MESSRS HORMONE LABORATORIES LTD. Versus THE COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, KARACHI

This is an application under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act) filed by the assessee upon the following question stated by the learned Income Tax Tribunal on the assessee's application:

"Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that the payment of Rs.1,11,500 for staff indemnities for toss of personal effects in East Pakistan made by the assessee was of an ex-gratia nature and not an admissible expense under section 10(2) of the Income Tax Act."

2. The brief facts leading to the filing of the above reference application are that the assessee company had their registered office in Karachi upto 1968 but shifted the same in the same year to Dacca. However, in 1971 it decided to re-transfer its head office to Karachi, two of its employees M/s. S.S. Dhunjee and S.M. Taqi, who were originally employed to serve in Karachi office were transferred to Dacca on the shifting of the company's registered office. Upon re-transfer of the registered office to Karachi in 1971 the aforesaid two employees were re-transferred to Karachi, specifically on the condition that their household and personal effects would be transported from Dacca to Karachi at the cost of the company. It is the case of the assessee company that because of the disturbed conditions in the then East Pakistan the aforesaid two employees lost certain household effects in the East Pakistan and, therefore, the company paid a sum of Rs.1,11,500 i.e. Rs.1,00,000 to one of the above two employees and balance of Rs.11,500 to the other employee.

3. During the assessment year 1974-75 the assessee company claimed the above amount as a business expense under section 10(2) of the Act.. The Income-tax Officer by his assessment order, dated 27-5-1976 disallowed the same on the ground that the explanation furnished by the assessee company in relation to the above expense not supported by any evidence or inventory of the household effects. The assessee company went in appeal but the same was dismissed by the learned Assistant Appellate Commissioner by his order, dated 13-8-1978 on the grounds firstly that the Government had provided a mechanism for compensation of such losses only in the case of an assessee and not that of personal effects of his employees, secondly the letter of the Managing Director of the assessee company dated 24-11-1973 indicated that it had only agreed to transport the household effects from Dacca to Karachi and, thirdly it was admitted by the representative of the assessee company before him that there was no provision in the terns of the employment that such had to be re-imbursed to the said employees. The assessee company went in second appeal before the learned Income-tax Appellate Tribunal which also maintained the above two orders and concluded as follows:--

"After considering arguments of both the representatives and examining the legal position, we are of the view that it is not possible for us to concede to the arguments of the learned Authorised Representative, firstly for the reason that the payment was not stipulated, in the terms, for any damage, breakage or loss and only transportation charges were agreed to be paid. Secondly, we find that- the employees did not possess such qualifications as would make them indispensible for the assessee as to justify all out effort to retain them in employment. Thirdly, the claim lodged by one of them, copy of which is placed on our record, clearly shows that the valuation on the basis of which compensation was made, was more than the value for which the household effects were insured. Hence what the employees were paid was not the indemnity for loss v:' their effects but the re-imbursement for purchase of new furniture etc. Finally, we find that the household effects were, in fact, handed over to Saleem sons, the packers and freight forwarders, by the employees themselves. It is thus evident that the employees intended to claim re-imbursement for the bill and it would be wrong to presume that the entire household effects were handed over to the Assessee Company for safe delivery in Karachi. If that were the case, the responsibility for safe transport without damage, destruction etc., would have been that of the Assessee but in the present circumstances the packers and forwarders were responsible to the employees directly and the. Assessee -company did not come into the picture at all. The payment is, therefore, clearly of ex-gratia nature, which we cannot hold to be admissible expense under section. 10(2) of the Income-tax Act."

4. The assessee had filed an application before the learned Income-tax Tribunal for getting the reference made on the above quoted question, which application was allowed. In pursuance thereof the present application was filed.

5. In support of the reference, Mr. Ali Athar learned counsel for the assessee company has vehemently urged that in view of clause (xvi) of subsection (2) of section 10 of the Act the above expense was an admissible business expense. To re-inforce his above submission, he has referred to the above clause, which provides as follows: --

"(xvi) any expenditure (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."

