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Commissioner of Income-tax, Bombay City-iii Vs. Oxford University Press - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 40 of 1970
Judge
Reported in[1977]108ITR166(Bom)
ActsIncome Tax Act, 1961 - Sections 37
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentOxford University Press
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateF.N. Kaka, Adv.
Excerpt:
(i) direct taxation - revenue expenditure - section 37 of income tax act, 1961 - whether expenditures incurred for uniting work and architect's fees were expenditure incurred for repair and allowable deduction under section 37 - uniting was improved method of plastering and repairing work - no new assets brought into existence by reason of expenditure incurred for doing uniting work - such expenditure to be regarded as expenditure of revenue nature - held, expenditure as allowable deduction. - section 31(4) (since repealed) :[tarun chatterjee & h.l.dattu, jj] jurisdiction of high court - respondent, a government company, chartered appellants vessel to carry rock phosphate from togo to west coast india - dispute arose between parties - under agreement, respondent had chosen mumbai as.....tulzapurkar, j.1. two questions, one at the instance of the commissioner of income-tax, bombay city, and the other at the instance of the assessee, have been referred to us by the tribunal for determination under section 256(1) of the income-tax act, 1961, and the two question respectively are : '(1) whether, on the facts and in the circumstances of the case, the expenditure of rs. 59,000 for the uniting work and architect's fees of rs. 3,680 in connection therewith were rightly held as expenditure incurred for repairs and, therefore, allowable deduction under section 37 of the act (2) whether, on the facts and in the circumstances of the case, the whole or any part of the gratuity paid to the heirs of shri b. d'brass was an allowable expenditure in the hands of the company ?' 2. as far.....
Judgment:

Tulzapurkar, J.

1. Two questions, one at the instance of the Commissioner of Income-tax, Bombay City, and the other at the instance of the assessee, have been referred to us by the Tribunal for determination under section 256(1) of the Income-tax Act, 1961, and the two question respectively are :

'(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 59,000 for the uniting work and architect's fees of Rs. 3,680 in connection therewith were rightly held as expenditure incurred for repairs and, therefore, allowable deduction under section 37 of the Act

(2) Whether, on the facts and in the circumstances of the case, the whole or any part of the gratuity paid to the heirs of Shri B. D'brass was an allowable expenditure in the hands of the company ?'

2. As far as the first question is concerned, the relevant facts are these : The assessee is a company carrying on business of publishers and book sellers, importing and selling books published by the Oxford University. The assessment year is 1963-64. During the accounting period relevant to the assessment year the assessee incurred an expenditure of Rs. 59,000 in the form of payment made to M/s. John Fleming & Co. for uniting work carried on in its building known as 'Oxford House' and also a sum of Rs. 3,680 as fees paid to the architects in connection with uniting work undertaken on the advice of the architects. The assessee claimed both the items as expenditure incurred for repairs to their building. The Income-tax Officer observed that the repairs in question could not be called 'current repairs' but that the assessee had undertaken major structural repairs which had the effect of prolonging the life of the building for a least 15 years and as the repairs resulted in extension of the period of the serviceableness of the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. In the appeal preferred to the Appellate Assistant Commissioner the assessee explained the real nature of uniting work that had been undertaken and as to why it was found necessary and claimed that the expenses were for current repairs and that even if the expenses could be regarded as having been incurred for accumulated repairs, still deduction should be allowed under section 37 of the Income-tax Act, 1961. The Appellate Assistant Commissioner took the view that the expenses incurred for uniting could not be considered to be for the current repairs but could only be considered under section 37 but having regard to the fact that the life of the building has increased by about 15 years and that the structural strength of the building has increased considerably, the expenses should be treated as a capital expenditure incurred by the appellant. He also took the view that the fees paid to the architects should also be considered along with this expenditure as capital expenditure. The assessee carried the matter in further appeal to the Appellate Tribunal and relying upon the correspondence that was exchanged between the assessee and its architects on the subject, which had been produced on record, the assessee submitted that the uniting process was nothing else but improved method of doing the plastering work and by employing this process the assessee had done nothing but carried out the usual repairs to its building and that no new asset was brought into existence as a result of adopting this process but the asset, viz., the house, was brought to its original position. It was, therefore, contended that the expenses incurred on uniting as well as in paying the architects' fees should have been allowed as current repairs or in any case as accumulated repairs under section 37 of the Act. On the other hand, it was contended on behalf of the department that the repairs were major repairs which increased the structural strength as well as life of the building and, therefore, the expenditure in question was capital expenditure. The Tribunal accepted the assessee's contention and held that looking to the facts which were placed before it it was quite clear that what the assessee had done was employing the uniting process to carry out certain repairs which were either current repairs or accumulated repairs. The Tribunal, therefore, held that the amounts spent in uniting process and the architects' fees in connection therewith was an expenditure incurred for the repairs of the building of the assessee and the same should be allowed as a deduction either as current repairs or accumulated repairs under section 37 of the Act. At the instance of the Commissioner of Income-tax the first question set out above has been referred to us for determination.

