1. In this reference under Section 256(1) of the I.T. Act, 1961, we are concerned with the following questions of law :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that a sum Rs. 50,000 paid to the two retiring directors was allowable as revenue expenditure on grounds of commercial expediency ?
2. If the answer to the above question is in the affirmative, then, whether the liability to pay the sum arose during the accounting year relevant to the assessment year 1964-65 and was, therefore, deductible in the assessment for the said year '
2. The assessee is a private limited company. The assessment year involved is 1964-65, for which the relevant previous year commenced on June 1, 1962, and ended on May 31, 1963.
3. The assessee claimed before the ITO that Rs. 50,000 paid to the two retiring directors was deductible in the assessment for the aforesaid year.
4. The ITO found that 400 out of 600 shares of the assessee-company were held by those two directors and the balance shares were held by the managing director. He also found that the services of those two directors were terminated with effect from May 31, 1963, and that the agreement between the assessee and those two directors relating to the termination of their service was executed on 3rd August, 1963, and that the payment of Rs. 25,000 to each of those retiring directors was described in that agreement as gratuity or ex gratia payment. Under this agreement, the amount of Rs. 50,000 was payable by 20 monthly instalments and the first of such instalment was payable on or before the 10th September, 1963.
5. In these circumstances, the ITO disallowed the claim. The AAC upheld the order of the ITO.
6. The assessee stated before the Tribunal that there was friction between the managing directors and those two retiring directors which was hampering the business of the assessee. It was further stated that as the managing director held minority shares he was unable to get rid of those two directors who were holding up the progress of the assessee's business and that those two directors ultimately retired on condition that the assessee-company would pay them Rs. 50,000 as compensation and their shares would be purchased by the managing director at their face value. Attention of the Tribunal was drawn to the fact that Rs. 60,710 paid to those two directors as their remuneration in the accounting year was allowed by the ITO. It was also shown that after those two directors left the assessee-company a new director was appointed in their place and Rs. 7,500 as remuneration was paid to that new director.
7. It was submitted that by paying Rs. 50,000 the assessee had saved an annual recurring payment of over Rs. 50,000 by getting rid of those two undesirable directors. It was also pointed out to the Tribunal that the board of directors passed a resolution on May 31, 1963, authorising the managing director to grant compensation to the outgoing directors at the rate of Rs. 25,000 each on their retirement as settled. The resolution also provides that an agreement has to be executed in that behalf by these two directors with the assessee-company. It was submitted that Rs. 50,000 was paid on the ground of commercial expediency and this amount was laid out wholly and exclusively for the purpose of the assessee's business and, therefore, it was a deductible expenditure.
8. The departmental representative did not agree with the aforesaid legalarguments and also pointed out that the accounting period ended on31st May, 1963, the agreement was executed on 3rd August, 1963, and thepayment was not made in the accounting year. It was, therefore, argued that the liability to pay the aforesaid compensation did not arise in the accounting year.
9. A number of cases were also cited before the Tribunal by both the parties.
10. The Tribunal found that the aforesaid amount was paid to the outgoing directors as compensation for termination of their service as they were not found desirable in the interests of the assessee-company. The Tribunal, after considering all the facts and circumstances of this case, also accepted the arguments of the assessee and allowed the claim.
11. Mr. B. K. Bagchi, learned advocate for the revenue, argues before us that Rs. 50,000 is not an allowable deduction in view of the principles laid down by the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT : 118ITR261(SC) .
12. We are, however, not impressed by it. The facts of the aforesaid case are different from the facts of the instant case before us. That apart, the Supreme Court allowed the appeal filed by the assessee by holding that the expenditure incurred by the assessee was deductible as a revenue expenditure. It was also held that the amount, if expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee, has to be allowed as a revenue expenditure in view of the third test laid down in its earlier judgment in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT : 44ITR551(SC) .
13. The aforesaid test laid down in Gordon Woodroffe's case directly applies to the facts and circumstances of this case and, therefore, we answer question No. 1 in the affirmative and against the revenue.
14. Although it was argued before the Tribunal on behalf of the revenue that the liability to pay the aforesaid amount did not arise during the accounting year, the Tribunal did not decide that point. In view of the judgment of the Supreme Court in the case of CIT v. Scindia. Steam Navigation Co. Ltd. : 42ITR589(SC) , it must be held that question No. 2 arises out of the order of the Tribunal and accordingly we will deal with it.
15. Those two directors retired on the last day of the accounting year. On that day, the aforesaid resolution was passed by the board of directors. The resolution authorised the managing director to grant compensation to those two directors on their retirement as settled between them. It also says that an agreement, in that behalf, has to be entered into by the assessee with those two directors.
16. The agreement was entered into on the 3rd August, 1963. Under the agreement the compensation was payable by twenty monthly instalmentsand the first of such instalments was payable on or before 10th September, 1963, as found by the ITO.
17. This finding was not challenged by the asscssee either before the AAC or before the Tribunal, The payments were also made after the accounting year in terms of the aforesaid agreement. This is also the finding of the authorities below.
18. In view of the aforesaid facts, it must be held that the liability to pay the aforesaid amount did not arise in the accounting year relevant to the assessment year 1964-65.
19. In the premises, we answer question No. 2 in the negative and in favour of the revenue.
20. There will be no order as to costs.
R.N. Pyne, J.
21. I agree.