P.D. Desai, J.
1. The assessee is a private limited company. At the relevant time, it was working as the selling agent of the State Trading. Corporation for cement and asbestos products manufactured by Messrs. Digvijay Cement Co., Ltd., Sikka. One of its employees, M. C. Maloo, who was at the material time the secretary of the asses see-company, was sent to the U.S.A. in the month of -June, 1963, for training in sales technology, of asbestos and cement products. In July, 1963, Maloo suddenly expired in the U.S.A. while undergoing training. On January 4, 1964, the board of directors of the assessee-company passed a resolution to pay compensation in the sum of Rs. 12,500 to the daughter of Maloo in recognition of his past services. On June 13, 1964, a resolu tion was passed in the general meeting of the company approving the aforesaid proposal. The amount was accordingly paid to the daughter of the deceased employee. In the course of its assess ment proceeding for the assessment year 1965-66, the assessec company claimed a deduction under section 37 of the Income-tax Act, 1961, for the amount so paid on the around that it was expended wholly and exclusively for the purpose of its business. The claim was negatived by the Income-tax Officer on the ground that there was no, gratuity or pension scheme and that the assessee-company was not under any obligation to pay such amount. Besides, it was not shown that like compensation was paid previ ously in such circumstances to the heirs of any deceased employee or that there was any practice to pay such amount under similar circumstances. In appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In further appeal, the Income-tax Appellate Tribunal took a con trary view and held that the expenditure incurred by the assessee on this count was laid out wholly and exclusively for business purposes in order to maintain good relations between the employer and the employees and to engender confidence in the manage ment and that it was, therefore, admissible expenditure under section 37.
2. The revenue was aggrieved by the aforesaid decision and at its instance the following question of low has been referred for our opinion by the Tribunal :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in following Rs. 12,500 as an admissible business expenditure incurred wholly and exclusively for the assessee-company's business ?'
3. The question arising for determination in this case is comparatively simple and, prima facie, it would appear that an expenditure of this nature would merit deduction under section 37. However, the revenue strenuously contends that having regard to the facts that, (i) the deceased was a relative of one of the directors of the assessee-company, (ii) the payment was made only in recognition of his past services, (iii) there was no scheme not any established practice nor any contractual obligation justifying such payment, and (iv) there was no evidence to show as to on what basis the amount of compensation was computed, this isolated payment on a solitary oecaion was required to be looked upon as an ex gratia payment governed by consideration of sympathy and generosity and not as having been made wholly and exclusively for the purposes of carrying on of the business of the assessee-company. In support of this submission, reliance was placed on a host of authorities in which similar payment male either to employees or their relatives in facts and circnmstances peculiar to each case has been held to be not deductible under the relevant statutory provision.
4. It would be convenient first to refer to the leading decision of the Supreme Court in Gordon Woodroffe Leather Mfg Co. v. Commissioner of Income-tax, which lays down the guidelines for the decision of the point which arises for our consideration. In that case, one J. H. Philips was at first an employee of the managing agent of the assessee-company for several years and later employee of the assessee-company and subsequently its director. On his retirement he was paid a large amount as gratuity in appreciation of his long and valuable services to the assessee-company. The amount paid as and by way of gratuity was claimed as deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The amount was disallowed by the Income-tax Officer as well as by the Appellate Assistant Commissioner as also by the Income-tax Appel late Tribunal. On a reference, the High Court agreed with the decision of the Tribunal. In the appeal before the Supreme Court it was urged on behalf of the assessee-company that the amount had been paid as a matter of commercial expediency and in the interest of the assesee-company as an inducement to the other employees that if they rendered service in a similar manner neither efficiency and honesty, they would be similarly rewarded, while rejecting the said contention, the Supreme court observed that the amount was paid not in pursuance of any scheme of payment of gratuities nor was it an amount which the recipient expected to be paid for long and faithful service. It was a voluntary payment made not with the object of facilitating the carrying on of the business of the assessee-company or as a matter of commercial expediency but in recognition of long and faithful service of Philips. There was no practice in the assessee-company to pay such amounts and it did not affect the quantum of salary of the recipient. The proper test to be applied in such cases was formulated in the following words :
'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.'
5. On the facts of that case it was found that the test was not satisfied and, therefore, the amount claimed was held to be not a deductible item under section 10(2)(xv) of the Indian Income-tax Act, 1922.
