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Issues:
1. Deductibility of gratuity payment as revenue expenditure. 2. Commercial expediency in relation to the payment of gratuity. 3. Application of legal precedents regarding gratuity payments. Analysis: The High Court of Bombay addressed the issue of deductibility of a gratuity payment as a revenue expenditure in the context of a company acquiring another business. The case involved an assessee company in the cotton and cotton waste business, which acquired the business of another firm, Volkart Brothers. The question was whether the payment of gratuity to the assessee's employees, who had exceeded the age of 57 1/2 years, was a revenue deduction. The Income-tax Officer initially disallowed the deduction, considering it as part of the purchase consideration for the new business. However, the Appellate Assistant Commissioner allowed the deduction, emphasizing that the payment was essentially a gratuity to the employees. The Tribunal upheld the Appellate Assistant Commissioner's decision, stating that the payment was commercially expedient and ensured staff retention and contentment. The Tribunal's findings highlighted that the business taken over merged with the assessee's existing business, and the gratuity payment was made only to the assessee's employees, not those of the acquired business. It was noted that the assessee had a pre-existing gratuity scheme and that the payment was considered commercially expedient to retain experienced staff. The Tribunal concluded that the payment was justified as a revenue expenditure. The High Court agreed with the Tribunal's findings, emphasizing that the payment was made under an existing scheme and for commercial expediency, aligning with legal precedents that consider gratuity payments allowable if made as a matter of practice affecting salary quantum, with employee expectations, and for commercial expediency. The judgment referenced legal precedents such as the Supreme Court's decision in Gordon Woodroffe Leather Manufacturing Company case, where the court outlined tests for determining the allowability of gratuity payments as revenue expenditure. The Division Bench of the High Court further discussed cases like Sassoon J. David and Company Pvt. Ltd. v. Commissioner of Income-tax and Balarama Varma Textiles Ltd. v. Commissioner of Income-tax, applying the principles laid down by the Supreme Court. The court reiterated that if a payment meets the criteria of affecting salary quantum, employee expectation, and commercial expediency, it should be allowed as a revenue expenditure. In this case, the Tribunal's findings aligned with these principles, leading to the affirmation of the deduction of gratuity payment as a revenue expenditure in favor of the assessee. In conclusion, the High Court upheld the Tribunal's decision, allowing the gratuity payment as a revenue deduction based on commercial expediency and existing schemes, in line with established legal principles regarding the deductibility of such payments. The judgment reaffirmed the importance of considering employee expectations, salary impact, and commercial expediency in determining the allowability of gratuity payments as revenue expenditure.
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