Skip to content


Commissioner of Income-tax Vs. Health and Co. (Calcutta) P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 131 of 1969
Judge
Reported in[1978]114ITR605(Cal)
ActsIncome Tax Act, 1961 - Section 256(1); ;Income Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax
RespondentHealth and Co. (Calcutta) P. Ltd.
Appellant AdvocateBalai Pal and ;A. Sengupta, Advs.
Respondent AdvocateDebi Pal and ;Manisha Seal, Advs.
Cases ReferredIndian Cable Co. Ltd. v. Their Workmen
Excerpt:
- .....severed its connection asregards the loan of staff with m/s. lyons (india) pvt. ltd. after the indiancompany had discontinued its business in tea, the assessee began to exporttea to all persons including the london company. the indian companyretrenched some of their staff consequent on the assessee's terminating theprevious arrangement of getting the staff on loan from that company andperhaps also due to its closing its own export activity. the assessee-company thereupon entered into an arrangement with liptons ltd. inorder to attend to the export business thereafter. liptons ltd. were paidat an agreed rate depending on the quantity of tea exported. as a resultof the retrenchment, the indian company paid retrenchment compensationdue under the industrial disputes act. there was a.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961, we are concerned with the assessment year 1962-63. The question in respect of which this reference arises is whether the sum of Rs. 1,51,008 was allowable as a deduction in the hands of the assessee. The assessee is a subsidiary of J. Lyons, (London) (hereinafter called 'the London company'). The London company had another subsidiary by the name of Lyons (India) Pvt. Ltd. (hereinafter called ' the Indian company'). The assessee was purchasing tea and exporting it to the London company. The assessee-company was purchasing tea in India and exporting it to U.K. and other countries but its transactions were not with the London company. The assessee did not have any staff of its own for effecting these purchases. The necessary staff was maintained by the Indian company. The assessee-company utilised for several years the services of the said staff and was making payments to the Indian company, on an agreed basis. . The assessee, however, had sustained losses in the earlier years. During the year ending on 31st March, 1961, the turnover of the assessee Was Rs. 58.63 lakhs and it had sustained a loss, as per its books, of Rs. 87,163. There were similar losses in the earlier years. It is not necessary to refer in detail to those losses. At the end of the relevant year the assessee had an unadjusted loss of Rs. 2,58,268 computed under the Income-tax Act. In the relevant accounting year, for a short period, M/s. Lyons (India) Pvt. Ltd. made available its staff towards the assessee's business. Lyons (India) Pvt. Ltd., however, discontinued their business in tea. Itwas stated that the company had not been wound up and was at the relevant time an existing company. The assessee severed its connection asregards the loan of staff with M/s. Lyons (India) Pvt. Ltd. After the Indiancompany had discontinued its business in tea, the assessee began to exporttea to all persons including the London company. The Indian companyretrenched some of their staff consequent on the assessee's terminating theprevious arrangement of getting the staff on loan from that company andperhaps also due to its closing its own export activity. The assessee-company thereupon entered into an arrangement with Liptons Ltd. inorder to attend to the export business thereafter. Liptons Ltd. were paidat an agreed rate depending on the quantity of tea exported. As a resultof the retrenchment, the Indian company paid retrenchment compensationdue under the Industrial Disputes Act. There was a certain arrangementregarding insurance policy, which was also made with the Life InsuranceCorporation. The total sum for these purposes amounted to over Rs. 3 lakhs.The assessee was debited with 50 per cent, thereof, namely, Rs. 1,51,008.This amount was claimed as deduction by the assessee in its income-taxassessment.

2. The Income-tax Officer held that these payments did not constitute 'business expenses. The Income-tax Officer was of the view that it was difficult to understand why the assessee was liable to meet the expenses connected with the retrenchment of the employees of the Indian company and, therefore, it was held by the Income-tax Officer that the expenditure had not been laid, out wholly and exclusively for the purpose of the business.

3. There was an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount in question did not by any stretch of imagination constitute business expense of the assessee and as such was not deductible in computing the total income. The Appellate Assistant Commissioner held that the employees were not those of the assessee and merely because they were rendering services to the assessee, for which the assessee was paying certain amount, it did not follow that retrenchment-compensation also had to be shared by the assessee also and that there was no agreement to that effect between the two companies. He, therefore, upheld the order of the Income-tax Officer on the question of disallowance.

