Law:

Section:

Section 10(10) of the income-tax act, 1961-Exemption-Gratuity-Whether where an employee retires and earns gratuity in terms of agreement, fact that such person is re-employed under fresh contract by same employer without any break in service would not alter character of earlier gratuity payment made pursuant to agreement and such payment is entitled to exemption under section 10(10)-Held, yes. Facts The assessee functioned as the managing director of a company under an agreement, which was to be operative from 1-1-1966 for a term of five years. The agreement, inter alia, provided for payment of gratuity to the managing director as per the terms of the agreement at the time of termination of appointment. During the accounting year relevant to the assessment year 1971-72, after the expiry of the said agreement on 1-1-1971, the assessee was paid certain gratuity in accordance with the terms of the agreement. Thereafter, the assessee was reappointed as managing director under a fresh agreement which also contained a clause as to payment of gratuity. The assessee claimed that under section 10(10 ), a part of the gratuity received was exempt from tax. The ITO negatived the claim, holding that the assessee's services had not been terminated, with the result that no gratuity was due and, consequently, section 10(10) was not applicable. On appeal, the AAC and the Tribunal, however, allowed the claim of the assessee. On reference : Held When an employee retires and earns gratuity and the same employer offers such employee a job under afresh agreement and the new agreement provides for the payment of gratuity, that would, in no way, militate against the concept of gratuity if such gratuity is paid on the first retirement. Retirement, in the case of a managing director, would be a matter of contract and the agreement may provide for payment of gratuity on the expiration of the term of appointment. Therefore, whatever happens to the managing director thereafter, whether the managing director is appointed for a fresh term under a fresh agreement or not, the earlier agreement works itself out and, consequently, when the managing director retires, he or she would be entitled…

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