Gordon Woodroffee Leather Manufacturing Co. v. the Commissioner of Income-tax, Madras
KAPUR, J.-This appeal by special leave is
directed against the judgment and order of the
High Court of Judicature at Madras. The appel
lant is the as&e'l8ee and the respondent is the
Commiseioner of Incom&-tax and the question raised
is as to appli<)&bility of a. 10(2)(xv) of the Indian
Income-tax Aot to a gratuity paid by the appellant
to ono of its offioere on hie retir<>ment from
B!'rvioo.
The appeal relates to the &88e88DJ~nt year
HJ50·51. M/s. Gordon Woodroffee & Co. (Madl'llB)
Ltd., was incorporated as a private limited com
pany in 1922 and became the Managing Agent of
a. public limited company M/e. Gordon Woodroffee
Leather Manufacturing Company Ltd., which is the
&BB!'SBOO. One J. H. Philips was €mployed in the
Managing Agent Company from 1922 to 1935 and
from 1935 he became an employee of the appellant
company and became its Dirertor from 1940. On
March 22, 1949, he wrote a letter to the appellant
company exprcasing bis intention to resign from
the Board of the Company ae 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 p&Blled 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
2 S.C.R. SUPREME COURT REPORTS 213
of which the appellant Company was to pay
Rs. 40,000/- and the Managing Agent Company
the balance of Rs. 10,000/-. On April 4, 1949, this
resolution of the Board of Directors was confirmed.
On the saine date a resolution to the same effect
was passed at an Extraordinary General Meeting
of the Company and before the end of its account
ing 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
~eads :·-
Section 10(2) "Such profits or gains shall be
computed after making the following allowances,
namely:
............................................................ . . . . . . . . . . . . . ............. ~ ............................... .
(xv) any expenditure (not being a'.l allow
ance of the nature described in any of tho
clauses (i) to (xiv) inclusive, and not being in
the nature of capital expenditure or personal
expenses of the assessee) laid out or expen
ded wholly and exclusively for the purpose
of such business, profession er 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 an.d that the entry in the assl,ssee'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 a 0Cording to the reso
lution the gratuity was paid "for long and valu
able sen,ices to the Company" ; that there was
nothing to indicate that Mr. J. 1!. Philips had
accepted a lower salar.Y in expectation of get.ting
a gratuity at the end of his service ; that there
1961
Gordon TV oorlro.f!tt
Leather
llfanufactu.ri11g Co
v.
The CommiJsir,ner vf
Income·tax, JJ1adras
!(apur J.
llltJ
c.,... w ..,/to.ff,,
Lu,.,,
MG11Mjactu i11g Co.
.. n.. CommissiclU< of
1__,.1ox, MUros
/C-J.
214 SUPREME COURT REPORTS (1962] SUPP.
was no such praotice in the appellant Company
and that during the course of his service he WaR
being remunerated at a graduated scale of salary
and a commit!sion of 2 !% on the profits; that
there was no •·expectancy" that at the end of the
service thero would bo a recompense for faithful
and efficient service that he had been suitably n·ward
ed 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 Com·
pany tho amount had not been debited in the profit
and loSB axPunt but was debited to the appropria
tion account thereby indicating that it was an
extra payment or a payment made in the nature
of a capita.I expe118e. Taking all these circumstances
into consideration the Tribllnal came to the con·
clusion that it was difficult to hold that the expen,
dituro was not in the nature of a ctpital expendi·
ture or tha,t it wa11. expended wholly and exl'IU·
sively for the purpose of the a88Cll8ee'11 busin888. At
the instance of the appellant Company the case
was stated to the High Court under e. 66( l) of the
Income-tax Act and the following question was
referred:-
"W1ether the sum oi H~. 40,000/- paid
to Mr. J. H. Philips on hill retirement from
tho service of the CJompany was not an ~issi
ble deduction under Section 10(2Xxv) of the
Income-tax .Act, 1922."
The High Court answered tlie question against
the appellant Company. It held that in order thi.t
s. J 0(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 buain888.
In this case the amount was paid on retirement
and for valuable servioee rendered by Mr. J. H.
