G.K.MITTER, J. - (1.) THE main question which arises on this reference is whether a payment made to the widow of the chairman of the board of directors of the assessee-company by way of compensation in view of the circumstances attending on the death of the said chairman was admissible as an expense under s. 10(2)(xv) of the Indian IT Act. Incidental thereto is another question as to whether the said payment was related as an expenditure to the year of account of the assessee relevant to the asst. yr. 1951-52.
(2.) THE facts are as follows: THE assessee is a company which keeps accounts on the mercantile system according to the calender year. THE assessment year in question is 1951-52, the corresponding accounting year being the calender year 1950. On 26th March, 1950, Mr. Cameron, the chairman of the board of directors of the assessee-company, lost his life by the action of a riotous crowd while proceeding from Bandel to Calcutta. THE travel was not occasioned by any business of the assessee. On 5th June, 1950, the board of directors of the assessee recorded in a resolution passed that it felt that "the company was under an obligation to pay to Mr. Cameron's widow a sum as compensation and that if compensation was not paid there was likely to be unfavourable criticism of the company and repercussions from other employees particularly in view of circumstances of Mr. Cameron's death. THE chairman recommended that pending a decision as to what the full amount of compensation should be, an interim payment of Rs. 1,20,000 should be made to Mrs. Cameron....it was the feeling of all directors that the company was under a definite obligation to pay compensation". THE above quotation is from the minutes of the board meeting of the assessee which further show that the chairman of that meeting had represented to the board that had Mr. Cameron lived he would, in the normal course of events, have served the company for some years to come. THE above minutes do not show clearly any basis on which the board was going to fix the amount of compensation. It would appear, however, from the order of the Tribunal that the interim payment was related to an insurance policy effected by the company on Mr. Cameron's life to the extent of Rs. 1,20,000. At a further meeting of the said board of directors of the assessee-company held on 22nd Jan., 1951, reference was made to the above minutes and the question of the amount of compensation to be paid to Mrs. Cameron was discussed again. At this meeting the chairman said that "in his opinion a further and final payment of Rs. 2,00,000 would be fair and reasonable". THE chairman also added that "he had consulted the company's auditors who agreed with his view. After full discussion by the board it was resolved that the sum of Rs. 2,00,000 should be paid to Mrs. Cameron as compensation". Again the quotations are from the minutes of the board meeting. When exactly the auditors were consulted over this matter does not appear from the record but a letter dt. 9th Dec., 1955, from M/s Price Waterhouse Peat and Co., the auditors of the assessee, addressed to the company shows that the question of fixation of compensation had been discussed prior to the date of the board meeting and that the auditors had opined that the sum of Rs. 3,20,000 based on approximately two years' total emoluments of the late Mr. Cameron was in the circumstances fair and reasonable. THE ITO disallowed the payment of Rs. 2,00,000 as an expenditure on the ground that it was merely gratuitous although connected with the employment of Mr. Cameron by the company. THE AAC upheld that order of the ITO and further held that the liability was not ascertained in the year of the account and could not therefore be allowed as an admissible expense in that year. Before the Tribunal it was argued on behalf of the assessee that the payment had been made to satisfy the other employees against such risks of life and therefore the expense so incurred was solely for the purpose of the business of the assessee. It was claimed that Mr. Cameron would in the normal course of things have been in the service of the company for another year receiving emoluments to the extent of Rs. 1,35,000. Besides this, there was a further stipulation in his contract of employment that he should enjoy pension at the rate of Rs. 11,400 per annum continuously for 20 years. Thus in the normal way the company would have to meet an expense of about Rs. 3,56,000 against which the compensation was fixed at Rs. 3,20,000. THE Tribunal held that the expenses were laid out for the business purpose of the assessee and if it had been incurred in the accounting year, the amount could have been allowed as an expense under s. 10(2)(xv) of the Act. THE Tribunal further recorded that "in fact having considered the quantum of the compensation as against the emoluments receivable by the said Mr. Cameron, we are of opinion that the amount paid as compensation was reasonably based on business expediency alone and for no other purpose". THE Tribunal was, however, unable to hold that the liability for compensation was ascertained and/or quantified in the year of account noting that the basis of payment arose from the resolution