Kapur, J. - (1.)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 the applicability of S. 10 (2) (xv) of the Indian Income-tax Act to a gratuity paid by the appellant to one of its officers on his retirement from service.
(2.)The appeal relates to the assessment year 1950-51. M/s. Gordon Woodroffee and Co. (Madras) Ltd., was incorporated as a private limited company in 1922 and became the Managing Agent of a public limited company M/s. Gordon Woodroffee Leather Manufacturing Company Ltd., which is the assessee. One J. H. Philips was employed 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 the Company he be paid a gratuity of Rs. 50,000/- out of which the appellant Company was to pay Rs. 40,000/-. and the Managing Agent Company the balance of Rs. 10,000/-. On 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. 40,000/- was paid to Mr. J. H. Philips.
(3.)This amount was claimed as a deduction under S. 10 (2) (xv) of the Income-tax Act which reads:-
Section 10 (2):"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 clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) 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 is service; at there 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 it 2 1/2 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 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 S. 66 (1) of the Income-tax Act and the following question was referred:-
"Whether the sum of Rs. 40,000/- paid to Mr. J. H. Philips on his retirement from the service of the Company was, not an admissible deduction under S. 10 (2) (xv) of the Income-tax Act, 1922."