pASNAYAJCE, C.J.—Colombo Electric Tramways and Lighting Co., Lid. 313
v. Commissioner of Inland Revenue
1963Present: Basnayake, C.J., Abeyesundere, J., andG. P. A. Silva, J.COLOMBO ELECTRIC TRAMWAYS AND LIGHTING CO., LTD.Appellant, and COMMISSIONER OP INLAND REVENUE,
S. C. 11—Income Tax Case No. BRA fE. 30
Excess Profits Duty—Cessation of a business activity—Payment of gratuity thereafterto the employees—Right of employer to deduct the sum in assessing profits—Income Tax Ordinance (Cap. 188), 8. 10 (c).
The assessee was a non-resident company which carried on business in Ceylon.On 31st August 1944 its activity of running electrio tramcars was acquired bythe Municipal Council of Colombo in the e ercise of its rights under a contractexecuted in 1896 which gave the Municipal Council the right to purchase thebusiness on giving a year’s notice. The persons employed by the assesseewere taken into the service of the Municipal Council. Under their terms ofemployment with the assessee they were entitled to receive a gratuity at theend of their period of service. After the acquisition by the Municipal Council,the assessee paid its employees a sum of Its. 107,986 es gratuities.
Held, that the sum of Rs. 107,986 was allowable as a deduction in ascertainingthe profits for the Excess Profits Duty assessment. The fact that the gratuitieswere paid after the cessation of the business made no difference.
Case stated under section 74 of the Income Tax Ordinance (Cap. 188).
H. W. Jayewardene, Q.C., with M. Sivagurunathan, for Assessee-Appellant. V.
V. Tennakoon, Deputy Solicitor-General, with M. Kanagasunderam,Crown Counsel, for the Assessor-Respondent.
January 29, 1963. Basnayake, C.J.—
The assessee, the Colombo Electric Tramways and Lighting Company,was a non-resident company which commenced to carry on businessin Ceylon in the year 1901. Until the year 1927 the assessee carriedon in Ceylon the activity of running electric tramcars by virtue of acontract with the Municipal Council of Colombo, executed in 1896,which gave the assessee the exclusive right of running tramcars inLXVI—142—E 957—1855 (9/64)
314BASNAYAJ5LE, C.J.—Colombo Electric Tramways and Lighting Co., Ltd.,
v. Cm.tmissioner of Inland Revenue
Colombo subject to the right of the Municipal Council to purchase thebusiness on giving a year’s notice. The assessee also acted as electricalcontractors and suppliers of electric current for lighting. Separateaccounts were kept of each of those activities.
Between the years 1927 and 1928 the assessee’s activity of generatingand supplying of electric current for lighting was taken over by theGovernment, and the assessee ceased to engage in that activity there-after. On 31st August 1944 the activity of running electric tramcarswas acquired by the Municipal Council of Colombo in the exercise ofits rights under the contract referred to above. The persons employedby the assessee in this activity were taken into the service of the MunicipalCouncil. There remained only the activity of electrical contract workwhich the assessee carried on till 14th August 1945 on which date thebusiness was sold to the United Planters of Ceylon Ltd., whereuponthe assessee company went into voluntary liquidation.
After its acquisition by the Municipal Council the ^ssessee paid thosewho were its employees in the activity of running electric tramcars asum of Rs. 188,946 as gratuity. The minutes of the Board whichrelate to the payment of gratuity are as follows :—
*' 1. Minutes of Board Meeting held on 28th September 1943 :
Superannuation gratuity etc.
Cable 22nd September from B. Bros.
Daily paid employees 15 years and over gratuity payable
Strikers calculated three quartersRs. 79,416
Additional one month’s pay..7,365
Daily paid employees one week’s pay per
year for those under 15 years..22,447
The Board sanctioned a gratuity, oh the above! basis to be paidwhen the personnel concerned cease to be employees of the Company.
Minutes of the Board of Meeting held on 16th January 1945 : ;
Gratuity to clerks and Inspectors (after take-over of tram-.,ways by Municipality)
Rs. 40,000 was allocated by the Board for payment of agratuity to the Clerks and Inspectors in recognition oftheir past services.
