2017 (7) TMI 1372 - HC - Income Tax

Allowing ex gratia payment as a deductible expense - ex gratia payment by its very nature of payment is a favour having no nexus with commercial consideratio - Tribunal allowed claim - HELD THAT - Section 63 of the Act empowers the Board of Directors to approve payment of ex gratia amount to its employees. It is also observed by the Tribunal that the assessee has been extending incentives to employees for the preceding years and the subsequent years also and the same is accepted by the Revenue. Tribunal has also relied on the Judgment of this Court in the cases of CIT Vs. Maina Ore Transport P. Ltd., 2008 (8) TMI 504 - BOMBAY HIGH COURT and Shahzada Nand Sons 1977 (4) TMI 4 - SUPREME COURT wherein it has been held that ex gratia payment made by the employer to its employees is on account of commercial expediency and hence allowable. In the case of Mafatlal Fine Spg. Mfg. Co.Ltd 2003 (2) TMI 27 - BOMBAY HIGH COURT relied by the Revenue, there was no evidence to show the agreement between the assessee and the employees and the earning of the assessee or to show that ex gratia payment is reasonable or in accordance with the provisions at the relevant time.The practice of ex gratia payment is evident from the observations of the Tribunal. For the preceding year and the subsequent years the department has allowed deduction in respect of ex gratia payment. No substantial question of law

Summary

Issues:
1. Deductibility of ex-gratia payment as an expense for the assessment year 2007-2008.

Analysis:
The appellant argued that the Tribunal erred in allowing ex-gratia payment as a deductible expense, contending that it lacks a commercial nexus. Citing Section 63 of the Multi State Co-operative Societies Act, the appellant relied on the judgment in Commissioner of Income Tax Vs. Mafatlal Fine Spg. & Mfg. Co.Ltd. The respondent, on the other hand, supported the Tribunal's decision, stating that the ex-gratia payment was approved by the Board and ratified in the Annual General Meeting, falling within the purview of Section 63 of the Act.

The Court examined Section 63 of the Act, which empowers the Board of Directors to approve ex-gratia payments to employees. It noted the consistent practice of extending incentives to employees by the assessee, accepted by the Revenue. Relying on precedents like CIT Vs. Maina Ore Transport P. Ltd. and Shahzada Nand & Sons Vs. CIT, the Tribunal found ex-gratia payments to be commercially expedient and hence allowable.

In contrast to the Mafatlal Fine Spg. & Mfg. Co.Ltd. case, where evidence was lacking regarding the agreement with employees and reasonableness of ex-gratia payments, the present case demonstrated a clear practice of making such payments, supported by the Tribunal's observations and past departmental approvals. Consequently, the Court concluded that no substantial question of law arose in the appeal, leading to its dismissal without costs.