Philips ; there wall no evidonoo that he expected
to receive this amount or the Company contemp
lated its payment at any time before ; the paym~
2 s.c.R. SUPREME COURT REPORTS 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
t•l a retiring employee recognition of his past
services, wirh nothing more cannot, in our
opinion satisfy the requirements of Section
IO(:l){xv), even if those requirements are
judged from the view point of commercial
expediency, as it always should be when a
olaim 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 the Com
pany. 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 ren
dered 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 em
ployees to give their best to the employer and if it
was so then the payment was a matter of commer
cial prudence, It was also submitted that the Com·
pan;Y had acted not with any oblique motive and
1961
Gordon Woodrojfee
LeatMr
Manufacturing Co,
v.
The Commissioner
Income-tax, 111.adra
Kapur J,
:!W SUPREME COURT REPORTS [1962] SUJ:>J·.
1~1 its good faith was not in doubt and in support of
Gordo• Woad,.Jfu the contention several caseH were relied upon.
Uallo"
Ma••f"''"'i"' Co. In our opinion on the findings &H given the pay-
n,·c.:,;.;,,;,,..., of ment in dispute <loes not fall within the prodsiuns
1,,,..,,.,.,,, MaJr'" of s. 10(::'.)(xv). The amount w11s paid not in pur
l(.,., J. suance of any scheme of payment of gratuities nor
was it au amount which the recipient expected to be
paid for long and faithful service but it was a
voluntary payment not with the object of facilita
ting 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. H. Philips. There V£&S no practice in the
appellant Company to pay such amounts and it <lid
not affect the quantum of sal.iry of the recipient.
The two cases Htrongly relied upon by the appellant
Company were J. ,P; Hancol: v. General Reversioruiry
& Investment Oompany Ltd.(') and J. W. Smith v.
Tli,e, lncorporalR.d Council of Law Reporting for Eng/,and
and Wales('). In the former case the a.ssessee Com
pany sought to chargA as a trade expense a lump
sum which it had paid for tho 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 wu.s held to be an ex
pense admissible in computing the Company's pro.
fits assessable to iucome·tax. But in that case it
was the practice of the assessee company to grant
pemions to its servant!! after a oon~iderable period
of service and this practice was known to the em·
ployees~and aff~cted the rate of salary paid by the
Company in that the employees wore willing to
serve tho Compa11y at lower rates than they other.
wise would have by reason of the expectation
of the pension at the end of their service. In the
latter case there was a praotioo of granting gratuities
and th~t WM the ground for holding th" amount
·to be a proper dedqction:
(I) (1918) 7 T. C. 358.
(2) (1914) 6 T. C. 477.
2 S.C.R. SUPH.l<:ME COURT REPORTS
ryl~
• I
In our opinion the proper test to apply in this
case is, was the payment m:ide as a matter of prac·
ticc 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 in·
directly 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 with
costs.
Appeal dismissed.
NEW BANK OF INDIA LTD.
v.
PEAREY LAL
( B. P. SINHA, c. J., J.L. KAPUR, M. !ImAYATULLAH,
J. c. SHAH and J. R. MUDHOLKAR, JJ.)
Bank-Mon<y delivered by constituent-;--Special instruc
tion to await direction for deposits-If held by the bank as
trustee-Scheme for settlement of bank's liabilittes sanctioned
Amount, if subject to it.
The respondent delivered certain sums of money to the
appellant-bank at Lahore for transmission to Calcutta, with
instructions to await his directions regarding the opening' of
accounts for keeping the money in fixed deposit in the Cal
cutta Branch of the bank which was proposed to be opened
in the near future. The respondent did not however give any
instruction for opening any account, fixed deposit or otherwise
in regard to the amounts after they reached Calcutta. Within
a few days after the opening of the Calcutta branch of the
bank it ceased making payments and a moratorium for a.
limited period was declared under an ordinance issued by the
Governor General restraining the bank from making payments
to its depositors. After the expiry of the period of the mora
torium the Calcutta branch of the bank raised objections to
the respondent's application for withdrawal of the amount
1961
Gordon W11udroj/ie
Le(Jt/ie1
lll anuja .. Juring Co,
v.
The Cemmissio11er of
Income~fa.'I: M1,.dros
Kapur J,
1961
December 20,