1. In this reference we are called upon to determine whether certain amounts paid by the assessee-company as pension to two of its erstwhile employees amounted to capital expenditure or expenditure for business purposes on the part of the company.
2. The assessee is Messrs. W. T. Suren & Co. (Pvt.) Ltd. There was previously a partnership firm known as W. T. Suren & Co. The assessee-company was incorporated in February, 1948, and by an agreement with the partnership firm took over the entire business of the firm. W. T. Suren & Co. was carrying on the business of distribution of pharmaceuticals manufactured by a British Company - the Teddington Chemical Factory Private Ltd. They were also importing and selling sundry other goods.
3. In the employment of the firm were two persons, C. R. March and G. D. Dave. When the firm transferred its business to the limited company, theses employees had put in more than 25 years of service each and with the transference of the business they continued to work for the assessee-company. After they had worked for almost a year, on 16th February, 1949, agreements were entered into by the company with March and Dave separately. The agreements are in identical terms so far as both the employees are concerned and we would, therefore, only refer to the agreement with March for the purposes of the points arising in this reference. According to clause (1) of the agreement with March 'the employee' was to remain in the service of the company for a period of three years from 1st July, 1948 (that being the date on which the transference of business from the firm to the company was to take effect). By clause (4) March was given a monthly salary of Rs. 3,000 plus bonus, and clause (8) provided that, notwithstanding anything to the contrary in the agreement, either party to the agreement could terminate the same by giving not less than six months' previous notice in writing to the other party of termination. The company further reserved the right to terminate the contract on payment of six months' salary to the employee. Clause (11) conferred the right to pension and it is that clause which has given rise to the dispute between the assessee and the department. Clause (11) was as follows :
'In case the employee shall retire from his employment with the company during the currency of this agreement after giving notice as provided for by clause (8) hereof or upon determination of this agreement by the effluxion of time there shall be paid to him a pension for so long as he lives at the rate of Pounds 750 (seven hundred and fifty pounds sterling) per annum by monthly instalments of pounds 62-10-0 (Sixty-two pounds ten shilling sterling) payable on the last day of each month, the first of such instalments to become due one month after the termination of his employment. In consideration therefor the employee hereby covenants with the country to abstain from being engaged or employed in India either directly or indirectly in business of the kind carried on by the company.'
4. A little more than two years after this agreement was entered into clause (11) came to be amended after a resolution was passed by the board of directors on the 22nd March, 1951. The period of the agreement was extended up to 30th June, 1952, and in clause (11) amended instead of the original pension of pounds 750 per year the company agreed to pay Pounds 1,500 per year by monthly instalments of Pounds 125 each. The other terms remained the same.
5. The terms of the agreement with Dave were substantially similar. The original agreement was entered into on the same date, 16th February, 1949. His monthly salary was Rs. 1,500 and according to clause (9) his pension was to be Rs. 4,800 per year.
6. We are concerned in this reference with the four assessment years 1955-56 to 1958-59. Dave retired from the service of the assessee-company on the 30th April, 1953 and March on 30th June, 1953. In the year of account ended 30th April, 1954, relevant to the assessee year 1955-56 Dave was paid pension of Rs. 4,800 and March Rs. 16,724 in terms of the agreements. The company claimed these amounts as expenditure and the Income-tax Officer allowed the same. In the course of the assessment for the following years, however, the Income-tax Officer disallowed the claim of the company to the pension payment of Rs. 20,069 made to March. The findings of the Income-tax Officer in this respect are briefly as follows :
1. That the assessee did not have any pension scheme covering all or any specific group of its employees. 'The provision of a pension to one particular employee was therefore an unusual feature.'
2. It was not proved that there was an agreement between the firm and March to pay him pension and the stipulation regarding it was made for the first time in the agreement of 16th February, 1949.
3. That 'it is obvious that Shri March had even at the time when the agreement was entered into reached the superannuation age and the company had practically nothing to fear of him on account of his being employed elsewhere or being engaged their directly or indirectly in the business of the kind carried on by the company.'
4. From his experience in handling cases of pharmaceutical companies the Income-tax Officer held that 'the distribution of pharmaceuticals is by no means the monopoly of the assessee concern. Several concerns, local as well as foreign, have for long time past been engaged in this line of business in the taxable territories and it is well known that the market has continued to be well-supplied with, if not flooded with pharmaceuticals for quite some time now. It is, therefore, inconceivable that one particular person after he has reached superannuation age, could be the potential source of such serious dislocation to the assessee's business that the assessee should be constrained to provide for him a substantial pension on his retirements just to buy him off.'
