2014 (4) TMI 826 - HC - Income Tax

Entitlement for deduction of ex-gratia payment - Whether the Tribunal was right in holding that the assessee is entitled for deduction of ex-gratia payment made to the employees since bonus cannot be paid as the employees are excluded from the category of bonus under the Payment of Bonus Act Held that - The Tribunal rightly was of the view that the payment was made to those employees who did not fall within the purview of the Payment of Bonus Act - Relying upon Commissioner Of Income-Tax Versus National Engineering Industries Limited 1993 (7) TMI 40 - CALCUTTA High Court - the payment was a matter of business expediency thus, the payment made by the assessee to its employees who were not covered under the provisions of the Payment of Bonus Act was in the nature of ex-gratia payment as an incentive to the employees to be considered for deduction u/s 37(1) of the Income Tax Act,1961 the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues:
Admissibility of deduction for ex-gratia payment to employees not covered by the Payment of Bonus Act under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The issue before the court was whether the assessee was entitled to a deduction for ex-gratia payment made to employees not covered by the Payment of Bonus Act under the provisions of Section 37(1) of the Income Tax Act, 1961. The Assessing Officer had disallowed the deduction, stating that such payment could not be considered as falling under business expediency and therefore not eligible for deduction under Section 37(1). The Commissioner of Income Tax (Appeals) upheld this decision, leading the assessee to appeal to the Income Tax Appellate Tribunal.

The Tribunal, in its decision, noted that the ex-gratia payment was made to employees who were not covered by the Payment of Bonus Act. It referred to Section 36(1)(ii) of the Income Tax Act, 1961, which deals with specific instances of deductions, including payment of bonus. The Tribunal considered the payment as a matter of business expediency and held that even if the amount paid exceeded the statutory limit, it could still be considered for deduction. Citing a decision of the Calcutta High Court, the Tribunal concluded that the payment was in the nature of an ex-gratia payment as an incentive to employees and could be considered for deduction under Section 37(1) of the Income Tax Act, 1961.

The Revenue, aggrieved by the Tribunal's decision, filed the present appeal before the High Court. The High Court, after considering the arguments, agreed with the Tribunal's view. It held that since there was no restriction or prohibition under Section 37 of the Income Tax Act, 1961, on claiming a deduction for ex-gratia payment given as an incentive to employees out of business expediency, and since the payment constituted a business expenditure, the Revenue's case was dismissed at the admission stage itself.

In conclusion, the High Court dismissed the Tax Case (Appeal) and closed the connected miscellaneous petition, ruling in favor of the assessee. No costs were awarded in the matter.