Back
1967 Supreme(Cal) 178
HIGH COURT OF CALCUTTA
B.N.BANERJEE, K.L.ROY, JJ.
C.I.T. Calcutta - Appellant
Versus
Turner Morrison And Co Private Limited – Respondent
Decided On : Aug 07, 1967
B.L.Pal, D.Pal, M.Seal, N.A.Palkhiwala, N.L.Pal,
Compensation paid to directors for premature termination of service contracts, with the object of saving money by reducing top-heavy administration costs, is an allowable deduction as business expenditure under section 10 (2) (XV) of the Indian Income Tax Act.
Headnote:
INCOME TAX - Business Expenditure - Compensation to Directors - Revaluation of Business Premises - Whether Allowable Deductions. 1. Compensation paid to directors for premature termination of service contracts, with the object of saving money by reducing top-heavy administration costs, is an allowable deduction as business expenditure under section 10 (2) (XV) of the Indian Income Tax Act. 2. Expenditure incurred for obtaining expert valuation of business premises for the purpose of securing evidence of proper valuation in connection with municipal revaluation is also an allowable deduction as business expenditure under section 10 (2) (XV) of the Act.
Fact of the Case:
The assessee, Turner, Morrison and Company Private Limited, paid compensation to three of its directors for premature termination of their service contracts. The assessee also incurred expenses for obtaining expert valuation of its business premises in connection with municipal revaluation. The Income Tax Officer disallowed both these expenses as business expenditure. The Appellate Assistant Commissioner and the Tribunal allowed the deductions.
Finding of the Court:
The High Court held that the compensation paid to the directors was an allowable deduction as business expenditure because it was paid to save money by reducing top-heavy administration costs. The Court also held that the expenditure incurred for obtaining expert valuation of the business premises was an allowable deduction as business expenditure because it was incurred to secure evidence of proper valuation in connection with municipal revaluation.
Issues: 1. Whether the compensation paid to the directors was an allowable deduction as business expenditure under section 10 (2) (XV) of the Indian Income Tax Act? 2. Whether the expenditure incurred for obtaining expert valuation of business premises was an allowable deduction as business expenditure under section 10 (2) (XV) of the Act?
Ratio Decidendi: 1. The Court held that the compensation paid to the directors was an allowable deduction as business expenditure because it was paid to save money by reducing top-heavy administration costs. The Court relied on the fact that the directors were consuming a good deal and the compensation that was paid to them was much less than what they would have consumed if the service agreement had not been terminated in the manner done. 2. The Court held that the expenditure incurred for obtaining expert valuation of the business premises was an allowable deduction as business expenditure because it was incurred to secure evidence of proper valuation in connection with municipal revaluation. The Court relied on the fact that if the municipal assessment of consolidated rates had been unduly enhanced, the assessee would have been compelled to pay more by way of rates.
Final Decision: Both the questions are thus answered in. the affirmative and in favour of the assessee. The Commissioner of Income-tax must pay costs of this reference to the assessee.
1. This reference under section 66 (1) of the Indian Income Tax act, has been made in circumstances hereinafter related.
2. The assessee, Turner, Morrison and Company Private Limited, is an Indian Company doing business as the Managing Agent of certain shipping concerns. During the assessment year 1952-53 the assessee company used to employ five Directors and during the assessment year 1953-54 one more. These persons, although designated as Directors (to be more precise either as Full directors or as Local Directors, according to their executive ranks), were, in fact, high executives of the company. They did not hold any shares in the company and had no hand in policy making. Each one of them rose by promotion from lower ranks. Their remuneration and service conditions; used to be governed by separate agreements with the assessee company. They were in no way related to the shareholders of the assessee company, who mostly belong to the wealthy English family known as "turner Family. "
During the assessment year 1952-53, the assessee company paid to one ox its Directors, of the name of M. G. Robson, a sum of Rs. 1,00,000 by way of compensation for earlier termination of his contract service. Again, during the assessment year 1953-54, the assessee company paid to two of its Directors of the names of J. Morshead and W. L. A. Radcliffe respectively Rs. 1,50,000/- and Rs. 1,00,000/- for the same reason.
3. The circumstances under which payment of compensation to M. G. Robson was decided upon appear from the minutes of two meetings of the Directors of the assessee company. At the meeting held on June 3, 1951, the chairman of the assessee company reported that while in the United Kingdom he and one Mr. Gloag had discussi in with the beneficial shareholders of the assessee company on the subject as to whether, for acceleration of promotion of newer members of the Board of directors and for inclusion therein of persons who are qualified to become directors, senior people at the top rank of the assessee company should retire earlier than the contracted period. He further reported that, at the suggestion of the shareholders, it was thought advisable to ask M. G. Robson, who was at that time on home leave in the United Kingdom, to agree to his service contract being terminated with the expiry of his leave at the end of Sept. 1951. He also reported that the agreement with M. G. Robson would terminate with the expiry of the month of March 1955, by efflux of time, and as there was no provision in the agreement for giving notice by either side, M. G. Robson should be entitled to ask for compensation for premature termination of office. The Board, thereupon, decided to write to M. G. Robson and find out his reaction to the proposal. In his reply to the letter written by Board, M. G. Robson demanded a sum of Rs. 1,00,000/- as compensation. At the next meeting of the Board, held on June 25, 1951, the Board agreed that the request was not unreasonable and that the company would be saving money by terminating the services of M. G. Robson with effect from September 30, 1951 even on payment of compensation of Rs. 1,00,000/ -. The Board, therefore decided to do so.
4. It was not disputed before us that the circumstances which induced the Board earlier to terminate the services of J. Morshead and W.L.A. Radcliffe (who were also contractually due to retire not earlier than March 31, 1955), in the year 1952, were the same circumstances, as in the case of M. G. Robson, and the sums of Rs. 1,50,000. 00 and Rs. 1,00,000. 00 were respectively paid to them as compensation for the same reason as in the case of M. G. Robson.
In the assessment year 1952-53, the assessee claimed deduction of amount of compensation paid to M. G. Robson as business expenditure under section 10 (2) (XV) of the Indian Income Tax act. In the assessment year 1953-54 the assessee claimed deduction of the amounts of compensation paid to J. Morshead and W. L. A. Raddiffe as busines
