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Issues Involved:
1. Applicability of section 40(c)(i) versus section 40A(5) for determining inadmissible expenditure. 2. Whether section 40(c)(i) applies to retirement gratuity payments to a director. Summary: Issue 1: Applicability of section 40(c)(i) versus section 40A(5) for determining inadmissible expenditure The assessee, a company, paid Rs. 90,000 as retirement gratuity to its chairman and full-time director, Mr. Kodikal, and claimed it as deductible expenditure. The Income-tax Officer and Appellate Assistant Commissioner rejected this claim. The Tribunal, however, held that the payment should be considered u/s 40(c) and not u/s 40A(5). The High Court examined the provisions of sections 40(c) and 40A(5) and concluded that both sections could apply to a director who is also an employee. However, the retirement gratuity paid to Mr. Kodikal was not covered by either section as it was not a periodic payment but a one-time payment made at retirement. The Court noted that section 40A(7) does not prohibit the deduction of actual gratuity payments made during the accounting year, distinguishing between provisions for future payments and actual payments. Issue 2: Whether section 40(c)(i) applies to retirement gratuity payments to a director The Court analyzed the nature of the expenditure covered by sections 40(c) and 40A(5), noting that both sections deal with periodic payments related to the previous year. The Court referred to the Supreme Court's observations in CIT v. Indian Engineering and Commercial Corporation P. Ltd., which stated that for directors who are also employees, both sections would apply, and the higher ceiling would be used. However, the Court emphasized that retirement gratuity is a one-time payment based on the entire length of service and not a periodic payment. Therefore, it cannot be computed within the framework of sections 40(c) and 40A(5), which are designed for periodic payments. The Court concluded that the retirement gratuity paid to Mr. Kodikal was not covered by these sections and upheld the Tribunal's decision to allow the deduction. Conclusion: (a) In determining inadmissible expenditure for payments to a director who is also an employee, both sections 40(c)(i) and 40A(5) apply. However, the retirement gratuity paid to Mr. Kodikal is not covered by either section. (b) The provisions of section 40(c)(i) do not apply to the retirement gratuity payment, and the expenditure is deductible. (c) No order as to costs.
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