TMI Blog1977 (4) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 the assessee had not indicated whether conditions laid down in s. 40A(7)(b)(ii) introduced by the Finance Act, 1975 had been complied with. He, therefore, directed the ITO to verify whether the conditions have been satisfied and to deal with the claim for deduction thereafter. With regard to the amount of Rs. 68,762, the AAC held that Rs. 4,882 having been already allowed by the ITO for the earlier year, the balance of Rs. 63,800 only arose for consideration. This payment he held had been made on the ground of commercial expediency and in order to facilitate the carrying on of the business. He, therefore, allowed the sum of Rs. 63,880. The Department has come up on appeal against the AAC s order on both these points. 3. The learned Departmental counsel has pointed out that the assessee did not have any scheme of gratuity. The employees continued with the assessee and had further periods of service. There was no question, therefore, of a contingency warranting the payment of gratuity. Under the Industrial Dispute Act retrenchment compensation should be paid (S. 25FF), but such a payment cannot be allowed in the present case. Since the payment is gratuity it should satisfy the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s correct in stating that a contingency authoring the payment of gratuity has not arisen. The matter, however, does not stop there. The assessee in effect paid the employees a lump sum in order to alter the general condition of their service. This payment has been computed on the basis of every completed year of service till 31st March, 1973. The formula for calculating the lumpsum payment is in fact the same as for calculating retirement or death gratuity but the similarity stops there. In so far as the contingency necessitating the payment of gratuity has not arisen, the payment cannot be regarded as gratuity even tough it is called gratuity. The allowability or otherwise of the sum of Rs. 63,880 has, therefore, to be considered not on the basis that the payment is a payment of gratuity, but on the ground that this is a general lump sum payment made to all employees affecting their conditions of service. So considered any reference to the payment of Gratuity Act, or the scheme of gratuity thereunder or the creation of a fund would not be relevant. 5A. The undisputed facts are that the assessee made a lump sum payment to each of the employees and an over all payment of Rs. 63,88 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of commercial expediency, and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purposes of the trade." In Noble Ltd. vs. Mitchell 1927 11 Tax Cases 372 the question related to an inconvenient director who was to be dismissed. To avoid publicity injurious to the company s reputation an agreement was made under which the director agreed to retire on the company agreeing to pay him 300 , all payable in instalments. The question was whether the payments made by the company to the director were admissible deductions for IT purposes. In upholding the claim Lord Hanoworth, M.R., observed at pages 420-421: "It is a payment made in the course of business, dealing with a particular difficulty which arose in course of the year, and was made not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperilled by the presence of one who, if the public had known about it, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once". Lawrence, L.J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is from revenue, and not for capital". In G. Scammel Nephew Ltd. vs. Rowles (1940) 8 ITR Supp. 41, deduction was claimed by the assessee-company of payments made by compromising a suit and counter-claim wherein the respective claims were for a declaration that the debentures were void and for damages for defamation. The payments in question were held as made for the purpose of the assessee s business and admissible deductions in computing the profits. 6A. In Cannanore Spg. Wvg. Mills Ltd. vs. CIT (1961) 42 ITR 528, the assessee had appointed a firm as its managing agents for a period of 20 years. Disputes having arisen, the company agreed to pay their managing agents a sum of Rs. 3 lacs for termination of the managing agency and loss of office as managing agents for the unexpired time. Their Lordships of Kerala High court held that the payment was only for the termination of the arrangement which had become dangerous to the future well-being of the company and reflected a genuine and bona fide settlement, and was therefore, an expenditure laid out wholly and exclusively for the purpose of business allowable under s. 10(2)(xv). In P. Orr Sons vs. CIT (1959) 35 ITR 556), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms of the service and made as a matter of business expediency in the assessee s business. In Gordon Woodroffe Leather Mfg. Co. vs. CIT (1962) 44 ITR 551 (SC) the point regarding payment of gratuity came up for consideration. In that case one Philip was first an employee of the managing agents of the assessee-company and later employee of the assessee-company and subsequently its director. On his retirement he was paid a large amount as gratuity in appreciation of his long and valuable service. The Supreme Court upheld the disallowance of the claim for the deduction of the above amount and in doing so laid down the test as under: "In our opinion the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business". In CIT vs. Lakshmi Cement Distributors (P) Ltd. 1976 CTR (Guj) 338 : (1976) 104 ITR 711 (Guj) and in British India Tobacco Corporation, the Supreme Court s decision in Gorden Woodroffe s case was expla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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