1994 (4) TMI 27 - HC - Income Tax

Court upholds deduction of gratuity payment for ex-director, citing business nexus. Ruling favors assessee.

The High Court upheld the Tribunal's decision, allowing the deduction of the gratuity payment to the ex-working director. The court emphasized the ... Business Expenditure Issues:1. Deductibility of gratuity payment to ex-working director under the Income-tax Act, 1961.Detailed Analysis:The judgment by the High Court of Madras involved a question of law referred by the Revenue regarding the deductibility of a sum of Rs. 24,000 paid to an ex-working director as gratuity under the Income-tax Act, 1961. The assessee, a private limited company, claimed this deduction for the assessment year 1971-72, which was initially allowed but later withdrawn by the Income-tax Officer after reassessment based on an audit note. The claim was disallowed on the grounds that the payment was ex gratia, not based on commercial expediency, and the director had no expectation of receiving gratuity at the time of joining the service. The Appellate Assistant Commissioner upheld this view, leading the assessee to appeal to the Tribunal.The Tribunal, after thorough examination, found that the ex-working director had served the company from 1948 to 1970, receiving a salary and a share of profits. The sum of Rs. 24,000 paid to him was roughly half a month's salary for each year of service, and a resolution by the company's board confirmed the practice of paying gratuity to retiring employees, including directors. The Tribunal concluded that the payment was a legitimate deduction as it was a customary practice within the company and connected to the business, ensuring the financial security of retiring employees.The arguments presented by the Revenue contended that the payment was voluntary and not linked to the business, citing a previous Supreme Court decision. In contrast, the assessee's counsel argued that the payment was made in consideration of long-term service, maintaining employee morale and business continuity. Referring to the Supreme Court ruling in Sassoon J. David and Co. P. Ltd. v. CIT, the counsel emphasized that such payments are considered business expenditures under the Income-tax Act.The High Court upheld the Tribunal's decision, emphasizing that voluntary payments can still be deductible if there is a reasonable nexus to the business. The court clarified that payments like gratuity, bonus, or compensation for termination of service, whether statutory or voluntary, are deemed connected to the business if reasonable in amount and facilitating business operations. The court distinguished and explained the earlier Supreme Court decision cited by the Revenue, affirming that the payment in this case was commercially expedient and essential for business continuity.In conclusion, the High Court ruled in favor of the assessee, allowing the deduction of the gratuity payment to the ex-working director. The court highlighted the importance of employee payments in business operations and upheld the Tribunal's decision based on the reasonable nexus between the payment and the business, answering the question referred in favor of the assessee and awarding costs accordingly.