The AO says the payment mainly benefited someone else. Does that destroy my business expenditure claim?
No. 'Wholly and exclusively' does not mean 'necessarily', and the fact that somebody other than the assessee is also benefited does not come in the way of the deduction if the expenditure otherwise satisfies the test laid down by law. It is ordinarily for the assessee to decide whether an expenditure should be incurred in the course of its business.
Decided by the Supreme Court (N.L. Untwalia and E.S. Venkataramiah, JJ. (judgment delivered by Venkataramiah, J.)) on 1979-05-03, reported as (1979) 118 ITR 261; 10 CTR 383; 1 Taxman 485 (SC); AIR 1979 SC 1441; (1979) 3 SCC 524; [1979] 3 SCR 878; Civil Appeal No. 2501 of 1972 and Civil Appeal Nos. 2502-2504 of 1972. It bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the answer to two of the commonest reasons given for a s.37(1) disallowance: that the payment was not necessary, and that the real beneficiary was somebody else — a purchaser of shares, a group company, a departing promoter. Here the terminations were required by an agreement for the sale of a shareholder's shares to a third party, and the deduction was still allowed because the company remained a separate entity and got a genuine commercial benefit in a substantially reduced wage bill. The lesson for drafting is to identify the benefit to your own business rather than to argue about who else gained.
Binding on every court and authority in India.
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The assessee was an investment company whose 1,000 ordinary shares were held, directly or through nominees, by Sir Percival David, Lady David and Mr V.P. David. Its assets were valued by its auditors at Rs.155 lakhs as at 31 December 1955. On 2 December 1955 the directors resolved to terminate the services of 22 employees on payment of retrenchment compensation, and the shareholders approved that at an extraordinary general meeting on 25 January 1956, the terminations to take effect from 1 April 1956. On 23 March 1956 the Davids agreed to sell the shares to Tata Sons Ltd. for Rs.155 lakhs; the agreement recorded that the company would make the payments already voted and that the sums so paid would come off the purchase price, and required the Davids to arrange the termination of all employees and the resignation of all directors so that Tatas could choose whom to appoint. Nine of the 22 employees were re-engaged. In the accounting year 1956 the company debited Rs.1,64,899 in all: Rs.1,04,626 to the 22 employees, Rs.6,000 additional retrenchment compensation, Rs.21,200 for commutation of pension, Rs.16,885 annuity to A.E. Joseph, a former director, payable over five years from 1956, and Rs.16,188 as compensation for loss of office to the managing director, Mr R. Mathalone. The Income-tax Officer disallowed the whole sum for assessment year 1957-58, and the annuity of Rs.16,885 was likewise disallowed for 1958-59, 1959-60 and 1960-61. The Appellate Assistant Commissioner and the Tribunal upheld the disallowance. The Bombay High Court allowed only Rs.21,200 and Rs.16,188 and refused the balance of Rs.1,27,511, and refused the annuity for the three later years.
The appeals were allowed. Rs.1,27,511 was held deductible under s.10(2)(xv) for assessment year 1957-58, and Rs.16,885 for each of the three succeeding years, with costs to the assessee (in the concluding passage, "We, therefore, allow these appeals"). The company was neither dissolved nor was its undertaking sold; it continued as a juristic entity after the shares changed hands, and the expenditure was laid out for its own trade and not for that of Tatas, who were only shareholders (in the passages on whose trade the expenditure was laid out for). Neither the Davids nor Tatas derived any direct benefit from the payments, and the argument that Tatas gained because the price was reduced was rejected: the company's assets had been valued before the liability was incurred, so the reduction merely reflected that (in the passage answering the argument that Tatas gained by the reduction in price). The expression 'wholly and exclusively' does not mean 'necessarily'; it is ordinarily for the assessee to decide whether to incur an expenditure, which may be voluntary and without necessity, and the fact that somebody else is also benefited is no bar to deduction (in the passage beginning "It has to be observed here that the expression").
