BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. The question referred to this court for opinion is :
'Whether, in the facts and circumstances of the case, the Tribunal was justified to hold that the payment of the sum of Rs. 38,509 was an expenditure in the nature of capital and as such not admissible under section 10(2)(xv) of the Act ?'
The facts giving rise to the reference are : The assessee is a private limited company. It succeeded to the business of a partnership. The partnership business was started on May 1, 1944. From the very commencement of the business one J.P. Vaish was appointed its general manager and he continued to be the general manager of the partnership business until June 30, 1947. It may be stated that the accounting period of the partnership business ended every year on the 30th June. On July 8, 1947, Sri J.P. Vaish died. On July 12, 1947, his widow wrote a letter to the proprietors of the firm 'claiming' gratuity equal to the salary and commission earned by him for the accounting year 1946-47, estimating the claim rightly at Rs. 87,000. On July 17, 1947, the claim was admitted to the extent of only Rs. 38,509, which is roughly equal to one-third of the salary and the commission earned by him from July 1, 1944, to June 30, 1947. The amount was paid to the lady on May 22, 1948.
On July 23, 1947, an agreement was entered into by the partners of the firm who were the promoters of the assessee company by which it was agreed to transfer the business of the firm with all assets and liabilities, all rights and obligations and all subsisting contracts with retrospective effect from July 1, 1947. It was also agreed that pending the formation of the company the business would be carried on in the name of the firm in the same manner as if no transfer had taken place. The company was incorporated on June 26, 1948, and on June 30, 1948, a regular sale deed was executed by the proprietors of the firm in favour of the company in pursuance of the agreement. Thus even though the company was actually incorporated only on June 26, 1948, and the sale deed was executed on June 30, 1948, the last day of the accounting period for the assessment year 1949-50, by reason of the agreement the parties understood that with effect from July 1, 1947, the company was the virtual proprietor of the business and the business was being carried on on behalf of it.
Upon these facts the company filed its return of income for the assessment year 1949-50, for the entire period, July 1, 1947, to June 30, 1948. The department accepted the position of the company as virtually carrying on the business during that period and as having earned the income which was returned and the assessment was completed in the hands of the company. The company claimed that the payment of Rs. 38,509 as gratuity to the widow of Sri J.P. Vaish was an admissible deduction under section 10(2)(xv). This was refused by the income-tax authorities and by the Income-tax Appellate Tribunal on the ground that the payment was of a capital nature and was made by the company under the agreement by which it had undertaken the liabilities of its predecessor firm. In this view the Tribunal did not consider it necessary to go into the question of the reasonableness of the payment.
In his arguments before us learned counsel for the assessee has raised the point that having regard to the arrangement between the firm and the company, the company having undertaken all the liabilities with effect from July 1, 1947, and being virtually in charge of the management of the business from that date (even though it was not incorporated until June 26, 1948) the payment was made by the company not under the agreement but as an item of expenditure incurred by itself particularly having regard to the fact that Sri J.P. Vaish had died after the company had taken over the business. The short answer to this argument is, firstly, that this argument was never raised before the Income-tax Appellate Tribunal and was not dealt with by it with the implications involved in it and, consequently, it cannot be said to arise out of the Tribunals order. The second answer is that even if the payment was considered to be a payment by the assessee itself and independently of the agreement, the question would still be whether the payment was of a capital nature or of a revenue nature. If it could be referred to the undertaking or understanding or practice between the company and its employees and officers it might be possible to say that it was with a view to encourage employees to render better or more faithful service to the company. If, on the other hand, there was no such undertaking or understanding or practice and the payment was merely an isolated payment on a solitary occasion governed only by considerations of sympathy or pity then obviously the payment could not have been said to have been incurred even partially, much less 'wholly and exclusively', for the purpose of carrying on of the business of the assessee. There may be a case where having regard to an undertaking or understanding or practice in this behalf low salaries might be acceptable to the employees in the expectation that they would in any case be entitled to a gratuity on death or on retirement. In that case the payment of gratuity would be part of salary or remuneration and would not be an ex gratia payment. The difference would be this that if such a payment is considered to be part of salary or remuneration it would be an instance of expenditure incurred wholly and exclusively for purposes of business. If on the other hand it was merely an ex gratia payment it would be a payment not for that purpose but for some other purpose or with some other object. Whether there was such understanding, undertaking or practice was obviously a matter for evidence. The company was claiming the deduction and the duty to lead evidence and the burden of proving those facts was obviously upon it but it led no such evidence. It did not even advance this argument before the Tribunal. In the circumstances, the learned counsel cannot possibly succeed in his contention that even if the expenditure was treated to be an expenditure directly by the company and not as a part of its liability under the agreement, the expenditure is of a revenue nature deductible under section 10(2)(xv). A similar point arose in a Madras case and the decision of the High Court was affirmed by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. v. Commissioner of Income-tax. The facts there were that a person who was at first an employee of the managing agent of the assessee company for several years and later employee of the company and subsequently was a director of it, was paid a large amount as gratuity by it 'in appreciation of his long and valuable services to the company'. There was no evidence that the company had any scheme for payment of gratuities not did it pay gratuities as a matter of practice. There was nothing to show that the employees had accepted low salaries in expectation of gratuities on retirement or that gratuity was paid for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. In the circumstances, it was held that the amount of gratuity was not an admissible deduction under section 10(2)(xv). The present case is very similar to the Madras case. It has not been argued that if the payment was under the agreement dated July 23, 1947, on account of the liabilities incurred by the predecessor firm it was not in the nature of a capital payment and was deductible under section 10(2)(xv).
The answer to the question should, therefore, be in the affirmative. The department should get its usual costs assessed at Rs. 200.
Question answered in the affirmative.