4. The assessee appealed to the Tribunal. The Tribunal held that the expenditure was commercially expedient in the facts and circumstances mentioned hereinbefore. The Tribunal was further of the opinion that the assessee was in this business for some time and it had incurred losses in the (earlier years. In the view of the Tribunal, therefore, the assessee thought that it was profitable to discontinue the same arrangement and considered itnecessary in the interest of its business to terminate its arrangement with M/s. Lyons (India) Pvt. Ltd. As part of the arrangement for termination, in the view of the Tribunal, the expenditure was incurred. The Tribunal was further of the opinion that in finding out whether the expenditure was commercially expedient or not, one had to consider as to whether the expenditure was incurred as a trader and for carrying out its trade. The Tribunal held that the assessee was continuing its business and, therefore, the expenditure was not for closing down any business. From the materials before it the Tribunal could not find any motive other than commercial consideration in making the payment in question. The Tribunal pointed out that if the suggestion was that the assessee was trying to assist the Lyons (India) Pvt. Ltd. in seeing that it was not over-burdened with the expenditure of retrenchment, then the necessary materials should have been brought on record. Apart from the suggestions which were made out during the arguments, the Tribunal noted that there was no evidence to support the contention made before the Tribunal on behalf of the revenue that there was any motive other than commercial expediency. The Tribunal further observed that when the facts indicated that the assessee had incurred the expenditure in the interest of business and for the purpose of earning more profits, then, if the revenue wanted to draw a different inference of absence of commercial expediency, it was for the department to bring the necessary facts. The Tribunal noted that if the employees of the assessee had to be retrenched then the compensation paid to such employees would have been deductible. In the premises, the Tribunal allowed the claim for allowance of Rs. 1,51,008.

5. On this, the Tribunal has referred the following question to this court under Section 256(1) of the Income-tax Act, 1961 :

'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,51,008 was an allowable business expenditure?'

6. The principles upon which the question that we, have to answer should be judged have been enunciated in several decisions. These decisions of the courts have not been able to close the controversy whether in a particular case an expenditure is allowable or not. The general tests to be applied in cases of this type have been enumerated in various decisions. There is, therefore, no difficulty in enumerating these tests but the difficulty arises when the courts are called upon to apply these tests in particular cases. We have set out the facts of this case. On behalf of the revenue it was emphasised that there was no evidence of any compelling necessity for carrying on of the business to incur the expenditure in question. It was urged that the assessee was under no legal obligation to pay the amount in question. There was no contractual or statutory liability in respect of which the payment had been made. It was furthersubmitted that the employees were not the employees of the assessee. It was also urged that as a result of this arrangement the assessee-company secured the prospects of its future profits. For those reasons it was submitted that the expenditure in question was not allowable. Reliance in this connection was placed on the observations of the Supreme Court in the case of J.K. Cotton . v. Commissioner oj Income-tax : [1975]101ITR221(SC) , where the Supreme Court had reviewed several previous decisions. It is well settled, however, that an expenditure though not out of necessity but incurred voluntarily and for indirectly facilitating the carrying on of the trade or business will be allowable expenditure. This is well settled by the observations of Viscount Cave in the case of Atherton (H. M. Inspector of Taxes) v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. It is also well settled that payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage so as to be considered a capital expenditure. See in this connection, the observations of Mr. Justice Rowlatt in the case of B.W. Noble Ltd. v. Mitchell [1927] 11 TC 372 and the observations of the Supreme Court in the case of Commissioner of Income-tax v. Ashok Leyland Ltd. : [1972]86ITR549(SC)

7. In the instant case, it is apparent that the arrangement that the assessee had with Lyons (India) Pvt. Ltd., had proved to be disadvantageous to the assessee. The assessee was incurring losses. The assessee wanted to get rid of this arrangement and thereby get rid of this recurring disadvantage and as a result whereof to earn profits. Such an expenditure, in our opinion, cannot be considered to be a capital expenditure. It is further necessary to emphasise that the amount in question was paid to the employees. There was no dispute that this was sharing of the amount payable to the employees who had worked in part for the assessee. Therefore, normally, if they were the employees of the assessee then in case of termination or retrenchment of their employment in the present business set-up and in the light of the present statutory and commercial obligations, the assessee would have been liable to pay them retrenchment compensation and such payment would have been indisputably allowable as deduction. The fact that it was sharing with Lyons (India) Pvt. Ltd. the expenses of that liability does not affect the position because there is no evidence that any oblique or improper motive was there of benefiting Lyons (India) Pvt. Ltd. The Tribunal has categorically negatived such a suggestion. Therefore, in the perspective of a prudent businessman for facilitating carrying on of its business and for having a smooth running of the work and the goodwill for the business if the assessee as a trader thought itfit to incur this expenditure by sharing retrenchment compensation paid by Lyons (India) Pvt. Ltd., in our opinion, such payment cannot be-disallowed.