The High Court had gone wrong by placing more weight on the motive with which the money was spent than on the fact that the expenditure was incurred in connection with the company's business and reduced its annual wage bill in later years - from Rs.1,14,197 in 1955 to Rs.67,268 in 1956 and to about Rs.54,000 in each of 1957 and 1958 (in the passage beginning "The High Court, however, in the course of its judgment found"). Even if the motive was to satisfy the terms of the share sale agreement, that did not matter so long as the sum was laid out wholly and exclusively for the purposes of the assessee's business (in the passage beginning "Even assuming that the motive behind the payment of retrenchment"). The decisive correction was to Gordon Woodroffe Leather Manufacturing Co. v. CIT: the three tests stated there - payment as a matter of practice affecting the quantum of salary, an expectation of gratuity on the part of the employee, and expenditure on the ground of commercial expediency indirectly facilitating the carrying on of the business - are to be read disjunctively, and this case satisfied the third (in the passage dealing with Gordon Woodroffe). The Court drew support from three Scottish appeals in which subsidiaries of a group taken over by another company were allowed deductions for sums paid to cancel managing directors' contracts, the Crown's argument that the payments were incidental to the acquisition having failed (in the passage dealing with the Scottish cases - Patrick Thomson Ltd., J. & R. Allan Ltd. and Pettigrew & Stephens Ltd.). On 'necessity', the Court traced the legislative history: the Income-tax Bill of 1961 would have made s.37(1) read 'wholly, necessarily and exclusively', that drew public protest, and the word 'necessarily' was dropped before enactment (in the passage beginning "It is relevant to refer at this stage to the legislative history of section 37"). It also relied on CIT v. Chandulal Keshavlal & Co., that if expenditure is incurred for the purpose of the assessee's trade it does not matter that it may enure to the benefit of a third party (in the same passage). Finally, on the facts, the company's case was that many employees were old and superfluous and that terminating all and re-engaging some was the only way to reduce the number; a method the company thought would enure to its benefit could not be called an oblique motive (in the closing passage on the facts).
It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily".
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Handle my notice → Ask a CA on WhatsAppNo. 'Wholly and exclusively' does not mean 'necessarily', and the fact that somebody other than the assessee is also benefited does not come in the way of the deduction if the expenditure otherwise satisfies the test laid down by law. It is ordinarily for the assessee to decide whether an expenditure should be incurred in the course of its business. This was decided by the Supreme Court (N.L. Untwalia and E.S. Venkataramiah, JJ. (judgment delivered by Venkataramiah, J.)) and bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961. It is reported as (1979) 118 ITR 261; 10 CTR 383; 1 Taxman 485 (SC); AIR 1979 SC 1441; (1979) 3 SCC 524; [1979] 3 SCR 878; Civil Appeal No. 2501 of 1972 and Civil Appeal Nos. 2502-2504 of 1972. This is the answer to two of the commonest reasons given for a s.37(1) disallowance: that the payment was not necessary, and that the real beneficiary was somebody else — a purchaser of shares, a group company, a departing promoter. Here the terminations were required by an agreement for the sale of a shareholder's shares to a third party, and the deduction was still allowed because the company remained a separate entity and got a genuine commercial benefit in a substantially reduced wage bill. The lesson for drafting is to identify the benefit to your own business rather than to argue about who else gained. If it applies to you, the first step is this: State in the reply what your own business gained — a reduced wage bill, an ended liability, a settled dispute — and quantify it where you can, since that is what carried this case.
The assessee was an investment company whose 1,000 ordinary shares were held, directly or through nominees, by Sir Percival David, Lady David and Mr V.P. David. Its assets were valued by its auditors at Rs.155 lakhs as at 31 December 1955. On 2 December 1955 the directors resolved to terminate the services of 22 employees on payment of retrenchment compensation, and the shareholders approved that at an extraordinary general meeting on 25 January 1956, the terminations to take effect from 1 April 1956. On 23 March 1956 the Davids agreed to sell the shares to Tata Sons Ltd. for Rs.155 lakhs; the agreement recorded that the company would make the payments already voted and that the sums so paid would come off the purchase price, and required the Davids to arrange the termination of all employees and the resignation of all directors so that Tatas could choose whom to appoint. Nine of the 22 employees were re-engaged. In the accounting year 1956 the company debited Rs.1,64,899 