1. This reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, West Bengal-II, Calcutta, arises out of the income-tax assessment of Messrs. Chloride and Exide Batteries (Eastern) Pvt. Ltd., Calcutta, the assessee for the assessment year 1963-64, the relevant previous year having ended on the 31st August, 1962.
2. The facts found and/or admitted are, inter alia, as follows : One R. Knight was the manager of the Bombay branch of the assessee. Knight had originally joined a company known as the Chloride Electrical Storage Co. (India) Ltd., on the 26th July, 1926, and was employed there till 1st January, 1950, when the business of sale of the said company as also the services of Knight were taken over by the assessee. By a letter dated the 26th September, 1961, the assessee informed Knight of its intention to pay an amount of 4,000 (in rupees 53,333) on his retirement and thereafter passed a resolution to that effect on the 19th February, 1962. The rupee equivalent of 4,000, viz., Rs. 53,333 was paid to Knight on his retirement on the 31st August, 1962, during the relevant accounting year and in the assessee's account the payment was shown under the head ' Salaries, wages and bonus amount '.
3. In its assessment the assessee claimed a deduction of the said sum of Rs. 53,333. The Income-tax Officer noted that there was no resolution authorising payment of gratuity to the entire staff of the assessee nor was it shown that the assessee had decided to pay gratuity to each of its senior staff. The Income-tax Officer also found that this payment to Knight was not made under any policy followed by the assessee. He also held that it had not been established that this payment of gratuity to Knight was made exclusively out of business consideration. Accordingly, he disallowed the claim.
4. On appeal, the Appellate Assistant Commissioner found that there was no contractual obligation to pay any gratuity to Knight and that there was no general resolution of the assessee for payment of gratuity to its senior executives and prior to the payment no gratuity had been paid to any of its senior executives. Applying the principles laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Company v. Commissioner of Income-tax : 44ITR551(SC) , the Appellate Assistant Commissioner upheld the decision of the Income-tax Officer.
5. Being aggrieved, the assessee went up in further appeal before the Income-tax Appellate Tribunal. Further documents, including a letter dated the 26th September, 1961, written by a director of the assessee to Knight, a copy of a resolution of the assessee dated the 19th February, 1962, and a chart showing payment of gratuity to various employees of the assessee for the years 1959, 1960, 1961 and 1962 were filed before the Tribunal. It was contended that Knight had prior knowledge of the gratuity to be paid to him and the resolution to pay the same having been passed during the currency of his service he expected the same. It was also contended that there was a prevailing practice of payment of gratuity to the staff of the assessee on retirement. It was contended that the tests laid down by the Supreme Court in the case of Gordon WooAroffe Leather Manufacturing Co. : 44ITR551(SC) had been fulfilled in the case.
6. The revenue contended that it did not appear from the chart filed that gratuity was ever paid to any senior executive. It was further contended that under the terms of his appointment Knight was not contractually entitled to any gratuity and that the assessee had no general scheme to pay gratuity.
7. The Tribunal was, however, satisfied from the evidence on record that Knight was intimated about the payment of gratuity to him before his retirement and that the board of directors of the assessee passed their resolution to pay such gratuity before the retirement of Knight. The Tribunal held that though there was no general resolution to pay gratuity, the assessee had satisfied the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather^ Manufacturing Co. : 44ITR551(SC) and allowed the deduction of the said sum of Rs. 53,333.
8. From this order of the Tribunal the following question has been referred.
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 53,333 paid as gratuity to Mr. Knight was allowable as deduction '
9. Mr. A. K. Sengupta, learned counsel for the revenue, has contended before us that the chart filed before the Tribunal did not disclose any basis on which a lump sum of Rs. 53,333 was decided to be paid to Knight. Basis for payment to the other employees was shown as 15 days' basic salary for every completed year of service before introduction of the provident fund scheme in October, 1947, whereas Knight joined the assessee only in 1950.
10. Mr. Sengupta contended further that mere intimation to Knight immediately prior to his retirement that he would receive the gratuity would not lead to any expectation on his part. A gratuity scheme or an established practice for payment of gratuity is required to create sufficient expectation.
11. He submitted that it had been held by the Income-tax Officer that the payment of gratuity to Knight was not exclusively out of business considerations and this finding had been affirmed by the Appellate Assistant Commissioner. The Tribunal did not advert to these findings at all and did not enquire whether this amount had been laid out or expended wholly and exclusively for the purposes of the business of the assessee.