7. He held therefore that March could not be a source of danger to the company which was a fact sought to be highlighted in clause (11) of the agreement. For these reasons the Income-tax Officer held that 'the agreement for payment of pension to Shri March was not for the consideration mentioned in the agreement and therefore the pension is not paid in the ordinary course of business. The pension could at best be regarded as ex gratia payment'. He held that the payment was not on business considerations but 'arbitrary and completely removed from normal business considerations'.
8. Two points regarding the Income-tax Officer's findings may be noted, (1) that the Income-tax Officer did not hold that the payment was in the nature of capital expenditure but the finding which he gave was that it was an ex gratia payment and therefore not a business expenditure, and (2) the Income-tax Officer overthrew the agreement between the parties and held that the payment of pension was not for the consideration mentioned in the agreement. The payment was for considerations other than those mentioned in the agreement.
9. When the matter came before the Appellate Assistant Commissioner, he took the view that the stipulation in clause (11) of the agreement by the employees to abstain from being engaged or employed in business of the kind carried on by the company 'amounts to nothing else than a covenant not to compete with the company in its business.' He held that by buying off potential competitors the company improved the value of its goodwill and thus brought into existence an advantage for the enduring benefit of the trade. Therefore, quite apart from the fact that the payment might have been made out of non-business considerations the payment was also of the nature of capital expenditure. He referred to the decisions of the English Courts in Associated Portland Cement . v. Kerr and the United Steel Companies Ltd. v. Cullington. He disallowed the payments made both no March and Dave on the ground that they were payments in the nature of capital expenditure.
10. The Tribunal has confirmed this view of the Appellate Assistant Commissioner : (1) The Tribunal relied on the decision in Associated Portland Cement . v. Kerr (H. M.'s Inspector of Taxes). (2) It held that it was not the intention of the assessee to grant these pensions in recognition of past services; otherwise there was nothing to prevent it from saying so in the agreements. (3) That there was no covenant entered into with the employees for the payment of any pension after their retirement when they were initially taken into employment with the partnership, W. T. Suren & Co. (4) When pensions are allowed to be drawn by employees subsequent to retirement, such restrictions, i.e., to abstain from engaging or being engaged in a rival business, are not placed upon the employees. (5) The prime motive of the assessee was that the said employees should not enter into competition with the business carried on by the assessee. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business, but it went to appreciate the whole of the capital asset and make it more profit yielding.
11. It will be noticed that though the Appellate Assistant Commissioner as well as the Tribunal affirmed the final conclusion of the Income-tax Officer, they did so for totally different reasons. While the Income-tax Officer held that the payment was not a business payment but merely an ex gratia payment made by the company divorced from business considerations the Appellate Assistant Commissioner and the Tribunal disallowed the expenditure because they took the view that the expenditure was incurred in order to protect the goodwill of the company and so was in the nature of capital expenditure. The Income-tax Officer did not rely upon the agreements at all. He rather suggested that the consideration for the payment was not what was stated in the agreement but was something de hors the agreement. On the other hand the view which the Tribunal has taken is that the agreement and the agreement alone must be looked at and nothing else and that the conclusion that the two employees were being remunerated for past services could not be drawn because it is not so stated in the agreements. We shall presently show how this difference in the viewpoints of the authorities below affects the question before us.
12. Before the Tribunal a contention was taken on behalf of the department that even apart from the fact that the expenditure was not of a revenue nature, it was not expenditure which was wholly and exclusively laid out for the purposes of the business and that, therefore, the expenditure could not be allowed under the provisions of section 10 (2), clause (xv), of the Income-tax Act even if it was not of a capital nature. This contention was brushed aside by the Tribunal by merely saying 'as this was not the case of the department, we refuse to consider it at this stage'.
