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Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1985-86 - Whether where payment is made to run business which is necessary to run business that payment is for purpose of business and, hence, allowable expenditure - Held, yes - Assessee's claim for deduction of ex gratia payment to employees was disallowed on ground that assessee suffered loss and no outstanding performance had been shown - Payment was not made to any friend or relation of directors but to workers with commercial expediency - Whether, Tribunal was, therefore, right in holding that payment was with object to run business and for purposes of business and in allowing claim of assessee - Held, yes FACTS The assessee-company claimed deduction of ex gratia payment of Rs. 19,77,436 to its employees during the assessment year 1985-86. The Assessing Officer negatived the claim as the assessee suffered loss and no outstanding performance had been shown. The Commissioner (Appeals) also held that the amount was not for the purpose of business. The Tribunal, however, allowed the assessee's claim. On reference : HELD The Directors' report stated that as a measure of good gesture, the payment of bonus and ex gratia was being retained at 20 per cent in spite of substantial losses incurred during the year. [Para 5] If the payment has been made to run the business which is necessary to run the business, the payment is for the purpose of business. It was also pertinent to note that the assessee-corporation was a public undertaking of State. The payment had not been made to any friend or relation of the Directors. The payment had been made to the workers with the commercial expediency. [Para 6] The Court, therefore, agreed with the view of the Tribunal that the payment had been made with the object to run the business. The payment of ex gratia bonus was for the purpose of business and that should not be disallowed. In view of the aforesaid facts, there was no infirmity in the order of the Tribunal. [Para 7] R.B. Mathur for the Applicant. A. Kasliwal for the Respondent. ORDER 1. On an application under section 256(1) of the Income-tax Act, 1961, the Tribunal has…

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