12. Mr. Sengupta also contended that the finding of the Tribunal that all the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Company : 44ITR551(SC) have been satisfied in the instant case was patently erroneous as the only test satisfied was that of ' expectation '. Even there the finding of the Tribunal was that it was the assessee and not its employee who was given the intimation as to the proposed gratuity.
13. Mr. Sengupta finally contended that the facts found in this case were not sufficient to the court to answer the question referred and the matter ought to go back to the Tribunal for determination of further facts.
14. It will be convenient at this stage to consider the decision of the Supreme Court in the case of Gordon Woodroffe Leather . was incorporated as a private limited com' pany in 1922 and became the managing agent of the assessee. One J. H. Phillips was employed in the managing agent company from 1922 to 1935 and from 1935 he became an employee of the assessee and ultimately became its director in 1940. On the 22nd March, 1949, he wrote a letter to the assessee expressing his intention to resign from the board of directors with effect from the 4th April, 1949, upon his retirement from the employment of the assessee and requested that his resignation be accepted. On the 24th March, 1949, the board passed a resolution that his resignation be accepted and that in appreciation of his long and valuable services to the company he should be paid a gratuity of Rs. 50,000, the assessee contributing Rs. 40,000 and the managing agent contributing the balance. a similar resolution was passed at an extraordinary general meeting of the share-holders and before the end of the accounting year the said sum of Rs. 40,000 was paid.
15. The assessee appealed to the Income-tax Appellate Tribunal which upheld the order of the Appellate Assistant Commissioner.
16. On the above facts the question before the Supreme Court was whether the said sum of Rs. 40,000 paid to the employee on his retirement from the services of the assessee was not an admissible deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
17. It was contended on behalf of the assessee that the said sum had been paid as a matter of commercial expediency and in the interest of the assessee as an inducement to other employees that if they rendered service in a similar manner with efficiency and honesty they would be similarly rewarded. It was submitted that the assessee had not acted with any oblique motive and in good faith. The Supreme Court noted that the said amount was paid not in pursuance of any gratuity scheme nor was it an amount which the recipient expected to be paid but that it was a voluntary payment. The object of this payment was not facilitating the carrying on of the business of the assessee or, as a matter of commercial expediency, the payment was made in recognition of long and faithful service of the employee concerned. There being no prevailing practice of payment of such amounts, it did not affect the quantum of salary of the recipient. The contentions of the assessee were rejected and the Supreme Court observed as follows (page 555) :
' 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). '
18. Mr. Sengupta contended that this decision of the Supreme Court must be understood in the context of its facts, the basic question being whether such payments did come within the four corners of the said Section 10(2)(xv) corresponding to Section 37 of the later Act. It had to be decided in each case whether the payment was commercially expedient, that is whether it was laid out or expended wholly and exclusively for the purposes of the business of the assessee. Accordingly, the tests laid down by the Supreme Court should be construed conjunctively and not disjunctively.
19. Mr. Sengupta cited a large number of decisions of different High Courts to show how the said decision of the Supreme Court has been construed and applied. In their chronological order the said decisions are as follows :
(a) J. K. Woollen Manafacturers Ltd. v. Commissioner of Income-tax : 46ITR1123(All) . The facts in this case were that soon after the death of the general manager of the assessee on the 8th July, 1947, his widow claimed gratuity on the salary and commission earned by her husband for the accounting year 1946-47, ending on the 30th June, 1947. An amount was paid to the widow by way of gratuity on the 22nd May, 1948. In the relevant assessment year the sum paid by way of gratuity was claimed as a deduction but was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. On a reference the Allahabad High Court applied the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. : 44ITR551(SC) and found that the assessee had no scheme for payment of gratuity nor did it pay gratuity as a matter of practice. There was nothing to show that the employees had any expectation of gratuity. The payment could not be shown to have been made for the purposes of facilitating the carrying on of the business of the company or as a matter of commercial expediency. In these circumstances, the High Court held that the amount paid was not admissible as a deduction under Section 10(2)(xv).
