TMI Blog2002 (6) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... dge(s) : H. L. GOKHALE., J. P. DEVADHAR. JUDGMENT The judgment of the court was delivered by H.L. GOKHALE J.-Heard Mr. Desai for the appellant. Mr. Zhaveri with Mr. Singh appears for the respondent. This appeal under section 260A of the Income-tax Act, 1961, seeks to challenge the order dated December 3, 1998, passed by the Income-tax Appellate Tribunal confirming the order of the Commissioner of Income-tax (Appeals) which allowed the appeal filed by the respondent herein to the extent of disallowance of Rs.3,70,755 which was claimed to be deducted by the respondent from its income under section 37 of the Income-tax Act, 1961. The relevant assessment year is 1989-90. The facts leading to this appeal are as follows: The respondent herein is a beedi manufacturing company. It employs a large number of workmen for its activities. For the assessment year 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 of the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the claim of the assessee. The appeal of the Revenue on this ground is accordingly dismissed." Being aggrieved by the order of the Commissioner of Income-tax (Appeals) as confirmed by the Income-tax Appellate Tribunal, this appeal has been filed. The appeal seeks to raise the following question of law: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs.3,70,755 incurred by the assessee as retirement compensation was for maintaining good relations with the employees and for the welfare of the employees and hence allowable as revenue expenditure?" Mr. Desai, learned senior counsel appearing on behalf of the appellant submitted that the deduction which has been claimed, was essentially towards the unpaid gratuity which ought to have been paid by the earlier employer for the services rendered under him. The submission of Mr. Desai, therefore, was that if that was so, this would become the deduction even permissible under section 36(1)(v) of the Income-tax Act and, therefore, cannot be permitted under section 37 of the Act. For ready reference, we reproduce herein the clauses, relevant for our p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, section 36(1)(ii) would apply and the allowability of the expenditure as a deduction in computing the income of the assessee can only be determined by the test laid down in that case. He had therefore, submitted that it was not permissible for the assessee to claim deduction under the general provision contained in section 37. The submission made by Mr. Desai was accepted by the Division Bench and the Tribunal was faulted for holding that the payment towards bonus in that case was allowable as deduction under section 37. The Tribunal was, however, directed to afford the assessee a reasonable opportunity of hearing to satisfy it that the conditions set out in the second proviso to section 36(1)(ii) are fulfilled and if the Tribunal was so satisfied, it may allow deduction under section 36(1)(ii) of the Act. Mr. Desai submits that the present case is comparable with Rajaram Bandekar's case [1999] 237 ITR 628 (Bom) and, therefore, this court should follow the same course. Mr. Zhaveri, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r attention to another resolution dated April 20, 1987, which obviously must have been passed in view of the filing of this proceedings. That resolution reads as follows: "Resolved that the workers be paid compensation by ex-gratia payment in view of their loyal and dedicated service and such compensation be calculated by taking into account the gratuity that would have been due as if the services rendered to the firms of Bastiram Narayandas Maheshri or B.N. Sarda Ltd. were to be rendered to the company itself. Further resolved that such ex-gratia payment that was made in the past be and are hereby ratified." Mr. Zhaveri has also drawn our attention to the list of workers who were paid this retirement compensation. The list runs into some 505 workmen. The name of said Mrs. Sugrabi Hawaldar appears at serial No. 1 therein. The table points out that she had put in around, 24 years of service, out of which ten years were under the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicating the reasons for such payment. The Calcutta High Court held that the benefit provided to the employee by way of pension to himself and after his death to his widow must be held to be reasonable on considerations of commercial expediency. Therefore, the pension payments were admissible business expenditure under section 37(1) of the Income-tax Act. The Calcutta High Court in turn in that judgment has relied upon a judgment of the Constitution Bench of the apex court in the case of Gordon Woodroffe Leather Mfg. Co. v. CIT [1962] 44 ITR 551. The apex court has laid down three tests in that judgment, in connection with the allowability of gratuity as business expenditure under the then prevelant section 10(2)(xv) of the Indian Income-tax Act, 1922, which is similar to section 37(1) of the Income-tax Act, 1961. These tests are (see [1989] 175 ITR 414, 415): "(a) was the payment made as a matter of practice which affected the quantum of salary; or (b) was there an expectation by the employee of getting a gratuity; or (c) was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business." The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 Gordon Woodroffe Leather's case [1962] 44 ITR 551 clearly apply in the present case. The proposition laid down in the case of Rajaram Bandekar [1999] 237 ITR 628 (Bom) 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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