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TMI Blog2000 (12) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... in law in coming to the conclusion that the amount of gratuity includible fur disallowance under section 40(c) of the Act would be the excess of the amount which is exempt under section 10(10) of the Act?" A sum of Rs. 10,500 was payable to one of the managing directors, who retired at the end of the accounting year. The assessing authority and the Commissioner of Income-tax (Appeals), treated the said amount as part of salary and hence not deductible in computing the income chargeable under the head "Profits and gains of business or profession" in accordance with section 40(c) of the Act. The Income-tax Appellate Tribunal, however, came to the conclusion on the basis of its own decision in ITO v. Sapt Textiles Ltd. [1981] 7 Taxman 40 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions of the Bombay High Court, to which we shall shortly make a reference. For answering the question referred, it is necessary to examine the relevant provisions of the Act. Section 40 contains a description of such amounts which are not deductible in computing the income chargeable under the bead "Profits and gains of business or profession". The relevant provision contained in clause (c) of section 40 as it existed at the relevant time reads : "40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the bead 'Profits and gains of business or profession' (a) in the case of any assessee-. . . (c) in the case of any company (i) any exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to clause (a) of sub-section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be. Explanation.-The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i) ;" The other relevant provision is section 10 which contains a description of items not included in total income. The section reads: "10. In computing the total income of a previous year of any person, any income falling within any of the fallowing clauses shall not be included.-. . . (10) (iii) any other gratuity received by an employee on his retirement or on is becoming is capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(c). In the opinion of the Tribunal, the lump sum payment of Rs. 10,500 made by the assessee-company to the managing director can be treated to be "an expenditure which, results directly or indirectly in the provision of any remuneration or benefit or amenity to the director" and is, therefore, not deductible from the income of the assessee chargeable under the head "Profits and gains of business or profession". It is deductible only to the extent the amount is not in excess of Rs. 72,000 as provided in sub-clause (A) of the said clause (c) of section 40. The Tribunal in coming to the above conclusion has referred to its own decision in ITO v. Sapt Textiles [1981] 7 Taxman 40 (Born). The opinion of the Tribunal also finds support from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an employee at the time of his retirement and not on the basis of his salary in any specific year. Therefore, payment of gratuity at the time of retirement cannot be equated with a monthly or yearly payment of salary or monthly allowance ... gratuity cannot be looked upon as periodic payment, it is not covered by the provisions of either section 40(c) or section 4OA(5) of the Income-tax Act, 1961. The ceiling, therefore, which is prescribed under these two sections on allowable expenditure will not apply to this payment." The Bombay High Court in the case of Colgate Palmolive (India) Pvt. Ltd. [ 1994] 2 10 ITR 770, having thus held that lump sum payment by way of gratuity at the time of retirement to an employee or director, being no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r some other kind of terminal benefit. It was certainty not a periodic payment to which the ceiling provided in sub-clauses (A) and (B) of clause (c) of section 40 could be applied. Such a one-time lump sum payment to a director on his retirement, being not a periodic payment towards any remuneration, benefit or amenity, falls outside clause (c) of section 40, and therefore, the Tribunal was in error in applying the provisions of clause (c) of section 40 for coming to the conclusion that the amount in excess of the limit prescribed in sub-clause (A) of clause (c) of section 40 is an amount not deductible for computation of income. We find ourselves in respectful agreement with the opinion of the Division Bench of the Bombay High Court expre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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