D, holding directly or through his nominees, entire shares of the assessee- company, entered into an agreement with T, in terms of which D sold his shares in the assessee company to T. The agreement provided for termination of services of employees and managing director and for payment of retrenchment compensation, commutation of pension and compensation to managing director. The appellant paid Rs. 1,64,899, which amount, inter alia, <\/em>included Rs. 16,188 paid to the managing director in lieu of six months\u2019 notice, Rs. 21,200 paid towards compensation for termination of pension allowance, and Rs. 16,885, the first of five annual payments as compensation to the director. These amounts were claimed as a deduction under section 37(1). These payments resulted in a substantial reduction in the wage bill as a consequence of the retrenchment.<\/p>\n The ITO denied the deduction on the ground that the services of the managing director and the employees were terminated not because of business expediency but because T made it a pre-condition under the agreement and therefore, it could not be considered as allowable under section 37(1). The additions were confirmed by the Commissioner (Appeals). The Tribunal confirmed that the expenditure was not incurred for the purpose of the business and further held that no deduction could be allowed since it was made to benefit the\u00a0 third party.\u00a0 On\u00a0 a\u00a0 reference, the High Court held that only the two amounts of Rs. 21,200 and Rs. 16,188\u00a0 were allowable as deductions and that the balance of Rs. 1,27,511 paid to the employees and a director was not allowable as a deduction since the expenditure had notbeen incurred by the company for commercial reasons.<\/p>\n \u00a0<\/p>\n Whether the said payments of Rs. 1,27,511 made by the assessee company\u00a0\u00a0\u00a0\u00a0 to the employees and the director by way of retrenchment compensation or compensation for termination of service were allowable as business expenditures under section 37(1)?<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n The assessee-company was neither dissolved nor was its business undertaking sold. It continued to exist as a juristic entity even after the transfer of its shares\u00a0\u00a0\u00a0\u00a0 by D in favour of T. No doubt that on account of such transfer of shares, the transferees gained control on the assessee company, but neither D nor T derived any direct benefit out of the payment of retrenchment compensation even though such retrenchment might have facilitated the transfer of shares. The High Court wrongly placed more emphasis on the motive with which the amount was expended than the fact that the expenditure was incurred in connection with the business of the assessee company.<\/p>\n \u00a0<\/p>\n On appeal reversing the judgement of the High Court, the Supreme Court held\u00a0\u00a0\u00a0 that even assuming that the motive behind the payment of the compensation was that the terms of the agreement between the D and T for the sale of the shares should be satisfied, as long as the amount of Rs. 1,27,511 was laid out wholly\u00a0\u00a0 \u00a0and exclusively for the purpose of the business of the appellant, there was no reason for denying the deduction. The appellant company continued to function even after its control passed on to the T and the expenditure in question was\u00a0\u00a0\u00a0 laid out for the purpose of the company\u2019s own trade and not for the trade of the\u00a0\u00a0\u00a0\u00a0\u00a0 T who was only its shareholder. As a result of the expenditure, the appellant company was in fact benefited by reduction in its wage bill. It could not be said that the T was in any way benefited financially because of the deduction in the consideration payable by it for the shares.<\/p>\n The expression \u2018wholly and exclusively\u2019 does not mean \u2018necessarily\u2019. Ordinarily,\u00a0 it\u00a0 is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. The fact that somebody other than the assessee is\u00a0\u00a0\u00a0 also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction if it satisfies otherwise the test laid down by law.<\/p>\n The sum of Rs. 1,27,511 was, therefore, held to be expended by the appellant\u00a0 \u00a0\u00a0\u00a0\u00a0on the ground of commercial expediency and in order to indirectly facilitate the carrying on of its business, and was, therefore, allowable as a deduction. (AY. 1957-58, 1958-59, 1959-60and 1960-61) (CA Nos. 2501 and 2502-2504 of 1972<\/p>\n dt. 3-5-1979).<\/p>\n D, holding directly or through his nominees, entire shares of the assessee- company, entered into an agreement with T, in terms of which D sold his shares in the assessee company to T. The agreement provided for termination of services of employees and managing director and for payment of retrenchment compensation, commutation of pension and compensation to managing director. The appellant paid Rs. 1,64,899, which amount, inter alia, <\/em>included Rs. 16,188 paid to the managing director in lieu of six months\u2019 notice, Rs. 21,200 paid towards compensation for termination of pension allowance, and Rs. 16,885, the first of five annual payments as compensation to the director. These amounts were claimed as a deduction under section 37(1). These payments resulted in a substantial reduction in the wage bill as a consequence of the retrenchment.