8. In the case of Employers in relation to the managment of the Indian Cable Co. Ltd. v. Their Workmen : (1972)IILLJ121SC , the Supreme Court observed that the payment of compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate carrying on of the business and it was an expenditure allowable under Section 37(1) of the Income-tax Act, 1961. It is, however, true that the Supreme Court was making the said observations not in the background of the question of controversy of the assessability to income-tax and also the Supreme Court was making the said observations where such allowance was paid to the company's own employees. But in the absence of any oblique motive the fact that such compensation was paid not to its own employees but to the employees who had worked for the assessee as a result of an arrangement with another company of sharing the employees would not make any difference on the point. In the case of Commissioner of Income-tax v. Ashok Leyland Ltd. : [1972]86ITR549(SC) , the Supreme Court held that the compensation paid for termination of the services of the managing agents in that case was payment made with a view to save business expenditure in the accounting period as well as a few subsequent years. It was not made for acquiring any enduring benefit or income-yielding asset. The Supreme Court observed that by avoiding certain business expenditure the company could not be said to have acquired enduring benefit or any income-yielding asset. The expenditure was of revenue nature and was allowable deduction in computing the profits of the assessee-company. There the assessee-company, which was originally importing and assembling motor cars, parts, etc., manufactured by Austin of England, had appointed C. B. Ltd., in 1948, as its managing agents for a period of 14 years. In 1952, the Government of India referred the question of establishing automobile industry in India to the Tariff Commission. The assessee-company submitted a comprehensive scheme for the manufacture of Leyland trucks and participated in the proceedings before the Commission. The Government instructed the assessee to take up the manufacture of Leyland commercial vehicles and, in 1954, the, company ceased to manufacture Austin cars in view of the Government's decision. At a meeting held on 24th January, 1955, it was suggested by the Minister that the company should invite the Leylands to provide part of the capital and raise the remaining capital in India and assured that the Government would arrange for the required capital in India but that such a liability would be accepted only if the managing agency was abolished. The directors of the company having already taken steps to terminate the services of the managing agents, by means ofan agreement dated 29th January, 1955, terminated the managing agency on payment of compensation of Rs. 2,50,000. The assessee-company claimed deduction of that amount in computing these profits as revenue expenditure. The Appellate Tribunal found that, in View of the change in its business activity, the continuance of the managing agents became superfluous and that the company terminated their services on business considerations. The Supreme Court held that the expenditure was of a revenue nature and was an allowable deduction in computing the profits of the assessee. The Supreme Court in the case of J. K. Cotton . v. Commissioner of Income-tax : [1975]101ITR221(SC) of the report, had considered the last-mentioned case and observed that it was the finding of fact that the termination of the managing agency was purely on business consideration and as a matter of commercial expediency and no enduring benefit accrued that was important.

9. In the instant case also, the finding that the expenditure in question was for commercial expediency is based on evidence. The test of law applied by the Tribunal for determining whether the expenditure was revenue was not an improper test. By getting rid of disadvantage of recurring expenditure, as has been noted, the assessee-company was not getting enduring benefit. The Supreme Court in the case of J. K. Cotton . v. Commissioner of Income-tax : [1975]101ITR221(SC) , referred to hereinbefore, was dealing with the facts of a peculiar nature. There on the 8th August, 1941, the appellant-company had appointed a firm as its managing agents for a period of 20 years at a remuneration of 2 1/2 per cent, commission. Though the firm was neither guilty of negligence nor of inefficiency, about two years later, the appellant voluntarily decided to terminate that managing agency and a release deed was executed by the managing agents on September 28, 1943, under which the appellant agreed to pay Rs. 2,50,000 as compensation for terminating the managing agency agreement. The question was whether the payment was allowable as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held by the Supreme Court, that the termination of the managing agency could not be said to be in terrorem but was voluntary so as to obtain an enduring or recurring benefit and payment of the compensation was not dictated by commercial expediency since there was absolutely no necessity to terminate the managing agency and the appellant wanted to benefit both the firms in which the Singhania family had major interest. Therefore, the compensation paid to an outgoing agent was capital expenditure and was not allowable as deduction under Section 10(2)(xv). As we have mentioned before, there is a categorical finding in the instant case before us that there was, in the facts and circumstances of case, no motive t& benefit the Lyons (India) Pvt. Ltd. The payment inquestion was not made to benefit any other company but was sharing payment in respect of the payments made to the workers. It was to terminate an arrangement which was proving disadvantageous to the assessee as mentioned hereinbefore. In this background, the facts of the present case are essentially different.

10. We are of the opinion that the Tribunal was right in allowing the sum of Rs. 1,51,008 as business expenditure.

11. The question, therefore, is answered in the affirmative and in favour of the assessee.

12. Parties, however, will bear and pay their own costs.

Guha, J.

13. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //