Mackinnon Mackenzie & C. (Pak.) Ltd
Com. of Taxes Ctg (South) Zone, Chtg,
MH Rahman J
ATM Afzal J
Mustafa Kamal J
Mackinnon Mackenzie & Company (Pakistan) Ltd.. ………………………………Appellant
Commissioner of Taxes Chittagong (South) Zone, Chittagong …………….Respondent
June 5th, 1991
Case Referred to-
Commissioner of Income?Tax, Kerala Vs Malayalam Plantations Ltd.  53 ITR (SC) 140 (150).
Syed Ishtiaq Ahmed, Senior Advocate, instructed by Md. Aftab Hossain, Advocate -on?Record? For the Appellant.
Moksudur Rahman, Senior Advocate, Supreme Court, instructed by Md. Sajjadul Huq, Advocate?on?Record? For the Respondent.
Civil Appeal No. 31 of 1988
(From the Judgment and order dated 28.4.85 and 29.4.85 passed by the High Court Division, Chittagong Bench in Application No. 4 of 1984)
MH Rahman J: This appeal by special leave, at the instance of the assessee, is directed against the judgment and order dated 28.4.1985 and 29.4.1985 of a Division Bench of the High Court Division at Chittagong passed on an application under section 66(1) of the Income Tax Act, 1922, Application No. 4 of 1984.
2. The assessee, a non?resident Company, a subsidiary of Mackinnon and Mackenzie Co. Ltd. closed down its business in Bangladesh with effect from 1.10.1972. On 11.12.73 it submitted an assessment showing a loss of Tk. 27,015.00.
On 20.6.1977 it submitted a revised return showing an enhanced loss of Tk. 1, 30,759.00. In support of the revised return neither the statement of accounts, nor the statement of debits and credits of account, nor the books of accounts and other supporting papers were produced before the Deputy Commissioner of Taxes, Companies Circle III, Chittagong, in spite of the requisition by the department. The assessee’s explanation was that they did not receive the revised audit report from the auditors, and that as the company closed down its business and went ‘into liquidation they could not produce other necessary papers.
3. A copy of a Memorandum of Agreement between the Management and Staff of the Company was however produced by the assessee in support of the company’s claim of business expenditures on two counts, a sum of Tk. 2, 15,759.00 and another sum of Tk. 4,21,859.00 incurred respectively against the following two item, Nos. 6 and 7 of the Agreement:
“6. Ex Gratis 1?1/2 month’s gross salary for, each completed year of service or part therefor.
7. Cyclone/Flood Loans: All deductions to be waived as gesture to mitigate the suffering of the staff concerned and also granted 15 days gross salary as relief for House Building to the permanent staff”.
4. It was also stated in the Agreement: “In pursuance of the policy decision of P & O, Mr. DW McKay visited Chittagong and announced the closure of Mackinnon Mackenzie & Co. Ltd., to the members of the Staff on the 13th September, 1972 to be effective from 1st October, 1972.
5. The following terms and conditions were mutually agreed between the Management and the permanent staff in an atmosphere of cordiality and accommodation on both sides.”
6. In view of absence of supporting papers, verifiable evidence of payment to the staff, and the fact that the agreement was made on 14.9.72, only 16 days before the closure of the business on 30.10.72, the assessee’s claim that the above two sums were spent for the purpose of its business was disallowed by both the Deputy Commissioner of Taxes and the Appellate Joint Commissioner of Taxes.
7. On a second appeal the Taxes Appellate Tribunal allowed the assessee’s claim after holding that the liabilities for the expenses accrued at a time when the business of the company was continuing and that arose in and through an enforceable contract with its employees.
8. On 29.3.1984 the revenue made a reference to the High Court Division raising three questions of law, two of which were not answered by the High Court Division as they were neither raised nor decided by the Tribunal. The following question was answered in the negative:
“1. Whether the Appellate Tribunal is justified in law in holding that the assessee’s claim for deduction of Tk. 2,15,559.00 and Tk. 4,21,859.00 on account of “Relief for Rehabilitation and house?building and “Ex?gratia payment” respectively is allowable under section 10(2) (xvi) of the Income?Tax Act, 1922, since the said two sums were not laid out or expended wholly and exclusively for the purpose of the business nor were they incidental to the business”.
9. The High Court Division held that the declared intention of the assessee was to close down its business with effect from October 1, 1972, that the expenses incurred against items 6 and 7 of the Agreement signed on September 14, 1972 were in the nature of compensation and benefits for termination of services of the employees for closing down the business; and that as they were not incurred for keeping the business going or for carrying on the business they were not allowable under section 10(2)(xvi) of the Act.
