1978 (8) TMI 72 - HC - Income Tax

Kerala High Court: Gratuity Payment Deductible as Business Expenditure

Commissioner Of Income-Tax, Kerala Versus Standard Furniture Co. Limited (In Liquidation)

The High Court of Kerala resolved a conflict between its Division Bench ruling and Supreme Court decisions on the deduction of gratuity payment as a ... Business Expenditure, Expenditure Incurred, Wholly And Exclusively Issues involved: Conflict between Division Bench ruling and Supreme Court decisions regarding the deduction of gratuity payment as a business expenditure u/s 37 of the Income Tax Act for the assessment year 1971-72.Summary:The High Court of Kerala addressed a conflict between its Division Bench ruling and Supreme Court decisions regarding the deduction of gratuity payment as a business expenditure u/s 37 of the Income Tax Act for the assessment year 1971-72. The case involved an assessee company that went into voluntary liquidation and sold its stock and machinery, incurring a liability for gratuity payment to its workers. The company claimed a deduction of the gratuity amount as a business expenditure u/s 37 of the Act, which was initially disallowed by the Income Tax Officer but later allowed by the Appellate Authority and sustained on further appeal by the Tribunal.The Division Bench ruling in High Land Produce Co. Ltd.'s case established that the liability to pay gratuity, though contingent, was ascertainable with substantial accuracy and could be considered for arriving at the true profits and gains of the assessee. However, the reference to a Full Bench highlighted that certain Supreme Court decisions, such as Haji Aziz and Abdul Shakoor Bros.'s case and Malayalam Plantations Ltd.'s case, emphasized that expenses deductible under the Act must be incurred for the purpose of earning profits, not as a penalty for breach of the law during the course of trade.After thorough examination and discussion, the High Court concluded that the payment of gratuity, even if made ahead of the actual time for payment, constituted an expenditure wholly and exclusively for the purpose of the business. The Tribunal had considered this aspect and found the gratuity payment to be a legitimate business expenditure. The Court rejected the revenue's contention that the claim for deduction should fall under a specific provision of the Act, emphasizing that the gratuity payment qualified as a deductible expense u/s 37 of the Income Tax Act.In light of the precedents and principles established by various High Courts and the Supreme Court, the High Court ruled in favor of the assessee, affirming that the gratuity payment was a permissible business expenditure u/s 37 of the Act. The judgment was communicated to the Tribunal for further action.