# [1962] Supp. 2 S.C.R. 211 - **Citation:** [1962] Supp. 2 S.C.R. 211 - **Court:** Supreme Court of India - **Decided:** 1961-12-20 - **Case number:** CIVIL APPELLATE Jun1snrcTION: Civil Appeal No. 62 of 1961 - **Bench:** B. P. Sinha, J. L. Kapur, ~L HmAYATULLAH, J.C. Shah, J.·R. Mudholkar - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1962-supp-2-s-c-r-211-2598 - **Pages:** 7 ## Headnote Incom.~-Ta.x-Gratuity-.Payment of nof. in pur.s1!'ance nf any scluime but 1;ol1tntaril.11 .for lonq and varu.rJblr. servicPsWhelher detlnclion can be claimed-Income-Ta.~ Act, 1922 ( 11of1.922), 8. 10 (2) (xv). The company accepted the resignation of one of its directors and in appreciation of his long valnable services to the company, paict him a gratuity of Rs. 40,nOO/-. Tr.is amount was claimed as a·: deduction under s.10(2) (xv) of the Income.tax Act which was disallowed by the Income-tax Officer, on the ground that the appellant company had no pension scheme,; the payment was voluntary and that the entry in the assessec s boob clearly indicated it to be a capital payment. Held,' that the payment does not fall within the provisions of'· I0(2)(xv) of the Act. The amount was paid not in pursuance· of any scheme of payment of gratuities nor was it an amount which the reripien t expected to be pment from B!'rvioo. The appeal relates to the &88e88DJ~nt year HJ50·51. M/s. Gordon Woodroffee & Co. (Madl'llB) Ltd., was incorporated as a private limited company in 1922 and became the Managing Agent of a. public limited company M/e. Gordon Woodroffee Leather Manufacturing Company Ltd., which is the &BB!'SBOO. One J. H. Philips was €mployed in the Managing Agent Company from 1922 to 1935 and from 1935 he became an employee of the appellant company and became its Dirertor from 1940. On March 22, 1949, he wrote a letter to the appellant company exprcasing bis intention to resign from the Board of the Company ae 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 p&Blled a resolution that his resignation be accepted and in appreciation of his long and valuable services to Company hebe paid a gratuity of Rs. 50,000/- out 2 S.C.R. SUPREME COURT REPORTS 213 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 c ## Text . ., ~.C.R. SUPREME COURT REPORTS GORDON WOODROFFEE LEATHER MANUFACTURING CO. v. 211 THE COMMISSIONER OF INCOME-TAX, MADRAS (B. P. SINHA, c. J., J. L. KAPUR, ~L HmAYATULLAH, J.C. SHAH and J.·R. MUDHOLKAR, ,JJ.) Incom.~-Ta.x-Gratuity-.Payment of nof. in pur.s1!'ance nf any scluime but 1;ol1tntaril.11 .for lonq and varu.rJblr. servicPsWhelher detlnclion can be claimed-Income-Ta.~ Act, 1922 ( 11of1.922), 8. 10 (2) (xv). The company accepted the resignation of one of its directors and in appreciation of his long valnable services to the company, paict him a gratuity of Rs. 40,nOO/-. Tr.is amount was claimed as a·: deduction under s.10(2) (xv) of the Income.tax Act which was disallowed by the Income-tax Officer, on the ground that the appellant company had no pension scheme,; the payment was voluntary and that the entry in the assessec s boob clearly indicated it to be a capital payment. Held,' that the payment does not fall within the provisions of'· I0(2)(xv) of the Act. The amount was paid not in pursuance· of any scheme of payment of gratuities nor was it an amount which the reripien t expected to be pment from B!'rvioo. The appeal relates to the &88e88DJ~nt year HJ50·51. M/s. Gordon Woodroffee & Co. (Madl'llB) Ltd., was incorporated as a private limited company in 1922 and became the Managing Agent of a. public limited company M/e. Gordon Woodroffee Leather Manufacturing Company Ltd., which is the &BB!'SBOO. One J. H. Philips was €mployed in the Managing Agent Company from 1922 to 1935 and from 1935 he became an employee of the appellant company and became its Dirertor from 1940. On March 22, 1949, he wrote a letter to the appellant company exprcasing bis intention to resign from the Board of the Company ae 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 p&Blled a resolution that his resignation be accepted and in appreciation of his long and valuable services to Company hebe paid a gratuity of Rs. 50,000/- out 2 S.C.R. SUPREME COURT REPORTS 213 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 saine 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. This amount was claimed as a deduction under s. 10 (2)(xv) of the Income-tax Act which ~eads :·- Section 10(2) "Such profits or gains shall be computed after making the following allowances, namely: ............................................................ . . . . . . . . . . . . . ............. ~ ............................... . (xv) any expenditure (not being a'.l allowance of the nature described in any of tho 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 er 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 an.d that the entry in the assl,ssee'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 a 0Cording to the resolution the gratuity was paid "for long and valuable sen,ices to the Company" ; that there was nothing to indicate that Mr. J. 1!. Philips had accepted a lower salar.Y in expectation of get.ting a gratuity at the end of his service ; that there 1961 Gordon TV oorlro.f!tt Leather llfanufactu.ri11g Co v. The CommiJsir,ner vf Income·tax, JJ1adras !(apur J. llltJ c.,... w ..,/to.ff,, Lu,.,, MG11Mjactu i11g Co. .. n.. CommissiclU< of 1__,.1ox, MUros /C-J. 214 SUPREME COURT REPORTS (1962] SUPP. was no such praotice in the appellant Company and that during the course of his service he WaR being remunerated at a graduated scale of salary and a commit!sion of 2 !% on the profits; that there was no •·expectancy" that at the end of the service thero would bo a recompense for faithful and efficient service that he had been suitably n·warded 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 Com· pany tho amount had not been debited in the profit and loSB axPunt but was debited to the appropriation account thereby indicating that it was an extra payment or a payment made in the nature of a capita.I expe118e. Taking all these circumstances into consideration the Tribllnal came to the con· clusion that it was difficult to hold that the expen, dituro was not in the nature of a ctpital expendi· ture or tha,t it wa11. expended wholly and exl'IU· sively for the purpose of the a88Cll8ee'11 busin888. At the instance of the appellant Company the case was stated to the High Court under e. 66( l) of the Income-tax Act and the following question was referred:- "W1ether the sum oi H~. 40,000/- paid to Mr. J. H. Philips on hill retirement from tho service of the CJompany was not an ~issi ble deduction under Section 10(2Xxv) of the Income-tax .Act, 1922." The High Court answered tlie question against the appellant Company. It held that in order thi.t s. J 0(2) (xv) be applicable it had to be proved that the amount was laid out or expended wholly and exclusively for purposes of the company's buain888. In this case the amount was paid on retirement and for valuable servioee rendered by Mr. J. H. Philips ; there wall no evidonoo that he expected to receive this amount or the Company contemplated its payment at any time before ; the paym~ 2 s.c.R. SUPREME COURT REPORTS 215 was voluntary and there was no evidence to show that it was in the future interest of the business of the Company that the expenditure was incurred. The High Court observed :- "In the case of a payment of a gratuity t•l a retiring employee recognition of his past services, wirh nothing more cannot, in our opinion satisfy the requirements of Section IO(:l){xv), even if those requirements are judged from the view point of commercial expediency, as it always should be when a olaim arises under Section 10(2)(xv). Was the expenditure incurred in the future interest of the business of the assessee ? Was there any connection between the purpose of the payment and the further conduct of the business of the assessee ? These are the tests to be satisfied before it could be said that in paying the gratuity money was laid out or expended wholly and exclusively for the purpose of the business of the Company. These tests the assessee did not satisfy in this case." Against this judgment and order the appellant Company has brought this appeal by special leave. It was argued on behalf of the appellant that the amount had been paid as a matter of commercial expediency and in the interest of the Company as an inducement to other employees that if they rendered service in a similar manner with efficiency and honesty they would be similarly rewarded. Decisive test., it was submitted, was whether such payments of gratuity were likely in future also and was the payment made as an incentive to the employees to give their best to the employer and if it was so then the payment was a matter of commercial prudence, It was also submitted that the Com· pan;Y had acted not with any oblique motive and 1961 Gordon Woodrojfee LeatMr Manufacturing Co, v. The Commissioner Income-tax, 111.adra Kapur J, :!W SUPREME COURT REPORTS [1962] SUJ:>J·. 1~1 its good faith was not in doubt and in support of Gordo• Woad,.Jfu the contention several caseH were relied upon. Uallo" Ma••f"''"'i"' Co. In our opinion on the findings &H given the payn,·c.:,;.;,,;,,..., of ment in dispute