6. It would thus appear that in order that an amount can be claimed as a deductible item under section 37, the true test to be applied is as to whether the payment was made as a matter of practice so as to affect the quantum of salary or whether there was in the mind of the concerned employees any expectation of getting such payment or whether the sum was expendiency the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee. It is required to be borne in mind, however, in this context : (1) that the question as to whether an amount claimed as a permissible deduction was laid out or expended wholly and exclusively for the purposes of the business of the assessee has to be decided on the facts and in the light of the circumstances of each case (see Swdeshi Cotton Mills Co., Ltd. v. Commissioner of Income-tax 1), (2) that the tests laid down in Gordon Woodroffe's case 2 are independent or alternative tests and that any one of them can be applied to determine weather such payment could be treated as a permissible deduction (see British India Tobacco Corporation Ltd. v. Commissioner of Income-tax (3) and (3) that in applying, the test of commercial expediency, the question of the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue (see Commissioner of Income-tax v. Walchand and Co., P., Ltd.)
7. Now let us proceed to consider the case in hand in the light of the aforesaid principles. As the revenue rightly points out, there was no scheme or past practice or antecedent obligation to pay compensation to the next-of-kin of an employee if the assessee-company who died in harness. That circumstance, though relevant, is, however, not decisive of the matter (see India Overseas Bank Ltd. v. Commissioner of Income-tax 5), for, even in the absence of such practice or obligation, the payment could still be treated as a permissible deduction if the test of commercial expediency, and is satisfied (see British India Tobacco Corporation's case 3). It is well-settled that any payment made by an assessee in his character as a trader, out of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expendiency, and in order indirectly to facilitate the carrying on of his business, might still be treated as having been made wholly and exclusively for the purposes of the trade (see Atherton v. British Insulated and Helsby Cables Ltd. 2) It cannot be over looked also that death in harness of an employee is not a matter of every day occurrence and that it may not, therefore, have been thought necessary to adopt a scheme of compensation and no reason. The payment of family pension or gratuity to the dependants of the deceased employee, however, is now a recongnised concept in the field of employment and it has received statutory recognition. It cannot be any longer treated as a bounty or a philanthropic gesture actuated by any compassionate objective. Even if such payment is not provided for by any scheme or contract of employment or otherwise, a demand for the same could still be raised by way of an industrial disput by employees governed by labour legislation and such demand may well be accepted ln the course of an industrial adjudication having regard tothe paying capacity of the employer and any other relevant considerations. If a prudent employer,conscious of the new trend and ethos, voluntarily makes such payment in order to avoid such a dispute and to buy industrial peace and contentment amongst workers, it could certainly be treated as having been made on the ground of commercial expediency. The solitary payment might well mark the beginning of a new practice (and every practice must necessarily originate at same point of time in an action taken for the first time) and in the very nature of things, it cannot be confined to an isolated case, for the employer would then render himself open to the charge of discrimination and land himself in an industrial dispute. It would thus appear, as earlier stated, that not much stress could he laid on the fact that there was no antecedent obligation or prior practice justifying such a payment. It is only a relevant factor but not the decisive test in judging whether the payment was justified on the ground of business expediency.
8. Similarly, though the circumstances that the deceased employee in the present case was a relative of one of the directors of the assessee-company was initially pressed into service in behalf of the revenue presumably to urge that the payment was made with an indirect motive for some considerations aliunde the business, it was ultimately- rightly not relied upon, for the relationship was admittedly distant and that too with a director holding only ten percent. of the total shares of the assessee-company. Against the background of the overall circumstances of the case, this factor pales into insignificance and has not much relevance.
9. The Tribunal has found as a matter of fact in this case that the payment was made to maintain good relations between the employer and employees and to engender confidence in the management. This finding of fact is not under challenge and it has become conclusive. That apart, when compensation is given in circumstances such as those which prevail in the present case, it would not be unreasonable to uphold the claim of the employer that the predominant motive behind the gesture was to demonstrate the interest which he took in the ultimate well-being of his employees and their dependants with the end in view of securing the loyalty and devoted services of all his employees without whose whole-hearted co-operation his business cannot possibly be carried on with efficiency and profit. Such payment would generate in the mind of other employees a sense of confidence that their dependants would be well looked after if their life was cut short while still in service and such sense of security would motivate them to put in their best for the good of the employer. We are conscious that in the present case the resolution sanctioning the amount appears to have stated that the payment was made in recognition of the past services of the deceased employee. However, too much emphasis cannot be laid on the wording of the resolution. The resolution giving compensation to the dependants of an employee who has died in harness has no set formula. The circumstances in which the resolution was adopted have to be considered as a whole and, if on a consideration of such circumstances, the Tribunal came to the reasonable conclusion that the payment was made to maintain good relations and to engender confidence of all the employees in the management of the assessee-company and that it was, therefore, justified on the ground of commercial expediency, then the Tribunal could not be said to have misdirected itself in law.