3. The question as to what is the proper meaning of the expression 'repairs' and what test should be applied for determining the question whether a particular expenditure incurred in connection with repairs of an asset like a building should be regarded as expenditure of a capital nature or of a revenue nature came up for consideration before this court in the case of Gulamhussein Ebrahim Matcheswalla v. Commissioner of Income-tax : [1974]97ITR24(Bom) , where the principles applicable have been enunciated. It has been held in that case that the expression 'repair' must be understood in contradistinction to renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. If the amount is spent for the purpose of bringing into existence a new asset or obtaining a new advantage then such an expenditure would not be revenue expenditure. The mere quantum of expenditure is not by itself decisive of the question whether it is of the nature of revenue or capital. A sum can be allowed as cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs have been effected. It is thus clear that what the court is required to find out is whether as a result of the expenditure a new asset or a new advantage is being brought into existence. The court will also have regard to the aspect as to whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. It is on consideration of these matters that the question will have to be decided.

4. From the correspondence that was exchanged between the assessee and the architect, which was produced on record, it appears very clear as to why and in what circumstances the uniting work was undertaken by the assessee-company in relation to the building 'Oxford House'. In their letter dated June 22, 1964, the architects of the assessee stated that during the inspection of the building, which was undertaken in January, 1961, it was observed that the reinforcement of the slabs had decayed and cracks were visible underside of the slab and on the floors and some of the steel reinforcement in the slab had little or no cover. Further, that the assessee had been spending good amounts on the repairs of such cracks and plastering of the slabs on which the reinforcements had disappeared but the amount spent for plaster patch work that was undertaken was a waste and that, therefore, since the plastering by means of an ordinary method was of no use, plastering by the process of uniting was advised. The nature of the uniting process was explained by the assessee by its letter dated August 3, 1966, addressed to the Appellate Assistant Commissioner of Income-tax, Bombay, thus :

'Uniting is a process of cement plastering with the use of a gun. By this process the plastering is carried out under pressure and is particularly recommended where there are cracks, etc., and the ordinarily plastering does not last.'

5. Having regard to the nature of the uniting process that was undertaken for carrying out the plastering and repair work to the building and the reasons and circumstances as to why the uniting process had been employed, it appears to us very clear that by employing this method, which was nothing but an improved method of plastering and repairing work, all that the assessee had done was to preserve and maintain the already existing asset. No new asset or new advantage as such could be said to have been brought into existence by reason of expenditure incurred for doing the uniting work. As a result of uniting work done the assessee had not changed the nature of the asset, viz., the building as a whole, and the same in no way increased the accommodation or earning capacity of the building; in that sense no new advantage of enduring benefit has been brought into existence. The repairs also could not be regarded as heavy structural repairs, for, according to the assessee's architects, what could not be achieved by the ordinary method of plastering was achieved by a sophisticated method of process of uniting. In this view of the matter, it seems to us very clear that the expenditure of Rs. 59,000 incurred for uniting work done as also the expenditure of Rs. 3,680 being the architects' fees paid in connection therewith will have to be regarded as expenditure of a revenue nature. Since the same was incurred only with a view to preserve and maintain the existing asset and applying the test which has been indicated in Gulamhussein's case : [1974]97ITR24(Bom) the expenditure will have to regarded as allowable deduction.

