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Issues Involved:
1. Whether for the purpose of disallowance under section 40(c), payment of gratuity, contribution made to provident fund, pension fund, and premium to LIC are includible. 2. Whether the payment of gratuity to employees taken over from the amalgamated company is allowable as a business expenditure. Detailed Analysis: Issue 1: Disallowance Under Section 40(c) The Tribunal upheld the Commissioner (Appeals) decision that contributions towards provident fund, pension fund, superannuation fund, and gratuity cannot be regarded as remuneration or benefit under section 40(c) of the Act. The Tribunal also held that the payment towards one year renewable term assurance policy does not result in any benefit to the director. The Tribunal relied on the Karnataka High Court decision in CIT v. Amco Batteries Ltd. [1984] 150 ITR 48. Provident Fund and Pension Fund Contributions: The Tribunal and Commissioner (Appeals) determined that contributions to the provident fund and pension fund are not remuneration or benefits under section 40(c). They referred to the proviso to section 40(c) and sub-section (5) of section 40A, concluding that these contributions should not be considered when determining the ceiling under section 40(c). Gratuity Payment: The Tribunal agreed with the Commissioner (Appeals) that a one-time payment like gratuity does not fall within the scope of section 40(c). The Bombay High Court in CIT v. Colgate Palmolive (India) P. Ltd. [1994] 210 ITR 770 held that gratuity is not a periodic payment and cannot be equated to monthly salary or yearly payment under section 40(c). The Tribunal followed this reasoning, stating that gratuity, which is not relatable to a specific year of service, should be excluded from the expenditure exempt in the hands of the director. LIC Premium Payment: The Tribunal found that the policy amount assured under the Master Policy No. GI 31120 would be payable only in the event of the death of the member while in service. Thus, the premium paid by the assessee-company cannot be regarded as a benefit or remuneration to the director. The Tribunal followed the Karnataka High Court's decision in CIT v. Amco Batteries Ltd. [1984] 150 ITR 48, which held that premiums paid towards accident insurance policies are not perquisites under section 40A(5). Issue 2: Payment of Gratuity to Employees from Amalgamated Company The Tribunal upheld the Commissioner (Appeals) decision that the payment of gratuity to employees taken over from the amalgamated company is allowable as a business expenditure. The Tribunal noted that the assessee-company took over the entire business, including employees, of the amalgamated company. The liability to pay gratuity was transferred to the assessee-company, which made the actual payment to discharge this statutory obligation. Double Deduction Argument: The Revenue argued that allowing the deduction would result in double deduction since the amalgamated company had already made a provision. However, the Tribunal held that there is no double deduction as the grant of double deduction implies deduction in the assessment of the same person. Here, the assessee-company is a different entity, and the liability was taken over as part of the amalgamation. Supporting Case Law: The Tribunal referred to CIT v. Pandian Roadways Corporation Ltd. [1991] 187 ITR 121, where the court held that the entire amount paid as gratuity is deductible when the liability is taken over by the successor company. Conclusion: The Tribunal correctly held that contributions to provident fund, pension fund, and gratuity payments are not includible under section 40(c). Additionally, the premium paid for the LIC policy does not constitute a benefit to the director. The payment of gratuity to employees from the amalgamated company is allowable as a business expenditure. The questions of law were answered in the affirmative and against the Revenue.
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