Gordon Woodroffee Leather
Manufacturing Co. Vs. The Commissioner of Income-Tax, Madras  INSC 362
(20 December 1961)
SINHA, BHUVNESHWAR P.(CJ) HIDAYATULLAH, M.
CITATION: 1962 AIR 1361 1962 SCR Supl. (2)
CITATOR INFO :
R 1979 SC1441 (15,20)
Income-Tax-Gratuity-Payment of not in
pursuance of any scheme but voluntarily for long and valuable services-Whether
deduction can be claimed-Income-Tax Act, 1922 (11 of 1922), s. 10 (2) (xv).
The company accepted the resignation of one
of its directors and in appreciation of his long valuable services to the
company, paid him a gratuity of Rs. 40,000/-. This amount was claimed as a
deduction under s. 10(2) (xv) of the Income- tax Act which was disallowed by
the Income-tax Officer, on the ground that the appellant company had no pension
scheme; the payment was voluntary and that the entry in the assessee's books
clearly indicated it to be a capital payment.
^ Held, that the payment does not fall within
the provisions of s. 10(2)(xv) of the Act. 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 but it was for a voluntary
payment not with the object of facilitating carrying on the business of the
appellant company or as a matter of commercial expediency but in recognition of
long and faithful service. There Was no practice in the appellant company to
pay such amounts to and did not affect the quantum of salary of the recipient.
To claim a deduction under s. 10(2)(xv) of
the Act the proper test to apply is, was that the payment made as a matter of
practice which affected the quantum of salary or was there an expectation by
the employee of getting a gratuity or was the sum of money expended on the
ground of commercial expediency and in order indirectly to facilitate the
carrying on of the business.
J. P. Hancok v. General Raversionary &
Investment Co. Ltd. (1918) 7 T. C. 358 and J. W. Smith v. The Incorporated
Council of Law Reporting for England and Wales, (1914) 6 T. C. 477, REFERRED
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 62 of 1961.
212 Appeal by special leave from the judgment
and order dated December 20, 1956, of the Madras High Court in Case Referred
No. 85 of 1953.
A. V. Viswanatha Sastri, R. Ganapathy Iyer
and G. Gopalakrishnan for the appellant.
K. N. Rajagopala Sastri and P.D. Menon for
1961. December 20. The Judgment of the Court
was delivered by KAPUR, J.-This appeal by special leave is directed against the
judgment and order of the High Court of Judicature at Madras. The appellant is
the assessee and the respondent is the Commissioner of Income-tax and the
question raised is as to applicability of s. 10(2)(xv) of the Indian Income-tax
Act to a gratuity paid by the appellant to one of its officers on his
retirement from service.
The appeal relates to the assessment year
1950-51. M/s. Gordon Woodroffee & Co. (Madras) Ltd., was incorporated as a
private limited company in 1922 and became the Managing Agent of a public
limited company M/s. Gordon Woodroffee Leather Manufacturing Company Ltd.,
which is the assessee. One J. H. Philips was employee in the Managing Agent
Company from 1922 to 1935 and from 1935 he became an employee of the appellant
company and became its Director from 1940. On March 22, 1949, he wrote a letter
to the appellant company expressing his intention to resign from the Board of
the Company as from April 4, 1949 upon his retirement from the employment of
the company and requested that his resignation be accepted. On March 24, 1949,
the Board of Directors of the appellant Company passed a resolution that his
resignation be accepted and in appreciation of his long and valuable services
to Company hebe paid a gratuity of Rs. 50,000/- out 213 of which the appellant
Company was to pay Rs.
40,000/- and the Managing Agent Company the
balance of Rs. 10,000/- April 4, 1949, this resolution of the Board of
Directors was confirmed. On the same date a resolution to the same effect was
passed at an Extraordinary General Meeting of the Company and before the end of
its accounting year i. e. October 31, 1949, this amount of Rs. 40,000/- was
paid to Mr. J. H. Philips.
This amount was claimed as a deduction under
s. 10 (2)(xv) of the Income-tax Act which reads :- Section 10(2) "Such
profits or gains shall be computed after making the following allowances,
(xv) any expenditure (not being an allowance
of the nature described in any of the claused (i) to (xiv) inclusive, and not
being in the nature of capital expenditure or personal expenses of the assesee)
laid out or expended wholly and exclusively for the purpose of such business,
profession or vocation." The amount was disallowed by the Income-tax
Officer as well as by the Appellate Assistant Commissioner on the ground that
the appellant Company had no pension scheme; the payment was voluntary and that
the entry in the assessee's books clearly indicated it to be a capital payment.