It has been further contended by Mr. Ali Athar that since the above clause refers to all expenditure (not being in the nature of capital expenditure or personal expense of the assessee) the assessee company was entitled to the adjustment of the above amount as a business expense as admittedly, it was paid for earning good-will of the two employees which was for the benefit of the business. Reliance has also been placed by him on the following cases:

(i) Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal (1951) 20 I T R 1, in which the Indian Supreme Court while construing section 12(2) of the Act which is couched in the same language as section 10(2) of the Act inter alia, held that it is enough to show that money was expended not of necessity and with a view to a direct and immediate benefit to the trade but voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. In the above case inter alia reliance was placed on the case of (1926) A. C. 205.

(ii) M/s. Ata Hossain Khan Ltd. v. Commissioner of Income-tax, East Pakistan, Dacca P L D 1969 S C 517. In the above case the Hon'ble Supreme Court of Pakistan while construing section 10(2) (xvi) of the Act held that for deciding the question, whether an expense is admissible expense the question which should be considered is whether expenditure incurred bona fidely on ground of commercial expediency, and not whether it is reasonable. The reliance was also placed inter alia, on the above cited Indian Supreme Court's case. It may be advantageous to reproduce the following observations from the above judgment:

"In the case of Eastern Investments Limited v. Commissioner of Income-tax, the Supreme Court of India applied certain principles in construing section 12(2) of the Income Tax Act. The words that occur in that section are 'any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains'. It was said:--

(a) though the question must be decided on the facts of each case the final conclusion is one of law: Indian Radio and Cable Communication Ltd. v. The Commissioner of Income-tax, Bombay (1937) 5 I T R 270 (P.C.) and Tata Hydro Electric Agencies Ltd. v. The Commissioner of Income-tax, Bomaby (1937) 5 1 T R 202 (PC);

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned: Moore v. Stewards and Lloyds (1906) 6 Tax Cas. 501 and Usher's case (1915) AC 533;

(c) it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business". British Insulated and Helsby Cables Ltd. v. Anherton (1926) A .C 205 at 221 and 235;

(d) beyond that no hard and fast rule can be laid down td explain what is meant by the word "solely".

(iii) Calcutta Landing & Shipping Co. Ltd. v. Commissioner of Income-tax, West Bengal (1967) 65 I T R 1, in which an employee of the assessee company while in service was murdered. The company resolved to pay the pension to the wife of the deceased employee. A Division Bench of the Calcutta High Court upon a reference held that the above payment of pension was an admissible business expense under section 10(2) (xvi) of the Act.

6. On the other hand Mr. Shaikh Haider, learned counsel for the respondent/ Department has vehemently urged that this Court while nearing a reference does not interfere with a -finding of fact recorded by the learned Income-tax Appellate Tribunal. He has further submitted that in view of the finding of facts recorded by the learned Income Tax Tribunal in the instant case the answer of the above question should be in the affirmative. In furtherance of his submission, he has referred to the case of Commissioner of Income-tax v. S. Zoraster & CO. (1982) P T D 339, in which a Division Bench of the Rajhistan High Court held that the High Court is not entitled to go behind the facts found by the Tribunal and only legal effects of such facts can be considered by the High Court.

7. We are inclined to hold that in order to make an expense admissible, it is not necessary that the same should be incurred by an assessee in discharge of any legal or contractual obligation in relation to his business. If any business expense is bona fidely incurred by an assessee for the benefit of the business as a whole in broad sense, in that event notwithstanding that it may not bring any immediate benefit or profit to the assessee's business, it will be an admissible expense in terms of section 10(2) of the Act. However, at the same time the Assessing Authority is entitled to examine the question, whether on the facts of a particular case a particular expense is to be allowed as a business expense or not. In the present case, the learned Income-tax Tribunal has given more than one reason in the operative portion of its order reproduced hereinabove for disallowing the above expense. It has concluded that in the circumstances of the instant case, the above amount has rightly been disallowed as a business expense by the two forums below. We are inclined to hold that in view of the facts and circumstances of the, present case highlighted in the Tribunal's order, it was justified not to allow the above expense as an admissible expense under section 10(2) of the Act.

The above reference stands disposed of in the above terms with no order as to costs.

M.B.A./H-64/K Reference answered.