BASNAYAKE, C.J.—Colombo Electric Tramways and Lighting Co., Ltd.:315
v. Commissioner of Inland Revenue
The Board resolved that the Company goes into liquidation and
that the necessary steps be taken to accomplish this..
Minutes of the Board Meeting held on 3rd July 1945 :
The Board authorised the following payments:
To Mr. B. B. Anderson.. Rs. 25,000
To Mr. D. J. O. Gray..12,000 (one year’s salary)
as gratuities on leaving the Company’s service and taking employment
with the Colombo Municipality.”
From the inception of the assesseo’s business in Ceylon, in 1901, tillthe year 1931 the employees enjoyed the benefits of a provident fund towhich both employer and employee contributed. In the latter yearthe provident fund scheme was wound up by paying over to eachemployee the contributions made by him together with the contributionsmade by the employer, and a superannuation scheme was introduced.Under that scheme it would appear that an employee on leaving theassessee’s service became entitled to a gratuity. The assessee’s rightto deduct payments made under the superannuation scheme in ascertain-ing the profits from the assessee’s business does not appear to have beendisputed ; but the deduction, in ascertaining the profits from the businessof the assessee, of the payment made to the assessee’s employees on theacquisition of the activity of running tramcars is disputed on thefollowing grounds :—
(а)that the sum of Rs. 188,946 was paid by the assessee to theemployees in the tramcar service because there was a cessation ofbusiness and was not paid for the purpose of carrying on that business.
(б)that the sum of Rs. 107,986, Rs. 43,775 and Rs. 37,186 paid bythe assessee were voluntary payments made to the employees and that noliability to pay them was incurred by the assessee until the date of pay.ment. As these three sums of money were paid after the assessee hadceased to carry on the activity of running tramcars the payments wereoutgoings of a capital nature.
The Board sought to distinguish the payments made under the super-annuation scheme to employees who left the service while the assesseewas engaged in the activity of running tramcars from the payments madeafter it ceased to carry on that activity on the ground that in the formercategory were persons who retired from the service of the company andthat in the latter category were persons whose services were terminated“ under certain circumstances In their reasons the Board observe :
31 fi BASNAYAKE, C.J.—Colombo Electric Tramways and Lighting Co., Ltd.
v. Commissioner of Inland Revenue
“ The employees would not have received the sum of Rs. 188,946at the time they received it if the tramway business of the appellantcompany had not been taken over by the Municipal Council. Thispayment on account of gratuities had been definitely incurred as aresult of cessation of the tramway business. These payments werevoluntary payments. ”
It is conceded that the payment of Rs. 43,775 and Rs. 37,185 do notfall within the year of assessment to which this appeal relates. Thelearned Deputy Solicitor-General does not seek to maintain that theelectric tramways is a separate business in view of the fact that all theseyears all the activities of the assessee including the tramway's havebeen treated as one business.
The fact that the assessee paid a gratuity on retirement mustundoubtedly have been a matter which the assessee’s employees tookinto consideration in entering into the company’s service on the salariesthey were offered. It is the recognition of that fact that made theIncome Tax authority to refrain from disallowing the deductions.ofgratuities paid in respect of those employees who retired from servicewhile the assessee was engaged in the activity of running tram cars.The employees who were in service when the take over occurred werealso persons, like their predecessors who had retired, who, in acceptingthe salaries they were offered when they entered the service, took intoaccount the fact that at the end of their period of service they wouldreceive a gratuity. The fact that the gratuities now in question werepaid on the cessation of the activity makes no difference. We have nodoubt that the payments, not only do not fall within section 10 (c) asexpenditure of a capital nature, but that they are also deductible inascertaining the profits from the assessee’s business. Our opinion isthat the sum of Rs. 107,986 is allowable as a deduction in arriving atthe profits for the Excess Profits Duty assessment for the accountingperiod commencing on 1st January 1944 and ending on 31st Decemberof the same year.
We therefore remit the case to the Board in order that they mayrevise the assessment in accordance with our opinion.
The appellant is entitled to the costs of this appeal and the refundof the fee paid under section 74 (1) of the Income Tax Ordinance.
Ab eyesendere, J.—I agree.
G. P. A. Silva, J.—I agree.
COLOMBO ELECTRIC TRAMWAYS AND LIGHTING CO., LTD Appellant, and COMMISSIONER