Against this order the appellant Company took an appeal to the Income-tax
Appellate Tribunal which upheld the order of the Appellate Assistant
Commissioner. It held that according to the resolution the gratuity was paid
"for long and valuable services to the Company"; that there was
nothing to indicate that Mr. J. H. Philips had accepted a lower salary in
expectation of getting a gratuity at the end of his service; that there 214 was
no such practice in the appellant Company and that during the course of his
service he was being remunerated at a graduated scale of salary and a
commission of 2-1/2% on the profits; that there was no "expectancy"
that at the end of the service there would be a recompense for faithful and
efficient service that he had been suitably rewarded by being given a
commission on the profits in order to whip up his enthusiasm". It was also
mentioned that in the books of the appellant Company the amount had not been
debited in the profit and loss account but was debited to the appropriation
account thereby indicating that it was an extra payment or a payment made in
the nature of a capital expense. Taking all these circumstances into
consideration the Tribunal came to the conclusion that it was difficult to hold
that the expenditure was not in the nature of a capital expenditure or that it
was expended wholly and exclusively for the purpose of the assessee's business.
At the instance of the appellant Company the case was stated to the High Court
66(1) of the Income-tax Act and the following
question was referred :- "Whether the sum of Rs. 40,000/- paid to Mr. J.
H. Philips on his retirement from the service of the Company was not an
admissible deduction under Section 10(2)(xv) of the Income-tax Act, 1922."
The High Court answered the question against the appellant Company. It held
that in order that s. 10(2) (xv) be applicable it had to be proved that the
amount was laid out or expended wholly and exclusively for purposes of the
company's business. In this case the amount was paid on retirement and for
valuable services rendered by Mr. J. H. Philips; there was no evidence that he
expected to receive this amount or the Company contemplated its payment at any
time before; the payment 215 was voluntary and there was no evidence to show
that it was in the future interest of the business of the Company that the
expenditure was incurred.
The High Court observed:- "In the case
of a payment of a gratuity to a retiring employee recognition of his past
services, with nothing more cannot, in our opinion satisfy the requirements of
Section 10(2)(xv), even if those requirements are judged from the view point of
commercial expediency, as it always should be when a claim arises under Section
10(2)(xv). Was the expenditure incurred in the future interest of the business
of the assessee? Was there any connection between the purpose of the payment
and the further conduct of the business of the assessee ? These are the tests
to be satisfied before it could be said that in paying the gratuity money was
laid out or expended wholly and exclusively for the purpose of the business of
These tests the assessee did not satisfy in
this case." Against this judgment and order the appellant Company has
brought this appeal by special leave.
It was argued on behalf of the appellant that
the amount had been paid as a matter of commercial expediency and in the
interest of the Company as an inducement to other employees that if they
rendered service in a similar manner with efficiency and honesty they would be
similarly rewarded. Decisive test, it was submitted, was whether such payments
of gratuity were likely in future also and was the payment made as an incentive
to the employees to give their best to the employer and if it was so then the
payment was a matter of commercial prudence, It was also submitted that the
Company had acted not with any oblique motive and 216 its good faith was not in
doubt and in support of the contention several cases were relied upon.
In our opinion on the findings as given the
payment in dispute does not fall within the provisions of s. 10(2)(xv). 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 but it was voluntary payment not with the object of facilitating the
carrying on of the business of the appellant Company or as a matter of
commercial expediency but in recognition of long and faithful service of Mr. J.
There was no practice in the appellant
company to pay such amounts and it did not affect the quantum of salary of the
recipient. The two cases strongly relied upon by the appellant Company were J.
P. Hancok v. General Reversionary & Investment Company Ltd.(1) and J. W.
Smith v. The Incorporated Council of Law Reporting for England and Wales(2). In the former case the assessee Company sought to charge as a trade
expense a lump sum which it had paid for the purchase for the benefit of a
former actuary, of an annuity equal in amount to the pension which the Company
had resolved to pay him. This was held to be an expense admissible in computing
the Company's profits assessable to income-tax. But in that case it was the
practice of the assessee company to grant pensions to its servants after a
considerable period of service and this practice was known to the employees and
affected the rate of salary paid by the Company in that the employees were
willing to serve the Company at lower rates than they otherwise would have by
reason of the expectation of the pension at the end of their service, In the
latter case there was a practice of granting gratuities and that was the ground
for holding the amount to be a proper deduction.
217 In our opinion the proper test to apply
in this case is, was the payment made as a matter of practice which affected
the quantum of salary or was there an expectation by the employee of getting a
gratuity or was the sum of money expended on the ground of commercial
expediency and in order indirectly to facilitate the carrying on of the
business. But this has not been shown and therefore the amount claimed is not a
deductible item under s. 10(2)(xv) The appeal therefore fails and is dismissed