in all: Rs.1,04,626 to the 22 employees, Rs.6,000 additional retrenchment compensation, Rs.21,200 for commutation of pension, Rs.16,885 annuity to A.E. Joseph, a former director, payable over five years from 1956, and Rs.16,188 as compensation for loss of office to the managing director, Mr R. Mathalone. The Income-tax Officer disallowed the whole sum for assessment year 1957-58, and the annuity of Rs.16,885 was likewise disallowed for 1958-59, 1959-60 and 1960-61. The Appellate Assistant Commissioner and the Tribunal upheld the disallowance. The Bombay High Court allowed only Rs.21,200 and Rs.16,188 and refused the balance of Rs.1,27,511, and refused the annuity for the three later years. The matter was decided on 1979-05-03 by the Supreme Court (N.L. Untwalia and E.S. Venkataramiah, JJ. (judgment delivered by Venkataramiah, J.)). On those facts the Supreme Court held as follows. The appeals were allowed. Rs.1,27,511 was held deductible under s.10(2)(xv) for assessment year 1957-58, and Rs.16,885 for each of the three succeeding years, with costs to the assessee (in the concluding passage, "We, therefore, allow these appeals"). The company was neither dissolved nor was its undertaking sold; it continued as a juristic entity after the shares changed hands, and the expenditure was laid out for its own trade and not for that of Tatas, who were only shareholders (in the passages on whose trade the expenditure was laid out for). Neither the Davids nor Tatas derived any direct benefit from the payments, and the argument that Tatas gained because the price was reduced was rejected: the company's assets had been valued before the liability was incurred, so the reduction merely reflected that (in the passage answering the argument that Tatas gained by the reduction in price). The expression 'wholly and exclusively' does not mean 'necessarily'; it is ordinarily for the assessee to decide whether to incur an expenditure, which may be voluntary and without necessity, and the fact that somebody else is also benefited is no bar to deduction (in the passage beginning "It has to be observed here that the expression").
The High Court had gone wrong by placing more weight on the motive with which the money was spent than on the fact that the expenditure was incurred in connection with the company's business and reduced its annual wage bill in later years - from Rs.1,14,197 in 1955 to Rs.67,268 in 1956 and to about Rs.54,000 in each of 1957 and 1958 (in the passage beginning "The High Court, however, in the course of its judgment found"). Even if the motive was to satisfy the terms of the share sale agreement, that did not matter so long as the sum was laid out wholly and exclusively for the purposes of the assessee's business (in the passage beginning "Even assuming that the motive behind the payment of retrenchment"). The decisive correction was to Gordon Woodroffe Leather Manufacturing Co. v. CIT: the three tests stated there - payment as a matter of practice affecting the quantum of salary, an expectation of gratuity on the part of the employee, and expenditure on the ground of commercial expediency indirectly facilitating the carrying on of the business - are to be read disjunctively, and this case satisfied the third (in the passage dealing with Gordon Woodroffe). The Court drew support from three Scottish appeals in which subsidiaries of a group taken over by another company were allowed deductions for sums paid to cancel managing directors' contracts, the Crown's argument that the payments were incidental to the acquisition having failed (in the passage dealing with the Scottish cases - Patrick Thomson Ltd., J. & R. Allan Ltd. and Pettigrew & Stephens Ltd.). On 'necessity', the Court traced the legislative history: the Income-tax Bill of 1961 would have made s.37(1) read 'wholly, necessarily and exclusively', that drew public protest, and the word 'necessarily' was dropped before enactment (in the passage beginning "It is relevant to refer at this stage to the legislative history of section 37"). It also relied on CIT v. Chandulal Keshavlal & Co., that if expenditure is incurred for the purpose of the assessee's trade it does not matter that it may enure to the benefit of a third party (in the same passage). Finally, on the facts, the company's case was that many employees were old and superfluous and that terminating all and re-engaging some was the only way to reduce the number; a method the company thought would enure to its benefit could not be called an oblique motive (in the closing passage on the facts). In the words reproduced by the source cited on this page: "It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily"." The decision followed or applied Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] 44 ITR 551 (SC) (applied; its three tests held to be disjunctive); CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 (SC) (followed); CIT v. Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711 (Guj.) (approved); CIT v. Fairdeal Corporation Pvt. Ltd. [1977] 108 ITR 280 (Bom.) (approved); CIT v. Patel Cotton Co. Pvt. Ltd. [1977] 108 ITR 846 (Bom.) (approved).
