DIXIT C.J. - The question that arise for determination in this reference under section 66(1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Bombay, at the instance of the assessee, the Kalyanmal Mills Ltd., Indore, (hereinafter referred to as the mills), as stated by the Tribunal is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 66,900 paid to Shri Jall was a permissible deduction under section 10(2)(xv) of the Act in the year of assessment 1952-53 ?'
The material facts are that on 30th August, 1927, Shri Jall was appointed as the managing director of the assessee-mills. In 1933, his salary was Rs. 1,100 per month. In that year, on account of trade depression the mills cut down the salaries of all its employees and members of the staff by twelve and half per cent. This cuts was restored by the assessee-mills in 1941, in the case of all its officers and staff except Shri Jall. It is not known why the cut in Shri Jalls salary was not restored in 1941. The officers and members of the staff of the mills were also paid dearness allowance from 1st July, 1943, and bonus for each of the years from 1941 to 1948. This benefit of dearness allowance and bonus was, however, not given to Shri Jall. In March, 1951, the 'secretaries, treasurers and agents' of the mills decided to restore the cut in Shri Jalls salary with effect from 1st May, 1933, and to pay him dearness allowance from 1st July, 1943, and bonus for the years 1941 to 1948. The board of directors approved this decision of the 'secretaries, treasurers and agents' by passing on 8th November, 1952, a resolution in the following terms :
'The secretaries, treasurers and agents beg to report that in the year 1933, a general cut of twelve and half per cent was imposed on the salaries of all the officers and staff of the mill-company. This cut was subsequently restored in respect of all the officials except in the case of Shri R. C. Jall, the managing Director of the mill-company. As a result of this cut, his remuneration was reduced by Rs. 137-8-0 per mensem. After taking into consideration the meritorious services of Shri R. C. Jall in managing the affairs of the mill-company successfully through the critical times, the secretaries, treasurers and agents have restored the cut in the month of March, 1951, with retrospective effect, i.e., from the year 1933. The arrears on account of the restoration of the cut, the usual twelve and half percent dearness allowance thereon, and the proportionate arrears and bonus paid from time to time, which aggregate to Rs. 66,990 have been paid to him for the period from 1933 to February, 1951, which requires your sanction.
The board takes note of the above and resolves that the restoration of the twelve and half percent cut in the remuneration of Shri R. C. Jall, the managing director of the mill-company, and the payment of the arrears of Rs. 66,990 on account of the restoration of the cut, the usual twelve and half percent, dearness allowance thereon and the proportionate arrears of bonus paid from time to time to him by the secretaries, treasurers and agents is hereby confirmed.'
In accordance with this resolution, a sum of Rs. 66,990 was paid to Shri Jall in 1952. He was also assessed in respect of this amount. In its assessment proceedings for the year 1952-53 the accounting year of which ended on 31st December, 1951, the assessee claimed under section 10(2)(xv) of the Income-tax Act, 1922., a deduction of Rs. 66,990 paid to Shri Jall. The Income-tax Officer disallowed the claim taking the view that the payment made to Shri Jall was 'most extraordinary' and 'not warranted by the facts of the business'; that the boards resolution was silent in regard to the nature of 'meritorious services' rendered by Shri Jall. He also observed that the amount sought to be deducted represented arrears of pay, dearness allowance and bonus relating to the period during which the assessee-mill was not liable to tax as Indore was then a part of an Indian State and the Income-tax Act, 1922, was not operative therein. An appeal preferred by the assessee to the Appellate Assistant Commissioner of Income tax was dismissed.