dt. 22nd Jan., 1951. THE Tribunal referred to the assessee's balance-sheet and the profit and loss account which went on to show that it was the practice of the company to reserve out sums of money from its profits against contingencies and that "when the accounts were made up the amount was debited to the contingencies reserve account crediting the current liabilities and provision account". It observed that an assessee maintaining accounts on the mercantile system could legitimately include "the debt in respect of a definite liability which had accrued and about which all preliminary proceedings causing the accrual of the liability in a concluded form had already been gone through, although the actual disbursement had not taken place". But as the liability for compensation was not ascertained in the year of account it could not be allowed as an expense of that year. As against this, however, there is another letter of the auditors of the company addressed to the assessee on 9th Dec., 1955, wherein the auditors gave their opinion to the effect that the liability of Rs. 2,00,000 was correctly taken in the accounts for the year ended on 31st Dec., 1950. THE auditors reasoned that the board of directors had decided to pay compensation to Mrs. Cameron on 5th June, 1950, and that the payment of Rs. 1,20,000 was only an interim one pending a decision as to what the full amount of compensation should be. Further the commitment came into existence on 5th June, 1950, although the balance of the quantum was not ascertained till a later date. THE amount of the liability was known when the accounts for the year ended 31st Dec., 1950, was prepared and in the opinion of the auditors the balance of the compensation of Rs. 2,00,000 was correctly included in those accounts in conformity with normal accountancy principles and in accordance with the mercantile system of accounting regularly employed by the company. The questions which have been referred to this Court are as follows: "(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,00,000 was admissible as an expense under s. 10(2)(xv) of the Indian IT Act ? (2) If the answer to question No. 1 be in the affirmative then whether, on the facts and in the circumstances of the case, the said sum of Rs. 2,00,000 can be related as an expenditure to the year of account relevant to the asst. yr. 1951-52 ?" There was some controversy with regard to the scope of the first question. According to the assessee the Tribunal had found that the amount paid by way of compensation to Mrs. Cameron was a reasonable one "based on business expediency alone and for no other purpose". It was argued that this was a finding of fact not open to review by this Court the only question being whether on this finding the expense was admissible under s. 10(2)(xv) of the Act. On the other hand it was argued on behalf of the Revenue that to justify the deduction of an expense under s. 10(2)(xv) it must be shown by the assessee not only that the money was paid but that the nature of the payment was such as to entitle it to admissibility under s. 10(2)(xv). In other words the question as to whether a payment comes under s. 10(2)(xv) is a question of law and open to review under s. 66(1) notwithstanding any finding by the Tribunal. Apart from the authorities cited, which I shall presently consider, it seems to me that the finding is open to review.
(3.) SEC. 10 of the IT Act lays down how computation of the profits and gains of a business is to be done for the purpose of assessment of tax. Under sub-s. (2) such profits or gains have to be computed after making the allowances set down seriatim in cls. (i) to (xiv). The legislature felt that there might be other expenses which ought in reason to be allowed although not specifically covered by the said items. SEC. 10(2)(xv) provides for the deduction of "any expenditure [not being an allowance of the nature described in any of the cls. (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee] laid out or expended wholly or exclusively for the purpose of such business, profession or vocation". To merit exemption under cl. (xv) it is essential that the expenditure should not be in the nature of a capital one or personal expenses of the assessee. Very often it becomes extremely difficult to determine whether an expense incurred is capital or revenue in nature and many fine tests had been evolved from time to time to sift the matter. Once it is determined that the expenditure does not bear the characteristics of a capital expense or personal expenses of the assessee the further question arises as to whether it is laid out or expended wholly or exclusively for the purpose of the assessee's business. To solve this a test of the following nature has to be applied, viz., "has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration". If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure as the case may be. When the assessee places all the facts and circumstances before the Revenue authorities the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that the expense is allowable under s. 10(2)(xv) is an inference of law to be deduced from the facts of the case. The question is a mixed one of law and fact.;