10. The appellant now contends that when the Tribunal by lawful inference, drawn from a set of special and peculiar facts and circumstances of this case, found that the two items of expenditure were allowable under section 10(2)(xvi) of the Act, the High Court Division erroneously held that they were for the purpose of closing down the business, particularly when one item represented writing off, under the agreement, debt dues from the employees, and the other was an ascertained and enforceable liability by virtue of the agreement, and the expenditures were incurred for the business during the relevant previous year.
11. It is a well?settled principle of law that in Income?Tax matters it is for the Tribunal to decide questions of fact, and the High Court Division in a reference under section 66 of the Act will not ordinarily go behind the Tribunal’s findings of fact In a reference under section 66 of the Act the High Court Division, not constituted as a Court of appeal, exercises an advisory jurisdiction only and lays down the law in the facts found by the Tribunal. However, where the High Court finds that there is no evidence to support the finding of fact of the Tribunal, or the finding of the Tribunal is so unreasonable or perverse that no person acting judicially and properly instructed as to the relevant law could have arrived at it then in such circumstances there would arise a question of law which can be agitated before the High Court Division. Besides, the question of the applicability of a section of the Act to a particular set of facts or its construction is always a question of law.
12. In this case no supporting papers and documents excepting the Agreement dated 14.9,72 were produced by the assessee in support to its claim of allowance before the taxing authorities. The Tribunal, instead of relying on assessee’s own paper the Agreement, where the Director for the Company recorded his appreciation for the staff “for its loyalty and sense of duty particularly during the unrest period”, was swayed by the oral submissions, made for the first time before it on behalf of the assessee, do the expenditures were incurred under pressure for the protection of the business of the company when the assessee’s Director was gheraoed by the employees. The Tribunal further considered that as per mercantile system that the assessee followed, the liabilities became, due as soon as the agreement was signed on 14.9.72 and at that time the company was still doing business as evidenced by the fact that in September, 1972 four of the company’s ships arrived and departed from Chalna and Chittagong ports, and the last of its ships, the Galway, arrived at Chittagong Port on 20.9.72 and departed on 30.9.72. The movements of its ships particularly, the departure of the Company’s last ship on 30.9.72 clearly indicates that the assessee was closing down its business. In that background the assessee’s contention that the expenditures made on the two items, Nos. 6 and 7 of the Agreement, ought to have been construed as already incurred on 14.9.72, the date of the Agreement, for the purpose of the business of the Company, is too technical and devoid of any substance.
13. In support of the assessee’s contention that the expenditures were made for the protection of its business reliance is placed on the following observation of the Indian Supreme Court in Commissioner of Income?Tax, Kerala Vs. Malayalam Plantations Ltd.  53 ITR (SC) 140 (150) to which the Tribunal also alluded in its judgment:
“The expression “for the purpose of the business” is wider in scope than the expression “for the purpose or earning profits”. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business, it may comprehend many other acts incidental to the carrying on of a business.”
14. It appears that just to take a cover under these observations the assessee built up a case, for the first time before the Tribunal that the Agreement was done under duress. And the Tribunal without considering that it was a new case, not supported by any evidence, rather contradicted by the Agreement itself, observed: “The appellant offered before us an explanation as to why it had to come to a settlement with its employees in spite of its unfavourable terms and why ultimately it had to close down its business in Bangladesh. Having regard to the unsettled sociopolitical climate obtaining in Bangladesh in time immediately following independence, the explanation offered appears to us to be plausible. We are therefore inclined to accept the stand of the appellant’s counsel that the expenses in dispute were incurred for the purpose of business of the appellant inasmuch as they were incurred for the protection of its business assets in Bangladesh and thus for the sake of its overall business interests spreading over the subcontinent”.
15. These observations are sweeping and are not backed by any evidence. The Tribunal travelled beyond its jurisdiction in observing that the expenses were made “for the sake of its overall business interests spreading over the subcontinent”.
16. If the assessee’s business is closed down in this country for the protection of its business elsewhere, then the expenditures incurred for that purpose can in no sense be held as allowable under section 10(2)(xvi) of the Act.
17. The Tribunal noted only a portion of the observation of the Indian Supreme Court in the case of Malayalam Plantation Ltd. The more relevant observation follows immediately after the portion noted by the Tribunal: “However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.”
18. The Tribunal missed a simple fact, the most important one, that the expenses, made on the eve of the closing down of the business, are in the nature of compensation and termination benefits. Even if they are viewed as extortion they cannot be termed as the expenses for the business of the company, simply because they were not incurred for carrying on the business in this country.
The High Court Division’s answer to the question referred to is upheld. The appeal is dismissed with costs.
Source: 1992, (AD)