AI Drafter 
TaxTMI 
TaxTMI 
2002 (6) TMI 605
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.... 1989-90, it claimed a deduction of Rs. 3,70,755 as revenue expenditure on account of compensation paid to several workers on retirement. This amount was paid towards the period of service rendered by these workers under another company namely B.N. Sarda Ltd. This deduction as claimed under section 37 was disallowed by the Assessment Officer by order dated 28-2-1991. The Assessment Officer held that the assessee had on his freewill decided to distribute this amount amongst the workers on their retirement, without there being any legal liability to do so. He, therefore, held that the assessee was not entitled to claim deduction of this amount. 4. The respondent had carried the matter in appeal, as pointed out above to the Commissioner (Appeals). The Commissioner (Appeals) in para 3 of his order referred to the fact that the workers concerned had joined the respondent-company in 1974, i.e., from the inception of the respondent-company and had thereafter, rendered loyal and devoted service. Prior thereto, all of them were working in one B.N. Sarda Ltd. The workers were not paid their gratuity for the services rendered in B.N. Sarda Ltd. Though the respondent-company was legally not....
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....if that was so, this would become the deduction even permissible under section 36(1)(v) of the Act and, therefore, cannot be permitted under section 37. For ready reference, we reproduce herein the clauses, relevant for our purpose, including sub-clauses of sections 36(1) and 37(1) which are as follows : "36. Other deductions.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 (i) *** *** *** (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iii) *** *** *** (iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the cont....
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....s that the present case is comparable with Rajaram Bandekar & Sons Shipping (P) Ltd.'s case (supra) and, therefore, this court should follow the same course. 9. Mr. Zhaveri, the learned counsel appearing for the respondent on the other hand stressed the fact that this payment had been made as ex gratia retirement benefit to the employees, though the calculation was made on the basis of the unpaid gratuity which would have been payable for the services rendered under B.N. Sarda Ltd. He emphasized the fact that the Commissioner (Appeals) had in terms held that the expenditure was towards commercial expediency. He pointed out that in para 3 of order of the Commissioner (Appeals), it was recorded that the workers had made a representation and, thereafter this decision had been arrived at considering the loyal and dedicated services for long period rendered by them. 10. Mr. Zhaveri placed before us a compilation of documents for consideration. It included a notice dated 12-1-1977 issued by the Deputy Commissioner of Labour, Pune addressed to the respondent. It recorded that the services of the workers had to be treated as continuous as the respondent had taken over a going con....
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....d 24 years of service, out of which 10 years were under earlier company, and 14 years under the respondent. The amount of ex gratia mentioned against her name is Rs. 291. Mr. Zhaveri points out that this is component for the service rendered under the earlier company whereas the entire amount payable to her was Rs. 1,165. The total amount arrived at the bottom of this list of 505 workmen is Rs. 3,70,755. It is this amount which was claimed as a deduction before the assessing officer for the aforesaid assessment year, i.e., 1989-90. Mr. Zhaveri submits that the payment was considered expedient to avoid unrest in the large work-force and from the workers point of view it was in a way legitimate expectation. 14. Mr. Zharveri relied upon another judgment of a Division Bench of this court in the case of CIT v. Associated Cement Cos. Ltd. [2001]249ITR3(Bom) In that the matter the question raised was, whether gratuity paid in excess of limits prescribed by the Gratuity Act constituted allowable deducted. The Division Bench Relied upon a judgment of a Division Bench of the Calcutta High Court in the case of CIT v. Hindustan Motors Ltd. [1989]175ITR411(Cal) wherein it was held that the a....
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....e of getting gratuity; or (c) was the sum of money expended on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business." The Calcutta High Court has commented on these tests in Hindustan Motors Ltd.'s case (supra) that these tests are not cumulative. They are alternative and independent. If any one of these tests is satisfied, the expenditure has to be allowed as revenue expenditure. The then prevalent section 10(2)(xv) reads as follows : "(2) Such profits or gains shall be computed after making the following allowances, namely : (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation : " 17. In the aforesaid matter before the Apex Court, a person who was an employee of the managing agent of the assessee-company from 1922 to 1935 and who was also an employee of the assessee from 1935 and also its director from 1940, was paid a gratuity of Rs. 40,0....
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....d, therefore, it was necessary to examine as to whether the second proviso to section 36(1)(ii) would get attracted and it is for that purpose that the Division Bench had sent back the matter to the Tribunal. In this connection, it is material to note that the proviso to section 36(1)(ii) as it then existed (and deleted with effect from 1-4-1989) read as follows : "Provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission is reasonable with, reference to (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question; and (c) the general practice in similar business or profession." This clearly shows that the proviso was of wide ambit and it covered the expenditure in the nature of bonus in excess of the limit prescribed under the Payment of Bonus Act. That is not the case when it comes to payment in the nature of gratuity. Section 36(1)(v) quoted above referred to a sum approved gratuity fund created by him. In the instant case, it is not a payment with to wards or from the gratuity fund. It is a payment in exces....