Veeraswami, J.:— The assessee having failed to get deduction of two items claimed by it, the following questions have been referred to us under Section 66(1) of the Indian Income-tax Act, 1922:
“1. Whether the creation of a reserve in compliance with Section 17 of the Banking Companies Act is sufficient compliance with the requirements of Section 10(2) vide proviso (b) of the Indian Income-tax Act 1922; and
2. Whether on the facts and in the circumstances of the case, the pensions paid to Mr. Subbiah in the assessment years 1953-1954 to 1959-1960 were expenditure laid out wholly and exclusively for the purpose of the business under S. 10(2)(xv).”
2. The assessee is a public limited company carrying on business in banking. One Sri Subbiah was appointed as General Manager of the Bank for a period of seven years from April 1945, under the terms of a contract of service. On his retirement on 31-3-1952, he was co-opted as a Director with effect from 1-4-1952. Even when he was in service, the Board of Directors of the assessee passed a resolution on 17-5-1948, to the effect that Sri Subbiah and two other named senior officers would be eligible for pension to be calculated at the rates applicable to them as per the rules of service of the Imperial Bank for a period of their service with the assessee, but payment of pension would be on condition that the Officers concerned should not accept service, directly or indirectly with any other banking institution without the prior consent of the Board of Directors. Pursuant to this resolution the bank paid pension to Sri Subbiah in the sums of Rs. 14,063, Rs. 18,750, Rs. 18,750, Rs. 18,750, Rs. 18,375, Rs. 18,000 and another sum of Rs. 18,000 for the assessment years 1953-1954 to 1959-1960 respectively. The assessee claimed deduction of the pension so paid under S. 10(2)(xv). This was disallowed by the Income-tax Officer, and the assessee appeals failed.
3. The Revenue as well as the Tribunal were of the view that the payment was an ex gratia payment and not an expenditure wholly or exclusively laid out for the purpose of the business. The Tribunal reached that conclusion on the ground that there was no pension scheme for the employees of the assessee, that it was not the practice of the assessee to pay pension to any of its employees and that the terms of contract relating to the service of Sri A. Subbiah did not at the inception contemplate any payment of pension. In view of these circumstances, the Tribunal thought that the payment was in recognition of the past services of Sri A. Subbiah and not in regard to the future interest of the assessee's business.
4. The other claim for deduction, which is confined to the assessment year 1969-1960, is a sum of Rs. 1,37,836, representing development rebate. This claim was eventually disallowed by the Tribunal on the ground that one of the conditions requisite for the allowance of the claim as a deduction under proviso (a) to Expln. 9 to 8, 10(8)(vi-b) was not complied with. At earlier stages the Revenue thought that the expenditure did not relate to the category of plant and machinery installed. But this view is no longer pressed before us. The assessee's contention was that it had set apart a sum of Rs. 6 lakhs during the assessment year out of its net profits of the year and this fund so set apart not only satisfied the requirements of Section 17 of the Banking Companies Act, but also the requisites of the said explanation to S. 10(2)(vi-b). The Tribunal refused to recognise that this appropriation was sufficient compliance of the conditions for allowance of the development rebate.
5. On the first question referred to us, we are of the view that the Tribunal was right in its conclusion. Section 10(2) directs that income chargeable to tax shall be computed after making the deductions specified, one of which being what is called development rebate. Clause (vi-b) of sub-sec. (2) is to the effect that allowance should be made in respect of new machinery or plant installed after 31-3-1954, which is wholly used for the purposes of the business carried on by the assessee a sum by way of development rebate in respect of the year of acquisition or installation of the machinery or plant, and this sum will be equivalent to twenty five per cent in the case of machinery or plant installed before 1-4-1961, and in the case of machinery or plant installed after 31-3-1961, twenty per cent of the actual cost of the machinery or plant. This clause has two explanations, and the second has a proviso. Clause (b) of this proviso makes allowance of development rebate subject to two conditions, of which one is that an amount equal to seventy five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of ten years next following for the purposes of the business of the assessee. But this sum cannot be diverted for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India. If the machinery or plant in question is sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years, the allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of the Act. It may be at once seen from these provisions that the requirements of Cl. (b) to the proviso is not an idle formality but is intended to enable the Revenue to track the movement of the fund debited as part of the development rebate in the profit and loss account and credited to a reserve account. Unless this is done, and if the fund so set apart is not so debited or credited, it will be difficult for the revenue to see whether the fund has been utilised in the manner directed by the section as a condition for deduction by way of development rebate.
