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Issues: Allowability of deduction under section 10(2)(xv) of the Indian Income-tax Act for the sum paid to an ex-employee as gratuity.
Analysis: The case involved a reference under section 66(1) of the Indian Income-tax Act regarding the deductibility of a sum of Rs. 21,000 paid to an ex-employee, Jagannathji, by a registered firm. The firm claimed the amount as gratuity at the time of the employee's retirement. However, the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal all disallowed the deduction, citing the absence of evidence showing a practice of paying gratuities to employees or that the payment was in the interest of the business. The Tribunal specifically noted that it was the first instance of such a gratuity payment in the firm's history. The case was compared to a Supreme Court decision where a similar claim was denied due to lack of evidence supporting the payment's commercial expediency or impact on salary expectations. The Supreme Court precedent highlighted the importance of proving that the payment was made as a matter of practice affecting salary, or with an expectation of gratuity, or for commercial expediency. In this case, the firm admitted it did not have a practice of giving gratuities, and the payment to Jagannathji was a unique occurrence. There was no evidence of the employee expecting a gratuity or the payment being part of a future incentive scheme for all employees. The burden of proof lay with the assessee, which failed to establish the payment's commercial expediency or business facilitation. Consequently, the deduction claim was rejected. The counsel for the assessee requested a referral back to the Tribunal for a new line of inquiry regarding commercial expediency, but the court declined, citing precedents that prevent the introduction of new questions at this stage. Ultimately, the court held that the sum of Rs. 21,000 paid to Jagannathji was not deductible under section 10(2)(xv) of the Act. The assessee was directed to bear the costs of the reference, with counsel's fee fixed at Rs. 200.
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