In the appeal, which was then taken to the Appellate Tribunal, it was contended on behalf of the assessee that the payment made to Shri Jall, though a voluntary one, was yet a payment made out of 'commercial expediency' and was not, therefore, a gratuitous payment, and further that as the assessee accepted the liability for the payment and made the payment during the previous year, it was a legitimate expenditure of the previous year. The Tribunal, while accepting that a payment, though voluntary, could be one made out of 'commercial expediency', held that the payment made to Shri Jall could hardly be said to be one made on commercial considerations. The Tribunal said that no reason had been given why the cut in Shri Jalls salary was not restored in 1941 itself when the cut in the salary of the employees and members of the staff of the assessee-mills was restored in that year; that Shri Jall was given a favoured treatment in that the cut effected in his salary alone was restored from 1st May, 1933; that no reason whatsoever had been assigned why Shri Jall was not paid dearness allowance and bonus in the beginning when it was paid to the other employees of the assessee-mills; that the resolution passed by the board of directors did not clarify the 'meritorious services' rendered by Shri Jall; that Shri Jall might have rendered' such services as to deserve the payments made to him subsequently taking into considerations such past services', but such a payment relating to past services could not be allowed as a legitimate deduction; and that Shri Jall was still in the service of the mills and, therefore, the payment made to him could not be regarded as a gratuity amount. The Tribunal further observed that the payment being admittedly voluntary could not 'partake of the nature of the discharge of a liability'; that there was no evidence whatsoever to show that Shri Jall had ever raised a dispute or made a claim regarding the restoration of the cut in his salary and payment to him of dearness allowance and bonus; and that, consequently, the assessee-mills, when it followed the mercantile method of accounting could not claim that the amount paid to Shri Jall was a liability of the year of account ending on 31st December, 1951. On this view, the Tribunal dismissed the assessees appeal.
Shri Chitaley, learned counsel appearing for the assessee, argued that for the purpose of deduction of the amount paid to Shri Jall, it was wholly immaterial whether the payment was made by the mills voluntarily or compulsorily; that a payment made voluntarily and on the ground of commercial expediency and in order to facilitate the carrying on of the assessees business would be one 'expanded wholly and exclusively' for the purpose of the business; that the resolution passed by the board of directors in 'legal language' only meant that Shri Jall was paid the amount of Rs. 66,990 in the same way and in the same manner as the other officers and members of the staff of the mills were paid; that it was implicit in the resolution that Shri Jalls services and the assistance were necessary to the mills; and that, therefore, the payment was made on grounds of 'commercial expediency'. It was further submitted that the right of Shri Jall to get the amount accrued in the accounting year ending on 31st December, 1951, when the secretaries, treasurers and agents of the mills decided to pay the amount to him; that the amount was actually paid to Shri Jall in the accounting year; and that the payment was an admissible deduction though it was not in respect of services rendered in the trading year.
In reply, Shri Bhave, learned Government Advocate for the department, while approving the decision of the Tribunal, urged that when the cut in Shri Jalls salary was imposed in 1933, there was no liability whatsoever on the mills to restore it; that the payment made to Shri Jall was purely voluntary and not in discharge of the mills liability; that the resolution of the board of directors did not say that the amount was paid to Shri Jall on grounds of 'commercial expediency'; that the expenditure incurred by the mills in paying Rs. 66,990 to Shri Jall had no connection whatsoever with the business; and that the expenditure was one incurred for rewarding Shri Jall for his past services and could not, therefore, be an allowable deduction under section 10(2)(xv) of the Act.
The question that falls for determination turns upon the provisions of the section 10(2)(xv) of the Act, which is as follows :
'10. (1) The tax shall be payable by an assessee under the head profit and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely : ......
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of the capital expenditure or personal expenses of the assessee) laid out or expended wholly not exclusively for the purpose of such business, profession or vocation.'
