Civil Appeal No 62 of 1961
212 Appeal by special leave from the judgment and order dated December 20 1956 of the Madras High Court in Case Referred No 85 of 1953
A V Viswanatha Sastri R Ganapathy Iyer and G Gopalakrishnan for the appellant
K N Rajagopala Sastri and PD Menon for the respondent
December 20
The Judgment of the Court was delivered by KAPUR J
This appeal by special leave is directed against the judgment and order of the High Court of Judicature at Madras
The appellant is the assessee and the respondent is the Commissioner of Income tax and the question raised is as to applicability of section 102xv of the Indian Income tax Act to a gratuity paid by the appellant to one of its officers on his retirement from service
The appeal relates to the assessment year 1950 51
Ms Gordon Woodroffee  Co Madras Ltd was incorporated as a private limited company in 1922 and became the Managing Agent of a public limited company Ms Gordon Woodroffee Leather Manufacturing Company Ltd which is the assessee
One J H Philips was employee in the Managing Agent Company from 1922 to 1935 and from 1935 he became an employee of the appellant company and became its Director from 1940
On March 22 1949 he wrote a letter to the appellant company expressing his intention to resign from the Board of the Company as from April 4 1949 upon his retirement from the employment of the company and requested that his resignation be accepted
On March 24 1949 the Board of Directors of the appellant Company passed a resolution that his resignation be accepted and in appreciation of his long and valuable services to Company hebe paid a gratuity of Rs 50000 out 213 of which the appellant Company was to pay Rs 40000 and the Managing Agent Company the balance of Rs 10000 April 4 1949 this resolution of the Board of Directors was confirmed
On the same date a resolution to the same effect was passed at an Extraordinary General Meeting of the Company and before the end of its accounting year i e October 31 1949 this amount of Rs 40000 was paid to Mr J H Philips
This amount was claimed as a deduction under section 10 2xv of the Income tax Act which reads  Section 102 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 claused i to xiv inclusive and not being in the nature of capital expenditure or personal expenses of the assesee laid out or expended wholly and exclusively for the purpose of such business profession or vocation
 The amount was disallowed by the Income tax Officer as well as by the Appellate Assistant Commissioner on the ground that the appellant Company had no pension scheme the payment was voluntary and that the entry in the assessee s books clearly indicated it to be a capital payment
Against this order the appellant Company took an appeal to the Income tax Appellate Tribunal which upheld the order of the Appellate Assistant Commissioner
It held that according to the resolution the gratuity was paid for long and valuable services to the Company that there was nothing to indicate that Mr J H Philips had accepted a lower salary in expectation of getting a gratuity at the end of his service that there 214 was no such practice in the appellant Company and that during the course of his service he was being remunerated at a graduated scale of salary and a commission of 2 12 on the profits that there was no expectancy that at the end of the service there would be a recompense for faithful and efficient service that he had been suitably rewarded by being given a commission on the profits in order to whip up his enthusiasm
It was also mentioned that in the books of the appellant Company the amount had not been debited in the profit and loss account but was debited to the appropriation account thereby indicating that it was an extra payment or a payment made in the nature of a capital expense
Taking all these circumstances into consideration the Tribunal came to the conclusion that it was difficult to hold that the expenditure was not in the nature of a capital expenditure or that it was expended wholly and exclusively for the purpose of the assessee s business
At the instance of the appellant Company the case was stated to the High Court under section 661 of the Income tax Act and the following question was referred  Whether the sum of Rs 40000 paid to Mr J H Philips on his retirement from the service of the Company was not an admissible deduction under Section 102xv of the Income tax Act 1922
 The High Court answered the question against the appellant Company
It held that in order that section 102 xv be applicable it had to be proved that the amount was laid out or expended wholly and exclusively for purposes of the company s business
In this case the amount was paid on retirement and for valuable services rendered by Mr J H Philips there was no evidence that he expected to receive this amount or the Company contemplated its payment at any time before the payment 215 was voluntary and there was no evidence to show that it was in the future interest of the business of the Company that the expenditure was incurred
The High Court observed In the case of a payment of a gratuity to a retiring employee recognition of his past services with nothing more cannot in our opinion satisfy the requirements of Section 102xv even if those requirements are judged from the view point of commercial expediency as it always should be when a claim arises under Section 102xv
Was the expenditure incurred in the future interest of the business of the assessee Was there any connection between the purpose of the payment and the further conduct of the business of the assessee  These are the tests to be satisfied before it could be said that in paying the gratuity money was laid out or expended wholly and exclusively for the purpose of the business of the Company
These tests the assessee did not satisfy in this case
 Against this judgment and order the appellant Company has brought this appeal by special leave
It was argued on behalf of the appellant that the amount had been paid as a matter of commercial expediency and in the interest of the Company as an inducement to other employees that if they rendered service in a similar manner with efficiency and honesty they would be similarly rewarded
Decisive test it was submitted was whether such payments of gratuity were likely in future also and was the payment made as an incentive to the employees to give their best to the employer and if it was so then the payment was a matter of commercial prudence It was also submitted that the Company had acted not with any oblique motive and 216 its good faith was not in doubt and in support of the contention several cases were relied upon
In our opinion on the findings as given the payment in dispute does not fall within the provisions of section 102xv
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 but it was 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
The two cases strongly relied upon by the appellant Company were J P Hancok vs General Reversionary  Investment Company Ltd1 and J W Smith vs The Incorporated Council of Law Reporting for England and Wales2
In the former case the assessee Company sought to charge as a trade expense a lump sum which it had paid for the purchase for the benefit of a former actuary of an annuity equal in amount to the pension which the Company had resolved to pay him
This was held to be an expense admissible in computing the Company s profits assessable to income tax
But in that case it was the practice of the assessee company to grant pensions to its servants after a considerable period of service and this practice was known to the employees and affected the rate of salary paid by the Company in that the employees were willing to serve the Company at lower rates than they otherwise would have by reason of the expectation of the pension at the end of their service In the latter case there was a practice of granting gratuities and that was the ground for holding the amount to be a proper deduction
217 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 102xv The appeal therefore fails and is dismissed with costs
Appeal dismissed


Summary:
The company accepted the resignation of one of its directors and in appreciation of his long valuable services to the company paid him a gratuity of Rs 40000 
This amount was claimed as a deduction under section 102 xv of the Income tax Act which was disallowed by the Income tax Officer on the ground that the appellant company had no pension scheme the payment was voluntary and that the entry in the assessee s books clearly indicated it to be a capital payment
 Held that the payment does not fall within the provisions of section 102xv of the Act
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 but it was for a voluntary payment not with the object of facilitating carrying on the business of the appellant company or as a matter of commercial expediency but in recognition of long and faithful service
There Was no practice in the appellant company to pay such amounts to and did not affect the quantum of salary of the recipient
To claim a deduction under section 102xv of the Act the proper test to apply is was that 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
J P Hancok vs General Raversionary  Investment Co Ltd and J W Smith vs The Incorporated Council of Law Reporting for England and Wales  REFERRED TO