1. The following two questions have been referred to us at the instance of the Revenue :

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the medical expenditure to the extent of Rs. 2,54,994 incurred on an employee should be allowed as a valid business expenditure in the hands of the assessee under Section 37 of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the medical expenditure to the extent of Rs. 2,54,994 incurred on an employee could not be considered to be a perquisite and, therefore, could not be disallowed under Section 40A(5) of the Income-tax Act, 1961 ?"

2. They arose out of the assessment of the respondent company in which the public are not substantially interested, under the Income-tax Act for the assessment year 1986-87. During the assessment year, the assessee purchased air tickets for Sri A. M. M. Arunachalam, his wife, Smt. A. R. Lakshmi, and his relative Smt. Valli Alagappan, for their travel to the U. K. at the cost of Rs. 70,994. It also purchased demand draft and travellers cheques in foreign currency for Sri Arunachalam's treatment and the living expenses of Sri Arunachalam, his wife and relative in the U. K. Their visit to the U. K. was for a by-pass surgery for Sri Arunachalam. The amount so spent was not an amount which the company was required to spend under the terms of the contract of employment of Sri Arunachalam by the company.

3. It is not disputed that Sri Arunachalam had been appointed as an adviser to the company by letter dated January 17, 1981, which sets out the terms of his employment. In terms of that letter of appointment, he was to be paid a sum of Rs. 4,250 towards monthly salary, Rs. 450 per month towards engagement of a private servant. He was also to be provided medical facility for himself and his wife to the extent available under the assessee company's medical insurance scheme. In addition, the company was to reimburse to him the actual amount incurred towards medical expenses for him and his wife, which were not reimbursed by the insurance company subject to Rs. 4,500 per annum. He was also to be provided with a car together with a driver for private purpose and the company was to pay club subscription on his behalf for two clubs and reimburse the entertainment expenses incurred by him in connection with the business of the company.

4. The said Sri Arunachalam was not a whole time adviser of the company. The Tribunal has noted the fact that he was the chairman of the board of directors of three companies, Tube Investment of India Ltd., Carborandum Universal Ltd., and South Asian Financial Exchange Ltd. He was also the deputy chairman of Ashok Leyland Ltd., and W. S. (India) Ltd.

5. On April 3, 1985, the board of directors of the assessee-company passed a resolution resolving to bear the full expenditure for the by-pass surgery, which the said Arunachalam was required to undergo on the advice of doctors who had recommended that the surgery be done in the U. K. The reason given by the board of directors for so resolving was for the valuable advice that the company had received from him from time to time for the benefit of the group companies. The resolution was passed by the board by circulation. The recommended surgery was performed in the U. K. in April, 1985. Sri Arunachalam and his wife and relative remained in U. K. for seven weeks during April and May, 1985.

6. It is not in dispute that Sri Arunachalam has not sought any financial help from the assessee-company.

7. The Income-tax Officer as also the Commissioner of Income-tax held that the amount spent by the assessee-company for the medical treatment of the said Sri Arunachalam, and stay of his wife and his relative in the U.K. for seven weeks could not be allowed as business expenditure under Section 37 of the Income-tax Act, in the view that the amount so spent was only a gratuitous expenditure and could not be regarded as expenditure incurred for the purpose of the assessee's business. They also took the view that the payment was hit by the provisions of Section 40A(5) of the Act.

8. The assessee having appealed against the order of the Commissioner to the Tribunal, the tribunal disagreeing with the view of the Commissioner held that this payment did not attract Section 40A(5). It also held that the expenditure was incurred for the purpose of the assessee's business, as the said Sri Arunachalam had offered valuable advice to the assessee-company and the other group companies in the past and considering his standing in the business world, the advice rendered by him was valuable.

9. The Revenue being aggrieved by the decision of the Tribunal, the above two questions have been referred to us at the instance of the Revenue.

10. We may dispose of the second question first as the true scope of Section 40A(5) of the Act has now been explained authoritatively by the Supreme Court in the case of CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 644, wherein it has been held that cash payments are outside the purview of Section 40A(5) of the Act. The expenditure incurred by the assessee having been incurred by way of payments made in cash such payments do not attract Section 40A(5) of the Act. The second question referred to us, is required to be and is answered in favour of the assessee and against the Revenue.

11. Learned counsel for the Revenue submitted that the expenditure incurred by the assessee-company on the medical treatment, travel and stay of Sri Arunachalam, his wife and his relative was only a gratuitous expenditure that it was not an expenditure which could be regarded as justified on grounds of commercial expediency and that the expenditure was not one which was wholly and exclusively or even necessarily incurred for the purposes of the assessee's business. It was submitted that the contract as between the assessee and Sri Arunachalam did not provide for any such payment. The expenditure on medical expenses reimbursable as also the expenditure for the medical treatment which is available under the asses-see-company's medical insurance scheme have been spelt out in the letter of appointment. It was further submitted that the said Sri Arunachalam at no point of time requested for such payment being made and it was not the case of the assessee or of the said Sri Arunachalam that the salary that was being paid to him under the agreement was in any way affected by this sum being paid in the event of his having to undergo by-pass surgery. The reason given by the board of directors for making the payment being the benefit obtained by the company from his services in the past could not afford the justification for this payment. This justification for this payment cannot be regarded as sufficient for treating the expenditure as business expenditure in the light of the decision of the Constitution Bench of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Company v. CIT [1962] 44 ITR 551.

