2002 (6) TMI 33 - HC - Income Tax

Retirement compensation deemed allowable as revenue expenditure under Income-tax Act

The court held that the expenditure of Rs. 3,70,755 incurred by the assessee as retirement compensation was allowable as revenue expenditure under section ... Business Expenditure, Ex-gratia Payment, Revenue Expenditure - 'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs.3,70,755 incurred by the assessee as retirement compensation was for maintaining good relations with the employees and for the welfare of the employees and hence allowable as revenue expenditure?' - we are of the view that the deduction claimed by the company would not fall under section 36(1)(v) of the Act, but would be in the nature of revenue expenditure wholly and exclusively for the purposes of the business. In that view of the matter, in our view the decision arrived at by the Commissioner of Income-tax (Appeals) as well as by the Income-tax Appellate Tribunal cannot be faulted and the Tribunal was justified in coming to the conclusion in the facts and circumstances of the case that the expenditure of Rs.3,70,755 incurred by the assessee as retirement compensation was allow able as revenue expenditure. Issues Involved:1. Whether the expenditure of Rs. 3,70,755 incurred by the assessee as retirement compensation was allowable as revenue expenditure under section 37 of the Income-tax Act, 1961.Detailed Analysis:1. Allowability of Expenditure under Section 37 of the Income-tax Act:The primary issue in this case is whether the expenditure of Rs. 3,70,755 incurred by the assessee as retirement compensation to its employees is allowable as revenue expenditure under section 37 of the Income-tax Act, 1961. The respondent, a beedi manufacturing company, claimed this amount as a deduction for the assessment year 1989-90. The amount was paid as compensation to workers for their service period under a previous employer, B.N. Sarda Ltd. The Assessing Officer disallowed this claim, stating that the payment was voluntary and not a legal obligation.2. Commercial Expediency and Legitimate Expectation:The Commissioner of Income-tax (Appeals) allowed the deduction, emphasizing that the payment was made due to commercial expediency and to mitigate the hardship of the employees. The Commissioner noted that the workers had rendered loyal and devoted service and had not received gratuity from their previous employer. The payment was seen as necessary to maintain good relations and ensure the welfare of the employees. The Income-tax Appellate Tribunal upheld this view, agreeing that the expenditure was justified for maintaining good relations with the employees.3. Comparison with Previous Judgments:The appellant argued that the case was similar to CIT v. Rajaram Bandekar and Sons (Shipping) Pvt. Ltd. [1999] 237 ITR 628, where the court had held that bonus payments should be examined under section 36(1)(ii) and not under section 37. However, the court distinguished the present case, noting that the payment was not in the nature of bonus but was an ex-gratia payment for past services rendered under a different employer.4. Legal Precedents and Tests for Allowability:The court referred to the judgment in CIT v. Associated Cement Companies Ltd. [2001] 249 ITR 3, where additional gratuity payments were allowed as deductions. The court also cited the Calcutta High Court's decision in CIT v. Hindustan Motors Ltd. [1989] 175 ITR 411, which allowed pension payments as business expenditure under section 37(1) based on commercial expediency. The court applied the tests laid down by the Supreme Court in Gordon Woodroffe Leather Mfg. Co. v. CIT [1962] 44 ITR 551, which include whether the payment was made as a matter of practice, whether there was an expectation by the employee, and whether the expenditure was for commercial expediency.5. Conclusion:The court concluded that the payment of Rs. 3,70,755 was made for commercial expediency and to settle legitimate expectations of the employees. The expenditure was not covered under section 36(1)(v) as it was not a contribution towards an approved gratuity fund but was a necessary business expenditure. The court upheld the decisions of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, allowing the deduction under section 37(1). The appeal was dismissed with no order as to costs.