13. When the reference came before us on an earlier occasion, one of the points urged on behalf of the departments was that the above contention had been wrongly ruled out by the Tribunal and ought to have been heard. It was certainly covered by one of the two questions referred to us, namely, the question No. 1, out of the questions originally referred. Having heard the parties we decided that the Tribunal was not justified in not considering the above contention of the department and therefore by our order dated 3rd February, 1968, we called for a fresh statement of the case. The exact order which we had passed was 'the Tribunal will hear the parties and decide the question whether the expenditure was wholly and exclusively laid out for the purposes of the assessee-company's business so as to fall within section 10 (2) (xv) and after their decision a further statement of the case should be submitted to this court after which we shall decide the second question referred to us'. Accordingly, the Tribunal has drawn up a statement of the case on 9th August, 1968, after hearing both parties. That supplementary statement was upon the question whether the payments made to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business, a question which the Tribunal had declined to hear them on. In this supplementary statement the Tribunal has held that the payment in question was wholly and exclusively laid out for the purposes of the assessee's business, so as to fall within section 10 (2) (xv) of the Act of 1922. This finding being against the department was sought to be challenged before us by Mr. Joshi but then it was pointed out that the finding could not be challenged in the absence of any question being raised and referred to this court. Here it is necessary to set forth the two questions as they were originally framed and referred to this court :
'1. Whether the Tribunal was justified in not considering the department's contention that the payments made to the two employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business
2. Whether the said 'payments' made for each of the four assessment years were in the nature of capital expenditure and as such inadmissible under the provisions of section 10 (2) (xv) of the Income-tax Act ?'
14. The first question, as we have already said, we answered in favour of the department and therefore called for a fresh statement of the case by our earlier order of 3rd February, 1968. The second question, as it is worded merely possess the question whether the expenditure was inadmissible under the provisions of section 10 (2) (xv) of the Income-tax Act because the payments were in the nature of capital expenditure and nothing else. It does not raise the question whether apart from the fact that the expenditure was not of a capital nature, it was not wholly and exclusively laid out for the purposes of the assessee's business. That was the issue decided in the supplementary statement of the case and it is clear that without a further question being framed and referred to us we would not be able to deal with the findings of the Tribunal in the supplementary statement dated 9th August, 1968.
15. Realising this difficulty counsel for the department urged that they should be given some time to apply to the Tribunal for a reference being made on the question arising upon the supplementary statement. He pointed out that the department was will within time and there should be no difficulty in the Tribunal stating the new question which arises. This would have entailed our adjourning this matte after arguments had been heard almost fully and we should have been inclined to grant to the department some time, but unfortunately counsel for the assessee has urged that he would like the entire matter between the assessee and the department to be thrashed out once and for all and that the further delay would also be detrimental to the assessee. He therefore agreed on behalf of the assessee to the department amending their notice of motion dated 4th November, 1968, and including the prayer that a further question of law arising upon the supplementary statement should be raised and decided. That question, it has been agreed on all hands, would be as follows :
'Whether the payments made to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business ?'
16. Mr. Kolah on behalf of the assessee also agreed to waive notice and urged that the question should straightway be framed and decided by this court. In view of this consent of the parties we propose also to determine that question.
17. Thus the following two questions arise for determination in this reference :
'A. Whether the said 'payments' made for each of the four assessment years were in the nature of capital expenditure and as such inadmissible under the provisions of section 10 (2) (xv) of the Income-tax Act
B. Whether the payments to the two ex-employees did not represent expenditure wholly and exclusively laid out for the purposes of the assessee-company's business ?'
18. The latter question arises upon the supplementary statement dated 9th August, 1968, and the former is the only question the survives from the original reference.
19. The supplementary statement answered against the department the question whether the expenditure was wholly and exclusively laid out for the purposes of the assessee-company's business and Mr. Joshi on behalf of the department has pointed out that the findings given by the Tribunal in the supplementary statement of the case conflict with the earlier view it had taken. In the earlier statement the Tribunal had found that the payments were not made in consideration of past services but to acquire an advantage of an enduring nature, viz., insecurity from competition, whereas in the supplementary statement they have taken the view that the payments were made to the two employees in consideration for long service rendered by the two employees to the said firm. They said :
'Once it is accepted that the two employees had rendered long services to the business then the payment of pension to the two employees cannot be called a payment which is not wholly and exclusively for the purposes of the assessee's business only because there was no pension scheme covering all or specified group of employees both in the case of the said firm, M/s. W. T. Suren & Co., or the assessee-company.'
20. At the second hearing before the Tribunal reliance was also placed upon the decision of the Supreme Court in Gordon Woodroffe Leather Mfg. Co. Ltd. v. Commissioner of Income-tax, but the Tribunal distinguished that case on the ground that in that case a lump sum gratuity was paid whereas, in the present case, there was a computation of the payment.
21. It is undoubtedly true that these findings given by the Tribunal in the supplementary statement of the case are in conflict with the findings earlier given by the Tribunal in the original statement of the case and therefore it is necessary for us to consider which of the two findings should be sustained.
