Mysore Standard Bank Ltd. (In Liquidation) v. Commissioner Of Income-Tax, Mysore.

Hegde, J.:— This is a reference made under section 66(1) of the Indian Income-tax Act, to be referred to as the “Act” hereinafter. The question of law referred is:

“Whether the expenditure in the sum of Rs. 37,043-15-0 paid to the employees of the bank in the particular circumstances of the case is an allowable one under section 10(2)(x) or 10(2)(xv) of the Act?”

2. Sri D.R Venkatesha Iyer, the learned counsel for the assessee, did not avail of the assistance of section 10(2)(x). He conceded that that provision may not be applicable to the facts of the present case. Therefore, we have confined our attention only to the scope of section 10(2)(xv) of the Act. The material facts of the case are as follows:

The assessee was carrying on banking business with head office at Bangalore. It had one branch at Malleswaram and another at Shimoga. The branches at Malleswaram and Shimoga were closed in or about the middle of the year 1955. On 24th December, 1955, the following special resolution was passed:

“That the Mysore Standard Bank Ltd. be wound up voluntarily.

Resolved that the employees of the bank, including those who had worked in the branches of the bank, which had already been closed, be paid, by way of compensation for termination of their services, their salaries for two months for each year of their service in the bank.”

3. At this stage, it may be noted that the persons who were serving in Malleswaram and Shimoga branches had been retrenched as and when those branches were closed.

4. The question for consideration is whether the payments made in pursuance of the afore-mentioned resolution is deductible under section 10(2)(xv), which reads:

“Any expenditure (not being an allowance of the nature described in any of the 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 or vocation”

(The underlining* is ours),

Before considering the scope of the expression “laid out or expended wholly and exclusively for the purpose of such business”, it is necessary to mention that there is no proof before us that any part of the sum of Rs. 37,000 and odd mentioned in the statement of case had been expended during the account year.

Sri D.R Venkatesha Iyer, the learned counsel for the assessee, contended that the payment made to the employees is one that was to be required under law to be made and therefore that payment must be considered as having been made “for the purpose of such business”.

5. We shall first examine the contention: whether there was any legal liability on the part of the assessee to make the payment in question? From the resolution above noticed, it is clear that the payment in question was made for compensating the employees and the ex-employees whose services had to be dispensed with as a result of the closing of the bank. Sri Iyer did not invite our attention to any provision of law in force at the relevant time, under which the assessee was required to compensate the employees whose services the assessee had to dispense with, as a result of the closure of the bank. He contended that as a master, the assessee had to give reasonable notice of termination or in lieu thereof pay the salary of the period in question. The payment in question was not purported to have been made in lieu of notice. That much is clear from the resolution set out above. There fore, the question whether any notice had to be given to the employees or salary in lieu thereof should have been given, does not arise for consideration in this case.

6. It was next contended by Sri Iyer that on the principle of “social justice”—a term which is grossly misused—the employer had to pay compensation for terminating the services of his employees. “Social justice” is a philosophy and not law. Courts are primarily concerned with law and not philosophy. If any principle of “social justice” is enacted in a statutory provision, then the courts have to implement the same faithfully. While interpreting such a legislation the courts have to bear in mind the purpose of the legislation. The duty or the function of the court does not go any further. The only provision which has any bearing on the point in controversy is section 25F of the Industrial Disputes Act, 1947 (XIV of 1947). the scope of this provision was considered by the Supreme Court in Hariprasad Shivshankar Shukla v. Divikar [1957] S.C.R 121. Therein, their Lordships have laid down that section 25-F or section 25-FF did not apply to cases where the termination of service has taken place as a result of a bona fide closure of business. section 25-FFF was introduced into the Industrial Disputes Act with a view to get over the effect of the above decision. That provision was given retrospective effect to some extent. The scope of section 25-FFF was considered by the Supreme Court in Hatisingh Manufacturing Co. Ltd. v. Union of India [1960] 3 S.C.R 528 and other connected cases. Therein Shah J., who delivered the judgment of the case, observed:

“It is true that the Amending Act which has introduced section 25-FFF was passed in June, 1957, and liability to pay compensation arises in respect of all undertakings closed on or after November 28, 1956. But, if liability to pay compensation is not a condition precedent to closure, by failing to discharge the liability to pay compensation and wages in lieu of notice, the employer does not contravene section 25-FFF(1).”

7. In the instant case, the bank in question had been closed on December 24, 1955. Therefore, section 25-FFF of the Industrial Disputes Act is of no assistance to the assessee. Hence, the payment in question must be considered as a gesture of generosity.

