1. This is a reference under s. 66(1) of the Indian I.T. Act, 1922, at the instance of the Commissioner, and the following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, in computing the income of the company for the material year the pension payment of Rs. 6,672 is an allowable deduction ?'
2. We are concerned in this reference with the assessment year 1961-62 for which the accounting year is the year ending March 31, 1961. The assessee is a company which deals in liquor and has also income from agency commission and allowance. The controversy in the present reference is about the allowability of pension paid to one R. Preston, who was an employee of the company for more than thirty years. He commenced the employment with the company as an assistant and ultimately rose to the position of a director. He retired in 1956, but his services were continued to be retained till the end of September, 1959. At the time of retirement his salary amounted to about Rs. 2,500 per month. He had no service agreement with the company. The company had also no regular scheme for payment of pension to its retired employees; but a scheme for payment of gratuity to retired employers although it was found that he had not made any additional approach in the matter. On September 26, 1957, the board of directors of the assessee-company passed a resolution granting pension to Preston at the rate of Rs. 556 per month for a period of ten years. We shall quote the relevant portion of the said resolution a little later on. ADAG The claim for deducting the pension in computing the company's income was first made before the ITO at the time of reassessment for 1960-61. The ITO considered the merits of the claim but rejected it on several grounds. He emphasised the fact that Mr. Preston did not have any service agreement with the assessee-company nor did the company have any rules and regulations for the granting of pension. He had asked the representative of the assessee to file a copy of the resolution of the board of directors of the company, which also was not done. For the next year also the ITO did not allow the amount of pension to be deducted in the assessment of the assessee-company.
3. The assessee-company carried the matter in appeal for both the years. The AAC held that the pension granted to Mr. Preston could not be held to be gratuitous. He noted that a gratuity scheme had been introduced for all the employees who retired after 1957. He accepted the statement made on behalf of the assessee that one employee, a peon, who had retired before this date (and who was, therefore, not entitled to any gratuity under the said scheme) was given pension. According to the AAC, Preston had made a demand for pension privileges, although he had not agitated for the same as the other employees did. In his view the grant of the pension to Mr. Preston was the incurring of a liability by way of amicable settlement and had to be treated in the same manner as incurring of a liability after the adoption of agitational methods by the employees. The AAC considered the pension as not excessive and, therefore, decided to allow the same.
4. The department carried the matter in second appeal to the Income-tax Tribunal. The Tribunal decided in favour of the department for 1960-61, but in this reference we are not concerned with assessment year. Before the Tribunal the department relied very strongly on Gordon Woodroffe Leather Manufacturing Co. v. CIT : 44ITR551(SC) . The Tribunal, however, distinguished the facts of the case and held that the assessee was entitled to allowance in the amount of Rs. 6,672 during the assessment year in question.
5. At this juncture the material portion of the resolution of the board of directors may be fully set out :
'No. 1236. Mr. G. A. D. Porter reported that it has been the intention of the company to award a pension to Mr. R. Preston on his retirement from the company's service, in recognition of his services to the company in India, extending over some 34 years.
6. Although Mr. Preston is still in the employ of the company (in terms of resolution No. 1124 of October 11, 1956), he had asked that the intention of the board in this matter be placed on record.
7. It was accordingly resolved that in recognition of Mr. R. Preston's past services to the company, to grant him and/or his dependents named below a pension of Rs. 556 (rupees five hundred and fifty-six) per month for a period of ten years, to be remitted to England at the rate of exchange ruling on the date of remittance, to be payable subject to and in accordance with the following provisions and until otherwise resolved :
(1) Commencing date :- The pension shall commence upon and as from the date of Mr. Preston's retirement from the company's service with the consent of the company or upon and as from the date of his death whilst still in such service (whichever of such dates shall be the earlier).
(2) Recipients :- Subject as below provided, the pension shall be payable to the following persons, if and so long as they shall respectively be living and in the following order :-
(a) to Mr. Preston during his life, and after his death,
(b) to his wife, Mrs. Eileen Margaret Preston, during her life, and after her death,
(c) to their son, Richard Preston during his life.
(3) Cessation :- The pension shall in any event cease to be payable at the expiration of ten years from the commencing date notwithstanding that all or any of the above-named recipients may then be living.'
8. Mr. Joshi on behalf of the revenue submitted that the tests laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co.'s case : 44ITR551(SC) were not satisfied on the facts as found by the Tribunal. In the above case it was observed (pp. 554, 555) :
'In our opinion on the findings as given the payment in dispute does not fall within the provisions of section 10(2)(xv). The amount was paid not in pursuance of any scheme of payment of gratuities not was it an amount which the recipient expected to be paid for long and faithful service but it was a voluntary payment not with the object of facilitating the carrying on of the business of the appellant-company or as a matter of commercial expediency but in recognition of long and faithful service of Mr. J. H. Phillips. There was no practice in the appellant-company to pay such amounts and it did not affect the quantum of salary of the recipient.'
and finally at page 555 it was further observed :
'In our opinion the proper test to apply in this case is was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and, therefore, the amount claimed is not a deductible item under section 10(2)(xv).'