6. It was sought to be urged by Mr. Joshi for the revenue that on their own showing the assessee's architects had claimed that the effect of repairing work had prolonged the life of the building by at least 15 years and it that was so, it should be held that a new advantage of enduring character had been obtained by the assessee by undertaking uniting work. It would be pertinent to observe that every type of repairs carried out to an asset like a building is bound to extend to a certain extent the life of the asset and simply because the assessee's architects claimed that because of repairs the life of the building had prolonged for at least 15 years, it cannot be said that the expenditure was in the nature of a capital expenditure. There is material on record to show that before plastering work was undertaken by adopting the uniting process, the repairs had been undertaken by doing plastering work in the ordinary way, but such repairs did not last even for a year or two, and, placed in that situation, the assessee was required to undertake the aforesaid repairs by adopting uniting process. Moreover, simply because the life of an asset is extended or that the asset is made to give better service than it was giving in the past is not decisive of the matter. The nature of the repairs undertaken will have to be taken into consideration and, as we have stated above, the repairs undertaken were not by way of any major structural repairs but it was plastering work that was undertaken by adopting sophisticated process called uniting process and, therefore, it will not be possible to accept the contention of Mr. Joshi.

7. In the context of the aforesaid contention urged by Mr. Joshi it will be useful to refer to an unreported judgment of this court in the case of Commissioner of Income-tax v. David Mills Ltd. in I.T. Reference No. 17 of 1950, decided on 10th October, 1950. (The judgment is printed in unreported Income-tax Judgments of the Bombay High Court, Book 1, at page 46). In that case the assessee-company had, in the past, repaired the flooring by replacing the upper layer which was a wooden layer by wooden boards. In the year of account, a layer of oxychloride was laid between the two layers. Though this process cost the company less than the original process, it made the floor more durable. The department's contention was that by this particular process a new asset had come into existence and, therefore, the amount spent was not a revenue expenditure. This court held that the assessee was only maintaining and preserving an asset, which he already possessed, by the process which he adopted. The life of the asset was made longer and it was made to give better service than it was doing in the past. Even so, the expenditure incurred was not of a capital nature. The ratio of this case would apply with equal force to the facts in the present case. All that the assessee-company did in the instant case was to undertake the plaster repairing work but by adopting a new method called uniting process, and by incurring the expenditure by adopting such a process the assessee was merely maintaining and preserving an asset which it already possessed and thus though to some extent the life of the asset had been prolonged and the asset was made to give better service than it was doing in the past, the expenditure will have to be regarded as a revenue expenditure. In this view of the matter, the first question is answered in the affirmative and in favour of the assessee.