12. Learned counsel for the assessee, on the other hand sought to support the order of the Tribunal and submitted that having regard to the later decision of the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261, the expenditure incurred by the assessee on the medical treatment of its adviser was required to be regarded as business expenditure.

13. In the case of Gordon Woodroffe Leather Manufacturing Company v. C/T [1962] 44 ITR 5.51 a Constitution Bench of the apex court considered the question as to whether the payment of a sum of Rs. 40,000 as gratuity to a person who was the employee of the managing agent of the assessee-company from 1922 to 1935 and also an employee of the assessee from 1935 and later its director from 1940, the payment having been made to him during the previous year relevant to the assessment year 1950-51 could not be regarded as an expenditure laid out or expended for the purpose of the business within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922. There also the payment had been made to a former employee "in appreciation of his long and valuable services to the company". The company there did not have any scheme for the payment of gratuity nor was the payment of gratuity a matter of practice. There was also nothing to show that the employee had accepted a low salary in expectation of a gratuity on retirement nor was there anything to show that the gratuity was paid for the purpose of facilitating the carrying on of the business of company or as a matter of commercial expediency.

14. The apex court in the case of Gordon Woodroffe Leather Manufacturing Company v. CIT[1962] 44 ITR 551 held that (headnote):

"The proper tests to apply in a case like this are whether the payment was made as a matter of practice which affected the quantum of salary or there was an expectation by the employee of getting a gratuity or the sum of money was paid on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business"

15. In this case also there is nothing on record to show that Sri Arunachalam had accepted a low salary in expectation of a benefit like the one now conferred on him, his wife and his relative, by the assessee-company. There is also nothing on record to show that the payment was made for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. There is also nothing on record to show that the company had a scheme of meeting the costs without any limit of its employees or advisers abroad and meeting the costs of the travel and stay of their relatives as well.

16. In the case of Sossoon J. David and Co. P. Ltd, v. C/T[1979] 118 ITR 261, a Bench of two learned judges of the apex court held that the expression "wholly and exclusively" used in Section 10(2)(xv) of the Indian Income-tax Act, 1922, does not mean "necessarily" and that ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The court also held that the tests laid down in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT , had to be read disjunctively. The court in that case held that the sum of Rs. 1,27,511 paid by the assessee towards compensation for termination of service, compensation to director and other payments were sums which were laid down wholly and exclusively for the purpose of business of the company. The court observed that as the result of the expenditure, the appellant-company was, in fact, benefited by reduction in the wage bill. That expenditure was held to be an expenditure on grounds of commercial expendiency and in order indirectly to facilitate the carrying on of its business and was therefore allowable as a deduction.

17. The tests laid down in the case of Gordon Woodroffe Leather Manufacturing Co. v, CIT , were laid down by the Constitution Bench of the apex court and those tests have not been varied in the case of Sassoon J. David and Co. P. Ltd. . The tests have been clarified to be disjunctive and that if the payment can be justified by applying any one of the tests, such expenditure can be regarded as one incurred wholly and exclusively for the purpose of business of the assessee.

18. Learned counsel for the assessee invited our attention to the decision of the Madhya Pradesh High Court in the case of CIT v. Steel Ingots Pvt. Ltd. [1996] 220 ITR 552 and to the decision of the Bombay High Court in the case of Mehboob Productions Pvt. Ltd. v. CIT [1977] 106 ITR 758 and submitted that expenditure on the travel and medical treatment of directors having been allowed in those cases, similar allowance in this case would be justified. On a perusal of those decisions we do not find any reference in these decisions to the decision of the Constitution Bench of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551, and we are unable to derive any assistance from those decisions.

19. The tests as laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551, as set out in the case of Sassoon J. David and Co. P. Ltd. :

"(i) that the payment should have been made as a matter of practice which affected the quantum of salary,

(ii) that there was an expectation by the employee of getting a gratuity, and

(iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee."

20. Applying these tests to the facts of this case, we are unable to hold that any one of the tests has been satisfied. The payment made was not one which had any link with the quantum of salary and other benefits to Sri Arunachalam. It is not the case of the assessee that Sri Arunachalam had any expectation of getting the amounts that were paid to him by the assessee for the medical treatment. In fact he did not seek any such payment and there is nothing to show that he was in need of it. The payments so made cannot be regarded as having been made on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee. A gratuituous payment, like the one, made by the assessee cannot be regarded as a matter of commercial expediency, as there is nothing to show that Sri Arunachalam would have withheld his service, if such payment had not been made and the effecting such payment was necessary or expedient in order to retain his service. The stated reason for the payment is "the valuable service rendered by him in the past". The payment is, therefore, clearly in the nature of gratuitous payment voluntarily made in appreciation of the services which he had rendered to the assessee in the past. If the payment of a sum of Rs. 40,000 as gratuity to a person who had served the company for a period of over 27 years cannot be regarded as an expenditure which was commercially expedient and for the purpose of facilitating the carrying on of the business of the company, the payment of a substantial sum of Rs. 2,54,994 to an adviser who was obviously a part time adviser and to whom many valuable facilities had been provided under the agreement and who had not in put the money from the company and was not in need of such payment, cannot also be regarded as an expenditure which was commercially expedient and was incurred wholly and exclusively for the purpose of business of the company.

21. We, therefore, answer the first question referred to us in favour of the Revenue and against the assessee.