The controversy in the present case centers round two points, namely, whether the amount paid to Shri Jall was one 'laid out or expended wholly and exclusively' for the purpose of the assessees business, and whether it was on expenditure incurred in the accounting year. The ground principles governing the subject of allowances or deductions permissible on the ground that the expenditure is laid out wholly and exclusively for the purpose of the assessees business are now well-settled. The Supreme Court has indicated in Eastern Investments Ltd., v. Commissioner of Income-tax, Commissioner of Income-tax v. Chandulal Keshavlal & Co., Commissioner of Income-tax v. Royal Calcutta Turf Club and Gordon Woodroffe Leather Mfg. Co., v. Commissioner of Income-tax, the tests to be applied in deciding whether a payment of money is a deductible expenditure under clause (xv) of section 10(2). In the case of Eastern Investments Ltd., the Supreme Court held that in the absence of fraud, the question whether a transaction had the effect of diminishing the assessees taxable income and whether it was necessary for the assessee to enter into that transaction are irrelevant in deciding whether the expenditure relating to that transaction should be allowed under section 10(2) of the Act before its amendment in 1939. The principle laid down in that case is equally applicable for a deduction under section 10(2)(xv). In Commissioner of Income-tax v. Chandulal Keshavlal & Co., it was held by the Supreme Court that in deciding whether an expenditure is a deductible one under section 10(2)(xv), one must take into consideration questions of commercial expediency and the principles of ordinary commercial trading; and that the expenditure may be voluntary, but so long as it is incurred for the assessees benefit the deduction would be claimable. Another test which was laid down by the Supreme Court in Chandulal Keshavlal & Co.s case was that if a transaction is properly entered as a part of the assessees legitimate commercial undertaking in order to facilitate the carrying on of its business, it is immaterial that a third party benefits thereby. In that case, the Supreme Court quoted with approval the following observations of Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. :
'It was made clear in the above cited cases of Ushers Wiltshire Brewery v. Bruce and Smith v. Incorporated Council of Law Reporting for England and Wales that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purposes of the trade.....'
These tests were reiterated in Commissioner of Income-tax v. Royal Calcutta Turf Club . In Gordon Woodroffe Leather Mfg. Co., v. Commissioner of Income-tax,an employee of the managing agent of the assessee-company, who resigned from services, was paid a gratuity of Rs. 40,000 by the assessee-company in appreciation of his long and valuable services to the company. It was not the practice of the company to pay such gratuities and the company had no such scheme. There was also no evidence to show that the employee had accepted a low salary in expectation of a gratuity after retirement or that the gratuity amount was paid for the purpose of facilitating the carrying on of the business of the company or was paid as a matter of commercial expediency. In these circumstances, the Supreme Court held that the claim was not a deductible item under section 10(2)(xv) of the Act, and made the following observations :
'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. Philips. There was no practice in the appellant-company to pay such amounts and it did not affect the quantum of salary of the recipient, 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)
It is in the light of these tests that the question, whether the deduction claimed by the assessee is permissible, must be decided. The question whether the amount claimed as a deductible allowance under section 10(2)(xv) was laid out wholly and exclusively for the purpose of the assessees business is, as observed by the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal and Co., a question of fact in each case to be determined by the fact-finding tribunal and the decision of the Tribunal must be sustained if there is evidence upon which the Tribunal could have based its conclusion about the allowance or disallowance of the deduction. In this connection, it would be pertinent to refer to the observations of Chagla C.J. in Jethabhai Hirji and Co., v. Commissioner of Income-tax, where a deduction on account of a certain amount paid by an employee to his employee was claimed under section 10(2)(xv) on two facts, namely, the existence of an agreement between the employer and the employee with regard to the payment, and the fact of actual payment. The learned Chief Justice said :
'In my opinion, it is erroneous to contend that as soon as an assessee has established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income-tax Officer to take into consideration various factors which would go to show whether the amount was paid as required by the section. For instance, the Income-tax Officer may take into consideration whether the moneys were paid to a near relation of the employer. He may take into consideration the extent of the business and the particular services rendered by the employee which called for a special remuneration at the hands of his employer. He may take into consideration the quantum of the payment made with a view to decide whether the payment was or was not grossly out of proportion to the work done by the employee. If after taking these factors into consideration he comes to the conclusion that the payment was not made wholly and exclusively for the purpose of the business of the assessee, it would be open to him either to disallow the whole sum or a part of the sum paid. The question whether a particular sum was expended wholly and the exclusively for the purposes of such business must essentially be a question of fact to be determined by the Income-tax Officer. But it would be open to the assessee to contend, as it has been contended in this case, that the decision arrived at by the Income-tax Officer was based on no evidence at all. If the assessee satisfies the court that apart from the actual payment and existence of the agreement there were no other factors which were taken into consideration by the Income-tax Officer, then perhaps the court would say that the Income-tax Officer was not justified in coming to the conclusion that he did.'