22. The principle contention on behalf of the department against the findings in the supplementary statement has been that in coming to their conclusion the Tribunal has taken into consideration a number of circumstances which are irrelevant and could not have been taken into account. What has been urged is that the agreement between the employees and the company alone can be looked at and all other circumstances are irrelevant and ought out to have been looked at. It will be noticed that that was also the view which the Tribunal took in their earlier order. In paragraph 6 of their order they said :
'The terms of the agreement are clear enough and nothing can be imported into them. A such it cannot be said that in recognition of the past services of the employees, the assessee-company stipulated to grant them such liberal pensions.'
23. On the other hand, in the supplementary statement the Tribunal has in paragraph 12 taken into account all the surrounding circumstances and these are : (1) that the agreement under which the payment was made is not challenged and the bona fides of the actual payment made to the employee are not in dispute; (2) that the employees to whom the payments were made have been in the service of the same business for a long time when it was a partnership as well as after it became a limited company, and that employers, were also the same although they acquired a different legal character. Taking into account all the facts and circumstances, therefore, they held that the payment of the pension to the two employees was wholly and exclusively for the purposes of the assess-company's business.
24. We are unable to accept the contention that in determining the question whether the expenditure was in the nature of a capital expenditure or a business expenditure laid out wholly and exclusively for the purposes of the assessee-company's business we must confine ourselves only to the agreement between the parties. The question must be determined in the light of all the facts and circumstances of each case and there is no rule that if there is a written agreement between the parties the authorities and this court must look only to that written agreement and nothing else. Indeed, throughout the proceedings, both the parties proceeded upon the assumption that other facts and circumstances could be looked at the that is why considerable other material has been brought on record. It is now settled law that the question whether the amount claimed as expenditure was laid out or spent wholly or exclusively for the purposes of the assessee's business has to be decided on the facts and in the light of the circumstances of each case. In Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, at page 60, the Supreme Court held :
'But, as we have already stated, it is not open to the assessee to contend that merely because of the existence of an agreement between the employer and the employee and the fact of actual payment, the Income-tax Officer must hold that the payment was made exclusively and wholly for the purpose of the business. It is manifest that the Income-tax Officer is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deducted under section 10 (2) (xv) of the Income-tax Act.'
25. Their Lordships made this remark with reference to an assessee's contention, but it is clear that the principle applies equally to the department. Thus, although there might be an agreement in existence and the payment might have been made pursuant to such an agreement it is still open to the Income-tax Officer to consider all the relevant circumstances and determine for himself whether the remuneration paid to the employee or any opinion thereof is properly taxable under section 10 (2) (xv).
26. Bearing in mind these principles we proceed to consider whether the payment in the instant case was in the nature of a capital expenditure or business expenditure. We will discuss the question whether it is wholly or exclusively laid out for the purposes of the assessee's business separately.
27. It is no doubt true, and that was the principal point made against the assessee, that clause (11) of the agreement, or for that matter the agreements dated 16th February, 1949, do not in terms say that the pension was being given to the two employees in consideration of their past services or for other business considerations but it must also be said that it is a remarkable feature of these agreements that beyond the mere terms of the agreements there are no other recitals whatever in the agreements such as are normally found in all agreements. There is no preamble and no introductory portion setting out the facts and circumstances under which the agreement is entered into or any reference to any past dispute which led to the agreement as is usually to be found in agreements or this nature. It seems that the draftsman of the agreements was merely content to put down the terms without reciting the previous history. The agreements with March and Dave contain a number of recitals which are clearly recitals to be found in an ordinary service agreement. The employees are charged with the duty to manage the affairs of the company and devote their whole time and attention and the utmost of their power, skill and ability to the business of the company. The employees are not to divulge or make public any of the secrets, accounts, transactions or dealings of the company (clause (2)). Then follows clause (5), (6) and (7). Clause (5) is regarding leave and clause (6) regarding return passages to and from England while to leave. Clause (7) is the usual clause conduct. Clause (9) provides for the employee contributing to the staff provident fund. Clause (10) provides for motor car allowance. Thus the first ten clause are clearly clauses which are normally found in a service agreement. Clause (11) provides for the pension. At the end of clause (11) is the sentence upon which strong reliance has been placed on behalf of the department. The employee covenants with the employer to abstain from being engaged or employed either directly or indirectly in business of the kind carried on by the company. Great emphasis was placed by counsel for the department on the words 'In consideration therefor' which precede the last sentence of clause (11). It was urged that these words show that the last clause is in consideration of whatever is provided in clause (11) and, so interpreted, the clause clearly shows that the covenant to abstain from being engaged or employed in India was wholly in consideration of the pension paid to them.