6. We are therefore, unable to accept the contention for the assessee that because it set apart for the accounting year as reserve fund a sum larger than what is required under the provisions of the Banking Companies Act and the excess was sufficient to cover the proportionate development rebate required to be set apart to qualify for deduction, it is entitled to the deduction. In repelling a similar contention the Tribunal observed, and we think, quite rightly, that till the reserve created under the Banking Companies Act equals to the paid up capital, the reserve could not be said to be available for any other purpose. Actually, when setting apart Rs. 6 lakhs, the Board of Directors did not express the purpose. They never said that the reserve so set apart was to comply with the provisions of the Banking Companies Act or Section 10(2)(vi-b) of the Income-tax Act, 1922. Having regard to one of the conditions prescribed by clause (b) to the proviso, unless it is complied with the assessee cannot successfully claim the deduction under this head. A similar view was taken by this court in Commissioner of Income-tax v. Veeraswami Nainar. 1965-55 ITR 35 at p. 39 : (AIR 1965 Mad 533 at p. 535) as to the effect of clause (b) to the said proviso. There it was observed:
“It will be apparent from the terms of the proviso that the object of the legislature is allowing a development of the assessee's business from out of the reserve fund the entries in the account books required by the proviso are not in idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business….”
7. With respect we are in entire agreement with this view. It follows that the first question should be answered against the assessee.
8. We are, however, unable to accept the view of the Tribunal on the second question. It is true that the assessee had no general scheme for payment of pension to its employees. But that is not conclusive on the question though there may be no pension scheme, still in exceptional cases, we do not see why a business concern may not enter into a contract of service providing for pension and properly claim deduction of pension paid. The principal question to be kept in view is whether the expenditure claimed is laid out for the purpose of the business, whether it is a legitimate business expenditure and whether it is in the interests of the business. The directorate of the business itself is a best judge on that matter, for it is for them to consider the business expediency and whether a particular expenditure should be incurred for purposes of the business Vide Newton Studios v. Commissioner of Income-tax, Madras, 1955-28 ITR 378 : (AIR 1958 Mad 646). In this case, as we mentioned earlier, pension to Sri A. Subbiah was not decided upon and paid after his retirement the resolution to allow pension was passed as early as 17th May 1948 when Sri A. Subbiah had still four years of service. This, as it seems to us, is an important fact which should have been borne in mind by the Tribunal in considering this question and which distinguishes the ratio of Gordon Woodroffee Leather Manufacturing Company v. Cit, Madras, Madras, 1962-44 ITR 551 at 555 : (AIR 1962 SC 1361 at p. 1363). That was a case where an employee resigned, and thereafter a voluntary payment was resolved upon and paid. This Court on a reference held that this was not eligible for deduction as it was but an ex gratia payment. The Supreme Court upheld this view, and in doing so observed:
“In our opinion, the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.”
9. The Tribunal in this case, as it seems to us, laid too much emphasis on the absence of any practice of payment of pension and failed to apply its mind to the fact that payment of pension to Sri A. Subbiah was resolved upon even during the currency of his service. Having regard to the history of this gentleman's service before he came to join the assessee and during his service with the assessee and how the management itself looked upon his services, it is not difficult to appreciate, as we think, that payment of pension was apparently thought of as a business expediency in the interests of the assessee's business. In fact, the premises of the resolution relating to payment of pension themselves show that it was as part of the terms of the service that the payment of pension was resolved upon. Further, the last part of the resolution, namely, a condition of the pension will be that the officers concerned should not accept service, directly or indirectly, with any other banking institution without the prior consent of the Board, also shows that the payment was in the interest of the assessee's business. We are of the view, therefore, that the pension paid for the accounting years constituted an expenditure laid out for the purpose of the business of the assessee. The second question is, therefore, answered in favour of the assessee with costs. Counsel's fee Rs. 250.
LJ/AKJ/D.V.C
10. Reference answered accordingly.