COMMISSIONER OF INCOME-TAX VS LUCAS INDIAN SERVICE LTD.
2001 P T D 514
[239 I T R 429]
[Madras High Court (India)]
Before Abdul Hadi and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME‑TAX
versus
LUCAS INDIAN SERVICE LTD.
Tax Case No. 1795 of 1984 (Reference No. 1291 of 1984), decided on 18/02/1997.
Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Remuneration to employees‑‑‑General principles‑‑ Pension paid to widow of director‑‑‑Resolution passed while director was working for assessee‑company authorising payment of pension to director and after his death to his widow‑‑‑Payment was made on grounds of commercial expediency‑‑‑Pension was deductible‑‑‑Indian Income Tax Act, 1961, S.37.
Where remuneration is paid to an employee, in order that the amount could be claimed as a deductible item under section 37 of the Income Tax Act, 1961, the true test to be applied is as to whether the payment was made as a matter of practice so as to affect the quantum of salary or whether there was in the mind of the concerned employees any expectation of getting such payment or whether the sum was spent on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee.
G became a director of the assessee‑company in 1959 and when he became a director of the company, he ceased to be a member of the company's provident fund. The company, therefore, passed a resolution initially granting him the benefit of gratuity. That resolution was subsequently modified by resolution, dated December 2, 1964, granting benefit of pension to himself and after his death to his wife and his legal representatives for a fixed period of ten years from the date of retirement of G. That resolution was slightly modified in regard to quantum of pension by a resolution, dated July 26, 1968. G retired from service on July 31, 1968. The assessee‑company claimed deduction of a sum of Rs.15,600 paid by way of pension to the widow of G. The Income‑tax Officer disallowed the claim but the Commissioner of Income‑tax (Appeals) and the Tribunal allowed it. On a reference:
Held, that the resolution was passed even during the period when G was working as a director and in that resolution it was. provided that the pension would be paid to G and on his death his wife would be paid pension for a fixed period of ten years from the date of retirement of G. The payment was made only to generate confidence in the mind of the employee that he would be taken care of after his retirement and after his demise his legal heirs would be taken care of. The resolution by the assessee authorising the payment of family pension would ensure cooperation of the employees in the smooth running of the business. The payment was made on grounds of commercial expediency. It was deductible.
Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551 (SC) applied.
Amalgamations (P.) Ltd. v. CIT (1995) 214 ITR 396 (Mad.); CIT v. Fairdeal Corporation (Pvt.) Ltd. (1977) 108 ITR 280 (Bom.) and CIT v. Laxmi Cement Distributors (Pvt.) Ltd. (1976) 104 ITR 711 (Guj.) ref.
S.V. Subramaniam for C.V. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑Pursuant to the directions of this Court in T. C. P. No. 178 of 1983, dated October 26, 1983, the Appellate Tribunal has stated a case and referred the following question of law for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act").
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment to Mrs. Ghaswala, the wife of the former director is an admissible deduction in computing the income of the assessee?"
The assessee is a company and in the course of the assessment proceedings for the assessment year 1976‑77 the assessee claimed deduction in computing its business income of a sum of Rs.15,600 paid by way of pension to Mrs. Ghaswala, wife of the late Sri Ghaswala, a former director of the assess‑company. The Income‑tax Officer disallowed the claim of the assessee holding that the payment could not be said to have been laid out wholly and exclusively for the purpose of the business and the provisions of section 37 were inapplicable. The assessee then preferred an appeal before the Commissioner of Income‑tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal, following his earlier order for the assessment year 1975‑76. He held that the pension paid to Mrs. Ghaswala is an allowable deduction. It is now necessary to see the findings of the Commissioner of Income‑tax (Appeals) rendered for the earlier assessment year 1975‑76. In that order, he found that Mr. Ghaswala was a former director of the assessee‑company and the said Ghaswala became a director of the company sometime in 1959 and at that time in the resolution, dated November 27, 1959, the company noted that as from the date of appointment to the board, he ceased to be a member of the company's provident fund. It was resolved that he would be entitled to be paid by way of gratuity upon retirement from service with the company or on death, whichever is earlier, a sum equivalent to a month's salary for every year of service with the, company. This resolution was rescinded by a resolution of the directors passed on November 30, 1964. On December 2, 1964, another resolution was passed to the effect that Mr. Ghaswala would be entitled to be paid a pension at the rate of Rs.1,100 per month for a fixed period of ten years from the date of retirement from service with the company, and in the event of death prior to the period of ten years, the pension would be payable monthly for the balance of the period of ten years from the date of retirement to Mr. Ghaswala's heirs, executors and administrators.
