1. We are concerned in the reference with the assessment year 1961-62, the corresponding previous year being the year ended September 30, 1960. The assessee is a private limited company having the business of running cinemas. It is admittedly a closely held company. Unit March 31, 1958, it was managed by a firm of managing agents, viz., M/s. Kooka Sidhwa & Co. There were two partners of the said managing agency firm, viz. Kaikhushroo A. Kooka and Framji H. Sidhwa. Both the partners were substantial shareholders in the assessee-company also. Under the managing agency agreement, the managing agents were entitled to a commission at the rate of 10% on the net profits of the company. In addition to such commission the partners of the managing agency firm were also drawing remuneration at the rate of Rs. 1,000 per month each. An agreement dated March 31, 1958, was made between these two partners and three others, two of them being the sons of Framji and the third one being the son of Kaikhushroo. This agreement provided that the firm shall resign as managing agents of the assessee-company with effect from the day of March 31, 1958, from which date the partnership also should stand dissolved. There were further provisions regarding the mode of management of the assessee-company with effect from March 31, 1958, from which date the partnership also should stand dissolved. There were further provisions regarding the mode of management of the assessee-company after the ending of the managing agency. These provisions need not be set out at this juncture as we shall have occasion to refer to the said agreement in some detail in the later part of this judgment. The company passed the necessary resolution for giving effect to the resignation of the managing agency and for implementing these arrangements. By a subsequent resolution dated June 26, 1958, it was resolved that Kaikhushroo A. Kooka one of the directors, shall be a director till his lifetime on a monthly remuneration of Rs. 2,000 from June 26, 1958. It was further resolved that, after the death of the said Kaikhushroo A. Kooka, his wife, hirinbai Kooka, should be paid a sum of Rs. 1,000 per month for her life. It was expressly mentioned that this was in view of the long association and service rendered by Kaikhushroo A. Kooka with the company.
2. Kaikhushroo died in 1959 and his widow, Shirinbai, was paid the amount of Rs. 12,000 in accordance with the arrangement described earlier in the accounting year relevant to the assessment year 1961-62. The ITO disallowed the amount observing that it appeared from the resolution that the payment has been made to Shirinbai on account of her husband's past services. No similar payment has been made to anyone else. He considered that the principles laid down by the decision of the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. v. CIT : 44ITR551(SC) were applicable, and applying these principles, the ITO considered the claim for deduction clearly inadmissible. The matter was carried in appeal to the AAC, but the appeal proved unsuccessful. The AAC laid emphasis on the fact that no service had been rendered to the company by Shirinbai. He was unable to admit the deduction of the allowance merely on the ground that the payment was made to the widow on account of the meritorious service rendered to the company by Shirinbai. He was unable to admit the deduction of the allowance merely on the ground that the payment was made to the widow on account of the meritorious service in further appeal by the assessee to the Tribunal. Before the Tribunal, it was contended by the learned counsel for the assessee that the ration of the decision of the Supreme Court in Gordon Woodroffee Leather Manufacturing Co. 's case : 44ITR551(SC) was not
3. applicable to the present case inasmuch as Kaikhushroo had entered into an agreement with the company after the termination of the managing agency and that the payment of Rs. 1,000 per month to his widow was one of the terms of such agreement. This contention found favour with the Tribunal (See para. 3 of the order of the Tribunal). According to the Tribunal, the payment in the present case could not be said to be made ex gratia but was made in pursuance of the agreement of the agreement between various persons interested in the company including the former director. The Tribunal also placed emphasis on the fact that such payment was also to be made to the wife of the other director after the demise of the other director. According to the Tribunal, in the place of a fixed remuneration and percentage of profits, Kaikhushroo and Framji agreed to take fixed remuneration for their lifetime and a reduced payment after their death to their wives on a certain basis. According to the Tribunal, therefore, the term to pay a fixed amount to Kaikhushroo's widow could not in these circumstances be taken to be dictated by any extra-commercial consideration and such payment would pass the test laid down in s. 10(2) (xv). According to the Tribunal therefore, it was allowable as a deduction under the said section. It is from this decision of the Tribunal that the reference has been made to this court at the instance of Commissioner under s. 66(1) of the Indian I. T. Act, 1922, and the following question has been referred to us for our opinion.