8. On the second question the facts are these : The assessee-company had an employee by name Mr. B. D'brass who had put in 24 years of service and was a member of the covenanted staff. Mr. B. D'brass died suddenly in the office at the age of 52 and at the time of his death he was drawing a salary of Rs. 24,000. The assessee paid a sum of Rs. 50,000 as and by way of gratuity, roughly calculating the quantum of 2 years' salary payable to the deceased at the time of his death. The assessee claimed the said payment of Rs. 50,000 as an allowable expenditure in computing its assessable income. The Income-tax Officer disallowed the claim on the ground that there was no contractual obligation to pay any gratuity and, therefore, the payment was an ex gratia payment and not a legitimate business expenditure. In the appeal preferred to the Appellate Assistant Commissioner, the assessee pointed out that there was a settlement between the non-covenanted staff and the assessee-company on 26th August, 1955, under which gratuity was payable on certain scale to the said employees and that on the death of Mr. B. D'brass the assessee-company considered that the representative or heirs of the said deceased should be paid gratuity equivalent to approximately 2 years' salary. It was also submitted that the gratuity was actually paid and that the company was actually paying gratuity to its non-covenanted staff and that, therefore, payment to the heirs of Mr. B. D'brass was not an isolated case. It was further submitted that in view of the scheme of gratuity which obtained in the case of non-covenanted staff, the payment of gratuity was in the interest of business and to maintain good relations with the covenants staff and, therefore, the gratuity paid to the heirs of Mr. B. D'brass should be allowed as business expenditure. The Appellate Assistant Commissioner observed that it was only natural that the covenanted staff would also be in expectation of receiving gratuity on death or retirement since there was a gratuity scheme in respect of non-covenanted staff and, therefore, the gratuity paid by the assessee-company to its covenanted staff could not be considered to be an ex gratia payment. After examining the terms of settlement between the assessee-company and the non-covenanted staff, the Appellate Assistant Commissioner took the view that the gratuity paid to the deceased's heirs was equivalent to approximately 2 years' salary while the gratuity fixed for the non-covenanted staff was only 12 months' salary and in view of this he held that the gratuity payment in excess of 12 months' salary was an ex gratia payment. In other words, he allowed a deduction of Rs. 24,000 representing 12 months' salary as legitimate business expenditure but disallowed the rest as being in the nature of ex gratia payment. Cross-appeals were filed before the Appellate Tribunal, one by the assessee contending that there was no justification for disallowing part of the gratuity paid by the assessee-company to the heirs of the deceased and the other by the department contending that since there was no contract to pay such gratuity to the covenanted staff, any payment was purely ex gratia and no part of the gratuity paid to the heirs of the deceased who was a member of the covenanted staff should have been allowed. The Tribunal upheld the Appellate Assistant Commissioner's order whereby gratuity paid in part has been allowed as an allowable deduction. It confirmed the Appellate Assistant Commissioner's finding that in view of the settlement that obtained between the assessee-company on the one hand and its non-covenanted staff, on the other, it was natural for the members of the covenanted staff to expect that some gratuity on death or retirement would be payable by the assessee-company to them. The Tribunal, therefore, upheld the Appellate Assistant Commissioner's order and dismissed both the cross-appeals. In the circumstances the Tribunal has referred the second question to this court for determination and the question is :

'Whether, on the facts and in the circumstances of the case, the whole or any part of the gratuity paid to the heirs of Mr. B. D'brass was an allowable expenditure in the hands of the company ?'

9. Mr. Joshi appearing for the revenue has contended before us that there was no written agreement between the assessee and the members of the covenanted staff or the individual employee concerned in the matter of payment of gratuity upon death, retirement, etc. He also urged that no material has been brought on record to show that there was any practice prevailing in the assessee-company to pay gratuity qua its covenanted staff - a practice which could be legally enforced. He, therefore, urged that whatever payment was made by the assessee to the heirs of Mr. B. D'brass, a member of the covenanted staff, will have to be regarded as an ex gratia payment. He also urged that it could not be said that the payment could be said to have been laid out wholly and exclusively for its business purpose. Strong reliance was placed by him upon the decision of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Company v. Commissioner of Income-tax : [1962]44ITR551(SC) where, according to Mr. Joshi, certain tests have been indicated by the Supreme Court to decide this particular question and, according to him, none of the test as laid down by the Supreme Court in this decision was satisfied in the instant case. In that case one Mr. J. H. Philips, who was an employee of the managing agent company of the assessee-company from 1922 to 1935, was an employee of the assessee from 1935 and became its director from 1940, was paid a gratuity of Rs. 40,000 by the assessee-company 'in appreciation of his long and valuable services to the company'. The company had no scheme for payment of gratuities nor did it pay such gratuities in practice. There was nothing to show that the employee had accepted a low salary in expectation of a gratuity on retirement or that the gratuity was paid for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. The court held that the amount of gratuity paid by the assessee was not, under the circumstances, an expenditure laid out or expended for the purposes of the assessee's business, within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922, and was not deductible in computing the profits and gains of the company. In particular Mr. Joshi invited our attention to page 555 of the report where the Supreme Court has indicated the tests which it wished to lay down in these terms (See : [1962]44ITR551(SC) ) :

'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 the money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.'

