High Court orders rehearing on ex-gratia payments under Income-tax Act, emphasizes commercial expediency factors

The High Court directed a rehearing of the case regarding the reasonableness of ex-gratia payments to workers under section 36(1)(ii) of the Income-tax Act, emphasizing the need to consider commercial expediency factors as per the Supreme Court's ruling. Additionally, the High Court clarified that the conditions in the second proviso to section 36(1)(ii) are cumulative, requiring a re-examination by the Tribunal in line with the Supreme Court's decision.

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Issues involved:
The issues involved in this case are:
1. Whether the ex-gratia payment made to workers based on a settlement memorandum was reasonable and allowable u/s 36(1)(ii) of the Income-tax Act, 1961.
2. Whether the conditions mentioned in the second proviso to section 36(1)(ii) are cumulative in nature.

Summary:

Issue 1:
The assessee sought opinion on the reasonableness of ex-gratia payment to workers under section 36(1)(ii) of the Income-tax Act, 1961. The Tribunal initially decided against the assessee, following directions from the High Court. However, the High Court noted that the Tribunal's conclusions were at variance with the decision of the Supreme Court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. The High Court emphasized that the factors determining reasonableness should be viewed from a commercial expediency standpoint, as per the Supreme Court's ruling. As the Tribunal's decision did not align with this principle, the High Court directed a rehearing of the matter in light of the Supreme Court's decision.

Issue 2:
The second issue pertained to whether the conditions in the second proviso to section 36(1)(ii) are cumulative. The High Court observed that the requirements set out in the provisos must be read together to understand the permissible deduction under section 36. It was held that the conditions mentioned are indeed cumulative. The Tribunal was directed to re-examine the acceptability of the assessee's case in line with the Supreme Court's decision in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. The High Court concluded by disposing of the reference accordingly.

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