This resolution, dated December 2, 1964, was slightly modified by a resolution, dated July 26, 1968, and by that resolution the pension which was earlier fixed at Rs.1,100 per month was increased to Rs.1,300 per month. It was also noticed in that resolution that Mr. Ghaswala would be retiring on July 31, 1968. The Commissioner of Income‑tax (Appeals) held that the payment of pension to Mrs. Ghaswala was a continuation of the pension paid to Mr. Ghaswala after his death for the same fixed period for which Mr. Ghaswala would be entitled to the pension. Further, he also noticed that the pension was primarily to have been paid to the director on his retirement and only in the event of his death, it was to be continued for the fixed term for which the pension was originally intended. He, therefore, held that the payment had been laid out for the purpose of the business of the company and was an allowable deduction.
The Revenue preferred an appeal before the Income‑tax Appellate Tribunal, challenging the order of the Commissioner of Income‑tax (Appeals). The Appellate Tribunal, following the earlier order for the assessment year 1975‑76, held that the payment of pension made to Mrs. Ghaswala was a payment made out wholly and exclusively for purposes. of the business of assessee‑company as it has an element built into it to encourage the employees and directors to bear the work with more zeal and dedication and put the assessee‑company in a very sound position. The Appellate Tribunal, therefore, found that the payment made to the wife of the retired director was made in consideration of the meritorious service of her deceased husband and hence allowable as business expenditure. It is this order that is the subject‑matter of this tax case reference.
Mr. S.V. Subramaniam, learned senior counsel for the Revenue, submitted that the pension paid to Mrs. Ghaswala is not an allowable deduction and that the company has been passing resolutions, one after another and because of that it cannot be held that the payment of pension to the wife of the deceased director can be held as a business expenditure. He strongly placed reliance on the decision reported in the case of Amalgamations (P.) Ltd. v. CIT (1995) 214 ITR 396 (Mad.) and submitted that payment made out, was not of commercial consideration and is not allowable as a business expenditure.
Mr. P.P.S. Janarthana Raja, on the other hand, brought to our notice the earlier resolutions of the company as well as the earlier order of the Commissioner of Income‑tax (Appeals). He also placed reliance on the decision of the Gujarat High Court in CIT v. Laxmi Cement Distributors (Pvt.) Ltd. (1976) 104 ITR 711 and submitted that the amount was paid in consideration of the past service of the director and also in recognition of the service rendered by the deceased director of the company. He also submitted that the finding recorded by the Appellate Tribunal has not been challenged by the Department in the reference and in view of the finding of the Appellate Tribunal that the amount has been paid on the basis of commercial consideration, the Tribunal was quite correct in holding that the pension paid to the wife of the retired director was an allowable deduction.
We have carefully considered the submissions of learned counsel for the parties. It is seen that Mr. Ghaswala became a director of the company somewhere in the year 1959 and when he became a director of the company, he ceased to be a member of the company's provident fund. The company, therefore, passed a resolution initially granting him the benefit of gratuity. That resolution was subsequently modified by resolution, dated December 2, 1964, granting benefit of pension to himself, as well as to his wife and his legal representatives. That resolution was slightly modified in regard to quantum of pension by a resolution, dated July 26, 1968, Mr. Ghaswala retired from service on July 31, 1968. It is seen from the orders of the lower authorities that the pension was paid to the wife of the deceased director in recognition of the past services rendered by Mr. Ghaswala, while he was working as an employee and then later as a director of the company. The payment of pension‑‑to the director and then the family pension to his wife and his legal heirs can only be regarded as payment in recognition of the past services rendered by him to the company. The resolution authorising the payment of pension, would, in our view give mental satisfaction to the employee that he would be paid the pension after his retirement and after his lifetime, his wife and family members would be taken care of by the assessee and it would generate in the mind of the employee a sense of satisfaction and it will promote good‑will leading to a better relationship between the employee and the employer. The Tribunal, therefore, taking all these factors into consideration, has found that the payment was made only on the basis of commercial consideration and hence the same was allowable as a business expenditure. The decision relied on by learned counsel in the case of Amalgamations (P.) Ltd. v. CIT (1995) 214 TTR 396 (Mad.) has no application to the facts of the case. In that case, it is seen that payment was made by the company to the wife of the Chairman, as a mark of respect to the late Chairman and to provide facilities to the wife during her lifetime and it was also found that the payment was made not out of commercial consideration and the payment was made not in lieu of the past services rendered by the chairman or as per the provisions contained in the scheme framed by the company. It was also found that there was "no" commercial consideration on the part of the assessee‑company to make payment of pension to the Chairman's wife after his lifetime. Hence, we are of the opinion that the decision in Amalgamations (P.) Ltd. v. CIT (1995) 214 ITR 396 (Mad.) is not applicable to the facts of the case.