10. Mr. Joshi urged that in the case before us admittedly there was no written agreement or any contractual obligation on the assessee to pay any gratuity to covenanted staff. He further pointed out that though two instance were brought on record by the assessee-company before the Appellate Assistant Commissioner where the amount of gratuity had been paid to two members of its covenanted staff, that by itself was not sufficient to establish any practice which could be said to be prevailing in the assessee-company in the matter of paying gratuity to its covenanted staff. In fact, he pointed out that out of two instances the first one was of Mr. B. D'brass, the employee concerned in the instant case, to whom an amount of Rs. 50,000 was paid on rough calculation of two years' salary payable to him at the time of his death, and the other was the case of another employee who was a member of the covenanted staff to whom gratuity had been paid on rough basis of 4 years' salary payable to him at the time of his death. But in both these cases no fixed basis could be said to have been adopted by the assessee, but that payment of gratuity was on ad hoc basis. He further pointed out that no material had been placed by the assessee-company before the taxing authorities to show that the employees belonging to the covenanted staff had agreed to accept lower rates of salary in expectation of any gratuity that might be payable to them on death, retirement, etc. He, therefore, urged that none of the tests indicated by the Supreme Court in the aforesaid decision was applicable to the facts to the case and, therefore, no deduction whatsoever in respect of the payment made by the assessee-company to the heirs of Mr. B. D'brass should have been allowed. In support of his contention he also relied upon two more decisions, one of the Bombay High Court in the case of Sassoon J. David and Company Pvt. Ltd. v. Commissioner of Income-tax : [1972]85ITR83(Bom) and the other of Madras High Court in the case of Balarama Varma Textiles Ltd. v. Commissioner of Income-tax : [1973]92ITR485(Mad) .

11. On the other hand, Mr. Kaka, appearing for the assessee, contended that each one of the three decisions on which reliance has been placed by Mr. Joshi was clearly distinguishable on facts and he urged that in the instant case one of the tests which had been laid down by the Supreme Court in Gordon Woodroffe Company's case : [1962]44ITR551(SC) was fully satisfied on the finding that had been recorded both by the Appellate Assistant Commissioner and by the Tribunal and that since the said finding recorded by the Appellate Assistant Commissioner and the Tribunal had not been challenged by the revenue, it was not open to the revenue to contend that the expenditure ought to be disallowed.

12. In our view, there is considerable force in the contention of Mr. Kaka that each of the three decisions on which reliance has been placed by Mr. Joshi is clearly distinguishable on facts. So far as the Supreme Court decision in Gordon Woodroffe Company's case : [1962]44ITR551(SC) is concerned, the decision really turned on the peculiar facts therein; admittedly, the said company had no scheme whatsoever for payment of gratuity nor did the assessee pay such gratuity in practice to its employees. In the instant case before us it cannot be said that there is no scheme for payment of gratuity at all, for, admittedly, by reason of the settlement that was arrived at on 26th August, 1955, a scheme for payment of gratuity at least to the assessee's non-covenanted staff was obtaining in the company. Secondly, the amount of Rs. 40,000 paid by Gordon Woodroffe Company to J. H. Philips was in terms paid to him 'in appreciation of his long and valuable services to the company'. Thirdly, the said payment had been debited in the books of the assessee-company not in the profit and loss account but to the appropriation account, thereby indicating that it was an ex gratia payment or payments made in the nature of capital expenditure. These aspects are absent in the instant case before us. What is more, in the Supreme Court decision there was no finding that the employee expected any gratuity to be paid to him either on death or retirement. In fact there was a negative finding to the effect that there was no expectancy that at the end of the service he would be recompensed for the faithful service. In the instant case the Appellate Assistant Commissioner has recorded a finding that it was natural on the part of the members of the covenanted staff to expect that some payment by way of gratuity would be made to them upon death or retirement, etc., and this finding has been confirmed by the Tribunal in its order. It is, therefore, clear to us that the decision of the Supreme Court in Gordon Woodroffe Company's case : [1962]44ITR551(SC) is clearly distinguishable from the facts which obtained in the instant case.

