Madhava Reddy, J.
1. The following question has been referred under Section 256 of the Income-tax Act, 1961.
'Whether on the facts and in the circumstances of the case the sum of Rs.88,000/- paid by the assessee to secure a pension to the Director on his retirement is a permissible deduction in the computation f the asessee's business income?'
2. The assess is a Limited Company incorporated in the United Kingdom and carrying on business in buying and processing tobacco and as commission agents for other non-resident Companies. It has branch for the purchases and processing of tabacco in Runtur in Andhra Pradesh State, It employs large number of Indian Personnel and labour to carry on its business. Shri D.N. Murthy an Indian National took up employment in the Company in 1938 as the resident Manager of the Branch at Guntur on a salary of Rs.500/- and a bonus. in 1949 he became a Director of the Company and was remunerated by a salary and a commission on purchases of tobacco leaf. He was however not admitted to the benefit of Provident Fund Scheme introduced in 1946 to which all other employees were entitled. The terms of his service were incorporated in an agreement dated 4-7-1950. Sri Murthy was due to retire in or about 1957. But in view of f his invaluable service the asessee company intended to retain him. When he was in England in connection with the business affairs, after a free the frank discussion. it was agreed between the Board of Directors and Sri Murthy that he should continue in service for a further period of three years and the same was recorded by way of a resolution as Minute No.7 on 19-12-1957 in the following words:
'Following the long and frank discussions between Mr. Murthy and the Management Committee on the subject of his ultimate retirement, Mr. Murthy confirmed to the Broad his willingness to continue his Agreement with the Company for another three years.'
In continuation of the above resolution on the same day, the assessee company by another resolution resolved to pay him a person of $750 per annum for a period of ten years commencing from the date of his retirement in the following words;
'In appreciation of Mr. Murthy's invaluable services since the inception of the Company, it was unanimously resolved that he be paid a pension of $750 per annum for a period of ten years commencing from the date of his retirement in 1960.'
A few months before his retirement at a meeting of the Board of directors of the Company held in London, a further resolution was recorded to the following effect;
'It was resolved that in consideration of Mr. Murthy's past services to the Corporation since 1938 in the capacity of Resident Manager and then Resident Director he be granted a pension of Rs.10,000/- per annum payable to him or to his estate, as the case may be, for a period of ten years certain, the 1st payment to commence in April, 1961.'
Sri Murthy eventually retired from service of the Company in October, 1960. The assessee Company on 8-12-60 resolved to entrust the liability for payment of pension to Shri Murthy to the Life Insurance Corporation by making an outright payment. The resolution was in the following words:-
'The Company having assumed the liability to pay Mr. D.N. Murthy a pension of Rs.10,000/- per annum payable on 1st April, in each year for a period of 10 years, it was resolved that the obligation under the Director's resolution dated 13-7-1960 should be entrusted to the Life Insurance Corporation in India by payment of Sterling $ 6594/19/10 on 1st January, 1961,'
In pursuance of this resolution a sum of Rs. 88,000/- was shown in the Books as payment to the life Insurance Corporations in discharge of obligation of pension to Resident Director and transfer of balance of provision to profit and loss account. The assessee's claim to deduct this sum of Rs.88,000/- as an expenditure incurred wholly and expenditure incurred wholly and exclusively for the purpose of business carried on by it, was rejected by the Income-tax Officer. That rejection was upheld by the Appellate Assistant Commissioner as well as the Tribunal mainly on the ground that where was nothing to indicate in the resolution that Sri Murthy was persuaded by the Company not to retire but to continue for three years to train its personnel, that there is no documentary evidence that he actually did so, that there was no practice in the Company to pay such pension and that the pension was only paid in appreciation of the past service of Sri Murthy.