10. It is true that the basis of the computation of the amount of compensation is not disclosed in the present case. This factor again is not of great relevance in the facts and circumstances of the case and by itself is certainly not destructive of the nature and character of the expenditure if other material factors are borne in mind. It is not in dispute that the amount is reasonable. Besides, it is primarily for the business man to decide as to what expenditure was reasonable and not for the revenue. In these circumstances, in our opinion, merely because no evidence has been led to show as to on what footing the amount of compensation was arrived at in the present case, the claim for deduction cannot be thrown out.
11. It now remains to refer to the authorities cited during the course of the arguments. No useful purpose will be served in discussing these cases in detail because each of the decisions was given in matters where the context,that is, the facts and circumstances in which the expenditure was incurred in each ease, naturally played a vital part in the conclusion arrived a.t. We shall, however, briefly notice the decisions relied upon.
12. In J.K. Woollen . v. Commissioner of Income tax gratuity was paid to the widow of the general manager of the assessee-company on his death. In Lakhamichand Muchhal v. Commissioner of Income-tax gratuity was paid to the munim of the assessee on his retirement. In Andrew Yule & Co., Ltd. v. Commissioner of Income-tax the chairman of the board of directors met with death while travelling not on the assessee-company's business and compensation was paid to his widow. In Teekoy Rubbers (India) Ltd. v. State of Kerala two payments by way of gratuity were made by the assessee-company. Gratuity paid to a superintendent on termination of his services and also to the widow of a superintendent on his death in harness. In Seshasayee Bros. (Travancore) P., Ltd. v. Commissioner of Income-tax two payments were made by the assessee-company. Pension was paid to the widow of a permanent director who died while still in service and gratuity was paid to a retired permanent director. In Balarama Varma Textiles Ltd. v. Commissioner of Income-tax, payment by way of gratuity was made to several employees such as factory manager, clerk and cashier on their retirement. In all such as factory manager clerk, and cashier on their retirement. In all these cases, the amount paid to the employees or their dependants, as the case may be, was claimed as deductible business expenditure by the concerned assessee on the ground of business expediency. However, relying upon the decision in Gordon Wooderoffe's case the claim was disallowed primarily on the ground that since there was no scheme or past practice or antecedet obligation or expectation on the part of the concerned employees with regard to the payment of such amount, such exgratia payment could not be treated as having been made for the purpose of the business of the assessee. In our opinion, these decisions which were given in the facts and circumstances of each case cannot help the revenue. In the first place, we are unable to appreciate, with respect, as to how the mere fact that there was no scheme, etc., can be treated as decisive of the matter in judging commercial expediency. We have already adverted to this point earlier and even at the risk of repetition, say once again, that the Supreme Court did not intend to lay down in Gordon Woodroffe's case that any payment made towards gratuity or pension, which is not justifiable on the ground of prevalent practice should necessarily be held to be an inadmissible deduction. It is one of the alternative tests and all that the Supreme Court laid down was that if there was such a practice, it might go a long way in each satisfying the test of commercial expediency (see British India Tobacco Corporation's case). In the next place in three out of the aforesaid cases, and even in Gordon Woodroffe's case the employee concerned was a highly placed officer such as a director or general member of the company and payment made either to him or to his dependants could not possibly have been treated as offering a general incentive to all other employees at lower level to put in loyal and efficient service in future expectation of receiving such compensation. In the present case, we are not concerned with such a highly placed officer and the considerations governing the present case must, therefore, be altogether different. In the last place, the concept of commercial expediency in the context of and payment made in similar circumstances must change with changing times and the problem deserves a fresh look. As earlier pointed out, payment by way of retirement benefits or family pension is a well-accepted concept in modern times and if an employer makes the beginning and voluntarily- expends money on payment of gratuity or pension or compensation to one or more of his employees or their dependants, without there being any compulsion, statutory or otherwise, taking notice of the altering pattern of the employer-employee relationship, then, the expenditure cannot but lie treated as having been made to earn greater co-operation and loyalty of his employees in whose mind such a gesture would generate a legitimate expectation of being similarly treated. Law cannot take leave of realities and under conditions prevalent in the mid-sixties, such expenditure must be taken to have been incurred wholly and exclusively for the purposes of the employer's business. In our opinion, therefore, the decisions on which the revenue relies cannot help it in the facts and circumstances of the present case.
