Decided on June 28,1963

J. THOMAS AND CO. LTD. Respondents

Cited Judgements :-



SEN, J. - (1.)THIS is a reference under s. 66(2) of the Indian IT Act, 1922, hereinafter described as the Act.
(2.)THE facts, as appearing in the statement of the case, are stated below : THE assessee, J. Thomas and Company Limited, Calcutta, is a private limited company doing business as tea and shellac brokers. Mr. R. A. S. Thomas belonging to the family of the founders joined the business in 1929 as an assistant. In terms of an agreement between the firm and Mr. Thomas, he was appointed a co-managing director for a period of two years w.e.f. April 1,1949. With effect from April 1, 1951, the agreement was renewed for a period of another three years expiring on March 31, 1954. In terms of the agreement the salary was Rs. 40,000 per annum plus a commission of 5 per cent. on the net profit. He was also the holder of 325 ordinary shares of the company. On this qualification he was given a share of the profits in the firm of M/s Thomas Cumberlege and Inskipp carrying on business in the United Kingdom. Under the articles of association of J. Thomas and Company Limited, a retiring director was required to sell all the ordinary shares and by convention the sharing of profits in the English firm was to be discontinued. During the first period of his service, Mr. R. A. S. Thomas was absent from India from February 3, 1948, to August 1, 1948, and again from February 2, 1950, to May 24, 1950, on leave.
The assessment year is 1952-53 and the corresponding accounting year is the financial year ending on March 31, 1952. Before the IT authorities Mr. T. C. W. Roe, a partner of the solicitor's firm, M/s Orr Dignam and Company, made a statement. His statement was to the effect that in October-November, 1951, the chairman of the firm informed him that Mr. Thomas was not behaving satisfactorily and, as such, certain other directors had tried to induce him to retire from the company. The chairman was, however, at that time reluctant to call upon him to retire, as he had served the company for many years, but instead warned him to behave properly. Mr. Roe further stated that during the aforesaid time the chairman obtained a letter from Mr. Thomas to the effect that if called upon to do so, he would resign from the position of the managing director. The chairman of the company approached Mr. Roe and informed him on February 20, 1952, that the directors took an adamant attitude that unless Mr. Thomas's services were dispensed with, the other directors would resign. This was followed by a discussion between the chairman and Mr. Roe, who gave him some advice. There were discussions in the matter between the chairman and Mr. Thomas and there is a definite statement that Mr. Thomas also approached Mr. Palmer of Sandersons and Morgans regarding his position and as a sequel thereof, he vehemently expressed his desire not to retire from the company. This attitude on the part of Mr. Thomas gave rise to a discussion between Mr. Palmer and Mr. Roe and eventually, Mr. Thomas was prevailed upon to retire on payment of a compensation of Rs. 2,80,000. It was also stated by Mr. Roe that the chairman expressed anxiety throughout to avoid unpleasantness and publicity and any litigation and, therefore, advised the chairman to compromise the matter by payment of compensation to Mr. Thomas. The statement of Mr. Roe before the ITO was supported by the day-book of the firm of solicitors, which was also placed before the ITO. The day-book showed that the matter was discussed with the chairman during the period from February 20, 1952, to March 10, 1952. On March 14, 1952, the chairman wrote to Mr. Thomas that if he would agree to resign, the terms of retirement would be settled. On March 15, 1952, Mr. Thomas finally wrote to the chairman that he was not prepared to resign. On the very same date, Mr. Thomas was present in the meeting of the board of directors where the chairman stated that Mr. Thomas had refused to resign and expressed his anxiety to fulfill the agreement and work for the company. Accordingly, the chairman recommended to the board that if Mr. Thomas did not resign and the company did not desire him to continue to serve the remaining period in terms of the agreement, the agreement with Mr. Thomas must be determined w.e.f. March 31, 1952, and as a compensation for breach of the agreement, a sum of Rs. 2,80,000 would be paid to Mr. Thomas. Therefore, another meeting of the board was held on the 26th March, 1952, and on Mr. Thomas's acceptance of the terms, the agreement was terminated.

On the above facts the ITO found that the payment of Rs. 2,80,000 cannot be treated as an expenditure laid out wholly and exclusively for the purpose of business under s. 10(2) (xv) of the Act. It was further held that all the transactions in writing were recorded with a particular colour to create evidence that Mr. Thomas was forced to resign and that the said amount was paid as compensation in view of the premature termination of the contract. The reasons for such a conclusion were that there was no evidence to show that Mr. Thomas was an inconvenient managing director and that there was no record of any "ill- conduct" of Mr. Thomas. It was further held that the retirement was for other considerations and the payment was for some extra commercial reasons. The contention of the assessee- company throughout was that the amount of Rs. 2,80,000 was paid to Mr. Thomas in the interest of business as he was found to be an inconvenient managing director. The AAC affirmed the decision of the ITO, on appeal by the assessee.

(3.)THERE was a difference of opinion between the Judicial Member and the Accountant Member of the Tribunal in the second appeal preferred by the assessee. The Judicial Member was of opinion that having regard to the circumstances and probabilities, the sum of Rs. 2,80,000 was not wholly and exclusively spent for the purpose of the company's business. The Accountant Member on the other hand that the facts warranted the conclusion that the transaction was a bona fide one and that the payment of compensation was for the premature termination of the contract. The matter was referred to the President under s. 5A(vii) of the Act and the President concurred with the decision made by the Accountant Member and held that there was evidence to show that the expenditure claimed to be deducted was laid out absolutely for the purpose of the assessee's business. His further reason was that the managing director of the company, Mr. Methold, was present before the ITO and had the ITO any doubt about the statement of Mr. Roe and the stand taken by the company, the ITO ought to have cross-examined him. According to the President there was no material on the record to warrant the conclusion that the payment was made for any extra-commercial reasons and that there was no good and sufficient reasons for disbelieving the company, when it was said that it paid the money as a price for getting rid of a director who had two years more to run under his contract and whose presence on the board was regarded as detrimental to the profitable conduct of the company's business.
On the above facts the following question has been framed under s. 66(2) of the Act for a decision by this Court : "Whether, on the facts and in the circumstances of the case and on the materials before it, the Tribunal was right in law in holding that the sum of Rs. 2,80,000 paid by the assessee-company to Mr. R. A. S. Thomas was an expenditure admissible as an allowance under s. 10(2) (xv) of the IT Act, being an amount paid to the said Mr. R. A. S. Thomas as compensation for termination of his connection with the company which had become detrimental to the company's interest.

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