Case: Commissioner of Income-Tax, Mumbai City-Iii, Mumbai Vs. Sinnar Bidi Udyog Limited &amp; Another

profits or gains shall be computed after making the following allowances, namely :- (XV) any expenditure (not being an allowance of the nature descried 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. 40,000/- by the assessee company, "in appreciation of his long and valuable services to the company". The company had no scheme for payment of gratuities nor did it pay such gratuities in practice. There was nothing to show that the employee had accepted a low salary in expectation of a gratuity on retirement or that the gratuity was paid for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. The Apex Court disallowed the deduction and it is in that context, the Apex Court has laid down the tests as referred to above.18.Having heard both the Counsel and having noted relevant judgments as stated above, we are of the view that as far as the present payments made to the employees are concerned, although these payments were made for the services rendered by the employees concerned for the period prior to their joining into the assessee company, the assessee company had considered their representation and thereafter, settled the matter with the employees. The Respondent assessee company had considered the fact that the affairs of the earlier company were taken over by the assessee company and the services of the employees were continuous and they had put in long valuable service over the years. Since the affairs of the earlier company were taken over and the services were continuous, the workers had legitimate expectation that their earlier service will also be considered for calculating gratuity. The employees had also initiated proceedings against the Respondent company, first before the Labour Commissioner and thereafter before the Gratuity Authority. It is, thereafter that the necessary decision was taken by the Respondent company to settle the controversy. The Respondent company accepted part of the claim by passing a resolution in the meeting of Board of Directors. Therefore, we are of the view that this payment has been made to the employees by way of commercial expediency also. In our view the second and the third test laid down by the Apex Court in the Gordon Woodroffe Leather case (supra) clearly apply in the present case.19.The preposition laid down in the case of Rajaram Bandekar has no application to the present case. In that matter, the Division Bench has squarely held that it was a case pertaining to the expenditure in the nature of bonus and, 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 1st April, 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) of the Act quoted above referred to a sum paid by the assessee as an employer by way of contribution towards the approved gratuity fund created by him. In the instant case, it is not a payment either towards or from the gratuity fund. It is a payment in excess of the payment that would be required to be made under the Payment of Gratuity Act, though made on the basis of legitimate expectations of the workmen in the facts of the case on the one hand and the commercial expediency of the employer on the other.20.It is well settled that the legitimate business needs of an assessee must be judged from the point of view of business. It is for the assessee to consider the business expediency and whether a particular expenditure should be incurred for the business. Provision of gratuity to the employees for the continuous services rendered to the company taken over cannot be said to be either unusual or unnecessary. The workmen have come to expect such provision or their legitimate due and in the instant case they had in fact filed application before the Payment of Gratuity Authority. The resolution of the Board of Directors also accepted their legitimate dues while making it clear that, it should not create financial burden beyond legal provision on continuity of service.21.In the circumstances, we are of the view that the deduction claimed by the company would not fall under section 36(1)(v) of the Act, but would be in the nature of revenue expenditure wholly and exclusively for the purposes of business. In that view of the matter, in our view the decision arrived at by the C.I.T. (Appeal) as well as by the Income Tax Appellate Tribunal cannot be faulted and the Tribunal was justified in coming to the conclusion in the facts and circumstances of the case that the expenditure of Rs. 3,70,755/- incurred by the assessee as retirement compensation was allowable as revenue expenditure.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]18.Having heard both the Counsel and having noted relevant judgments as stated above, we are of the view that as far as the present payments made to the employees are concerned, although these payments were made for the services rendered by the employees concerned for the period prior to their joining into the assessee company, the assessee company had considered their representation and thereafter, settled the matter with the employees. The Respondent assessee company had considered the fact that the affairs of the earlier company were taken over by the assessee company and the services of the employees were continuous and they had put in long valuable service over the years. Since the affairs of the earlier company were taken over and the services were continuous, the workers had legitimate expectation that their earlier service will also be considered for calculating gratuity. The employees had also initiated proceedings against the Respondent company, first before the Labour Commissioner and thereafter before the Gratuity Authority. It is, thereafter that the necessary decision was taken by the Respondent company to settle the controversy. The Respondent company accepted part of the claim by passing a resolution in the meeting of Board of Directors. Therefore, we are of the view that this payment has been made to the employees by way of commercial expediency also. In our view the second and the third test laid down by the Apex Court in the Gordon Woodroffe Leather case (supra) clearly apply in the presentclearly 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) of the Act quoted above referred to a sum paid by the assessee as an employer by way of contribution towards the approved gratuity fund created by him. In the instant case, it is not a payment either towards or from the gratuity fund. It is a payment in excess of the payment that would be required to be made under the Payment of Gratuity Act, though made on the basis of legitimate expectations of the workmen in the facts of the case on the one hand and the commercial expediency of the employer on the other.20.It is well settled that the legitimate business needs of an assessee must be judged from the point of view of business. It is for the assessee to consider the business expediency and whether a particular expenditure should be incurred for the business. Provision of gratuity to the employees for the continuous services rendered to the company taken over cannot be said to be either unusual or unnecessary. The workmen have come to expect such provision or their legitimate due and in the instant case they had in fact filed application before the Payment of Gratuity Authority. The resolution of the Board of Directors also accepted their legitimate dues while making it clear that, it should not create financial burden beyond legal provision on continuity of service.21.In the circumstances, we are of the view that the deduction claimed by the company would not fall under section 36(1)(v) of the Act, but would be in the nature of revenue expenditure wholly and exclusively for the purposes of business. In that view of the matter, in our view the decision arrived at by the C.I.T. (Appeal) as well as by the Income Tax Appellate Tribunal cannot be faulted and the Tribunal was justified in coming to the conclusion in the facts and circumstances of the case that the expenditure of Rs. 3,70,755/incurred by the assessee as retirement compensation was allowable as revenue expenditure.