1994 (4) TMI 27

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....61?" The facts leading to this reference stated briefly are : The assessee, a private limited company, while computing the total income of the company for the assessment year 1971-72 claimed deduction of the sum of Rs. 24,000 said to be the gratuity paid to its ex-working director, Sri S. Venkataraman. This claim, though initially allowed by the Income-tax Officer, was subsequently withdrawn by him after reassessment made pursuant to an audit note. The claim was disallowed on the ground that the payment of gratuity to the director was an ex gratia payment ; that at the time the director joined service, he had no expectation of receiving gratuity, and that the payment made to him was not based upon commercial expediency. The Appellate Ass....

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....ion of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] 44 ITR 551, the Tribunal ought to have disallowed the assessee's claim. Learned counsel for the assessee, on the other hand, submitted that the facts found by the Tribunal would clearly establish that there was a practice of paying gratuity to the retiring employees of the company; that the employees during their course of service had a reasonable and legitimate expectation of being paid gratutity at the time of their retirement; that such payment was a payment connected with the business, as it was made in consideration of over two decades of service rendered by the director and was intended to reassure the existing employees who toil and lo....

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....ct. Payments made voluntarily are not to be disallowed only on account of their voluntary character. So long as there is a reasonable nexus between the expenditure and the business, the expenditure will be regarded as having been incurred for the purposes of the business. The success of any business enterprise, to a substantial degree, is dependent on the willing performance of their tasks by the employees. Payments made to employees, by way of gratuity, bonus, retrenchment compensation, or compensation for termination of service, whether under compulsion of statute, or voluntarily cannot be said to be unconnected with the business, or as not being commercially expedient, so long as the quantum of the payment is reasonable, having regard to....