28. We do not think that we can read this clause in that way. The agreement is to be construed as a whole and there is nothing to show that clause (11) is divorced from the rest of the provisions of the agreement. The clause by which the employees undertook not to be engaged or employed in any other business is the last clause of the agreement and it is preceded by the words 'In consideration therefore'. We can see no reason whatever why the words 'In consideration therefore' should be read as referring only to clause (11) and not to the entire agreement. On the other hand, it is quite clear from a perusal of the rest of the agreement that all the terms thereof are in consideration of the covenant of the employee to abstain from being engaged or employed directly and indirectly in a rival business to that carried on by the company. These are business agreements and must be read as a business man would read them unless there is some contrary indication in the agreement itself. In our opinion, there nothing to indicate that clause (11) is a special provision by itself and apart from the rest of the provisions of the agreement.
29. Coupled with the terms of the agreement are certain other important facts and circumstances which must be taken into account. In the original statement of the case it has been pointed out in paragraph 3 that March and Dave were in the employment of the firm and that they had put in more than 25 years of service by the time the assessee-company took over the partnership business. Before the Income-tax Officer these facts were admitted as can be seen from the following passage in the order of the Income-tax Officer :
'It is said by the assessee that Shri March had been in the employ of the assessee's predecessor-in-interest, namely, the partnership concern of M/s. W. T. Suren & Co., for over 25 years. The assessee adds that the business of the firm was taken over by the assessee with all benefits of the existing staff and the organisation. This is not disputed.'
30. Under these circumstances, we are not in agreement with the view which the Tribunal took in its first order that it was confined only to the agreements between the parties and 'nothing can be imported into that'. In our opinion, that view of the Tribunal was incorrect upon the authority of the decision in the Swadeshi Cotton Mills Co.'s case, to which we have already referred.
31. If the other circumstances which we have set forth above are taken into account and an inference drawn, as the Tribunal has in the second statement of the case drawn it, that the payments were made to these two old employees whose services the limited company has taken over from the erstwhile partnership, we can see nothing wrong with that inference. The reasoning which the Tribunal has given in this regard is clear from paragraph 12 of their order :
'We enquired into the question as to who were the partners of the firm, W. T. Suren & Co., and who were the major shareholders of the assessee-company and we are told that the persons who were the partners of M/s. W. T. Suren & Co. were the family members of Mr. Suren and the same are major shareholders in the assessee-company. From this fact it would be permissible to assume that the business of the said firm was taken over by the assessee-company and the services rendered by the two employees to the said firm a would be taken into account by the assessee-company and the payment of the pension to the two employees for the entire service appears to be quite reasonable. Once it is accepted that the two employees had rendered long services to the business, then the payment of pension to the two employees cannot be called a payment which is not wholly and exclusively for the purposes of the assessee's business only because there was no pension scheme covering all or specified group of employees both in the case of the said firm, M/s. W. T. Suren & Co., or the assessee-company.'
32. In our opinion, this was a correct conclusion in all the circumstances of this case. The cardinal fact remains that the two employees had been in the service of the partnership for over 25 years and the entire business of the partnership was taken over by the limited company, the assessee. The business, therefore, remained the same. Similarly, the former employer, namely, Mr. Suren, and the members of his family who were the partners in the firm became the principal shareholders in the assessee-company. Therefore, there was continuity in the employer also. So far as the employees are concerned, the same employees were taken over by the limited company and on the date of the agreements, in addition to their past service, had already served the limitation company for about a year. It is in this context that the agreements which came to be made contained the stipulation that these two employees would not engage in any rival business or be employed in such business. On the date on which the agreements were made, both March and Dave were still in the employment of the assessee-company and there was no question of their retirement in the near future. It has been held that they had at least another four years of service to put in. If under such circumstances as part of an agreement laying down the rest of the terms upon which these employees were to serve their former masters who had taken over the former business, a stipulation was also put in that they will be paid a pension but that event, they must not work for a rival business, we cannot extract only that clause and consider it separately and hold that there was an acquisition of a capital asset, namely, the right to immunity from competition. We must view the agreement as a whole, and viewing it as a whole, it seems to us that this term was one of the terms of a purely business agreement made to cover the normal terms of service of an employee with his employer. In several of the cases to which we will presently refer, one of the grounds for holding that a payment made to an employee would be in the nature of capital expenditure is that the company apprehends competition from such employee after the termination of his services, but that depends upon whether in fact the employee was in a position to enter into competition and that would depend upon the circumstances such as whether he has any special skill or knowledge regarding the employer's business which had to be safeguarded. In this case, there is absolutely nothing to show that these two employees had any special skill or knowledge pertaining to their employer's business. On the other hand, the only finding given in the case is a finding which leads to the contrary conclusion. That finding is to be found in the Income-tax Officer's order as follows :
'On the other hand, it is clear that Shri March had already spent his active years in the employ of the firm of M/s. W. T. Suren & Co. and that when he had not decided to set up a rival business or join a rival concern (if at all there could be a rival to the assessee alone) he could not be the source of the danger to the company which is sought to be highlighted in the agreement.
