VENKATARAMIAH - (1.) SINCE these appeals by certificate involve a common question of law, we find it convenient to dispose them of by this common judgment.
(2.) CIVIL Appeal No. 2501 of 1972 is filed against the judgment of the High Court of Bombay in Income-tax Reference No. 58 of 1963 and CIVIL Appeals Nos. 2502-2504 of 1972 are filed against the judgment of that High Court in Income-tax Reference No. 87 of 1963. The assessee, M/s. Sessoon J. David and Co. Pvt. Ltd. (hereinafter referred to as 'the Company') is the appellant in all these cases and the assessment years are 1957-58, 1958-59, 1959-60 and 1960-61, the relevant calendar years being 1956, 1957, 1958 and 1959 respectively. The Company is an investment company and its shares were originally held either directly or through their nominees by Sir Percival David, Lady David and Mr. V. P. David (hereinafter collectively referred to as 'Davids'). The issued capital of the Company consisted of 1000 ordinary shares of the face value of Rs. 10,000 each. According to the valuation made by the auditors, the assets of the Company were worth Rs. 155 lacs as on 31/12/1955. At a meeting of the directors of the Company held on 2/12/1955, a resolution was passed recommending that the employees of the Company whose names were set out in the statement attached thereto be paid certain sums or annuity as set out against the names of each of them as and by way of retrenchment compensation and compensation for termination of employment and also for long and faithful services rendered by them to the Company in the past and that their services might be terminated. It was also resolved to call an extraordinary general meeting of the share-holders of the Company to consider and if thought fit to approve the recommendation made by the directors as stated above. Accordingly an extraordinary general meeting of the shareholders of the Company was held on 17/01/1956 but it was adjourned to 25/01/1956. On the adjourned date, the meeting passed a resolution approving the recommendation made by the directors to pay the employees retrenchment compensation and compensation for termination of employment and also additional retrenchment compensation and compensation for termination of employment in the case of some of them and to terminate their services on or after 1/04/1956. Thereafter an agreement was entered into between Davids and Tata Sons Ltd. (hereinafter referred to as 'the Tatas') on 23/03/1956 agreeing to sell the 1000 shares held by Davids or their nominees in the Company in favour of Tatas or their nominees for a sum of Rs. 155 lacs. The said agreement inter alia provided that the sum voted by the Company for payment of gratuities and/or as compensation for loss of employment to existing directors and employees of the Company with respect to their services up to and inclusive of 31/03/1956 and a further amount of Rs. 16,188 payable to the Managing Director, Mr. Mathalone should be paid in accordance with the resolution by the Company and the amount so paid should be deducted from the purchase price of Rs. 155 lacs agreed upon. It also provided that Davids should arrange to terminate the services of all employees with effect from 31/03/1956 and also to arrange that all directors (including the Managing Director) resign their offices and Tatas or their nominees should thereafter be entitled to appoint or elect all or any of the members of the staff and directors (including existing directors and members of the staff) of the Company as they deemed fit. Of the 22 employees covered by the resolution of the directors dated 2/12/1955 followed by the confirmation at the extraordinary general meeting on 25/01/1956, 9 were re-employed and 13 persons were not re-employed. In the books of the assessee, there was a debit for a total sum of Rs. 1,64,899 during the accounting year 1956, the details for which were as follows:- JUDGEMENT_524_3_1979Html1.htm
(3.) IT should be mentioned here that A. E. Joseph, the former Director of the Company had to be paid as per the resolution of the Company Rs. 16,885 by way of annuity during a period of five years commencing with 1956. During the assessment year 1957-58, the relevant previous year being 1956, the Company claimed deduction of Rs. 1,64,899 referred to above before the Income-tax Officer under Section 10(2)(xv) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'). During each of the three succeeding assessment years with which we are concerned, the Company claimed deduction of Rs. 16,885 being the annuity paid to Mr. A. E. Joseph pursuant to the resolution. During the assessment year 1957-58, the claim in respect of the entire sum of Rs. 1,64,899 was disallowed by the Income-tax Officer on the ground that the services of the directors and employees had been terminated not because of business expediency but because Tatas, the purchasers of the shares made it a condition under the agreement. The relevant part of the order read as follows:- "Thus, it emerges that the expenditure of the type of gratuity would be allowable under S. 10(2)(xv) only if the persons retiring had such expectancy or they accepted lower salaries in such expectation and hence it was an incentive to existing employees or future employees. As against that we find that here even before the Tatas took up the management of the company, services of the employees and directors were terminated and the amount of compensation fixed. The fact that there was no expectancy or custom of such gratuity with the company is clearly borne out by the fact that many of the employees whose services are terminated had put in a number of years of service in some cases even going up to 40 years. As against this the assessee has been pleading that most of the employees were very old and that as a result of change of staff the Company was able to effect considerable economy. However, I understand that some of the old employees were reinstated and as stated the whole transaction was a part of the overall transaction of purchase of shares and passing over of control. The manner in which the services of all the employees under the old management were terminated is also significant. Thus I am unable to see how this expenditure can fall under S. 10(2)(xv). I am unable to find any distinction between compensation paid to employees and those paid to directors and also any distinction between outright compensation paid to a director and annuity paid to a director. None of the expenses are allowable and I add the whole amount claimed by way of gratuity, compensation for loss of employment and annuity or compensation for loss of office to a director or former director." ;