3. The resolutions extracted above would clearly show, that Sir Murthy wad due to retire inn or about 1957. It is also clear, that Sri Murthi had rendered invaluable services to the Company from its inception and the Company was anxious to retain him in service for a further period of three years. Minute No.7 further discloses that there was a long and frank discloses that there was a long and frank discussion between Sri Murthi and the Managing Committee on the subject of his retirement which would give an indication that while the Assessee Company was anxious to retain him for a further period of three years, Sri Murthy was not willing to continue in service on the same terms and conditions and ultimately the prior agreement of service dated 4-7-1950 was modified by way of Minute No.7 and Minute No.8 recorded on 19-12-1957, In view of those resolutions, the service agreement of Sri Murthy itself stands modified. While Sri Murthy greed to continue and render the important services required of him to the Company for a period of three years,, the Company on its part agreed to not only pay him his salary but also pay further a pension of $750 per annum for a period of ten years commencing from the date of his retirement in 19690, How absolutely important it was for the company to secure the services of Sri Murthy for a period of three years is not for any one else to judge than the Company itself., The invaluable services rendered by Sri Murthy in the past referred to in the resolution may have been the basis for requesting him to continue in service for a further period of three years and Sri Murthy may not have agreed to continue in service without a pension being secured to him. The payment of pension thus in the context cannot be deemed to be in consideration of his past services. The payment of pension is as a result of the modification of Service Agreement which was for securing for a further period of three years. That was a liability incurred by the Company long before the date of his retirement and was incurred wholly and exclusively for the purpose of busies carried on by the company. The Income-tax Authorities including the tribunal in our opinion were not correct in holding that there is no evidence to show holding that there is no evidence to show that he would not have continued in service but for the terms of payment of pension. The Company incorporated acts through its Board of Directors and all acts of the Board of Directors are recorded by way of Minutes which are required to be maintained by the Statute under which the Company is incorporated. That is admissible and unimpeachable evidence of what transpired, those resolutions regulate the business of the Company as well as its rights and liabilities vis-a-vis its employees and sometimes even the third parties. There is no basis for rejecting these resolutions as inadmissible and requiring further proof of the variation of the terms of employment of Sri Murthy. That apart the genuineness of those resolutions cannot be doubted, for there was no occasion for a British Company to pay an Indian National a large sum of money gratuitously It was however argued on the strength of a decision of the Supreme Court of Gordon Wood-Roffee and Co.v. Commr, of Income-tax, 4 ITR 551 : AIR 1962 SC 11361 that 'the proper tests to apply in a case like this are whether the payment was made as a matter of practice which affected the quantum of salary or there was a expectation by the employee of getting a gratuity or the sum of money was paid on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.' On the facts of this case, it is clear that the payment made to the Life Insurance corporation was made 'on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the Corporation' and there was also an expectation on the part of the employee getting the said sum. These two requirements are fully satisfied for Sri Murthy when he was due to retire in 1957, agreed to continue in service only in expectation of the payment of the pension for a period of ten years and the Company likewise did not intend to pay him gratuitously in view of his past services but agreed to pay the pension with a view to secure his services for a further period of three years. BY on stretch of imagination can this payment be treated as a gratuitous payment to Sri Murthy. In the decision relied upon for the Revenue , the payment that was made was not pension but gratuity . That apart , the decision to make that payment was taken on the expiration of term of service. In fact it was decided upon after the employee's resignation was accepted.
4. The other test viz. that the payment should have been made as a matter of practise, was applied in those circumstances. The Supreme Court in our opinion did not intend to lay down that any payment made contrary to the practice prevailing as to the payment of pension or gratuity should necessarily be held to be an inadmissible deduction. In our opinion, what the Supreme Court intended to lay down was, that if there is such a practice it would go a long way to satisfy the main test laid down by the Supreme Court viz, that it was not a gratuitous payment and that it was a payment on the ground of commercial expediency to facilitate the carrying on the business. It is clear from the judgment of the Supreme Court that these are two alternative tests that could be applied to determine whether such a payment could be held to be a permissible deduction. In the instant case, in our view the resolutions recorded on 19-12-1957 vary the terms of the service agreement of the assessee Company with Mr. Murthy. As a result of the above, Sri Murthy had an expectation of getting the pension and the Company had incurred that liability on the ground of commercial expediency to indirectly facilitate the carrying on of its business. It was only in discharge of that liability that the subsequent two resolutions were adopted after his retirement and the payment of Rs. 88,000/- was made to the Life Insurance Corporation for securing the payment of pension to Sri Murthy. This deduction in our opinion is clearly a permissible deduction in computation of the assessee's business income. We accordingly answer the question in favour of the assessee. The assessee will have its costs. Advocate's fee Rs.250/-.
5. Answered accordingly.