13. There are four decisions to which our attention was invited in which some expenditure incurred in similar circumstances has been held to be deductible expenditure on the ground of commercial expediency and reference may be made to them. In Indian Overseas Bank Ltd. v. Commissioners of Income-tax the assessee-company granted pension to its general manager on his retirement. There was no general pension scheme but by a resolution passed during the currency of his service payment of pension was agreed to on the condition that no re-employment with any other bank would be accepted by him after retirement without prior sanction of the board of directors of the assessee-company. The Madras High Court took the view that it was a payment as a part of the terms of service agreed upon during the currency of employment and that the payment was made a matter of business expediency in the interest of the assessees business having regard to the fact that the concerned employee had agreed not to accept service after retirement with any other banking institution without the prior consent of the board. In British India Tobacco Corporation's case a director of the assessee-company who was due to retire was continued in service for a further period and the company agreed to pay him certain pension periodically on his retirement. When he retired, the company made a lump sum payment and the amount so paid was claimed as permissible deduction and the Andhra Pradesh High Court upheld the claim on the ground of commercial expediency having regard to the fact that the expenditure was incurred as a result of the modification of the service agreement which was made for securing the valuable service of an employee for a further period and such modification had raised an expectation in the mind of the concerned employee of getting the pension. In Commissioner of Income-tax v. Supreme Motors Ltd., the chairman of the assessee-company died of heart failure in Delhi while on a tour of inspection. The company chartered a plane to have his body sent back to, Jodhpur and incurred certain expenditure for that purpose. It was held that the expenditure incurred by the assessee was incidental to the business carried on by it and that it was allowable. In reaching this decision, the Delhi High Court relied primarily upon the circumstance that the deceased had gone to Delhi on the business of the company and that had he not expired, it would have been the liability of the company to meet his travelling expenses from Delhi to Jodhpur. The expenditure incurred by the assesses-company for carrying the dead body of the deceased was, there fore, the liability of the company which was incidental to the business of the company. These cases were decided on their own facts and though they are not directly helpful in answering the question raised for our determination in the context of the facts of the present case, they indicate the approach required to be adopted while dealing with similar questions. The last-mentioned case, which holds that the liability of the employer does not case on the death of the employee and that if the employer expends money on the deceased employee, who dies in harness, such expenditure might be treated as incidental to the employer's business, broadly supports our view.
14. The last decision to which reference may be made is in Calcutta Landing & Shiping Co., Ltd. v. Commissioner of Income-tax. The assessee company in that case sanctioned pension to the widow of a senior assistant in its employment who met with a violent death while actually performing his duties and the payment so made was held to be a deductible expenditure. The Calcutta High Court in taking this view, expressed itself as under :
'A payment made to employees in the expectation of, creating impetus or encouraging them to put in selfless work for the employer is a payment made out of commercial considerations and or commercial expediency. To have a body of contented and loyal workers, ready to lay down their lives for the cause of the employer, is a blessing to every commercial concern. If a payment be made in such expectation, such payment cannot but be regarded as an expenditure incurred wholly and exclusively fora the purposes of business expediency.....By resolving to pay a pension to the dependants of Baptist, it was not unlikely that some sense of security was being brought about in the minds of the employees that the employer would look after their dependants if anything untoward happened to them in the discharge of their duties. As we have already observed, to have a loyal body of employees is of great commercial expediency and its importance should not be in any way minimised. If the assessee company made a payment to achieve such an object, we are of the opinion that the expenditure was incurred wholly and exclusively for the purpose of business...... There is nothing on the record to indicate that generosity was a special virtue with the assassee. Nr is there anything to indicate that the murdered employee or his widow and children were special favourites of the assessee. In the absence of any such indication, it is but reasonable to hold that the resolution to pay pension was passed by a commercial concern out of commercial consideration. Therefore, the dominant object was to have a satisfied and loyal body of employees and this object was sought to be achieved by making the payment of pension to the dependants of a murdered employee. In other words, the, humane consideration shown to the widow of the murdered employee was not for any spiritual gain or with a compassionate objective but was, a payment made for the purpose of obtaining the earthly advantage of having grateful and loyal employess in its own employment.'
15. The general approach and reasoning adopted in this case completely wupport the view which we are taking in the present case, and the mere circumstance that in the case the concerned employee met with a violent death while actually discharging his duties where as in the present case the deceased employee died in natural circumstances while under going training abroad on behalf of the assessee company would not make the slightest difference in the application of the principle.
16. These four decisions show by and large that the approach of the courts in these matters has been pragmatic and that in the later case a broader view has been taken.
17. From the foregoing discussion it would appear that in the instant case the Tribunal was justified in taking the view that it did and that the payment made to the daughter of the deceased employee of the assessee company was rightly held to be a permissible deduction under section 37. We, therefore, answer the question referred to us in the affirmative and in favour of the asessee and against the revenue. There will be no order as to the costs of the reference.