9. The aforesaid decision of the Supreme Court and other decisions which have applied the tests enunciated by the Supreme Court in Gordon Woodroffe Leather . : 108ITR280(Bom) . It was observed by Tulzapurkar J., speaking for the Bench, that the concluding passage from the decision of the Supreme Court, which we have earlier extracted, clearly brings out the fact that the three tests indicated by the Supreme Court are alternative tests and that each one of them is independent of the other. In the Fairdeal Corporation's case : 108ITR280(Bom) , counsel for the assessee had very strongly relied upon the decision of the Gujarat High Court in CIT v. Laxmi Cement Distributors P. Ltd. : 104ITR711(Guj) . The Division Bench of this court observed that some of the views propounded in the said decision could be regarded as rather wide, but that there were one or two aspects indicated by the Gujarat High Court, with which the Division Bench was in complete agreement. It was observed at page 291 of the report (108 ITR) as under :
'For instance, the Gujarat High Court has clearly stated that though in that case the resolution sanctioning the amount stated that the payment was in recognition of the past service of the deceased employee, too much emphasis could not be placed on the wordings of the resolution and that the circumstances in which the resolution was adopted will have to be convent question will have to be decided. Similarly, the Gujarat High Court has further observed that in
applying the test of commercial expediency, the question of reasonableness of the expenditure had to be judged from the point of view of the businessman and not of the revenue. These observations of the Gujarat High Court are relevant to the issue which is arising before us in the instant case.'
10. Mr. Joshi drew our attention to a later decision of this High Court in N. Sirur and Co. P. Ltd. v. CIT : 109ITR432(Bom) , where payments made to the widow of the managing director of the assessee-company under a particular clause of the managing director's agreement with the company were held to be not allowable under s. 10(2)(xv) of the Indian I.T. Act, 1922, and s. 37 of the I.T. Act, 1961. The peculiar feature of the agreement was that it contained no provision whereby the managing director was to be given any benefit if he worked as such for the full period of the agreement. And that under the clause under consideration payment was to be made to the widow only if an unfortunate event like the managing director dying during the tendency of the agreement occurred. In this context, the court observed as under (p. 439) :
'As we have stated above, one can understand if the object was to benefit Sir Chandavarkar after the period of the agreement in view of his long and faithful services in the past so that other managing directors may think that such payment would be made to them and, therefore, could do their best to promote the interests of the business so as to make it very profitable, but in fact Sir Chandavarkar was not likely to get any benefit by way of pension or otherwise.'
11. As far as N. Sirur and Co.'s case : 109ITR432(Bom) is concerned, it would appear that it was dealing with a situation totally different from the one before us. The payments to the widow were held not allowable under s. 10(2)(xv) and s. 37 of the respective I.T. Acts. But we are concerned with the pension paid to an employee who had served the assessee company for over thirty years.
12. It is true that the pension was not paid in pursuance of any scheme of payment of gratuities or any scheme for payment of pensions. But it has been found that a gratuity scheme was introduced in 1957 in which year Preston was serving the company, though his regular employment had come to an end. He was then in the position of a person who had just missed having the benefit of the gratuity scheme. He was expecting (as is noted in the resolution that the company will give him some kind of retirement benefit and it is this benefit which is provided for in resolution No. 1236 passed by the board of directors of the assessee-company on September 26, 1957. It is also found by the tribunal that a similar benefit had been earlier extended to another employee, a more humble one, who had also missed having the benefit of the gratuity scheme on account of his retirement from the service of the company being prior to the introduction of the scheme. Thus, the payment can be regarded as being made in lieu of a benefit available under the gratuity scheme or any other retirement benefit scheme or any other retirement benefit scheme Again, the facts are not comparable to Gordon Woodroffe Leather Manufacturing Co.'s case : 44ITR551(SC) , where no practice to make such payment had been established. One such example has been clearly found by the Tribunal; this would be the second case of its type and not an isolated payment to a specifically favoured employee. Finally, it had been recognised in the Fairdeal Corporation's case : 108ITR280(Bom) that the matter is to be judged by applying the test of commercial expediency. The question of reasonableness of the expenditure is required to be viewed from the point of view of the businessman and not of the revenue. In this connection it has to be noted that the AAC has found the amount of pension as not excessive. It appears to be amount 25% of the salary drawn by Preston at the time when the resolution was passed by the board of directors.
13. Bearing all these circumstances in mind it is not possible to say that this was a purely voluntary payment. It appears to be some benefit provided to an employee who was expecting such benefit. It was certainly for his long and faithful services to the company. But that would not by itself disentitle the payment being allowed as a deduction in the year under consideration. There was an earlier instance of such pension benefit being provided to another employee, and the other employees who were in the regular service of the company in 1957 would be thenceforward covered by the gratuity scheme adopted in that year. It would appear that the facts are not at all similar to the facts considered by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co.'s case : 44ITR551(SC) and no compelling circumstance has been brought to our notice which would induce us to differ from the approach or conclusion of the Tribunal.
14. In the result, the question referred to us is answered in the affirmative and in favour of the assessee.
15. The revenue will pay to the assessee the costs of the reference.