this count was laid out wholly and exclusively for business purposes in order to maintain good relations between the employer and the employees and to engender confidence in the management and that it was, therefore, admiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner as also by the Income-tax Appellate Tribunal. On a reference, the High Court agreed with the decision of the Tribunal. In the appeal before the Supreme Court it was urged on behalf of the assessee-company that the amount had been paid as a matter of commercial expediency and in the interest of the assessee-company as an inducement to the other employees that if they rendered service in a similar manner with efficiency and honesty, they would be similarly rewarded. While rejecting the said contention, the Supreme Court observed that the amount was paid not in pursuance of any scheme of payment of gratuities nor was it an amount which the recipient expected to be paid for long and faithful service. It was a voluntary payment made not with the object of facilitating the carrying on of the of the assessee-company or as a matter of commercial expediency but in recognition of long and faithful service of Philips. There was no practice in the assessee-company to pay such amounts and it did not affect the quantum of salary of the recipient. The proper test to be applied in such cases was formulated in the following words : " In our opinion the proper test to apply in this case is, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation, the payment could still be treated as a permissible deduction if the test of commercial expediency is satisfied (see British India Tobacco Corporation's case). It is well-settled that any payment made by an assessee in his character as a trader, not out of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of his business, might still be treated as having been made wholly and exclusively for the purposes of the trade (see Atherton v. British Insulated and Helsby Cables Ltd., cited with approval in Commissioner of Income-tax v. Ashok Leyland Ltd.). It cannot be overlooked also that death in harness of an employee is not a matter of every day occurrence and that it may not, therefore, have been thought necessary to adopt a scheme of compensation and no past instance of such payment could also have been cited for the same reason. The payment of family pension or gratuity to the dependants of the deceased employee, however, is now a recognised concept in the field of employment and it has received statutory recognition. It cannot be any lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances such as those which prevail in the present case, it would not be unreasonable to uphold the claim of the employer that the predominant motive behind the gesture was to demonstrate the interest which he took in the ultimate well-being of his employees and their dependants with the end in view of securing the loyalty and devoted services of all his employees without whose whole-hearted co-operation his business cannot possibly be carried on with efficiency and profit. Such payment would generate in the mind of other employees a sense of confidence that their dependants would be well looked after if their life was cut short while still in service and such sense of security would motivate them to put in their best for the good of the employer. We are conscious that in the present case the resolution sanctioning the amount appears to have stated that the payment was made in recognition of the past services of the deceased employee. However, too much emphasis cannot be laid on the wording of the resolution. The resolution giving compensation to the dependants of an employee who has died in harness has no set formula. The circumstances in which the resolution was adopted have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the assessee-company. Pension was paid to the widow of a permanent director who died while still in service and gratuity was paid to a retired permanent director. In Balarama Varma Textiles Ltd. v. Commissioner of Income-tax, payment by way of gratuity was made to several employees such as factory manager, clerk and cashier on their retirement. In all these cases, the amount paid to the employees or their dependants, as the case may be, was claimed as deductible business expenditure by the concerned assessee on the ground of business expediency. However, relying upon the decision in Gordon Woodroffe's case the claim was disallowed primarily on the ground of business expediency. However, relying upon the decision in Gordon Woodroffe's case the claim was disallowed primarily on the ground that since there was no scheme or past practice or antecedent obligation or expectation on the part of the concerned employees with regard to the payment of such amount, such ex gratia payment could not be treated as having been made for the purpose of the business of the assessee. In our opinion, these decisions which were given in the facts and circumstances of each case cannot help the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such expenditure must be taken to have been incurred wholly and exclusively for the purposes of the employer's business. In our opinion, therefore, the decisions on which the revenue relies cannot help it in the facts and circumstances of the present case. There are four decisions to which our attention was invited in which some expenditure incurred in similar circumstances has been held to be deductible expenditure on the ground of commercial expediency and reference may be made to them. In Indian Overseas Bank Ltd. v. Commissioner of Income-tax the assessee-company granted pension to its general manager on his retirement. There was no general pension scheme but by a resolution passed during the currency of his service payment of pension was agreed to on the condition that no re-employment with any other bank would be accepted by him after retirement without prior sanction of the board of directors of the assessee-company. The Madras High Court took the view that it was a payment as a part of the terms of service agreed upon during the currency of employment and that the payment was made as a matter of business expediency in the interest of the assessee's business having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch reference may be made is in Calcutta Landing Shipping Co. Ltd. v. Commissioner of Income-tax. The assessee-company in that case sanctioned pension to the widow of a senior assistant in its employment who met with a violent death while actually performing his duties and the payment so made was held to be a deductible expenditure. The Calcutta High Court in taking this view expressed itself as under : " 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 contented and loyal workers, ready to lay down their lives for the cause of the employer, is a blessing to every commercial concern. If a payment be made in such expectation, such payment cannot but be regarded as an expenditure incurred wholly and exclusively for the purposes of business expediency ...... By resolving to pay a pension to the dependants of Baptist, it was not unlikely that some sense of security was being brought about in the minds of the employees that the employer would look after their defendants if anything untoward happened to them ..... X X X X Extracts X X X X X X X X Extracts X X X X
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