COMMISSIONER OF INCOME TAX Vs. STANES T AND COMPANY LIMITED

JUDGEMENT

(1.) THE assessee in this case is a public limited company and it has several activities. Originally, the business was carried on in partnership and then it was converted into a public limited company. Somewhere in the year 1939 a decision was taken to convert this company into a private company. At this stage two agreements of the same date dated March 14, 1939, came into existence. THEse two agreements evidence the following facts : One F. J, Stanes, who was the then managing director of the company and was about to retire from his office of managing director and his wife, Margaret W. Stanes, were joint holders of 1,679 ordinary shares of the face value of Rs. 100 each in the assessee-company. THEy were desirous of disposing of their shares. THE company was anxious to avoid the increase of membership which might be resulted if the Stanes were to sell their shares without any restriction. THE company was desirous of also prohibiting F. J. Stanes, the managing director, from engaging himself directly or indirectly after his retirement in any trade or business similar or competing with that carried on by the company. THE company, therefore, entered into an agreement with the said Stanes with reference to the disposal of these 1,679 shares. As a machinery for carrying into effect these agreements, the company constituted a fund called the Stanes and Company Staff Pension Fund (hereinafter called "the fund"). Under one of the agreements the company agreed to pay from 1st April, 1939, into this fund for the benefit of F. J. Stanes a sum of Rs. 1,000 per month free of Indian tax as extra remuneration so long as the said F. J. Stanes shall remain a director of the company and after his retirement as pension during his lifetime and after his death to his wife till her lifetime. THE amount of Rs. 1,000 is subject to reduction as and when the shares are transferred to the transferees approved by the company and such reduction is to be at the rate of Rs. 7 per month for each share so transferred and shall cease altogether when the last is transferred. It was further provided that if at the end of any financial year of the company the dividend declared on the 1,679 shares or on such lesser number of shares as at any time remain untransferred shall not amount to the aggregate sum of Rs. 12,000 in the year or lesser sum as may be ascertained with reference to the shares transferred as stated above, the deficiency will have to be made good by the company as extra remuneration to F. J. Stanes so long as he continued as director and thereafter as pension for his life and the life of his wife. If, however, the dividend so declared exceeds Rs. 12,000 or lesser sum as is referred to above, such excess shall be paid to the trustees of the fund upon the trusts therein declared.

(2.) UNDER the other agreement, the Stanes had agreed to transfer the shares to Eric Henry Stanes and Charles Eric Wootton, who are two other directors of the company. This deed further provided for the purchase of the shares by these two directors or their successors in office as directors of the company at the face value and in a phased programme. If within five years the transferees have not acquired one quarter of the said shares or within ten years have not acquired one-half of the shares or within fifteen years three-quarters of the said shares, after notice the transferor shall be entitled to treat the agreement as coming to an end. With the constitution of the fund, rules were also framed with the said Eric Henry Stanes and Charles Eric Wootton as trustees. Rules 5, 6, 7 and 8 of these Rules which are relevant for our purpose read as follows :

(3.) THESE amounts were paid as pension. It is also seen from the statement of facts that the company had been paying pension for quite some time. The company had also framed rules relating to the principles to be allowed for allotment of pension. One of the rules provides that 30 years of continuous service and/or attaining the age of 60 years after not less than 25 years of service will normally be the basis for consideration for allotment of pension. Another rule states that special consideration may be given in the case of incapacity for further work due to illness or accident, or to dependants of deceased long service employees, i.e., a widow or minor children. It further states that the general basis on which retirement pension will be payable is 1/100th part of every year of service of the average monthly substantive salary during the last five years' service, and such pension may be allotted as a net monthly sum, or as a pension plus variable dearness allowance. Of course, these rules wefe ostensibly framed for the purpose of recommending to the fund for allotment of pension. But we are pointing out these rules only to show that even these excess payments paid by way of pension were with reference to the rules framed generally and applicable to all employees in general and the payment was not with reference to any particular individual or for any particular reason and it was generally motivated by business considerations and Warranted by commercial expediency. While such is the case it cannot be denied that the payment was out of the business or commercial expediency and that it was wholly and exclusively spent for the purpose of the business. In this connection we have also to keep in mind that in order to make the company eligible for deduction of the amount paid by way of pension there need not be any particular, scheme for payment of such pension governing the relationship of the employer and employee. In this connection we may also usefully quote a passage from the judgment of this court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax, [1967] 63 ITR 733, 737 (Mad) which reads as follows :