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TMI Blog1979 (6) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... taff. No gratuity was payable if the employee resigned on his own accord or was dismissed from service for misconduct, insubordination, indiscipline or gross neglect of duty. On 31st December, 1966, as directed by the Reserve Bank of India, the assessee-bank was merged with the Indian Overseas Bank. The assessee had fifty-four employees on its staff, out of whom forty-two employees joined the Indian Overseas Bank and the remaining twelve employees were not taken over by that bank. There was an agreement at the time of the merger of the assessee-bank with the Indian Overseas Bank. Clause 13 of the agreement provided that the entire staff must resign from the services of the assessee-bank before any of them was taken over, and that all their dues referable to their service with the assessee must be settled by the assessee-bank. The same clause also provided for weightage being given to the employees taken over by the Indian Overseas Bank in the matter of fixation of their pay, having regard to their qualification and merit. The employees were assured that the total emolument would not be less than what they were getting while they were working with the assessee-bank. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated the sub-clause under which the present payment is sought to be brought in. There is provision for the allowance of payment of bonus or commission for services rendered under sub-cl. (ii) of s. 36(1). There is a provision for the allowance of payment of contribution towards a recognised provident fund or an approved superannuation fund under sub-cl. (iv) of s. 36(1). Subclause (v) of s. 36(1) provides for the allowance of payment made by the assessee by way of contribution towards in approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. The present case cannot be brought within the scope of any of these sub-clauses. This is not a payment of bonus or commission, nor is it any contribution towards a recognised provident fund superannuation fund or gratuity. There is, therefore, nothing in s. 36 which applies here, and the present claim for deduction cannot be brought within the scope of any of the sub-clauses of s. 36. The Tribunal's conclusion based on s. 36 is clearly erroneous. Section 37(1) of the Act provides for any expenditure, which does not fall within ss. 30 to 36 and which is not in the nature of capital expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the amount of gratuity paid in that case was not an expenditure laid out or expended for the purpose of the assessee's business within the meaning of s. 10(2)(xv) of the Indian I.T. Act, 1922, which corresponded to s. 37(1) of the present Act. The amount was, therefore, held to be not deductible in computing the profits and gains of the company. The proper test to be applied in a case like this was described at p. 555 as follows, In our opinion the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and, therefore, the amount claimed is not a deductible item under section 10(2)(xv). The learned standing counsel for the Commissioner submitted that there was no practice in the present case and that there was also nothing to show that any employee joined in the expectation of getting the gratuity. As pointed out by the Supreme Court in the recent decision, Sassoon J. Dav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices of the employees or alteration in the terms of their employment. In settling the accounts of the firm, a particular sum was taken into account as retrenchment compensation payable to the employees under s. 25FF of the Industrial Disputes Act, 1947, which would apply on a transfer of ownership. The question was whether the sum constituted an allowable expenditure in computing the income of the firm. The Supreme Court held that during the entire period, the business was continued, there was no liability to pay retrenchment compensation that the liability arose only on transfer of the business and that it was not of a revenue nature so as to be deductible under s. 10(1). Similarly, the liability under s. 25FF was also considered to be wholly contingent and did not arise as an obligation during the period of the business of the assessee-company. In the said case, the principle to be applied as pointed out by the Supreme Court at pages 649 and 650 is as follows : As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business but on account of the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The learned counsel drew our attention to the decision in Motors (South India) Ltd. v.. CIT [1975] 100 ITR 341 (Mad). A new subsidiary company was formed to take over the retreading division of the assessee-company. The subsidiary company took over all the employees who were working in the assessee-company. The gratuity payable to the transferred employees was calculated on the basis of the rules applicable to them, and this amount was transferred to the new company from the pension and gratuity reserve in the hands of the assessee-company. The assessee claimed that the amount so transferred was liable to be allowed as deduction, but this court negatived the claim. The point to be noted with reference to this case is that no payment was made as and by way of gratuity or retrenchment compensation to the employee. Similar is the position in CIT v. Pathinen Grama Arya Vysya Bank Ltd. [1977] 109 ITR 788 (Mad) another decision of a Bench of this court. In that case also, there was a merger of one bank with another. The agreement provided for the transferee-bank employing all the employees of the transferor-bank who had not completed the age of 60. In the transferor-bank, there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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