2002 (6) TMI 605 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 3,70,755 incurred by the assessee as retirement compensation was allowable as revenue expenditure under section 37 of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Context:
The appeal under section 260A of the Income Tax Act, 1961, challenges the order dated 3-12-1998 by the Tribunal, which confirmed the Commissioner (Appeals)' decision allowing the assessee's appeal regarding the disallowance of Rs. 3,70,755 claimed as a deduction under section 37 of the Act for the assessment year 1989-90. The respondent is a beedi manufacturing company that paid this amount as compensation to several workers on retirement for their service period under another company, B.N. Sarda Ltd.

2. Assessment Officer's Disallowance:
The Assessment Officer disallowed the deduction, stating that the payment was made voluntarily without any legal obligation and hence was not allowable under section 37.

3. Commissioner (Appeals)' Decision:
The Commissioner (Appeals) allowed the deduction, stating that the expenditure was incurred due to commercial expediency to mitigate the hardship of the employees, thus making it allowable as a revenue expenditure.

4. Tribunal's Confirmation:
The Tribunal upheld the Commissioner (Appeals)' decision, agreeing that the expenditure was for maintaining good relations and the welfare of the employees, thus justifying the claim under section 37.

5. Revenue's Argument:
The Revenue argued that the payment was essentially towards unpaid gratuity which should be considered under section 36(1)(v) and not under section 37. They relied on the precedent set by CIT v. Rajaram Bandekar & Sons Shipping (P) Ltd., where a similar issue regarding bonus payment was treated under section 36(1)(ii).

6. Assessee's Argument:
The assessee contended that the payment was ex gratia retirement benefit made on commercial expediency grounds, emphasizing the long and loyal service of the employees who had a legitimate expectation of such compensation. They also referred to various documents and resolutions supporting the continuity of service and the decision to pay the compensation.

7. Legal Precedents and Tests Applied:
The court referred to the judgments in CIT v. Associated Cement Cos. Ltd. and CIT v. Hindustan Motors Ltd., which allowed additional gratuity and pension payments under section 37 based on commercial expediency. The court also applied the tests from the Apex Court's decision in Gordon Woodroffe Leather Mfg. Co. v. CIT, which included:
- Whether the payment was made as a matter of practice affecting salary.
- Whether there was an expectation by the employee of receiving gratuity.
- Whether the expenditure was on grounds of commercial expediency.

8. Court's Conclusion:
The court concluded that the payments were made on grounds of commercial expediency and legitimate expectation of the employees. The decision to pay the compensation was taken to settle the controversy and avoid unrest among the workforce. The court noted that the payment did not fall under section 36(1)(v) as it was not towards a recognized gratuity fund but was allowable under section 37 as revenue expenditure wholly and exclusively for business purposes.

9. Distinction from Rajaram Bandekar & Sons Shipping (P) Ltd.:
The court distinguished the present case from Rajaram Bandekar & Sons Shipping (P) Ltd., noting that the latter pertained to bonus payments under section 36(1)(ii) and its proviso, which was not applicable to the present case involving gratuity-related compensation.

10. Final Judgment:
The appeal was dismissed, upholding the Tribunal's decision that the expenditure of Rs. 3,70,755 incurred by the assessee as retirement compensation was allowable as revenue expenditure under section 37. There was no order as to costs.