Earlier, the Income-tax Officer had also held : 'It is obvious that Shri March had even at the time when the agreement was entered, almost reached the superannuation age and the company had practically nothing to fear of him on account of his being employed elsewhere or being engaged directly or indirectly in the business of the kind carried on by the company.'
33. That was a finding of fact given by the Income-tax Officer - a finding which we do not find has been set aside or criticised at any stage - and, in our opinion, it was a finding which could be reasonably reached upon all the facts and circumstances. At any rate, there is absolutely nothing to show on the record that either March of Dave had any special skill or knowledge against the use of which the company had to safeguard itself. Therefore, they could not have agreed to pay pension to the two employees, for that reason.
34. Another circumstances which has been urged is that there was no general pension scheme in the assessee-company and that the payment of pension, therefore to the two individual employees was not out of business considerations. Where pension is in fact paid to two employees, the mere circumstance that there is no general scheme in the company is no a decisive circumstance) see Indian Overseas Bank Ltd. v. Commissioner of Income-tax. We must, in fairness to the assessee, also say here that it was stated before us that a pension scheme has been undertaken by the assessee-company after the agreements with March and Dave. Apart from this, it seems to us that, in giving pension to these two employees, the company could well have treated them as on a special footing, for they were both very old servants of the business which the company had taken over and to compensate such persons for their past services is not in any way unusual even without a pension scheme. At any rate, from that circumstance we cannot infer that, therefore, the payment was made in order to safeguard the company against competition by these servants. Taking all the circumstances into account, as we have set them forth, and even considering the contention that there is no recital in the agreements, we cannot see how the finding given by the Tribunal that the payment to the two employee was in consideration of the past services rendered by them to the firm and, therefore, to the assessee company is incorrect. We agree with that finding and hold that the payment made to the two employee was primarily in consideration of the past services rendered by them to the firm, the business of which was taken over by the limited company. If so, the payment would be for purposes of business and in the nature of business expenditure and will not partake of the nature of a capital expenditure.
35. That moneys paid under similar circumstances have been held to be moneys in the nature of business expenditure is clear a recent decision of the Madras High Court in Indian Overseas Bank's case which, in our opinion, is very similar to the one before us. In that case, one Subbiah, who was the general manger of the Indian Overseas Bank Ltd., at Madras, retired on 31st March, 1952, and was co-opted as a director with effect from 1st April, 1952. Even he was in service, the board of directors had passed a resolution on 17th May, 1948, that Subbiah and two other senior officers would be eligible for pension to be calculated at the rates applicable to them as per the rules of service of the Imperial Bank, but the payment of pension was made conditional upon the officer concerned not accepting service directly or indirectly with any other banking institution without the prior sanction of the board of directors. For the assessment years in question payment of substantial sums of money was made to Subbiah and others and the question was whether the company could claim deduction of the amount so paid under section 10 (2) (xv). The Tribunal, as in the present case, has also decided in that case that the payment was in the nature of capital expenditure and one of the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. v. Commissioner of Income-tax a case which is also relied on before us on behalf of the department. The Madras High Court held at page 737 :
'The Tribunal in this case, as it seems to us, laid too much emphasis on the absence of any practice of payment of pension and failed to apply its mind to the fact that the payment of pension to Sri A. Subbiah was resolved upon even during the currency of his service. Having regard to the history of this gentleman's service before he came to join the assessee and during his service with the assessee and how the management itself looked upon his services, it is difficult to appreciate, as we think, that payment of pension was apparently thought of as a business expediency in the interests of the assessee's business.'
36. In the present case also we have shown that the history of these two employees is one which would well justify the payment. The payment moreover was also made while the two employees were in the service of the assessee and had still 3 to 4 years to put in. Therefore, to much emphasis cannot be made upon the absence of any pension scheme or proof of any practice of payment of pension to other employees.
