Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1971-72 to 1973-74 - Assessee-company paid pension to wife of a deceased employee and also to a retired employee - Tribunal found that pension payments were made on considerations of commercial expediency - Whether payment in question was admissible as business expenditure - Held, yes FACTS The assessee-company was a manufacturer and dealer in motor cars, trucks, flanges, steel sheet castings, spare parts and also scrap. For the assessment years in question, the assessee claimed expenditure on account of payment of pension to wife of a deceased employee, and also to a retired employee. The ITO disallowed the said expenditure on ground the payments were not made according to service conditions but it was of a gratuitous nature. The AAC deleted the disallowances on the principle that the payments were made in order to create better relations with the employees. The Appellate Tribunal upheld the AAC's decision. On reference: HELD The existence of a general pension scheme is not always conclusive. Each case depends on its own facts. If the payment to the widow of a deceased employee or to a retired employee is found to be gratuitous and not on account of any practice or commercial expediency, the same will not be allowed. In the case of Gordon Woodroffe Leather Mfg. Co. v. CIT [1962] 44 ITR 551 (SC), three tests have been laid down by the Supreme Court in connection with the allowability of pension or gratuity. These tests are : (a) was the payment made as a matter of practice which affected the quantum of salary; (b) was there an expectation by the employee of getting a gratuity; and (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. 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. Every ex gratia payment to a retired employee or to the widow of the deceased employee cannot be supported on grounds of commercial expediency. But, in the instant case, the…

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