SASSOON J. DAVLD & CO. (P) LTD., BOMBAY versus C.L.T., BOMBAY

Citation: [1979] 3 S.C.R. 878 · Decided: 03-05-1979 · Supreme Court of India · Bench: N.L. UNTWALIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

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878 
SASSOON J. DAVID & CO. (P) LTD., BOMBAY 
v. 
C.I.T., BOMBAY 
May 3, 1979 
[N. L. UNTWALIA AND E. S. VENKATARAMIAH, JJ.] 
Indian Income Tt~x Act 1922-Section 10(2)(xv)-Scvpe of-Re-
trenchment 
compeTJ.Sation 
paid 
to emplOyees whose services were 
terminated-If an 
allowable 
deductiolt-"Wiwlly and 
exclusively" 
meaning of-Benefit to third party-Whether a consideradon for not 
allowing deduction. 
In January, 1956 the assessee company whose assets had 
been valued at -·-_.'f 
Rs. 155 lacs as on December 31, 1955 decided to terminate the services of 22 
( 
of its employees with effect from 31st March, 1956 and to pay them retrench-
ment compensation and compensation for termination of employment. There-
after Davids, who held the share~ of the company entered into an agreement 
with Taw to sell to them all the wares for Rs. 155 lacs. The agreement pro-
vided that compensation and gr~tuity payable to the Directors and employees 
whose :!ervices had been terminated and the annuity payable to the managing 
director should be deducted from the purchase consideration. 
The 
assessee 
claimed deduction under s. 10(2)(xv) of the Indian Income Tax Act, 1922 of 
a sum of Rs. 1.64 laths paid by way of retrenchment compensation and com-
pensation for termination of ~ervice during the assessment year 1957-58 and a 
sum of Rs. 16,885 which was tbe amount of annuity paid to the managing 
director in each of the three succeeding assessment years. 
The lncome Tax officer disallowed the amounts on the ground that the 
services of the directors and employees had been terminated not as business 
expediency but became the purchaser~ of the shares made it a condition under 
the agreement. 
On appeal the Appellate Assistant Commissioner, affirming the view of the 
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Tncome Tax Officer, held that the decision to pay compensation could not be 
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said to have been taken solely with a view to the business requirement of the ....... 
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company. 
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Dismissing the assessee's appeal the Appellate Tribunal held that the ex-
pensc.s had not been incurred for the purpose of the company but purely as a 
result of the bargain between Davids and Tatas and assuming that the pay-
men~ were beneficial to the assessees by reason of the reduction in its estab-
lishment expen~es, no deduction could be ollowed under s. 10(2) (xv) since the 
payment wa~ made to the benefit of a third party. 
Relying principally upon the decision of this Court in Gordon W oodroffee 
Leather Manufacturing Co. v. The Commr. of Income-tax, [1962] Supp. 2 SCR 
211, the High Court held that the amount involved in the case did not satisfy 
the test applicable to the expeJlditure allowable under s. 10(2) (xv) of the Act 
and, therefore, disallowed- the expenditure of Rs. 1.27 lakhs out of a sum of 
Rs. 1.64 lakhs on the ground that it had not been incurred for commercial 
expediency. The High Court also disallowed the annuity paid to the managin! 
director in the succeeding three assessment years. 
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SASOON J. DAVID V. C.I.T. 
879 
Allowing the assessee's appeals 
1:tF1D : 1 (a) The three tests Iai:d down by this Court in Gordon Wood-
roi/te'l case viz., (1) that the payment should have been made as a matter 
ot vractice which affected the quantum of salary, (ii) that there was an expec-
tation 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 have to be read 
disjunctively. So read the present case which satisfied the third test fell under 
s. 10(2) (:xv) of the Act. The High Court was in error in holding that the 
amount in question did not satisfy any of the test> applicable to the expendi-
ture allowable under the section. 
[893H] 
(li) In order to claim deduction under the section an assessee has to show 
that the expenditure in question (1) was not an allowance of the nature des-
cribed in any of the clauses (i) to (xiv) of the section, (ii) was not in the 
nature of a capital expenditure or personal expenses of the assessee and (iii) bad 
been laid out or expended wholly and exclusively for the purposes of his busi-
ness, profe!!Sion or voca!lon. 
[891G] 
(c) l!.'fen assuming that the motive behi,d the payment of retrenchment 
co~tion was that the terms of the agreement of the sale of shares should 
be satiified, 1111 long as the amount had been laid out or expended 

Excerpt shown. Read the full judgment & AI analysis in Lexace.