It was decided by the Supreme Court on 1979-05-03 and is reported as (1979) 118 ITR 261; 10 CTR 383; 1 Taxman 485 (SC); AIR 1979 SC 1441; (1979) 3 SCC 524; [1979] 3 SCR 878; Civil Appeal No. 2501 of 1972 and Civil Appeal Nos. 2502-2504 of 1972. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed. Rs.1,27,511 was held deductible under s.10(2)(xv) for assessment year 1957-58, and Rs.16,885 for each of the three succeeding years, with costs to the assessee (in the concluding passage, "We, therefore, allow these appeals"). The company was neither dissolved nor was its undertaking sold; it continued as a juristic entity after the shares changed hands, and the expenditure was laid out for its own trade and not for that of Tatas, who were only shareholders (in the passages on whose trade the expenditure was laid out for). Neither the Davids nor Tatas derived any direct benefit from the payments, and the argument that Tatas gained because the price was reduced was rejected: the company's assets had been valued before the liability was incurred, so the reduction merely reflected that (in the passage answering the argument that Tatas gained by the reduction in price). The expression 'wholly and exclusively' does not mean 'necessarily'; it is ordinarily for the assessee to decide whether to incur an expenditure, which may be voluntary and without necessity, and the fact that somebody else is also benefited is no bar to deduction (in the passage beginning "It has to be observed here that the expression"). It arises in Deductions & Disallowances matters, on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961, and was decided by N.L. Untwalia and E.S. Venkataramiah, JJ. (judgment delivered by Venkataramiah, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the 'not necessary' objection head-on with the rule that the phrase imports no test of necessity and that the decision to incur the expenditure is ordinarily the assessee's. Put the agreement or board record that required the payment on file, so the commercial context is on record and not merely asserted at the appellate stage. Do not spend the reply denying that a third party benefited; an incidental benefit to someone else is not a ground for disallowance.
Still good law. Positively confirmed on two later High Court decisions, both digested on itatonline and both fetched. Tristar Motors v. ACIT (2020) 196 DTR 209 (Karn)(HC) records Sassoon J. David as followed, for the proposition that once the nexus between the expenditure and the business is established the revenue cannot substitute its own view of what was reasonable for the businessman's. PCIT v. VVF Ltd. (2020) 273 Taxman 503 (Bom.)(HC) also records it as followed, in allowing a deduction for remuneration under s.37(1). Nothing overruling or doubting it was found. On the provision: the only later change to s.37(1) I could source is Explanation 3, inserted by the Finance Act 2022 with effect from 1 April 2022, and the itatonline article on that amendment states that it does not modify the 'wholly and exclusively' requirement itself but operates as an additional restriction within s.37(1) directed at benefits or perquisites whose acceptance violates a law, rule, regulation or guideline. The holding that 'wholly and exclusively' does not mean 'necessarily' is untouched by it. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Cite the provision correctly, and cite no paragraph number - the judgment as delivered runs as unnumbered prose, so any locator in circulation comes from a law report. This was decided under s.10(2)(xv) of the Indian Income-tax Act, 1922, for assessment years 1957-58 to 1960-61; the judgment itself notes that s.37 of the 1961 Act corresponds to it. That correspondence is the point of the case rather than a technicality: in the passage on the legislative history of s.37 the Court records that the Income-tax Bill of 1961 would have required expenditure to be laid out 'wholly, necessarily and exclusively', that the word 'necessarily' drew public protest, and that it was dropped before enactment - which is why the 1922 authority governs s.37(1) too. Note also what the Court actually decided the case on: it held that the three tests in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] 44 ITR 551 (SC) are to be read disjunctively, and that this expenditure satisfied the third of them, commercial expediency indirectly facilitating the business. No later-treatment banner was displayed on the subscription copy of the judgment, so the two 2020 High Court decisions recorded in the validity note were not re-verified against the judgments themselves on this read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed. Rs.1,27,511 was held deductible under s.10(2)(xv) for assessment year 1957-58, and Rs.16,885 for each of the three succeeding years, with costs to the assessee (in the concluding passage, "We, therefore, allow these appeals"). The company was neither dissolved nor was its undertaking sold; it continued as a juristic entity after the shares changed hands, and the expenditure was laid out for its own trade and not for that of Tatas, who were only shareholders (in the passages on whose trade the expenditure was laid out for). Neither the Davids nor Tatas derived any direct benefit from the payments, and the argument that Tatas gained because the price was reduced was rejected: the company's assets had been valued before the liability was incurred, so the reduction merely reflected that (in the passage answering the argument that Tatas gained by the reduction in price). The expression 'wholly and exclusively' does not mean 'necessarily'; it is ordinarily for the assessee to decide whether to incur an expenditure, which may be voluntary and without necessity, and the fact that somebody else is also benefited is no bar to deduction (in the passage beginning "It has to be observed here that the expression").
TaxSphere, “Sassoon J. David & Co P Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/sassoon-j-david-v-cit-wholly-and-exclusively/ (validity last checked 2026-08-25)
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