Commercial expediency supports deduction of voluntary ex gratia payment to workers despite no legal obligation

A voluntary ex gratia payment made to workers was held allowable as a business deduction under section 37(1) because it was actually paid, linked to reduction of workforce in response to falling business, and incurred on grounds of commercial expediency. The absence of a legal obligation did not prevent deduction where the expenditure was made for business reasons and in the interests of the assessee's operations. The disallowance was therefore set aside.

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Issues: Whether ex gratia payment made to workers was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The payment was actually made and was not disputed. The reduction in the workforce was undertaken to reduce production cost in view of the decline in business. The absence of a legal obligation did not prevent allowance of the expenditure, because the payment was made voluntarily in the interests of the business and on grounds of commercial expediency.

Conclusion: The ex gratia payment was deductible under section 37(1) and the disallowance was set aside.

Ratio Decidendi: A voluntary ex gratia payment made to workers for business reasons and on grounds of commercial expediency is an allowable deduction under section 37(1) even if there is no binding legal obligation to pay it.

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