BANERJEE, J. - (1.) THESE three references under the Indian IT Act, 1922, were made in circumstances hereinafter stated.
(2.) THE assessee, Calcutta Landing and Shipping Co. Ltd., is a public limited company acting as shipping agents, inter alia, in the Port of Calcutta. One A.I.D. Baptist joined the services of the assessee-company, on probation, on 1st Sept., 1954, and was confirmed as a senior assistant on 1st April, 1955. On June 3, 1955, the said Mr. Baptist was murdered in the company's yard, under circumstances tragic in nature, as appears from the following undisputed statement of fact made by the assessee-company (page 54 of the paper-book) : "Towards the end of May, 1955, one of the launches of the company 'Celt' was found to require major repairs and it was, therefore, directed to be dry-docked at the company's yard at Salkia, Howrah. When this was done, according to the practice followed on the river, all the crew of the launch excepting the serang and the engine driver was discharged. On 3rd June, 1955, at about 7- 45 a.m. Mr. Baptist, along with the yard foreman, went to inspect the launch 'Celt' in order to assess the repairs required and to give the necessary instructions regarding the same. He then found that the discharged crew were still occupying the launch. When he directed them to vacate the launch, an altercation arose between him and the discharged crew in the course of which the latter assaulted Mr. Baptist and threw him overboard. As he lay prostrate on the ground, some of the crew hit him with crowbars, hammers, etc., as a result of which Mr. Baptist became unconscious and began to bleed profusely. He was removed to the P. G. Hospital in a precarious condition and he died at about 11-20 a.m. on the same day." On 2nd Nov., 1956, the board of directors of the assessee-company passed a resolution sanctioning a pension to the widow of their deceased employee, A.I.D. Baptist, in the following language (page 6 of the paper-book) : "Resolved that a pension be granted to Mrs. D. C. Baptist, the widow of the late Mr. A.I.D. Baptist, who was murdered in the company's yard on the 3rd June, 1955, in the following manner : From 1st June, 1955, to 31st Oct., 1956, @ Rs. 500 per month. From 1st Nov., 1956, to 31st Dec., 1957, @ Rs. 420 per month. From 1st Jan., 1958, to 31st Dec., 1959, @ Rs. 375 per month. For a further period of 10 years from 1st Jan., 1960, @ Rs. 325 per month. Further to this, the company will bear the cost of passages to England for Mrs. Baptist and seven children, also first class railway fare to Bombay for them." The passage money paid to Mrs. Baptist and the children amounted to Rs. 8,580. Some more expenditure was incurred by the assessee in sending a wreath for and in repairing the grave of the said deceased employee. In accordance with the aforesaid resolution, the assessee- company incurred an expenditure of Rs. 14,855 for the asst. yr. 1957-58, an expenditure of Rs. 5,040 for the asst. yr. 1958-59 and a further expenditure of Rs. 4,590 for the asst. yr. 1959-60. The assessee-company claimed deduction of these amounts in the years in which they were incurred. The ITO disallowed the claims for all the three years on the ground that the amounts claimed appeared to be ex gratia payments and were not expenditure incurred or laid out or expended wholly and exclusively for the business and as such deductions could not be allowed under s. 10(2) (xv) of the Indian IT Act, 1922. The assessee-company appealed before the AAC for all the three years, who, in his turn, affirmed the order of the ITO on the following line of reasoning : "...The company has got its own pension scheme for its employees. However, Mr. Baptist could not join the scheme as he had not completed the required number of years of service with the appellant. Hence, his wife was paid pension and also provided for passage. The company's representatives were asked by me that there may be also cases of earlier years when the company's employees themselves left the services of the company before they could be eligible to take advantage of the pension scheme or any other schemes. The company has informed me that they could not trace the payment of a similar nature made to any other employee of the company, who might have been murdered or injured during the performance of his duties or left the service of the company voluntarily. Thus, the present payment which is an ex gratia payment is a solitary payment made to an employee. This therefore cannot be considered as a payment which can inspire an incentive amongst the employees. I am therefore of the opinion that this ex gratia payment, both the pension and passage expenses, cannot be considered as wholly and exclusively laid out for the purpose of the appellant's business." As against the aforesaid order, the assessee-company appealed before the Tribunal. The Tribunal also affirmed the order made by the AAC in the following language : "...All that has been urged before us is based purely on theoretical assumptions. It is a well- established principle of law that expenses incurred which may not even be found to have a direct bearing on the business, would still be allowable if the same had been incurred on grounds of commercial expediency and such expediency could only be gathered from the circumstances prevailing in each case. In the instant case, the expediency, which is said to be commercial in nature by the learned counsel for the assessee, is to create incentives in its employees to work efficiently. Apart from the fact that such a theory is farfetched, the fact itself clearly indicates that there was no such intention in this payment inasmuch as we do not find any such resolution having been adopted by the company to vindicate its intentions. All that has been done is that for a particular employee who died