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 year 1950-51 - Whether where amount of gratuity paid by assessee-company to its employee was not in pursuance of any scheme for payment of gratuities nor was it amount which recipient expected to be paid for long and faithful service but it was voluntary payment not with object of facilitating carrying on of business of assessee or as matter of commercial expediency but in recognition of long and faithful service of such employed, said amount was not allowable as business expenditure - Held, yes FACTS One 'G', who was a managing agent of the appellate assessee-company, became an employee from 1935 of the appellant company and become its director from 1940. He resigned from the board of the company as from 1-4-1949. The appellant in appreciation of long and valuable services of 'G' to the company paid to 'G' certain amount as a gratuity and claimed it as a business expenditure under section 10(2)(xv) of the 1922 Act. The amount was disallowed by the ITO as well as by the AAC on the ground that the appellant had no pension scheme; the payment was voluntary and that the entry in the assessee's books clearly indicated it to be a capital payment. The Tribunal confirmed the order of the AAC. On reference, the High Court decided against the assessee. On appeal to the Supreme Court : HELD In the instant case the amount was not in pursuance of any scheme of payment of gratuities nor was it an amount which the recipient expected to be paid for long and faithful service but it was a voluntary payment not with the object of facilitating the carrying on of the business of the appellant company or as a matter of commercial expediency but in recognition of long and faithful service of 'G'. There was no practice in the appellant-company to pay such amounts and it did not affect the quantum of salary of the recipient. The proper test to apply in this case was, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was…

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