Gratuity deductions require commercial expediency or an established practice; ad hoc ex gratia payments fail the business expenditure test.

Gratuity paid to employees is deductible as business expenditure only if it is shown to have been laid out wholly and exclusively for the purposes of the business. A mere payment made in the course of business is insufficient; the relevant test is whether the payment was made on grounds of commercial expediency, as part of a remuneration practice, or to facilitate the future conduct of the business. On the facts noted, there was no prior gratuity scheme, no uniform practice, no pre-existing obligation, and no consistent basis linked to service or salary. The payments were described as ex gratia and were treated as ad hoc, so the deduction claim failed under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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Issues: Whether gratuity payments made to employees without any prior scheme, uniform practice, or pre-existing obligation were deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: Deduction is allowable only where the expenditure is shown to have been laid out wholly and exclusively for the purposes of the business. A mere payment made in the course of carrying on business does not by itself establish that test. The governing principle is whether the payment was made as a matter of commercial expediency, or as a practice affecting remuneration, or in order to facilitate the future carrying on of the business. On the facts found, there was no material to show that any decision to pay gratuity had been taken during the employees' service, no uniform gratuity scheme, and no consistent method based on service or salary. The receipts themselves described the sums as ex gratia, and the payments were ad hoc.

Conclusion: The gratuity amounts were not allowable deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the claim failed against the assessee.

Ratio Decidendi: Gratuity paid without a prior scheme or established practice, and without proof of commercial expediency or a nexus with the future conduct of business, is ex gratia and not expenditure laid out wholly and exclusively for the purposes of the business.

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