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TMI Blog1978 (1) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... pound 4,000 (in rupees 53,333) on his retirement and thereafter pissed a resolution to that effect on the 19th February, 1962. The rupee equivalent of pound 4,000, viz., Rs. 53,333 was paid to Knight on his retirement on the 31st August, 1962, during the relevant accounting year and in the assessee's account the payment was shown under the head " Salaries, wages and bonus amount ". In its assessment the assessee claimed a deduction of the said sum of Rs. 53,333. The Income-tax Officer noted that there was no resolution authorising payment of gratuity to the entire staff of the assessee nor was it shown that the assessee had decided to pay gratuity to each of its senior staff. The Income-tax Officer also found that this payment to Knight was not made under any policy followed by the assessee. He also held that it had not been established that this payment of gratuity to Knight was made exclusively out of business consideration. Accordingly, he disallowed the claim. On appeal, the Appellate Assistant Commissioner found that there was no contractual obligation to pay any gratuity to Knight and that there was no general resolution of the assessee for payment of gratuity to its sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engupta, learned counsel for the revenue, has contended before us that the chart filed before the Tribunal did not disclose any basis on which a lump sum of Rs. 53,333 was decided to be paid to Knight. Basis for payment to the other employees was shown as 15 days' basic salary for every completed year of service before introduction of the provident fund scheme in October, 1947, whereas Knight joined the assessee only in 1950. Mr. Sengupta contended further that mere intimation to Knight immediately prior to his retirement that he would receive the gratuity would not lead to any expectation on his part. A gratuity scheme or an established practice for payment of gratuity is required to create sufficient expectation. He submitted that it had been held by the Income-tax Officer that the payment of gratuity to Knight was not exclusively out of business considerations and this finding had been affirmed by the Appellate Assistant Commissioner. The Tribunal did not advert to these findings at all and did not enquire whether this amount had been laid out or expended wholly and exclusively for the purposes of the business of the assessee. Mr. Sengupta also contended that the finding o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as an inducement to other employees that if they rendered service in a similar manner with efficiency and honesty they would be similarly rewarded. It was submitted that the assessee had not acted with any oblique motive and in good faith. The Supreme Court noted that the said amount was paid not in pursuance of any gratuity scheme nor was it an amount which the recipient expected to be paid but that it was a voluntary payment. The object of this payment was not facilitating the carrying on of the business of the assessee or, as a matter of commercial expediency, the payment was made in recognition of long and faithful service of the employee concerned. There being no prevailing practice of payment of such amounts, it did not affect the quantum of salary of the recipient. The contentions of the assessee were rejected and the Supreme Court observed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement and the amount paid was claimed as a deduction in the computation of its income in the relevant assessment year. It was found that it was not the practice of the assessee to pay gratuity to its employees and this payment was the first of its kind. There was also no evidence to show that the employee expected a gratuity when he entered service or that the gratuity was given as part of any scheme to give gratuity to the employees in future as an incentive for better service. On these facts, the principles laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551 was applied and it was held that this payment of gratuity was not allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. (c) Teekoy Rubbers (India) Ltd. v. Stale of Kerala [1966] 60 ITR 350 (Ker). In this case, a sum of Rs. 15,000 was paid to the widow of the superintendent of the rubber plantation who died while in the service of the assessee and a sum of Rs. 300 was paid to another superintendent on termination of his employment. There was nothing on record to show that there was any connection between the purpose of the payment and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned. On the question whether the payment was deductible as an expenditure, the Andhra Pradesh High Court applied the tests laid down by the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. [1962] 44 ITR 551 and held that the payment to the Life Insurance Corporation was made on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the company. The High Court also noted that that was an expectation on the part of the employee for the said sum. In its judgment the High Court observed as follows : " The Supreme Court, in our opinion, did not intend to lay down that any payment made contrary to the practice prevailing as the payment of pension or gratuity should necessarily be held to be an inadmissible deduction. In our opinion, what the Supreme Court intended to lay down was that if there is such a practice it would go a long way to satisfy the main test laid down by the Supreme Court, viz., that it was not a gratuitous payment and that it was a payment on the ground of commercial expediency to facilitate the carrying on of the business. It is clear from the judgment of the Supreme Court that these a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependents of a deceased employee was a recognised claim in industrial law and if a prudent employer, conscious of the new trend voluntarily made such a payment in order to avoid a possible future industrial dispute and bought industrial peace and contentment such a payment should certainly be treated as having been made on the ground of commercial expediency. Even a solitary payment might pass this test. (h) Commissioner of Income-tax v. Oxford University Press [1977] 108 ITR 166 (Bom). In this case, the relevant facts were that a member of the covenanted staff of the assessee after long years of service died suddenly. At the time of his death the deceased was drawing a salary of Rs 24,000 per year. The assessee paid a sum of Rs. 50,000 as and by way of gratuity, roughly on the basis of 2 years' salary payable and claimed the amount as an allowable expenditure. The Appellate Assistant Commissioner held that as there was a gratuity scheme in respect of the non-covenanted staff, it was only natural that the covenanted staff would also be in expectation of receiving gratuity on the death or retirement and, therefore, the payment should not be considered to have been made ex gratia. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Kerala High Court held that it was not found whether the payments were connected with the future conduct of the business of the assessee. Nor could it be ascertained whether the payments were dictated by commercial expediency. Accordingly, the matter was remanded to the Tribunal for re-hearing. Mr. Sengupta also cited Airways (India) Ltd. v. Commissioner of Income- tax [1966] 62 ITR 281 (Cal), Indian Overseas Bank Ltd. v. Commissioner of Income-tax [1967] 63 ITR 733 (Mad), W. T. Suren Co. (P.) Ltd. v. Commissioner of Income-tax [1971] 80 ITR 602 (Bom), Seshasayee Bros. (Travancore) Pvt. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 442 (Ker) and Sassoon J. David Co. Pvt. Ltd. v. Commissioner of Income-tax [1972] 85 ITR 83 (Bom). The facts in these decisions are entirely different from the facts in the case before us and in our opinion it is not necessary to consider the same any further for our purposes. Dr. Debi Pal, learned counsel for the assessee, contended, on the other hand, that the facts in the instant case satisfied at least one test laid down by the Supreme Court in Gordon Woodroffe Leather Manufacturing Co. Ltd. [1962] 44 ITR 551, namely, that the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt satisfies any of the said tests then further investigation whether other tests are satisfied would, in our opinion, not be necessary. We respectfully follow the decision of the Andhra Pradesh High Court in the case of British India Tobacco Corporation Ltd. [1971] 79 ITR 41 (AP) and the Bombay High Court in the case of Oxford University Press [1971] 108 ITR 166 (Bom) and hold that the tests laid down by the Supreme Court are disjunctive and alternative. From the facts found it has been held that the test of " expectation " has been directly satisfied. In our view, the test of commercial expediency is also indirectly satisfied. If gratuity is paid as a matter of course or practice or if by assurance or understanding expectation is engendered in the mind of an employee then withholding of gratuity cannot be prudent business practice. Even without any expectation similar payments in certain cases have been held to be commercially expedient : Vide Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711 (Guj) and Fairdeal Corporation Pvt. Ltd. [1977] 108 ITR 280 (Bom). In that view, the contention of Mr. Sengupta that payment of the amount of Rs. 50,000 to Knight by way of gratuity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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