Cash gratuity to a director fell outside section 40(a)(v), so the payment was not disallowable.

Section 40(a)(v) of the Income-tax Act, 1961 was construed as not covering cash gratuity payments made to an employee or director. The provision was read in the context of the earlier statutory scheme, including the omission of section 40(c)(iii) and the insertion of clause (a)(v) by the Finance Act, 1968, and the governing authority held that cash payments fell outside its scope. Accordingly, a cash gratuity payment made for commercial expediency was not disallowable under section 40(a)(v), and the referred question was answered in favour of the assessee.

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Issues: Whether a cash gratuity payment made to a director was disallowable under section 40(a)(v) of the Income-tax Act, 1961, even though the payment was made for commercial expediency.

Analysis: The question turned on the scope of section 40(a)(v) as it stood at the relevant time and whether cash payments to an employee or director were within its ambit. The provision was read in the light of the earlier statutory scheme, including the omission of section 40(c)(iii) and the insertion of clause (a)(v) by the Finance Act, 1968. On the authority governing the point, cash payments were not covered by section 40(a)(v).

Conclusion: The cash gratuity payment was not disallowable under section 40(a)(v); the answer to the referred question was in the negative and in favour of the assessee.

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