1978 (7) TMI 28 - HC - Income Tax

Tribunal Error: Payment to Bai Shirinbai Disallowed as Deduction under Income-tax Act

The Tribunal erred in accepting that the payment to Bai Shirinbai was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. ... Allowability under section 10(2)(xv) - expenditure wholly and exclusively for the purposes of business - commercial expediency test - contractual liability of the company under agreements between controllers - deferred remuneration versus pension - application of Gordon Woodroffe Leather Manufacturing Co. testAllowability under section 10(2)(xv) - expenditure wholly and exclusively for the purposes of business - contractual liability of the company under agreements between controllers - deferred remuneration versus pension - commercial expediency test - application of Gordon Woodroffe Leather Manufacturing Co. test - The amount of Rs. 12,000 paid to Bai Shirinbai was not allowable as a deduction in computing the business profits of the assessee-company for assessment year 1961-62 under section 10(2)(xv). - HELD THAT: - The court examined whether the payment to the widow was an expenditure incurred wholly and exclusively for the purposes of the company's business. The agreement of 31 March 1958 was an arrangement among persons who controlled the company and did not make the company itself a contracting party; the company later passed a resolution but the earlier document was not a contract by the company. The Tribunal erred in treating the payment as arising from a contractual liability of the company or as deferred remuneration to the lifetime directors. The remuneration to the widow was not dependent on the director's length of service as director and was payable for her life irrespective of the period of service, so it could not be treated as deferred remuneration. Consequently the payment had to be tested as a pension for past services and judged by the test laid down in Gordon Woodroffe Leather Manufacturing Co.'s case and the commercialexpediency enquiry articulated in Andrew Yule & Co. Ltd.'s case: whether the expense was incurred with the sole object of furthering the trade or business interest unalloyed by other considerations. Applying that test to the totality of facts, including the position of the payee as a founder director (not an ordinary employee), absence of any service by the widow, and lack of a commercial basis for the amount, the court concluded the payment was not dictated by commercial considerations and therefore did not qualify as an allowable business expenditure under section 10(2)(xv) (or s. 37 of the later Act). The Tribunal's contrary inference of law from the facts was held to be erroneous.Answered in the negative; the payment is not an allowable deduction under section 10(2)(xv) for AY 1961-62.Final Conclusion: The reference is answered against the assessee: the Rs. 12,000 paid to the widow is not deductible as an expenditure wholly and exclusively for business under section 10(2)(xv) for assessment year 1961-62; the Tribunal's view was erroneous and costs of the reference are awarded to the revenue. Issues Involved:1. Whether the amount of Rs. 12,000 paid to Bai Shirinbai was allowable as a deduction in determining the business profits of the assessee-company u/s 10(2)(xv) of the Indian Income-tax Act, 1922.Summary:Issue 1: Agreement and Contractual ObligationThe Tribunal erroneously accepted the submission that the payment to Bai Shirinbai was made in pursuance of an agreement between Kaikhushroo and the company. The agreement dated 31st March, 1958, was between the partners of the managing agency firm and their sons, not the company. The company passed a resolution on 26th June, 1958, for the appointment of Kaikhushroo as a lifetime director with a monthly remuneration of Rs. 2,000 and a provision for Rs. 1,000 per month to his widow after his death. The Tribunal's view that the payment was not ex gratia but in pursuance of an agreement was incorrect.Issue 2: Commercial ExpediencyThe proper test to determine if the expenditure was laid out wholly and exclusively for business purposes is whether the expense was incurred solely to further the trade or business interest of the assessee, unalloyed with any other consideration. The Tribunal's finding that the payment passed the test laid down in s. 10(2)(xv) and was not dictated by extra-commercial considerations was not the correct approach. The payment to the widow did not meet the criteria of being necessitated or justified by commercial expediency.Issue 3: Deferred RemunerationThe argument that the payment to the widow was deferred remuneration for Kaikhushroo and Framji was rejected. The remuneration to the widows was not dependent on the length of service of Kaikhushroo and Framji as directors. The payment was not a deferred remuneration but a pension for the widows, which did not fulfill the tests laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co.'s case [1962] 44 ITR 551.Issue 4: Pension for Past ServicesThe payment to the widow was considered a pension for the past services of her husband. However, this payment could not be justified as an allowable deduction u/s 10(2)(xv) as it did not meet the commercial considerations required for such an allowance. The payment was a provision made for the widow of a founder director, not an ordinary employee, and thus did not induce other employees to give their best to the company.Conclusion:The Tribunal's view was erroneous, and the payment of Rs. 12,000 to Bai Shirinbai was not allowable as a deduction in determining the business profits of the assessee-company u/s 10(2)(xv) of the Indian Income-tax Act, 1922. The question referred was answered in the negative and against the assessee. The assessee was ordered to pay the costs of the reference to the revenue.