2014 (1) TMI 1889 - AT - Income Tax

Rectification u/s 254 - whilst upholding the disallowance made by AO and affirmed by the CIT(A) pertaining to ex-gratia payments made to its employees the tribunal did not consider the case laws pleaded in the grounds - HELD THAT - It emanates to us that whilst deciding the assessee s appeal for assessment year 2006-07 we had confirmed the impugned disallowance by holding that the payments in question are nothing but bonus which is only an appropriation of the profits. A perusal of the pleadings raised by the assessee in its grounds reveals that it had also quoted various case laws in support of the arguments. Admittedly the same have nowhere been taken up in the order sought to be modified/rectified. Accordingly to this limited extent we recall our order to re-examine the assessee s contentions on merits. Disallowance on merits the only reason stated right from Assessing Officer till the tribunal has been that the payment of ex-gratia amounts to bonus in the nature of appropriation of profits. From the case law quoted by the assessee in CIT vs National Engineering Industries Ltd. 1993 (7) TMI 40 - CALCUTTA HIGH COURT it turns out that such a payment is allowable as expenditure. Therefore the assessee s corresponding ground in the appeal is decided against the Revenue and the disallowance in question is deleted. MP allowed.

Summary

Issues:
1. Modification/Rectification of order under section 254(2) of the Income-tax Act, 1961.
2. Consideration of case laws in upholding disallowance of ex-gratia payments.
3. Disallowance of ex-gratia payments as bonus or allowable expenditure.

Analysis:
1. The judgment pertains to a petition filed by the assessee seeking modification/rectification of an order passed by the tribunal under section 254(2) of the Income-tax Act, 1961. The assessee contended that the tribunal did not consider the case laws presented in the grounds while upholding the disallowance of ex-gratia payments made to employees. The Revenue supported the tribunal's order, stating that no interference under section 254(2) of the Act was necessary.

2. Upon considering the rival contentions, the tribunal acknowledged that the order confirming the disallowance of payments as bonus was based on the premise that such payments were an appropriation of profits. However, the tribunal noted that the case laws cited by the assessee in support of their arguments were not addressed in the order. As a result, the tribunal decided to recall the order to re-examine the assessee's contentions on merits, specifically regarding the nature of the payments.

3. Regarding the disallowance of ex-gratia payments, it was observed that the Assessing Officer, CIT(A), and the tribunal had consistently viewed these payments as bonus in the nature of profit appropriation. However, referencing a case law cited by the assessee (CIT vs National Engineering Industries Ltd.), it was determined that such payments could be considered allowable expenditure. Consequently, the tribunal ruled in favor of the assessee, deleting the disallowance and allowing the miscellaneous petition.

In conclusion, the tribunal granted the assessee's petition for modification, re-examined the contentions on merits, and ultimately decided in favor of the assessee by allowing the deduction of ex-gratia payments as permissible expenditure based on relevant case law.