1973 (2) TMI 18 - HC - Income Tax

Gratuity paid to employees in the absence of gratuity scheme - Whether the amount paid was not related to the salary or the length of service would be allowable if the decision to pay gratuity was taken after the employees left the services held that amounts were not deductible as business expenditure

Issues Involved
1. Entitlement to deduction of Rs. 14,160 under section 10(2)(xv) of the Income-tax Act for the assessment year 1962-63.
2. Entitlement to deduction of Rs. 7,000 under section 10(2)(xv) of the Income-tax Act for the assessment year 1963-64.

Detailed Analysis

1. Entitlement to Deduction of Rs. 14,160 for the Assessment Year 1962-63

The assessee, a public limited company, claimed a deduction of Rs. 14,160 paid as gratuity to three employees for the assessment year 1962-63. The Income-tax Officer disallowed the deduction on the grounds that there was no scheme for payment of gratuity and the payments were made ex gratia. The Appellate Assistant Commissioner upheld this decision, stating there was no basis for the computation of gratuity, no scheme or precedent, and no evidence that the employees had accepted lower salaries in anticipation of gratuities.

The Tribunal also rejected the assessee's appeal, finding that the payments were not made pursuant to any scheme, were dependent on the company's discretion, and were not based on any uniform principle. The Tribunal further noted that the payments were ad hoc and unrelated to the period of service or salary drawn by the employees.

The court referred to the Supreme Court's decision in Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income-tax, which laid down tests for allowable deductions under section 10(2)(xv). These tests include whether the expenditure was incurred in the future interest of the business and whether there was any connection between the payment and the future conduct of the business. The court found that these tests were not satisfied in this case, as the payments were ex gratia and not made with the object of facilitating future business.

The court also considered the principle from Indian Overseas Bank Ltd. v. Commissioner of Income-tax, which allows for pension payments even without a general scheme if decided during the employee's service. However, the court found no evidence that the decision to pay gratuity was made during the employees' employment.

2. Entitlement to Deduction of Rs. 7,000 for the Assessment Year 1963-64

For the assessment year 1963-64, the assessee claimed a deduction of Rs. 7,000 paid as gratuity to an employee named Rangian. The Income-tax Officer disallowed this sum on similar grounds as the previous year, stating there was no scheme for gratuity payments and the payment was ex gratia.

The Appellate Assistant Commissioner and the Tribunal upheld this disallowance, reiterating that the payments were not made pursuant to any scheme, were ad hoc, and were not based on any uniform principle. The Tribunal also noted that the payments were unrelated to the period of service or salary drawn by the employee.

The court applied the same principles and tests from the Supreme Court's decision in Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income-tax. The court found that the payments were ex gratia and not made with the object of facilitating future business, thereby failing to meet the criteria for allowable deductions under section 10(2)(xv).

Conclusion

The court concluded that the assessee was not entitled to the deductions claimed for both assessment years. The payments were found to be ex gratia, ad hoc, and not based on any uniform practice or scheme. The court emphasized that the mere fact that the company expended certain sums while carrying on business does not automatically qualify those sums as business expenditure under section 10(2)(xv). The questions referred to the court were answered in the negative, and the revenue was awarded costs of Rs. 250.

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