<\/p>\n The ITO denied the deduction on the ground that the services of the managing director and the employees were terminated not because of business expediency but because T made it a pre-condition under the agreement and therefore, it could not be considered as allowable under section 37(1). The additions were confirmed by the Commissioner (Appeals). The Tribunal confirmed that the expenditure was not incurred for the purpose of the business and further held that no deduction could be allowed since it was made to benefit the\u00a0 third party.\u00a0 On\u00a0 a\u00a0 reference, the High Court held that only the two amounts of Rs. 21,200 and Rs. 16,188\u00a0 were allowable as deductions and that the balance of Rs. 1,27,511 paid to the employees and a director was not allowable as a deduction since the expenditure had notbeen incurred by the company for commercial reasons.<\/p>\n \u00a0<\/p>\n Whether the said payments of Rs. 1,27,511 made by the assessee company\u00a0\u00a0\u00a0\u00a0 to the employees and the director by way of retrenchment compensation or compensation for termination of service were allowable as business expenditures under section 37(1)?<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n The assessee-company was neither dissolved nor was its business undertaking sold. It continued to exist as a juristic entity even after the transfer of its shares\u00a0\u00a0\u00a0\u00a0 by D in favour of T. No doubt that on account of such transfer of shares, the transferees gained control on the assessee company, but neither D nor T derived any direct benefit out of the payment of retrenchment compensation even though such retrenchment might have facilitated the transfer of shares. The High Court wrongly placed more emphasis on the motive with which the amount was expended than the fact that the expenditure was incurred in connection with the business of the assessee company.<\/p>\n \u00a0<\/p>\n On appeal reversing the judgement of the High Court, the Supreme Court held\u00a0\u00a0\u00a0 that even assuming that the motive behind the payment of the compensation was that the terms of the agreement between the D and T for the sale of the shares should be satisfied, as long as the amount of Rs. 1,27,511 was laid out wholly\u00a0\u00a0 \u00a0and exclusively for the purpose of the business of the appellant, there was no reason for denying the deduction. The appellant company continued to function even after its control passed on to the T and the expenditure in question was\u00a0\u00a0\u00a0 laid out for the purpose of the company\u2019s own trade and not for the trade of the\u00a0\u00a0\u00a0\u00a0\u00a0 T who was only its shareholder. As a result of the expenditure, the appellant company was in fact benefited by reduction in its wage bill. It could not be said that the T was in any way benefited financially because of the deduction in the consideration payable by it for the shares.<\/p>\n The expression \u2018wholly and exclusively\u2019 does not mean \u2018necessarily\u2019. Ordinarily,\u00a0 it\u00a0 is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. The fact that somebody other than the assessee is\u00a0\u00a0\u00a0 also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction if it satisfies otherwise the test laid down by law.<\/p>\n The sum of Rs. 1,27,511 was, therefore, held to be expended by the appellant\u00a0 \u00a0\u00a0\u00a0\u00a0on the ground of commercial expediency and in order to indirectly facilitate the carrying on of its business, and was, therefore, allowable as a deduction. (AY. 1957-58, 1958-59, 1959-60and 1960-61) (CA Nos. 2501 and 2502-2504 of 1972<\/p>\n dt. 3-5-1979).<\/p>\n Editorial: <\/em><\/strong>Earlier and Subsequent decisions on the issue may be referred Calcutta & Co. v. CIT (1959) 37 ITR 1 (SC), CIT v. Travancore Sugar\u00a0 Chemicals Ltd (1973) 88 ITR 1 (SC), Eastern Investment Ltd v. CIT (1951) 20 ITR 1 (SC), Alembic Chemical works v.\u00a0 CIT (1989) 177 ITR 377 (SC). <\/em><\/strong>In Shahzada Nand\u00a0\u00a0\u00a0\u00a0\u00a0 & Sons v.\u00a0 CIT (1977) 108 ITR 358(SC) <\/em><\/strong>the Court held that the reasonableness\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 of the payment has to be judgement not on any subjective authority standard of assessing authority but from the point of view of commercial expediency.<\/p>\n \u201cTruth is by nature self-evident. As soon as you remove the cobwebs of ignorance that surround it, it shines clear.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n","protected":false},"excerpt":{"rendered":" S. 37(1): Business expenditure \u2013 Termination of services of directors and employees to facilitate take over \u2013 Retrenchment compensation an allowable deduction \u2014 \u201cWholly and exclusively\u201d does not mean \u201cnecessarily\u201d \u2014 Benefit to third party irrelevant [Indian Income-Tax Act, 1922 S. 10(2)(xv)] <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13320","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3sQ","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13320","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13320"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13320\/revisions"}],"predecessor-version":[{"id":13321,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13320\/revisions\/13321"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13320"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13320"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13320"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Issue<\/h3>\n
View<\/h3>\n
Held<\/h3>\n
Facts<\/h3>\n
Issue<\/h3>\n
View<\/h3>\n
Held<\/h3>\n