37. A case was sought to be made out on behalf of the department on the sole ground that in the Indian Overseas Bank's case, there was a clear recital in the written agreement that the pension was as part of the terms of service and it was urged that in the present case there is no such recital. We have already shown that there were a sufficient number of other facts and circumstances to show that must have been the consideration for the payment of the pension to the two employees in question before us. At any rate, the inference which the Tribunal has drawn at the second hearing does not appear to us to be at all unreasonable. We do not think that the mere circumstance that there is no recital in the present case, in our opinion, falls within the principle of the decision in the Indian Overseas Bank's case.
38. The proper test in such cases was laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Company's case :
'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.'
39. Of course in Gordon Woodroffe's case, the amount paid was a lump sum of Rs. 40,000 by was of gratuity and not, as in the present case, a recurring amount of pension. That circumstances may well indicate expenditure of a capital nature. Moreover it appears from the facts as stated at page 552 that the employee, Philips, who was in managing agent company and who became its director from 1940, had given notice on 22nd March, 1949, that he intended to resign from the board of directors as from 4th April, 1949, and had requested that his resignation should be accepted. It was in answer to that letter that the board of directors passed a resolution accepting his resignation and then stating that, in appreciation of his long and valuable service to the company, he be paid a gratuity of Rs. 50,000, out of which the assessee-company was to pay Rs. 40,000. Thus, in that case the payment was not only a lump sum payment but was paid to the employee after his resignation had been accepted, in order words, not for services rendered to the company and not in order to advance the business of the company. In that case also the company had not debited the amount in the profit and loss account but had debited it to the appropriation account thereby indicating that it was an extra payment or a payment made in the nature of a capital expense. None of these circumstances are present in the case before us and it seems to us that the decision in Gordon Woodroffe's case would for that reason be distinguishable.
40. Almost similar to Gordon Woodroffe's case is the decision of the English Court of Appeal in Associated Portland Cement . v. Kerr - the case upon which the Tribunal relied in the original statement of the case. A consideration of this case serves to highlight the distinction with the present case and the grounds upon which it cannot be held here that the expenditure was in the nature of a capital expenditure. In the Associated portland Cement Manufacturers case two lump sum payments were made of Pounds 20,000 and Pounds 10,000 to two retiring directors. One was a managing director and the other an ordinary director. The managing director's agreement of service was due to terminate on 31st December, 1939, but he intimated his desire to retire from the service of the company some months prior to that date. The other person, who was a director, also gave notice some time before January, 1939, of his desire to resign his position with the company on 30th September, 1939, though there was no written service agreement in this case. Both of them had been with the company since its formation in 1900. The payments given to them were claimed by the company as deductions on account of business expenditure, but the claim was disallowed on the ground that it was expenditure in the nature of capital expenditure. The reasons given for so holding pointedly distinguish that case from the present one. In that case both the managing director and the director were persons who had exceptional knowledge of the cement industry and important business contacts and it was found as a fact that they would have been free on retirement to engage in competitive activities to the detriment of the company. The chairman of the company had deposed before the Tax Commissioner (vide page 108) that both those persons, Stevens and Charleton, were persons of exceptional knowledge and qualifications, held influential positions and had important business contacts in their respective spheres. That was the justification offered for the payment in that interest of the company of protest its goodwill by securing a bar against competition from the two persons concerned, who could otherwise have been instrumental in damaging the company's goodwill if they had been so minded. In the present case, we have already shown that, though these two employees were old employees and had later on become directors, there is nothing shown that they had any special knowledge or skill or special contacts which, if utilised against the company, would damage the goodwill of the company. On the other hand, the only finding given by the Income-tax Officer is that they had almost reached their superannuation age and the company had practically nothing to fear from them on account of their being employed elsewhere or being engaged either directly or indirectly in the business of the kind carried on by the assessee company. The Associated Portland Cement Manufacturers' case therefore, is clearly distinguishable.
41. Reference was also made to a decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax. The decision pointed out that there was no reason for making a distinction between an expenditure incurred for acquiring a material capital asset or a legal right in the nature of capital and an expenditure incurred for acquiring any other advantage of an enduring nature for the benefit of trade. It was urged that the company in the present case acquired an advantage of an enduring nature for the benefit of that trade when they got the covenant from the two employees that they would not be engaged directly or indirectly in a rival business and that, therefore, it should be held that the expenditure was a capital expenditure. We have already analysed the terms of the agreement and we have shown that the consideration for the grant of the pension was not the stipulation that they shall not be employed in a rival business but the totality of the terms of the agreement, which was essentially a service agreement, was to set down the terms of service. Its object was not to acquire what has been called 'advantage of an enduring nature for the benefit of the business of the assessee'. Apart from this, upon the facts also. Sitalpur Sugar Works' case is completely distinguishable.
