Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1962-63 and 1963-64 - Whether where assessee-company made ex-gratia payments of gratuity to its employees on ad-hoc basis without reference to any anterior obligation of assessee to pay said amount, payments so made could not be regarded as motivated exclusively by business considerations and commercial expediency - Held, yes - Whether, therefore, assessee's claim for deduction in respect of aforesaid payments was to be disallowed - Held, yes FACTS For the assessment years in question, the assessee claimed deduction towards gratuity amount given to its employees. The sums were disallowed by the ITO on the ground that there was no scheme for payment of gratuity and that the receipts for payment of the said gratuity amount showed that they had been paid as ex gratia in view of their past services. The AAC also upheld the disallowance on the ground that there was absolutely no basis for the computation of gratuity, that there was no scheme for payment of gratuity, nor was there any precedent and that there was no evidence that the employees had accepted low salaries in expectation of the gratuities. On further appeal, the Tribunal held that the payments made to the employees in question were on an ad hoc basis without any nexus or relation to the period of their service or to the salary drawn by them. On these findings, the Tribunal concluded that the assessee was not entitled to the allowance claimed. On reference : HELD The assessee was not entitled to the allowance claimed in relation to the gratuity amounts paid to the employees in question. Though the truth of the payment had not been doubted, still the assessee would be entitled to the allowance only if it was shown that the expenditure was incurred wholly and exclusively for the purpose of business. The mere fact that the company has expended certain sums while carrying on the business cannot lead to an assumption or inference that those sums had been actually expended, wholly and exclusively for the purpose of the business. In instant…

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