2021 (11) TMI 572 - HC - Income Tax

Deduction in respect of ex-gratia payment made to employees when such payments cannot be treated as business expediency or legal requirement allowable u/s 37(1) - HELD THAT - Identical substantial question of law was considered by a Division Bench of this Court in Lakshmi Vilas Bank Ltd. 2014 (4) TMI 826 - MADRAS HIGH COURT held that there being no restriction or prohibition under Section 37 of the Income Tax Act, 1961 on the claim for deduction on the ex-gratia payment given in the form of an incentive to the workman out of business expediency and the payment being a business expenditure, the Revenue's case deserves to be dismissed at the admission stage itself. Division Bench referred to the decision of the Calcutta High Court in CIT vs. National Engineering Industries Ltd 1993 (7) TMI 40 - CALCUTTA HIGH COURT which decision was followed by the Tribunal in the impugned order. Therefore, we find that the substantial question of law, raised in this appeal, has to be answered against the Revenue

Summary

Issues:
Interpretation of deduction for ex-gratia payment under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The appeal in question was filed by the Revenue under Section 260A of the Income Tax Act, 1961, challenging an order related to the assessment year 2006-07. The substantial question of law raised was whether the assessee is entitled to deduction for ex-gratia payments made to employees, which were not covered by the Payment of Bonus Act, under Section 37(1) of the Act. A similar issue was previously considered by a Division Bench in another case, where it was held that such payments could be considered as a deduction under Section 37(1) if they were made out of business expediency. The Tribunal in the present case also found that the ex-gratia payments made to employees who were not covered by the Payment of Bonus Act could be considered as a deduction under Section 37(1) as a matter of business expediency.

The Division Bench referred to a decision of the Calcutta High Court, which was followed by the Tribunal in the impugned order, supporting the view that ex-gratia payments made in excess of statutory limits could be considered as a deduction under Section 37(1) of the Income Tax Act, 1961. The Tribunal concluded that the ex-gratia payment in this case was a matter of business expediency and could be considered as an incentive for employees, thus falling within the purview of Section 37(1) for deduction purposes. The Tribunal's decision was upheld, dismissing the Revenue's appeal, as there was no restriction or prohibition under Section 37 for such deductions, and the payment was deemed a business expenditure.

Therefore, based on the precedents and interpretations provided by the Division Bench and the Tribunal, the substantial question of law was answered against the Revenue, and the tax case appeal was dismissed with no costs incurred.