42. While we have held that in our opinion the payments made to the two employees were in the nature of a business expenditure for the purpose of the business of the assessee-company and not of a capital nature, we must notice here an argument on behalf of the assessee that, even assuming that this expenditure was laid out for the protection of the goodwill of the company, still if it did not result in the company acquiring any new asset the expenditure would still partake of the nature of a business expenditure. It appears upon authority that this distinction has been drawn and adverted to in several cases. The leading case on the question is the decision of the English Courts in Southern v. Borax Consolidated Ltd., where a large sum of money was spent by Borax Consolidated Ltd. in defending the company's title to their land and building erected thereon before the American courts. That was an expenditure wholly for the protection of a capital asset and it was urged, therefore, that it could not be allowed as a business expenditure. Lawrence J. laid down the principle, at page 602, as follows :
'On the other question as to whether this is a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the case is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company. As I suggested to counsel for the Crown, the only way in which it can be said that there the City of Los Angeles had been removed from the category of possible litigants who might challenge the company's title. I cannot think that that makes the payment a capital payment. The title of the company, which must be assumed, in my opinion, to have been a good title, remains the same; there is nothing added to the title or taken away, and the title has simple been maintained by this payment.'
43. The learned judge referred to the leading English case, Atherton v. British Insulated and Helsby Cables Ltd., and to the test there laid down that 'when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion), for treating such an expenditure as properly attributable not to revenue but to capital'. Then Lawrence J. distinguished the case before him as follows :
'So here if it could be said that this expenditure had in any way altered the original character of the capital asset which was acquired by the respondent-company I should have taken the view that the payment was in respect of capital, but as the capital asset of the respondent-company in my opinion remained absolutely unaltered, that payment is property attributable to revenue.'
44. This principle was referred to and affirmed by the Court of Appeal in the case to which we have already referred, namely, Associated Portland Cement . and observed :
'The money that you spend in defending your title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure. There, again, there is all the difference in the world between defending your assets against the claim of somebody who has no claim against them, and acquiring a new asset or adding to an existing asset. If you acquire the benefit of a covenant which improves the value of your goodwill, in my opinion, you have acquired a capital asset, even though the goodwill has no value set upon it in the balance-sheet.'
45. And then Lord Greene referred to the same passage from the judgment of Lawrence J. in the Borax case to which we have referred above. The principle of the decision in Southern v. Borax Consolidated Ltd. was approved and applied by the Supreme Court in Commissioner of Income-tax v. Finlay Mills Ltd.
46. Applying the principle of these decisions to the present case it appears to us clear that all that the company was attempting to do when it put down clause (11) in the terms of the agreements between the two employees and the company was to protect their goodwill remained exactly the same as before and there was no addition or acquisition to those capital assets. Therefore, even assuming that this was an expenditure made to protect their capital assets, still it can be classed as a business expenditure.
47. So far as the new question which we have framed is concerned, we have already referred to the finding of the Tribunal in the supplementary statement of the case, particularly paragraph 12 thereof. The question arises out of that finding. We have already discussed that finding in connection with the question whether the expenditure was in the nature of capital expenditure or business expenditure. The Tribunal has accepted the facts that the partners of the firm were the same persons who were in the major shareholders of the assessee-company, that the said firm was taken over by the limited company and that March and Dave were two of its old employees. The inference drawn by the Tribunal from these facts is that the two employees had rendered long service to the business and, therefore, the payment of pension to the two employees was a payment made wholly and exclusively for the business of the assessee company. Having regard to all the circumstances, we are in agreement with the finding which appears to us to be a reasonable finding. The Tribunal in its earlier statement of the case took an incorrect view, in our opinion, that it earlier statement of the case took an incorrect view, in our opinion, that it had to confine itself only to the terms of the agreement and could not look to the other circumstances and, therefore, came to an erroneous conclusion.
48. In the result, we answer the original question No. 2 (which we have renumbered as A above) which survives for decision by holding that the payment made for each of the four assessment years were not in the nature of capital expenditure and were admissible under the provision of section 10 (2) (xv) of the Income-tax Act. We answer the new question which we have framed (and which we have renumbered as B above) in the negative. The Commissioner shall pay the costs of the assessee. There shall be no order as to costs on the notice of motion.