8. The next question is whether the expenditure for which exemption is claimed can be said to have been incurred “wholly and exclusively for the purpose of such business”. The scope of the words “for the purpose of such business” has been considered by Kanga and Palkhivala, in their book on Income-tax Act. This is what the learned authors say about it:

“The words ‘for the purpose of such business, profession or vocation’ in this clause refer to the business, profession or vocation described in sub-section (1), viz., the business, profession or vocation carried on by the assessee the profits of which are to be computed and taxed. ‘For the purpose of the business’ means ‘for the purpose of keeping the trade going’: voluntary payments made to employees after winding up or legal costs incurred in suing for dissolution of a firm, would not be admissible deductions under this clause.” (Vide page 370, volume I, fourth edition).

9. In Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax [1959] 37 I.T.R 66 the Supreme Court observed:

“This section (section 10(2)(xv) of the Act) though it enacts affirmatively what is stated in the negative form in the English statute, is substantially in ‘pari materia’ with English enactment…”

10. It was also observed therein:

“…. a court in India will be justified in considering the English authorities as aids to the interpretation thereof.”

11. The scope of the words “any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of the trade, profession or vocation” came to be considered by the King's Bench in Commissioners of Inland Revenue v. Anglo Brewing Co. Ltd. Interpreting those words, Rowlatt J., who delivered the judgment of the bench, observed:

“Now I cannot conceive how, under those circumstances, there can be any evidence at all that the payments were made for the purpose of the trade because that must mean for the purpose of keeping the trade going, and of making it pay. There was not any such purpose at all. The purpose was to wind it up, and making payments was not a question any longer. I am bound to say that I should have thought that that was a quite sufficient ground for disposing of this case. I think I ought also to say that the other point (there may be other points besides this one) which is against this decision is that the money was not paid in the year. Of course, it is crucial for the purposes of this case that the money should be paid in the year. It was not paid; there was no obligation to pay it.”

12. There is no dispute that the payments in question were not made “for the purpose of keeping the trade going”.

13. Further, admittedly the account year ended on the 31st of December, 1955. There is no evidence to show that any payment had been made in pursuance of the resolution above quoted during the account year.

14. Now, coming to the Indian cases which have some bearing on the point under consideration, we may first refer to the case of Messrs J.K Cotton Manufacturers, Kanpur…(Applicant); v. Commissioner Of Income-Tax…(Opposite-Party)., the assessee was a private company and C was its director-in-charge. He was at first drawing a salary of Rs. 6,000 a year, but later it was increased to Rs. 10,000 a year. He ceased to be the director-in-charge in September, 1938, and since then he was working merely as an ordinary director. The assessee decided to go into voluntary liquidation with effect from 30th September, 1941, and the actual order of dissolution was passed on 8th December, 1941. From 1st October, 1941, the assessee's business was taken over by a new public company. The assessee's board of directors by their resolution dated the 2nd February, 1942, approved and confirmed the payment of a sum of Rs. 10,000 to C in recognition of his past services to the assessee and this sum was debited to the assessee's profit and loss account for the year commencing 1st October, 1940. The question was whether the payment of Rs. 10,000 to C was an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. The relevant observations of their Lordships on the point are found at page 134. This is what is stated therein:

“Shri Pathak has, however, urged that the point of law that he wanted to urge is that the Tribunal committed an error of law in its view that the amount spent could not be held to be wholly and exclusively laid out for purposes of the business unless it related to expenditure for purposes of future business. In other words, if an employee has worked well, it is open to the assessee to recognise such exceptionally, good service, which has resulted in profits to the assessee, by making payment of a gratuity to him and any gratuity paid in such circumstances will be an allowable business expenditure. It is not necessary for us to answer this general question. It may be that, in certain circumstances, such a payment may be justified and may be deductible as an expenditure wholly and exclusively incurred for purposes of the business of the assessee. It, however, appears from the statement of the case and the facts put before the Tribunal that, on the eve of the closing of the business when the employee was leaving the undertaking, the assessee decided to pay a sum of money to him for services which had been rendered by him more than three years before. In such circumstances, without, any further facts justifying the payment, it is not possible to hold that the expenditure was wholly and exclusively for purposes of the business of the company.”

15. It is true, as contended by Sri D.R Venkatesha Iyer, that this case is not exactly on the point under consideration by us. But the ratio of the decision is of some assistance in finding out the true scope of section 10(2)(xv).

16. The next case to which reference was made at the Bar during the hearing of this reference is Inderchand Hari Ram v. Commissioner of Income-tax. Therein their Lordships observed that:

“In considering, however, whether the expenditure can be deducted as business expenditure, it must be remembered that sub-section (2)(xv) is a part of section 10 and at the time of the computation of the income of a business, though that income may be nil, the expense incurred wholly and exclusively for the purpose of that business may be a permissible deduction; but in order to be deductible under this clause the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment.”

17. In our opinion, the expenditure incurred at the time or for the purpose of closing the business cannot be considered as “expenditure incurred for the purpose of such business”. Similar is the position in the present case. For the reasons mentioned above, we answer the reference in the negative (in favour of the revenue). The assessee shall pay the costs of the revenue in this case. Advocate's fee Rs. 250.

18. Reference answered in the negative.