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TMI Blog2002 (6) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation 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 Act was disallowed by the Assessing Officer by order dated February 28, 1991. The Assessing Officer held that the assessee had of his free will 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. The respondent had carried the matter in appeal, as pointed out above, to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (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 Limited. The workers were not paid their gratuity for the services rendered in B.N. Sarda Limited. Though the respondent-company was legally not liable to pay the gratui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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-.... (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; ... (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 contributions are not in the nature of annual contributions of fixed amounts or annual contributions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 on the basis of the unpaid gratuity which would have been payable for the services rendered under B.N. Sarda Limited. He emphasised the fact that the Commissioner of Income-tax (Appeals) had in terms held that the expenditure was towards commercial expediency. He pointed out that in para. 3 of the order of the Commissioner of Income-tax (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. Mr. Zhaveri placed before us a compilation of documents for consideration. It included a notice dated January 12, 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 concern, namely, B.N. Sarda Limited. The Deputy Commissioner of Labour, therefore, sought to know as to what was the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Mr. Zhaveri relied upon another judgment of a Division Bench of this court in the case of CIT v. Associated Cement Companies Ltd. [2001] 249 ITR 3. In that matter the question raised was whether gratuity paid in excess of limits prescribed by the Gratuity Act constituted allowable deduction. 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] 175 ITR 411, wherein it was held that the additional gratuity paid to monthly wage earners could not be disallowed as it constituted an expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Calcutta High Court has commented on these tests in Hindustan Motors [1989] 175 ITR 411 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 prevelant 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." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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