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 12,000 paid to Bai Shirinbai was allowable as deduction in determining the business profits of the assessee-company under section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'
4. It becomes necessary before considering the rival contentions to note the provisions of the agreement dated March 31, 1958. As stated earlier, the agreement is between the two partners of the managing agency firm of M/s. Kooka Sidhwa & Co., viz. Kaikhushroo A. Kooka and Framji H. Sidhwa and their sons, Maneck and Dhunjishaw being the sons of Framji and Sorab being the son of Kaikhushroo. The company is not a party to this agreement. The agreement provides for resignation of the managing agents with effect from March 31, 1958, and the dissolution of the said partnership firm of M/s. Kooka Sidhwa & Co. from the identical date. Clauses 2 and 3 provide that Kaikhushroo and Framji respectively would continue as directors of the company for their lives on a monthly remuneration of Rs. 2,000. The two clauses also provide for remuneration at the rate of Rs. 1,000 to be paid to the respective widows for their respective lives. We are concerned with clause 2, which may be reproduced :
'2. That Mr. Kaikhushroo shall continue as a director of the company till his life and shall receive a monthly remuneration of Rs. 2,000. After his lifetime his wife, Bai Shirinbai Kaikhushroo Ardeshir Kooka, shall be paid Rs. 1,000 per month for her life.
There are provisions for Maneck and Dhunjishaw, the sons of Framji Sidhwa, to be appointed as joint managing directors on certain terms. Clause 5 provides for Sorab, the son of Kaikhushroo, also to be appointed as a director of the company on certain terms. A perusal of this agreement shows that it was between persons who effectively were in a position to control the assessee-company, and by agreeing between themselves they substituted one system of management, viz., that of the managing agents for another. Hereafter the company was not to be managed by the firm of M/s. Kooka Sidhwa & Co., but by the two joint managing directors and the other three directors. The agreement also provided as to what remuneration was to be paid to each of these five directors., It also mentions monthly amounts which are payable to the widows of Kaikhushroo and Framji after their respective deaths.
As stated earlier, there is mention in the statement of case that the company passed the necessary resolution for implementing these arrangements. However, only the resolution dated June 26, 1958, providing for the appointment of Kaikhushroo A. Kooka as the lifetime director of the company on monthly remuneration of Rs. 2,000 and for providing monthly payment at the rate of Rs. 1,000 to his widow after his death, has been made part of the statement of case as annex. 'B'.
It is obvious, therefore, that the Tribunal fell into a total error in accepting the submission of the counsel for the assessee based on the footing that there was an agreement Kaikhushroo and company. It is true that there was an express agreement between the people who controlled the company which embodied certain decisions taken amongst themselves altering the basis of the management of the company after March 31, 1958, and deciding upon certain amounts being paid as remuneration to themselves and in two specific cases to the widows of two of them, viz., Kaikhushroo and Framji.
It was submitted that the Tribunal has found that the payment passed the test laid down in s. 10(2)(xv) and it also found that it was not dictated by any extra-commercial considerations. It was contended that in view of these findings the burden lay on the revenue to show that the payment was made by reason of any extra-commercial considerations. In our opinion, this is not the proper approach to the question under consideration. The proper test to be employed was laid down by the Calcutta High Court in Andrew Yule & Co. Ltd. v. CIT : 49ITR57(Cal) and has been properly set out in the headnote of the decision as follows :
'In order to decide whether a particular amount is laid out or expended wholly or exclusively for the purposes of the assessee's business, the test to be applied is' Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration If the expense is found to bear an element other that the trade or business interest of the assessee, the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be. When the assessee places all the facts and circumstances before the revenue authorities, the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that the expense is allowable under section 10(2)(xv) is an inference of law to be deduced from the facts of the case. The question is a mixed one of law and fact.'
5. It many be mentioned that this test has been cited with approval in a Division Bench decision of Our High Court in N. Sirur & Co. Pvt. Ltd. v. CIT : 109ITR432(Bom) .
6. Thus, there appears to be no question of any particular finding arrived at by the Tribunal of the nature as contended by the learned counsel for the assessee. The Tribunal has found certain facts which are mentioned in the statement of case. From these facts and circumstances, it is required to be decided whether the expenditure was necessitated or justified by commercial expediency. This is the ultimate finding to be given and the answer to be given to the question referred to us is an inference of law to be deducted from the facts of the case, or, as the Calcutta High Court has observed, a mixed question of law and fact.