(b) Lakhamichand Muchhal v. Commissioner of Income-tax : 48ITR562(MP) . In this case, a registered firm paid a sum of Rs. 12,000 to its ex-munim. by way of gratuity on his retirement and the amount paid was claimed as a deduction in the computation of its income in the relevant assessment year. 'It was found that it was not the practice of the assessee to pay gratuity to its employees and this payment was the first of its kind. There was also no evidence to show that the employee expected a gratuity when he entered service or that the gratuity was given as part of any scheme to give gratuity to the employees in future as an incentive for better service. On these facts, the principles laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. : 44ITR551(SC) was applied and it was held that this payment of gratuity was not allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
(c) Teekoy Rubbers (India] Ltd. v. State of Kerala : 60ITR350(Ker) . In this case, a sum of Rs. 15,000 was paid to the widow of the superintendent of the rubber plantation who died while in the service of the assessee and a sum of Rs. 500 was paid to another superintendent on termination of his employment. There was nothing on record to show that there was any connection between the purpose of the payment and the future conduct of the business of the assessee. Even the resolution sanctioning the payment as gratuity was not in evidence. In the case of the payment of Rs. 500 to the other superintendent, it was found that he was not entitled to participate in the regular gratuity scheme provided for the labour. On these facts, the Kerala High Court following the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. : 44ITR551(SC) held that the payments were ex gratia and could not be supported on the ground of commercial expediency,
(d) Commissioner of Income-tax v. Indian Molasses Co, P. Ltd. : 78ITR474(SC) . The facts in this case were that the assessee had arranged to pay pension to its managing director on his retirement. In 1948, a sum was set apart for the purpose and in each of the six subsequent years a specific amount was delivered to a trust for taking out a deferred annuity policy to secure an annuity payable to the director concerned for life after he attained the age of his retirement and in the event of his death before that date for a payment of an annuity to his widow The Supreme Court held that it had to be established that the amount set apart in 1948 was laid out and expended wholly and exclusively for the purpose of business of the assessee before it could be claimed as a revenue expenditure and for that purpose remanded the matter back to the Tribunal.
(e) British India Tobacco Corporation Ltd. v. Commissioner of Income-tax : 79ITR41(AP) . The facts in this case were that an employee was due to retire in 1957 but in view of valuable services rendered by him the assessee decided to retain him in service and it was agreed between the board of directors of the assessee and the employee that his services would continue for a further period of 3 years. On the same day another resolution was passed by which it was decided to pay to the employee a pension for a period of 10 years commencing from his retirement. A few months before his retirement, another resolution was passed to the effect that he should be granted a pension of Rs. 10,000 per annum for a period of 10 years from his retirement commencing from April, 1961. After his retirement the assessee arranged for payment of his pension through the Life Insurance Corporation by making an outright payment in discharge of the obligation of pension to the employee concerned. On the question whether the payment was deductible as an expenditure, the Andhra Pradesh High Court applied the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. : 44ITR551(SC) and held that the payment 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 company. The High Court also noted that that was an expectation on the part of the employee for the said sum. In its judgment the High Court observed as follows (page 45) :
' The Supreme Court, in our opinion, did not intend to lay down that any payment mads contrary to the practice prevailing as 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 of 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.' (f) Balarama Varma Textiles Ltd. v. Commissioner of Income-tax : 92ITR485(Mad) . In this case, the assessee paid to its employees gratuity of various amounts on an ad hoc basis. The assessce's claim for deduction of such payments in computation of its income was disallowed by the revenue authorities. On a reference, the Madras High Court found that there was no material to show that the decision to pay such gratuity had been taken during the currency of the employment of the employees concerned and held that such decisions had been taken after the retirement of the employee concerned. There was also no evidence of any uniform practice or method followed by the assessee in making the payments. Applying the tests laid down in the case of Gordon Woodroffe Leather . : 44ITR551(SC) , the High Court held that the amounts were not deductible as business expenditure.
(g) Commissioner of Income-tax v. Laxmi Cement Distributors Pvt. Ltd. : 104ITR711(Guj) . The facts in this case were that the assessee had sent its secretary to the United States of America for training. While abroad the said employee died suddenly in July, 1963. In 1964, the assessee paid, compensation of Rs. 12,500 to the daughter of the deceased and claimed deduction of this amount in its assessment for the assessment year 1965-66 under Section 37 of the Income-tax Act, 1961. The Tribunal held that the payment was an admissible expenditure under Section 37. On a reference, the Gujarat High Court applied the tests laid down in Gordon Woodroffe Leather . : 44ITR551(SC) and held that the tests laid down in Gordon's case were independent or alternative tests and that any one of them could be applied to determine whether such payment could be treated as a permissible deduction. The High Court held father that though there was no scheme or past practice or antecedent obligation to pay compensation to the next-of-kin of an employee of the assessee who died in service the same would not be decisive 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 was satisfied. Payment of family pension or gratuity to the dependants of a deceased employee was a recognised claim in industrial law and if a prudent employer, conscious of the new trend voluntarily made such a payment in order to avoid a possible future industrial dispute and bought industrial peace and contentment such a payment should certainly be treated as having been made on the ground of commercial expediency. Even a solitary payment might pass this test.