Now, here, the facts found by the Tribunal are that there was no evidence whatsoever to show that the amount of Rs. 66,990 was paid to Shri Jall as a result of any dispute raised or claim made by him for the restoration of the cut in the salary from 1933 and payment of dearness allowance and bonus; that Shri Jall was given a favoured treatment when his salary was restored from 1st May, 1933, itself, whereas in the case of other employees it was restored in 1941; that the payment to Shri Jall in 1951 of dearness allowance and bonus for the earlier years was inexplicable when no reason had been assigned for not giving him these benefits of the time when other officers and members of the staff of the mills were paid dearness allowance and bonus amounts; that Shri Jall was still in service and the resolution passed by the board of directors gave no indication whatsoever of the commercial expediency which persuaded the assessee-mills to make the payment of Rs. 66,990 to Shri Jall; and that, on the other hand, the resolution admittedly and expressly said that the amount was paid to Shri Jall 'after taking into consideration his meritorious services in managing the affairs of the company successfully through the critical times.' On these facts, there can be no doubt that the amount of Rs. 66,990 which was paid to Shri Jall was in recognition of his past services and was not a voluntary payment with the object of facilitating the carrying on of the business of the assessee-mills. It was merely an exgratia payment unsupported by any practice or understanding between the assessee and Shri Jall or an undertaking by the assessee-mills to Shri Jall of restoring the cut in his salary from 1933 and of paying him dearness allowance and bonus in the same fashion as other employees were paid. As Shri Jall is still in service of the assessee, the payment cannot even be regarded as a payment of gratuity according to any practice of the assessee-mills or in discharge of a claim made by Shri Jall for compensation. The decision of the secretaries, treasurers and agents, and the resolution of the board of directors affirming it, with nothing more, is no evidence for establishing the facts leading to the conclusion that the payment satisfied the requirement of section 10(2)(xv) and the amount paid to Shri Jall was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The assessee was claiming the deduction, and the burden therefore of proving those facts lay on it. No evidence whatsoever was laid by the assessee to show that Shri Jall demanded the amount and that if it had not been paid to him he would have given up the managing directorship and the mills would have lost the benefit of his valuable services, and thus on grounds of commercial expediency determined from the point of view of a businessman the payment of that amount to Shri Jall was necessary in order to retain his services and facilitate the carrying on of the assessees business. When the resolution passed by the board of directors itself says in so many words that the amount that was paid to Shri Jall was for his 'meritorious services in managing the affairs of the mill-company successfully through the critical times', it cannot but he held that the payment was made to Shri Jall out of generosity and not because of any commercial expediency. The observation of the Supreme Court in Gordon Woodroffe Leather Mfg. Co. v. Commissioner of Income-tax, reproduced above, makes it very clear that the payment made to an employee in recognition and appreciation of his long and faithful service does not fall within the provisions of section 10(2)(xv). So also in F.E. Dinshaw Ltd., v. Commissioner of Income-tax it was said that the payment made to an employee out of generosity cannot be regarded as one made out of commercial expediency. In our opinion, on the material on record, the Tribunal was right in disallowing the deduction claimed by the assessee-mills on account of payment of Rs. 66,990 made to Shri Jall.
In this view of the matter, it is not necessary to consider whether the expenditure involved in the making of the payment by the mills of Rs. 66,990 was incurred in the accounting year. But it may be added that if this voluntary payment to Shri Jall in appreciation of his 'meritorious services' in the past had been an admissible deduction, then the expenditure on that account would be clearly one incurred in the accounting year when the assessee decided to pay the amount to Shri Jall and actually paid him. The fact that the payment was in appreciation of the services rendered not in the accounting year but in the previous years would then have been inconsequential.
For these reasons, our answer to the question stated for our decision is in the negative. The assessee shall pay the costs of this reference. Counsels fee is fixed at Rs. 150.
Question answered in the negative.