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TMI Blog1970 (8) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year with which we are concerned is 1963-64 and the accounting period is the year ending December 31, 1962. One Shri K. K. Raman was associated with the assesseee-company as a permanent director ever since its inception. He died on October 29, 1962. At the general body meeting of the company held on May 11, 1963, a resolution was passed sanctioning the payment of a pension of Rs. 500 per mensem to Shri Raman's widow for her lifetime. The resolution contains a statement that the said action was being taken " in consideration of the understanding and arrangement between the comoany and Shri K. K. Raman, under which he served the company as a whole-time director till his demise on 29th October, 1962." In the assessment proceedings for the assessment year 1963-64, the assessee-company claimed that they were entitled to a deduction of the sum of Rs. 1,000 representing pension paid to Mrs. Akila Raman, widow of the late Shri K. K. Raman for the two months of November and December, 1962. The Income-tax Officer disallowed the claim holding that the amount in question could be regarded only as an ex gratia payment because Shri Raman was not an employee of the assessee-company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of computation had been adopted by the company in arriving at the amount of Rs. 11,400 which was paid to Shri K. A. Varugis as gratuity. The assessee-company contended before the Income-tax-Officer that the said sum of Rs. 11,400 should be deducted in computing its assessable income for the assessment year 1963-64 on the ground that it was an expenditure laid out wholly and exclusively for the purposes of its business. The Income-tax Officer held that, since there was no gratuity scheme for the directors of the company at the relevant time and there was also no agreement between Shri Varugis and the company providing for payment of such gratuity, the expenditure in question could only be considered as an ex gratia payment. He further held that, in any event, the claim for deduction in respect of the accounting period ending December 31, 1962, was untenable since the amount had not been expended during the year of account. On both these grounds he disallowed the deduction. The Appellate Assistant Commissioner confirmed the view taken by the assessing authority. When the matter came up before the Income-tax Appellate Tribunal in second appeal filed by the assessee the Tribunal acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly to facilitate the carrying on of the business ? " Their Lordships rejected the claim for deduction put forward by the assessee in that case on the ground that "the amount had not been paid in pursuance of any scheme for payment of gratuities nor was it an amount which the employee expected to be paid for long and faithful service, but, on the other hand, it was a mere voluntary payment made not with the object of facilitating the carrying on of the business of the assessee-company or as a matter of commercial expediency but in recognition of long and faithful service of the employee ". In Teekoy Rubber (India) Ltd. v. State of Kerala a similar question came up for decision before a Division Bench of this court under the Agricultural Income-tax Act, 1950. The contention put forward in that case was that the amount paid by a company by way of gratuity to the widow of an employee who died while in service was expenditure laid out wholly and exclusively for the purpose of deriving the agricultural income under section(j) of the Agricultural Income-tax Act, 1950. This court held that "every ex gratia payment to an employee cannot be supported on grounds of commercial expediency. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y practice in the assessee-company to pay pension to the widow of a deceased director. On these facts and circumstances, the Tribunal was, in our view, perfectly justified in holding that the expenditure incurred in the payment of pension to the widow of Shri Raman can be regarded only as an ex gratia payment and that it is not deductible under section 37 of the Act. For the reasons stated above, we answer the question referred in I.T.R. No. 24 of 1968 in the affirmative, that is, against the assessee and in favour of the department. The assessee-company will pay the costs of the respondent. We now come to I.T.R. No 25 of 1968 where the question to be decided is whether the sum of Rs. 11,400 sanctioned by the company as gratuity to Shri K. A. Varugis was an inadmissible deduction under section 37 of the Act. Counsel appearing for the revenue contended that the reasoning of the Tribunal as well as the conclusion recorded by it on this question are vitiated by its omission to consider a most vital point, namely, whether the expenditure in question had been incurred by the assessee during the year of account. Counsel submitted that under section 37 no deduction is permissible u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee's business. The reasoning of the Tribunal that since there was a scheme in force in the company, providing for payment of gratuity to its employees on retirement or retrenchment, Mr. Varugis who was a permanent director of the company would have had an expectation that he would also get gratuity on a similar basis even though directors were not covered by the scheme, was attacked by the departmental counsel as far-fetched and fallacious. It was urged that the factual assumptions and inferences on which the Tribunal has rested its conclusion are not supported by any evidence at all but are based on mere guess-work and surmise and that the decision of the Tribunal is, therefore, vitiated by an error of law. It was also contended that no nexus whatever has been established between the expenditure in question and the future conduct of the company's business and since admittedly there was neither any scheme nor a practice in the company to pay gratuity to its directors on their resignation or retirement, the expenditure in question was a mere ex gratia payment and was not deductible under section 37 of the Act. In our opinion, counsel for the revenue is well founded i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction, the Appellate Assistant Commissioner has also taken notice of the department's contention that the amount had not been-paid in the year of account. It is thus seen that the point had been specifically raised at every stage of the proceeding and it is rather surprising that after having referred to this objection as one of the contentions raised before it by the department the Tribunal thereafter completely omitted to deal with this vital aspect of the case. The entire discussion of the Tribunal touching the admissibility of the claim for deduction of the amount of Rs. 11,400 is contained only in paragraph 17 of its order and it is exclusively devoted to a consideration of the question whether the payment could be regarded as one made for the purposes of the business of the company. The question whether there was any existing liability incurred by the company during the accounting period or whether what had been done by the assessee was only to make provision for a contingent or future liability has not been adverted to or considered by the Tribunal. There is also no discussion at all in the Tribunal's order of the question whether the deduction claimed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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