1977 (4) TMI 75 - AT - Income Tax

Tribunal upholds AAC's decision on business expenditure, directs ITO verification

The Tribunal dismissed the departmental appeal, affirming the AAC's decision to allow the sum of Rs. 63,880 as a business expenditure on grounds of ... - Issues Involved:1. Allowability of the sum of Rs. 68,762 as gratuity paid to employees.2. Allowability of the provision of Rs. 6,039 as gratuity payable to employees.Issue-wise Detailed Analysis:1. Allowability of the sum of Rs. 68,762 as gratuity paid to employees:The assessee, a public limited company running a printing press, claimed Rs. 68,762 as gratuity paid to employees during the year. The Income Tax Officer (ITO) disallowed this amount, reasoning that the contingency for payment of gratuity under the Gratuity Act had not arisen since the employees were still in service. The Appellate Assistant Commissioner (AAC) allowed Rs. 63,880 of this amount, stating it was paid on grounds of commercial expediency to facilitate business operations.The Tribunal considered the facts and noted that the payment was made as part of an agreement where employees' services were treated as terminated on 31st March 1973 and they were re-employed from 1st April 1973. The Tribunal concluded that the payment, though termed as gratuity, was essentially a lump sum payment to alter the service conditions of the employees. This payment was made to secure certain advantages for the business, such as forfeiting benefits from a longer period of service and resetting the calculation of future benefits like gratuity and pension.The Tribunal referenced several legal precedents to determine the allowability of such payments. The Supreme Court in CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and other cases like Atherton vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155, and Noble Ltd. vs. Mitchell (1927) 11 Tax Cases 372, established that payments made on grounds of commercial expediency to facilitate business operations are allowable deductions. The Tribunal concluded that the payment of Rs. 63,880 was made to secure business advantages and was therefore allowable as a business expenditure.2. Allowability of the provision of Rs. 6,039 as gratuity payable to employees:The assessee also claimed Rs. 6,039 as a provision for gratuity payable to employees. The AAC directed the ITO to verify whether the conditions laid down in section 40A(7)(b)(ii) of the Income Tax Act, introduced by the Finance Act, 1975, were satisfied. The Tribunal upheld the AAC's direction, stating that the Payment of Gratuity Act applies for assessment years after 1973-74, and it was appropriate for the ITO to verify the compliance with the conditions specified in the Act.Conclusion:The Tribunal dismissed the departmental appeal, affirming the AAC's decision to allow the sum of Rs. 63,880 as a business expenditure on grounds of commercial expediency and directing the ITO to verify the conditions for the provision of Rs. 6,039. The Tribunal emphasized that the payments were made to secure business advantages and were allowable under the principles of commercial expediency and business necessity.