1961 (12) TMI 4 - SC - Income Tax

Court rules voluntary gratuity payment not deductible under Indian Income-tax Act; payment not part of scheme

The Supreme Court affirmed the lower courts' decisions, ruling that the gratuity payment made by the appellant to an officer upon retirement was not ... Whether the sum of ₹ 40,000 paid to Mr. J. H. Philips on his retirement from the service of the company was not an admissible deduction under section 10(2)(xv) of the Income-tax Act, 1922 ? Held that:- The proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and therefore the amount claimed is not a deductible item under section 10(2)(xv). Appeal dismissed. Issues:Applicability of section 10(2)(xv) of the Indian Income-tax Act to a gratuity paid by the appellant to an officer on retirement.Detailed Analysis:The case involved an appeal regarding the applicability of section 10(2)(xv) of the Indian Income-tax Act to a gratuity paid to an officer upon retirement. The appellant, a managing agent company, paid a gratuity of Rs. 40,000 to an officer for his long and valuable services. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the amount, considering it a capital payment as the company had no pension scheme, and the payment was voluntary. The Income-tax Appellate Tribunal upheld the decision, stating that the payment was not wholly and exclusively for the purpose of the business. The High Court also ruled against the appellant, emphasizing that the payment did not meet the requirements of section 10(2)(xv) as it was voluntary and not in the future interest of the business.The appellant argued that the payment was made as a matter of commercial expediency to incentivize employees for efficient service. However, the Supreme Court held that the payment did not fall within the provisions of section 10(2)(xv). It was a voluntary payment in recognition of past service, not part of a gratuity scheme, and not made to facilitate business operations. The Court distinguished cases where payments were made as part of a practice affecting salary or with commercial expediency. As there was no evidence of such practices or expectations in this case, the Court dismissed the appeal, stating that the amount was not deductible under section 10(2)(xv).In conclusion, the Supreme Court affirmed the decisions of the lower courts, emphasizing that the payment of gratuity in this case did not meet the criteria set out in section 10(2)(xv) of the Income-tax Act. The Court highlighted the absence of a practice affecting salary or employee expectations, leading to the dismissal of the appeal with costs.