Business expenditure deduction for gratuity paid to an ex-working director upheld where commercial expediency and business nexus were shown.

Reasonable gratuity paid to an ex-working director may be deductible as business expenditure where it is made under an established company practice, has a real business nexus, and is commercially expedient. Voluntary character alone does not disqualify the outlay. The analysis treats gratuity, bonus, retrenchment compensation, and termination compensation as potentially allowable when the payment is reasonable and facilitates the carrying on of the business. On the facts discussed, the director had served the company for over two decades, the practice of paying gratuity was established and later affirmed by board resolution, and the deduction was accepted in favour of the assessee.

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Issues: Whether gratuity paid to an ex-working director was deductible as business expenditure under the Income-tax Act.

Analysis: The payment was made to a director who had served the company for over two decades, and the Tribunal found that the company had an established practice of paying gratuity to retiring employees, later confirmed by a board resolution. Voluntary character alone did not disqualify the expenditure. The governing test was whether there was a reasonable nexus between the payment and the business and whether the outlay was commercially expedient. Payments made to employees by way of gratuity, bonus, retrenchment compensation, or termination compensation may qualify as business expenditure where they are reasonable and facilitate the carrying on of the business. The earlier decision relied on by the Revenue was explained in the later Supreme Court authority, and the facts were held to fall within the permissible scope of business expenditure.

Conclusion: The gratuity payment was an admissible deduction and the question was answered in favour of the assessee.

Ratio Decidendi: A reasonable gratuity paid to an employee or director under an established practice, with a business nexus and commercial expediency, is allowable as business expenditure even if voluntarily made.

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