7. The payment to the widow in the assessment year under consideration was sought to be justified and can be sought to be justified on several of the various alternative footings. It will be required to set these out and then to examine them one by one to see whether the allowance on the basis of any of them would be justifiable or not : (1) The payment was made by the company in pursuance of an agreement. It was liable to make such payment under the agreement and, therefore, the payment could not be regarded as a sort of ex gratia payment. It was to meet the company's contractual liability. An allied aspect of this very proposition may also be indicated which was, (2) that even if the company may not be regarded to be a party as such to the agreement of March 31, 1958, an overall picture was required to be taken of the entire transaction, viz., the agreement followed by the resolution. The reason for passing the resolution was to implement the original agreement and the company, therefore, must be properly regarded as carrying out the terms of the earlier agreement. It would appear that this approach found favour with the Tribunal, which also was impressed by the fact that the two partners had agreed to take remuneration as directors and remuneration for their widows in lieu of what they were entitled to receive as partners of the managing agency firm. (3) The remuneration paid to the widows must be regarded and will have to be justified as part of the remuneration payable to Kaikhushroo and Framji, respectively, a deferred remuneration in view of the fact that they accepted remuneration at a lower figure than what they would be getting as partners of the managing agency firm. (4) Even on the footing that this was a pension provided to the widow for the past services of her husband, the payment can be justified as an allowable deduction under s. 10(2)(xv). It will become necessary to consider these submissions one by one.
8. Starting with the first two of these, the error that the Tribunal fell into in considering that the company was a party to the agreement or bound by that agreement must be avoided. The agreement is one among those controlling the company. As stated earlier, it substitutes one method of management for another. We need not speculate as to the reason why the managing agency firm of management was given a go-by, but those familiar with the history of the company legislation in India will find no difficulty in arriving at the correct answer. Previously, Kaikhushroo and Framji, as partners of the managing agency firm, were managing the company and were getting certain remuneration plus commission. In lieu of this system of management and not in lieu of what they were getting a new system of management was proposed. There are to be five directors, two of them, viz., Framji sons being mentioned as joint managing directors. Kaikhushroo and Framji are to be directors for life, and it is provided that they should get remuneration at Rs. 2,000 per month during their lives; it is further agreed that their widows should get Rs. 1,000 per month during their respective lives.
9. It is difficult, even if an overall picture is taken, to consider that this was a regular agreement of parties at arm's length and the company was giving something in return for something that it received. Under the new arrangement, which was to be effective after March 31, 1958, those controlling the company as we may call them. As far as the company is concerned, no service was received by the company at any time from the widows not was it receivable either under the agreement (to which the company was not a party) or under the resolution. The payment, therefore, will be required to be justified and allowed if at all only on the footings (3) and (4), viz., as a deferred remuneration of the two lifetime directors or as pension paid to widows for the long services rendered to the company by their husbands.
10. It was submitted that Kaikhushroo and Framji, who were getting large amounts from the company as partners in the managing agency firm agreed to take a lesser amount as whole time directors and one of the factors which weighed with them for obtaining a lesser amount was the provision for giving lifetime remuneration at the rate of Rs. 1,000 per month to the widows. This will not be a proper way to look at the arrangement. Firstly, the company is not a party to the overall arrangement at all. Further, it is not to be supposed that the company merely pays the amounts either to the managing agents or to the directors without receiving any return or consideration from them. The managing agents were supposed to manage the company's affairs and for such management they were being paid certain amounts. Hereafter, a new system of management with perhaps different obligations, rights and liabilities comes into being, viz., management by a board of directors with two joint managing director and they are to be paid different amounts. There is no question (in the instant case) of any payment of commission based on a percentage of the net profits to the board of directors or any of them. It will be improper to consider that Framji and Kaikhushroo had given up something to the company and that for such giving up were receiving something party for themselves directly and partly in the form of a deferred remuneration for their wives. Further, there would be an error in considering this to be deferred remuneration of the two lifetime directors, Kaikhushroo and Framji. These two were to serve the company as such directors only after March 31, 1958, and in case of Kaikhushroo after the resolution passed by the Company on June 26, 1958. The remuneration to be paid to the widow of Kaikhushroo does not depend upon the length of service of Kaikhushroo to the company as director for any particular period to time. It is not as if it provided that after Kaikhushroo serves as a director of the company for five years that his widow is to be paid the monthly widow is to get the remuneration for her life irrespective of the period of service rendered by Kaikhushroo as director. If kaikhushroo serves the company as a director for his lifetime, then whether his death occurs within a few months or a few years or after a considerable number of years, the widow has to receive her remuneration for her lifetime. The idea of deferred remuneration seems to have appealed to the Tribunal as would be found from para, 4 of the order but is not borne out by the facts and will be required to be rejected.
11. The remuneration paid to Shirinbai then cannot be justified either as paid by the company in pursuance of its contractual obligations and can also not be regarded as part of deferred remuneration payable by the company to her husband, Kaikhushroo. It will have to be allowed or not allowed on the footing that it is a sort of pension provided to the widow by reason of the long service which Kaikhushroo had rendered to the company.