(h) Commissioner of Income-tax v. Oxford University Press : 108ITR166(Bom) . In this case, the relevant facts were that a member of the covenanted staff of the assessee after long years of service died suddenly. At the timeof his death the deceased was drawing a salary of Rs. 24,000 per year. The assessee paid a sum of Rs. 50,000 as and by way of gratuity, roughly on the basis of 2 years' salary payable and claimed the amount as an allowable expenditure. The Appellate Assistant Commissioner held that as there was a gratuity scheme in respect of the non-covenanted staff, it was only natural that the covenanted staff would also be in expectation of receiving gratuity on the death or retirement and, therefore, the payment should not be considered to have been made ex gratia. But the amount was held to be excessive and only one year's salary was allowed as a deduction. The Tribunal upheld this order. On a reference, the Bombay High Court applied the tests laid in Gordon Woodroffe Leather . : 44ITR551(SC) and held that the said tests were separate and distinct. One of the said tests was a test of expectation. The High Court upheld the order of the Tribunal on the test of expectation.
(i) Commissioner of Income-tax v. Fairdeal Corporation Pvt. Ltd. 0043/1976 : 108ITR280(Bom) . The facts in this case were that the managing director of a company, the assessee, was entitled under the terms of his employment to a remuneration of Rs. 30,000 per year plus a commission of 10 per cent, of the net profits and in addition a car allowance of Rs. 250 per month. From 1952 onwards when the assessee was in difficulties he drew much less than what he was entitled to and forewent his salary. Thereafter even when the company made substantial profits he did not draw the commission he was entitled to. Four years after his death his widow requested the assessee to pay her a sum of Rs. 24,000 as a gratuity for services rendered by her husband and for having helped the assessee in times of difficulty. The board of directors by a resolution dated the 31st April, 1963, sanctioned the payment of a sum of Rs. 24,000 and the assessee claimed the same as a deduction. On these facts, the Bombay High Court answered considering the case of Laxmi Cement Distribtttors Pvt. Ltd. : 104ITR711(Guj) and observed that the Gujarat High Court in that case went too wide but agreed that the Gujarat High Court was right in upholding the claim of the assessee on the facts found.
On the facts before it the Bombay High Court held that the payment was dictated by commercial prudence and expediency. The payment was not unreasonable and the assessee was entitled to claim deduction of the same.
(j) Commissioner of Agricultural Income-tax v. Vellimala Estate 0065/1975 : 110ITR372(Ker) . In this case, the assessee, in the assessment year 1967-68, had paid a sum of Rs. 4,322.36 as gratuity to workers who had voluntarily retired. This amount was paid ex gratia and as special consideration for services rendered.
20. The Tribunal upheld the claim of the assessee and allowed the same to be deducted in the computation of the assessee's income. On a reference, the Kerala High Court held that it was not found whether the payments were connected with the future conduct of the business of the assessee. Nor could it be ascertained whether the payments were dictated by commercial expediency. Accordingly, the matter was remanded to the Tribunal for re-hearing.
21. Mr. Sengupta also cited Airways (India) Ltd. v. Commissioner of Income-tax : 62ITR281(Cal) , Indian Overseas Bank Lid. v. Commissioner of Income-tax : 63ITR733(Mad) , W. T. Suren & Co. (P.) Ltd. v. Commissioner of Income-tax : 80ITR602(Bom) , Seshasayee Bros. (Travancore) Pvt. Ltd. v. Commissioner of Income-tax : 82ITR442(Ker) and Sassoon J. David & Co. Pvt. Ltd. v. Commissioner of Income-tax : 85ITR83(Bom) . The facts in these decisions are entirely different from the facts in the case before us and in our opinion it is not necessary to consider the same any further for our purposes.