on duty, his family has been given this payment so that they may not become distitutes. This action on behalf of the company is indeed commendable but does not warrant these expenses being allowed as business expenses." Being aggrieved by the order of the Tribunal the assessee-company asked for a reference on the point as to whether the pension and the other expenses incurred by it would come under s. 10(2) (xv) of the Indian IT Act. The Tribunal refused to refer any such question for consideration of this Court. Thereupon, the assessee-company moved this Court and obtained an order calling upon the Tribunal to make a statement of case on the following questions of law : "1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 14,855 spent by the assessee partly by way of pension to Mrs. Baptist and partly by way of passage for Mrs. Baptist and her children to the United Kingdom and for funeral expenses are expenses laid out or expended wholly and exclusively for the purpose of the assessee's business and as such allowable under s. 10 (2)(xv) of the Indian IT Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,040 spent by the assessee by way of pension paid to Mrs. Baptist is an expense laid out or expended wholly and exclusively for the purpose of the assessee's business and as such allowable under s. 10(2)(xv) of the Indian IT Act, 1922 ? 3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,590 spent by the assessee by way of pension paid to Mrs. Baptist is an expense laid out or expended wholly and exclusively for the purpose of the assessee's business and as such allowable under s. 10(2)(xv) of the Indian IT Act, 1922 ?" In order to answer the questions referred to above, it is necessary for us to quote the relevant portion of s. 10 of the Indian IT Act, 1922, which reads as follows : "10. (1) The tax shall be payable by the assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains in business, profession or vocation carried on by him. (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 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 and exclusively for the purpose of such business, profession or vocation."
(3.) THE English IT Act also contains a provision almost in pari materia with the section in the Indian Act. That section came up for consideration in the case of Atherton vs. British Insulated and Helsby Cables Ltd. (1925) 10Tax Cases. 155 in which the respondent company claimed as a deduction, in computing its profits for income-tax purposes, a lump sum 31,784 which it had contributed irrevocably as a nucleus of a pension fund established by a trust deed for the benefit of its clerical and technical salaried staff, that being the sum actuarially ascertained to be necessary to enable the past years of service of the then existing staff to rank for pension. On a dispute being raised as to whether the respondent-company was entitled to a deduction of the above sum for income-tax purposes, Viscount Cave L. C. observed (at page 191) : "It was made clear in the above cited cases of Usher's Wiltshire Brewery Ltd. vs. Bruce (1914) 6 Tax Cases. 399 and Smith vs. Incorporated Council of Law Reporting (1914) 6 Tax Cases. 477 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade : and it appears to me that the findings of the Commissioners in the present case bring the payment in question within that description." The above principle appears to have been accepted in Indian decisions and I need refer to several of them which were cited from the Bar. In the case of CIT vs. Chandulal Keshavlal and Co. (1960) 38 ITR 601(SC), the assessee, a firm, was the managing agent of a company. In accordance with the managing agency agreement, the commission for the accounting year 1950 was a sum of Rs. 3,09,114, but at the oral request of the board of directors of the managed company, the assessee agreed to accept a sum of rupees one lakh only as its commission. The Tribunal found : (i) that the financial position of the managed company was rather unsatisfactory ; (ii) that the assessee had been remitting a part or whole of its commission in the past whenever profits of the managed company were unsatisfactory ; (iii) that the waiver was neither made out of bounty nor mala fide ; and (iv) that the business of the assessee was so linked up with the managed company that if the latter was put on a sounder position, the assessee would get a larger commission in the future. The Tribunal further held that the part of the commission remitted by the assessee was given up for reasons of commercial expediency and was business expenditure allowable under s. 10(2)(xv) of the Indian IT Act, 1922. Dissatisfied with the findings of the Tribunal, the CIT appealed before the Bombay High Court and lost before that Court. On further appeal before the Supreme Court, Kapur J. observed (pages 610-11) : "In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party : Usher's Wiltshire Brewery Ltd. vs. Bruce (supra). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1(SC). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessee's business and there is evidence to support this finding." His Lordship then referred to the observations of Viscount Cave L.C. in Atherton vs. British Insulated and Helsby Cables Ltd. (1925) 10 Tax Cases. 155and further observed : "Thus, in cases like the present one, in order to justify deduction the sum must be given up for reasons of commercial expediency ; it may be voluntary, but so long as it is incurred for the assessee's benefit, the deduction would be claimable.The Tribunal has found in favour of the managing agent that the amount was expended for reasons of commercial expediency . . . That finding is one of fact. On that finding the Income-tax Tribunal rightly came to the conclusion that it was a deductible expense under s. 10(2)(xv)." ;