12. Once the allowance of the amount is required to be considered on this footing, which, in our opinion, is the proper footing on which it is to be considered, it will be obvious that it will not be allowable since it does not fulfil any of the tests laid down by the Supreme Court in Gordon Woodroffee Leather . : 104ITR711(Guj) , would not be available in the case before us. It is true that Kaikhushroo was long associated with the company. Till March 31, 1958, he was managing the company as a partner of the managing agency firm of M/s. Kooka Sidhwa & Co. After June, 1958, he was to work as a lifetime director of the company and the joint managing directors were to act under the control and supervision of the two lifetime directors, Kaikhushroo and Framji. In a commercial and practical sense, Kaikhushroo and Framji were the company and it would not be proper to regard them as ordinary employees, for whom a special provision is required to be made and which provision can be justified and regarded as allowable as it would induce in the other employees the instinct of giving their best to the company, since the company would look after both the employee and the employees' dependents in case of death of the employees. The arrangement between Kaikhushroo and Framji and the three sons, which was partly given effect to by two widows of the two founder directors. It may be a very laudable object, but the question with which we are concerned is : was the provision of pension a provision made for commercial considerations. We have already noted the basic purpose of the agreement between Kaikhushroo, Framji and their sons. It was to provide for as to how the company was to be managed after cesser of the managing agency. The agreement further provided as to what emoluments each of the five parties thereto would receive, what position they would hold, and also provided for payment to Shirinbai and Pirobai after the death of their respective husbands. The amounts were not paid to the five parties or to the two widows in lieu of or by way of substitution of the remuneration and the commission payable under the managing agency agreement, nor can it be regarded as deferred remuneration to the two founder directors. As far as the company is concerned, in our opinion, this was clearly a monthly pension to be paid to the two widows and the two founder directors during their respective lives. The widows had rendered no service to the company. There was no basis of arriving at the amount of monthly payment to them. Such payment also, as stated earlier, could not be equated with the gratuity or family pension paid to the widow of an ordinary employee who had served the company for long. We have given reasons why such payment to an ordinary employee may be allowed on a commercial consideration as moneys wholly or exclusively laid out or expended for the purpose of trade or business. In our view, the payment will not pass the test indicated in Gordon Woodroffe Leather Manufacturing Co. 's case : 44ITR551(SC) . The payment, therefore, of the amount in the assessment year cannot be allowed under s. 10(2)(xv) of the Indian I.T. Act, 1922, or s. 37 of the I.T. Act, 1961.
13. Our attention was drawn at the bar to a number of authorities, Mr. Joshi relied upon the decision of a Division Bench of this court in N. Sirur & Co. Pvt. Ltd. v. CIT : 109ITR432(Bom) . The payment there was made to the widow of the managing director of the company under one of the clauses of the agreement. However, there were certain peculiarities of the agreement which have been noted in that decision. The decision, however, does not rest on the peculiarities although it must be stated that it notes them with special emphasis. In the aforesaid decision, it is noted that there is no material brought on record to shows that the managing director would not have served the company except for the provision in the contract. It is further observed that a mere term in the contract will not by itself be regarded as sufficient to show that it was an expenditure for the purposes of the company's business within the provisions contained in s. 10(2)(xv). Although there are material differences between the facts in our case and the facts under consideration in N. Sirur & Co. 's case : 109ITR432(Bom) , there are observations in the said case which would seem to apply and that case must be regarded as being in favour of the revenue.
14. Mr. Dastur, on behalf of the assessee-company, drew our attention to CIT v. Fairdeal Corporation Pvt Ltd. : 108ITR280(Bom) , where the amount was paid by way of gratuity to the widow of the erstwhile managing director. One of the factors which weighed strongly with the court was the fact that for several years the managing director had admittedly accepted lesser remuneration and forgone a part of the commission that he was entitled to under the agreement with the company but in the years in which there was substantial profit. The widow had brought this aspect to the attention of the directors of the company, which had motivated the board in sanctioning a reasonable amount by way of gratuity to the widow. The amount was also determined on the basis of the years of service rendered by the managing director. It was on all these considerations that the court confirmed the view of the Tribunal that the payment to the widow was dictated by commercial prudence and commercial expediency.
15. It will be rare to find that the facts of one case are identical with the facts of another. The totality of the circumstances will have to be considered and on that basis the proper inference of law will be required to be drawn as indicated by the Calcutta High Court in the passage from the decision in Andrew Yule & Co. Ltd. 's case : 49ITR57(Cal) , which we have earlier extracted. We have considered the totality of the facts and circumstances before us. We have considered the various alternative footings which were submitted for our consideration on the basis of which the amount can be allowed under s. 10(2)(xv). As stated earlier, we are unable to accept the submissions on any of the footings.
16. In the result, it will have to be held that the Tribunal took an erroneous view of the matter and the question referred to us is, accordingly answered in the negative and against the assessee.
17. The assessee will pay to the revenue the cost of the reference