1984 (9) TMI 14 - HC - Income Tax

Gratuity under Income Tax Act: High Court exempts managing director's payment.

The High Court of Gujarat ruled in favor of the assessee, holding that the gratuity received by an individual managing director under an agreement falls ... Exemptions, Gratuity Issues: Interpretation of section 10(10) of the Income-tax Act regarding the exemption of gratuity received by an individual managing director under an agreement.Analysis:The High Court of Gujarat addressed the issue of whether an amount received by an individual managing director as gratuity under an agreement is exempt from income tax under section 10(10) of the Income-tax Act, 1961. The managing director, appointed under an agreement in 1967, received a gratuity of Rs. 21,000, out of which the assessee claimed exemption for Rs. 9,625 under section 10(10). The Income-tax Officer denied the exemption, stating that gratuity is payable only on retirement, and as the managing director's services were not terminated, no gratuity was due. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ruled in favor of the assessee, leading to the Commissioner seeking a reference to the High Court. The court examined the relevant provisions of section 10(10) and the nature of gratuity as understood in common parlance.The court emphasized that gratuity is generally considered a retirement benefit, payable upon retirement or superannuation, but it does not preclude an individual from seeking re-employment and earning gratuity again. The court highlighted that the concept of gratuity is not limited to a one-time payment upon retirement but extends to situations where an individual retires, earns gratuity, and subsequently re-enters employment under a new agreement. The court emphasized that if an agreement provides for the payment of gratuity upon the termination of employment, any such payment made pursuant to the agreement qualifies as gratuity, regardless of subsequent re-employment under a fresh contract.The court held that if parties agree to provide a benefit upon the termination of employment, the payment made under such agreement constitutes gratuity, even if the individual is re-employed without a break. Therefore, the court concluded that the payment made by way of gratuity under the 1967 agreement falls within the purview of section 10(10) of the Income-tax Act, allowing the assessee to claim exemption to the extent permissible under the section. Consequently, the court ruled in favor of the assessee and against the Revenue, affirming the Tribunal's decision.