22. Dr. Debi Pal, learned counsel for the assessee, contended, on the other hand, that the facts in the instant case satisfied at least one test laid down by the Supreme Court in Gordon Woodroffe Leather . : 44ITR551(SC) , namely, that the employee concerned had reasonable expectation to receive the amount as gratuity. He submitted that at no stage the bona fides of the payment have been questioned nor had it been alleged that the amount paid was excessive and not dictated by commercial prudence. The employee concerned had been employed under the assessee and its predecessor-in-interest since 1926 till 1962, i.e., over 36 years, and, in view of the length of his service, the amount of Rs. 50,000 paid by way of gratuity could not in any event be considered to be excessive.
23. He contended further that the tests laid down by the Supreme Court in Cordon Woodroffe Leather . : 44ITR551(SC) were clear and unambiguous and they were necessary to be read disjunctively and as alternative tests and not conjunctively. He invited us to follow the cases cited where Gordon's case : 44ITR551(SC) has been construed and it was held that the tests laid down by the Supreme Court were disjunctive arid alternative tests.
24. In the instant case, the Tribunal has found as a fact that :
(a) Since 1959, the assessee in each year has paid some gratuity to its employees.
(b) In September, 1961, about one year prior to his retirement and during the currency of his service, Knight was informed by one of the directors of the assessee that he would be paid gratuity.
(c) A resolution sanctioning payment of gratuity to Knight was duly passed by the board of directors of the assessee.
25. From such facts, the Tribunal concluded that the payment of gratuity in the instant case fulfilled the tests laid down by the Supreme Court in Gordon's case : 44ITR551(SC) and was admissible as a deduction under Section 37 of the Income-tax Act, 1961, corresponding to Section 10(2)(xv) of the earlier Act of 1922.
26. We do not find any basis for the finding of the Income-tax Officer that this payment was not exclusively out of business consideration. The contention of Mr. Sengupta that the Tribunal did not enquire into this aspect of the case is without any substance. In our view, each of the tests laid down by the Supreme Court in Gordon's case : 44ITR551(SC) is meant to determine whether any amount paid as gratuity has been spent wholly and exclusively for the purpose of the business of the assessee and thus fall within Section 10(2)(xv) of the earlier Act of 1922 or Section 37 of the 1961 Act. If a particular payment satisfies any of the said tests then further investigation whether other tests are satisfied would, in our opinion, not be necessary.
27. We respectfully follow the decision of the Andhra Pradesh High Court in the case of British India Tobacco Corporation Ltd. : 79ITR41(AP) and the Bombay High Court in the case of Oxford University Press : 108ITR166(Bom) and hold that the tests laid down by the Supreme Court are disjunctive and alternative. From the facts found it has been held that the test of 'expectation' has been directly satisfied. In our view, the test of commercial expediency is also indirectly satisfied. If gratuity is paid as a matter of course or practice or if by assurance or understanding expectation is engendered in the mind of an employee then withholding of gratuity cannot be prudent business practice. Even without any expectation similar payments in certain cases have been held to be commercially expedient: Vide Laxmi Cement Distributors Pvt. Ltd, : 104ITR711(Guj) and Fairdeal Corporation Pvt. Ltd. 0043/1976 : 108ITR280(Bom) .
28. In that view, the contention of Mr. Sengupta that payment of the amount of Rs. 50,000 to Knight by way of gratuity had no basis is of little relevance. It has not been laid down by the Supreme Court and the other High Courts that the quantum of gratuity paid must have any fixed basis.
29. At no stage it was contended by the revenue that the amount paid was excessive or unreasonable.
30. Lastly, the contention of Mr. Sengupta that Knight did not have sufficient expectation that this gratuity would be paid to him is also unacceptable to us. On the facts found a conclusion can be safely drawn that Knight had sufficient expectation that the gratuity would be paid to him.
31. Payment of gratuity to employees at the time of their retirement is not a new or a. novel concept in India. The Supreme Court in Gordon's case : 44ITR551(SC) , has not laid down the length or duration of the expectation in the mind of 'the employee. In this case, it has not been found nor contended that the payment of gratuity to Knight was something unexpected. The prevalent practice of payment of some gratuity to the employee has been found and it has also been found that Knight was assured of payment of gratuity about one year prior to his retirement. In our opinion that concludes the matter.
32. For the reasons given above we answer the question referred in theaffirmative and in favour of the assessee. The reference is disposed ofaccordingly. In the facts and circumstances, there will be no order as tocosts.
C. K. Banerji, J.
33. I agree.