Law: Income Tax Act, 1961

Section: 37,256

Income-tax-----Business expenditure---Remuneration to employees---General principles--­Pension paid to widow of director---Resolution passed while director was working for assessee-company authorising payment of pension to director and after his death to his widow---Payment was made on grounds of commercial expediency---Pension was deductible---Indian Income Tax Act, 1961, S.37. Where remuneration is paid to an employee, in order that the amount could be claimed as a deductible item under section 37 of the Income Tax Act, 1961, the true test to be applied is as to whether the payment was made as a matter of practice so as to affect the quantum of salary or whether there was in the mind of the concerned employees any expectation of getting such payment or whether the sum was spent on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee. G became a director of the assessee-company in 1959 and when he became a director of the company, he ceased to be a member of the company's provident fund. The company, therefore, passed a resolution initially granting him the benefit of gratuity. That resolution was subsequently modified by resolution, dated December 2, 1964, granting benefit of pension to himself and after his death to his wife and his legal representatives for a fixed period of ten years from the date of retirement of G. That resolution was slightly modified in regard to quantum of pension by a resolution, dated July 26, 1968. G retired from service on July 31, 1968. The assessee-company claimed deduction of a sum of Rs.15,600 paid by way of pension to the widow of G. The Income-tax Officer disallowed the claim but the Commissioner of Income-tax (Appeals) and the Tribunal allowed it. On a reference: Held, that the resolution was passed even during the period when G was working as a director and in that resolution it was. provided that the pension would be paid to G and on his death his wife would be paid pension for a fixed period of ten years from the date of retirement of G. The payment was made only to generate confidence in the mind of the employee that he would be taken care of after his…

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