On the other hand, the decision of the Gujarat High Court in CIT v. Laxmi Cement Distributors (Pvt.) Ltd. (1976) 104 ITR 711 is a case nearer to the point. The Gujarat High Court in that case noticed a decision of the Supreme Court in the case of Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551. The Supreme Court in the above case laid down the following tests, that is, in order that an amount could be claimed as a deductible item under section 37, the true test to be applied is as to whether the payment was made as a matter of practice so as to affect the quantum of salary or whether there was in the mind of the concerned employees any expectation of getting such payment or whether the sum was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee.
It is seen from the facts of the case that a resolution was passed even during the period when Mr. Ghaswala was working as a director and in that resolution it was provided that the pension would be paid to Mr. Ghaswala and on his death his wife would be paid pension. There was an expectation in the mind of the employee that the pension payment will be made to him and after his demise to his legal heirs. Hence, the second test laid down by the Supreme Court in the case of Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551 is fully satisfied in this case.
The third test, viz. that the money was paid out of commercial expediency is also satisfied. It is seen that the payment was made only to generate confidence in the mind of the employee as he would be taken care of after his retirement and after his demise his legal heirs, would be taken care of. The resolution by the assessee authorising the payment of family pension would establish that the assessee has taken care of the well‑being of the employees and, their dependents which, in turn, would ensure full and active cooperation of the employees in the smooth running of the business. The resolution would generate in the minds of the employees goodwill towards the assessee and would promote goods relationship between the employer and employees. We are of the view that the payment was made on ‑the ground of commercial expediency.
Considering the development in law in the payment of family pension, the Gujarat High Court in CIT v. Laxmi Cement Distributors (Pvt.) Ltd. (1976) 104 ITR 711 held as follows (head note):
"The payment of family pension or gratuity to the dependants of a deceased employee is now a recognised concept in the field of employment and it has received statutory recognition. It cannot any longer be treated as a bounty or a philanthropic gesture actuated by compassionate objective. Even if such payment is not provided for by any scheme or contract of employment or otherwise, a demand for the same could still be raised by way of an industrial dispute by employees governed by labour legislation and such demand may well be accepted in the course of an industrial adjudication having regard to the paying capacity of the employer and other relevant circumstances. If a prudent employer, conscious of the new trend and ethos, voluntarily makes such payment in order to avoid such dispute and to buy industrial peace and contentment, amongst workers, it could certainly be treated as having been made on the ground of commercial expediency."
The Bombay High Court in the case of CIT v. Fairdeal Corporation (Pvt.) Ltd. (1977) 108 ITR 280 has held that the payment of pension to the widow, even where there was no practice for payment of pension is allowable as business expenditure. Applying the said decisions to the facts of the case, we are of the view that the Tribunal has come to a correct conclusion that the payment was made on the basis of commercial consideration. Once it is found that the payment was made on the basis of commercial consideration, there is no difficulty in holding that the payment made to Mrs. Ghaswala is an allowable deduction under section 37 of the Act. We have already seen that two of the tests laid down by the Supreme Court in Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551, are fully satisfied on the facts of the case. The resolution authorising the payment of pension shows an expectation on the part of the employee of getting the pension. Further the pension was made out of commercial consideration and in order to facilitate the carrying on the business smoothly. It is well‑settled that the tests laid down by the Supreme Court are independent or alternative and on satisfaction of any one test, the payment can be treated as a permissible deduction.
Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue. No costs.
M.B.A./236/FC.Reference answered.