13. So far as the Bombay decision reported in Sassoon J. David and Co. Pvt. Ltd. v. Commissioner of Income-tax : [1972]85ITR83(Bom) is concerned also, there are certain distinguishing features. In that case the assessee-company was carrying on its business with the assistance of a managing director, a manager and 22 other employees. There was a sale of the whole of the issued capital and transfer of management of the company to Tata Sons Ltd., and under clause 6 of the deed of sale the assessee-company agreed to arrange for the termination of service of all its employees. The board of directors of the company passed a resolution terminating the services of its employees on payment of retrenchment compensation. The board of directors also decided to pay a sum of Rs. 21,200 in commutation of pensions to its employees and an amount of Rs. 16,188 to its managing director in lieu of six months' notice to which he was entitled under his contract of employment. The company claimed the aggregate of these sums amounting to Rs. 1,64,899 as business expenditure. The claim was rejected by the Tribunal and on a reference the company contended that a part of the sum paid was gratuity to its employees. This court held that the fact that the wage bill had been reduced by means of the payments was insufficient to arrive at the conclusion that they were made for commercial considerations; that in the administration of the company there was no practice of payment of gratuity and no legally enforceable claim for such payment against the company. The payments had been described as retrenchment compensation but the retrenchment had been effected not for the purposes of economy but to comply with the requirements of the agreement for sale. This court took the view that the sum of Rs. 21,200 paid as commutation of pensions was an expenditure on account of an existing liability of the company and was deductible. The amount of Rs. 16,188 paid to the managing director under his contract of employment was also deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The rest of the disbursements amounting to Rs. 1,27,511 was not allowable. In terms there was a finding in that case that the termination of service and the payment of compensation were not done wholly with a view to the business requirements of the company and were bound up with the changing of hands of the shares of the company. The decision to pay compensation could not in the circumstances be said to have been taken solely with a view to the business requirement of the company though incidentally the company might have benefit by it. In other words, the payments that were made to the employees, barring the amount that was allowed as a deduction, were bound up with the sale transaction entered into by the assessee-company with Tata Sons Ltd. The payment made to the he is of the deceased member of the covenanted staff in the instant case is very much unlike the payments that were made to the employees in the Bombay decision. It may be pointed out that this court was principally concerned with deciding the question of allowing a deduction claimed either on the ground that they were done solely with a view to the business requirement of the company or not or whether the payments had been made in the interest of commercial expediency or not. In the instant case Mr. Kaka has urged that the deduction has been allowed on a finding recorded by the Appellate Assistant Commissioner that there was natural expectancy on the part of the covenanted staff to receive gratuity either on death or retirement, etc., and, therefore, the question which arises in the instant case is whether the test broadly laid down by the Supreme Court in Gordon Woodroffe Company's case : [1962]44ITR551(SC) has been satisfied or not.

14. As regards the Madras decision in Balarama Varma Textiles Ltd. v. Commissioner of Income-tax : [1973]92ITR485(Mad) the facts were : The assessee paid to its employees gratuity of various amounts which had no relation to their service or salary drawn but on an ad hoc basis and sought to deduct the payments in computing its income. This was disallowed by the departmental authorities and the Tribunal. On a reference, the High Court held that the decision to pay the amounts as gratuity to the employees in question had not been taken during the currency of the service of the employees and as there was no scheme for payment of gratuity, the amounts were not deductible as business expenditure. The question, it must be said, was considered by the Madras High Court in the context of a different test that was adopted for determination and, therefore, the ratio of the Madras decision would not apply to the facts of the present case.

15. The question before us will have to be considered in the context of three separate and distinct tests which have been indicated by the Supreme Court in Gordon Woodroffe's case : [1962]44ITR551(SC) and the question is whether the payment in the instant case satisfies at least one of the three tests so laid down. It is true, as was pointed out by Mr. Joshi, the Supreme Court has laid down three tests for determination of the question : (a) Was the payment made as a matter of practice which affected the quantum of salary (b) Was there an expectation by the employee of getting a gratuity and (c) Was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business According to Mr. Kaka, the test of expectation which has been laid down by the Supreme Court in the aforesaid decision must be deemed to have been satisfied fully having regard to a finding that has been recorded both by the Appellate Assistant Commissioner and the Tribunal in the case. He conceded that there was no scheme as such which obtained between the assessee-company on the one hand and the covenanted staff on the other, but at the same time he urged that it cannot be forgotten that in the case of the assessee-company as settlement had been arrived at between the non-covenanted staff and the assessee-company on August 26, 1955, under which gratuity was payable on certain scale to those employees and it was on an examination of the details of the said scheme of gratuity which obtained qua the non-covenanted staff that the Appellate Assistant Commissioner had recorded a finding of expectancy which had been confirmed by the Appellate Tribunal. That finding has been recorded by the Appellate Assistant Commissioner in the following terms :

'The appellant's representative has also filed before me the terms of the settlement between the appellant-company and non-covenanted staff of the company. Para. 4 of this settlement which deals with the gratuity, gives the details of the scheme of gratuity. It covers contingencies of death, retirement and dismissal for misconduct. On the death, an employee or his representative is entitled to gratuity of 21 days' salary or wages for each year of continuous service subject to a maximum of 12 months. The provision regarding retirement or resignation is also similar except that minimum 15 years' continuous service is required. Taking all these circumstances into account, it cannot be said that the entire gratuity paid to the heirs of Mr. B. D'brass is an ex gratia payment. The appellant-company has a scheme of gratuity for its non-covenanted staff. It is only natural that the covenanted staff also would be in expectation of receiving gratuity on the death or retirement. In view of this, the gratuity paid by the appellant company to its covenanted staff cannot be considered to be an ex gratia payment.'

16. Mr. Kaka further pointed out that after recording the aforesaid finding the Appellate Assistant Commissioner went on to hold that since the gratuity fixed for non-covenanted staff was subject to a maximum of 12 months' salary, in respect of covenanted staff the members thereof could at least expect that much gratuity if not more and, having regard to this aspect of the matter, the Appellate Assistant Commissioner held that part of the gratuity paid to the heirs of Mr. B. D'brass to the extent of Rs. 24,000 being 12 months' salary could be regarded as proper and legitimate business expenditure while that part which was an excess of 12 months' salary will have to be regarded as ex gratia payment and he, therefore, disallowed the excess amount to the extent of Rs. 26,000. Mr. Kaka further pointed out that when the matter was carried in further appeal to the Tribunal, the Tribunal has confirmed this finding of the Appellate Assistant Commissioner in these words :

'In our opinion, the Appellate Assistant Commissioner was right in observing that some gratuity may be paid by the assessee-company to the covenanted staff also. In the absence of any written agreement, in our opinion, the Appellate Assistant Commissioner was right in allowing gratuity payment on a par with that paid to the non-covenanted staff.'

17. Accordingly, the Tribunal upheld the deduction to the extent of Rs. 24,000 and further upheld the disallowance of gratuity to the extent of Rs. 26,000. Mr. Kaka urged that this finding which has been recorded by the Appellate Assistant Commissioner and which was confirmed by the Tribunal, that the test of expectancy was satisfied in the instant case, has not been challenged by the revenue at any stage, not even when it applied for reference to this court. He, therefore, urged that since the test of expectancy which had been laid down by the Supreme Court in Gordon Woodroffe's case : [1962]44ITR551(SC) has been satisfied, it would not be open to the revenue to contended that no part of the gratuity paid to the heirs of the deceased should be allowed as a deduction. We find considerable force in this contention of Mr. Kaka, but by the same token it would not be possible to hold that the test of expectancy has been satisfied in this case qua the amount of Rs. 26,000 that has been disallowed by the Appellate Assistant Commissioner. In this view of the matter, we are of the view that the Tribunal was right in allowing a deduction of the expenditure only to the extent of Rs. 24,000 being the part of the gratuity amount paid by the assessee-company to the heirs of Mr. B. D'brass and further right in disallowing the sum of Rs. 26,000. In the result, the second question is answered thus :

'Only a part of the gratuity to the extent of Rs. 24,000 paid by the assesses-company to heirs of Mr. B. D'brass was an allowable expenditure in the hands of the company.'

18. The assessee will get the costs of the reference from the revenue.


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