1. The assessee in this income-tax reference is a private limited company. One Raman was a paid director of the assessee. He had seen many years of service as a director. He died in harness on October 29, 1962, during the assessee's financial year 1962-63. The company paid his widow Rs. 35,000 as gratuity payable for the long years of service of the deceased as director.
2. The ITO disallowed this item of expenditure in the assessee's assessment for the relevant assessment year 1963-64. On appeal, however, the AAC held that the gratuity paid to the deceased director's widow was an allowable item of its expenditure. This decision was confirmed by the Appellate Tribunal.
3. The Tribunal found that the assessee had a gratuity scheme meant exclusively for the members of the staff working in its establishment. There was, however, an express provision in the assessee' s articles of association, namely, articles 72(d), under which the paid directors, in addition to their remuneration, were entitled to, and eligible for, provident fund and other benefits (other than bonus) on the same scale and in the same manner in which such benefits were enjoyed by the members of the staff. The Tribunal found that the amount of Rs. 35,000, which was the gratuity determined in respect of the services of the deceased director, was arrived at on the basis of 15 days' salary for every completed year of his service. A resolution of the company dated August 9, 1963, showed that this was the basis for the determination of Rs. 35,000. The Tribunal accordingly held that the assessee was entitled to deduct this sum as an item of business expenditure.
4. In this reference, which comes before us at the instance of the I.T. Dept., Mr. Jayaraman, their learned standing counsel, urged that gratuity in unthinkable in the case of company directors. His thesis was that only employees will be paid gratuity because they are employees, and directors being entrusted with the management of the business, can hardly be regarded as being so entitled in the same sense as employees. He submitted that directors cannot be treated as being on a par with the company's employees.
5. This argument goes against the present day tendency of having boards of directors formed with a mixed constitution. Some at least of the members of the board of directors of every modern company can properly be described as 'service directors'. These service directors sweat their brow in much the same way as the workers and members of the staff who earned their wages in the company's employment. The service directors are recruited to the board usually from the upper crust of the managerial personnel. The presence of these paid directors in the board is explained by the fact that the year regarded as experts in their particular line of activity. It is this trend in the evolution of modern corporate management, which is, perhaps, described by economists as the managerial revolution. In effect, this trend blurs the clear-cut distinction which once existed between the capitalist, who manages the business, on the one hand, and the employees, who work under his management, on the other. Even under the law there is no reason why a director should not be regarded as an employee of this company under certain circumstances and for certain purposes (See the well-known decisions in Catherine Lee v. Lee's Air Farming Ltd.  AC 12;  31 Comp Cas 233 and Boulting v. Association of Cinematograph, Television & Allied Technicians  2 QB 606;  33 Comp Cas 475 . Mr. S. Swaminathan, learned counsel for the assessee, pointed out that even tax laws recognize that a person can, at one and the same time, occupy the position of a director of the company as well as its employee. He cited, as an example, the proviso to s. 40(c) of the I.T. Act, 1961. We, do not, however, think it necessary to labour this point, considering that the paid directors of the assessee-company are in their own right entitled under the articles to like benefits as are being enjoyed by the regular members of the assessee's staff, in the matter of gratuity.
6. Mr. Jayaraman then contended that the mere fact that the gratuity in this case was paid in terms of the company's articles of association cannot conclude the discussion as to whether the outgoing was wholly and exclusively for the purposes of the assessee's business. The implication in the learned counsel's argument is that there must be an inquiry into the nature and object of the expenditure and not merely into the nature and degree of enforceability of the obligation under which the expenditure is incurred. We are, however, saved from going into this aspect of the discussion, not only because of the nature of the Tribunal's finding, but also because of a recent decision of the Supreme Court in which it has been laid down, almost as an axiom, that payment of gratuity in a business can no longer be regarded as ex gratia, but must nowadays be accepted as one made on grounds of commercial expediency and even of commercial necessity. (Vide Sassoon J. David and Co. P. Ltd. v. CIT : 118ITR261(SC) ). That decision dealt with gratuity paid to an employee. But, in our judgment, that principle applied to gratuity paid to a service director as well.
7. We are conscious that quite different considerations would prevail where the commission and benefits of that kind without regard to any business necessity or expediency. But service directors are a different breed. They are paid remuneration under the terms of the company's articles or under special agreements. They may also be entitled to such further benefits as gratuity, again, in terms of specific provisions in the articles or under other agreements or schemes. In such cases, it would not be correct for the I.T. authorities to reject the claim made by a company in respect of gratuity or other benefits merely on the score that the recipients are directors and are not workmen or members of the staff. We may add that as in the case of payments of workmen, so in the case of payments to paid directors, it may be open to the ITO to disallow the whole or a portion of the gratuity on the ground that the amount disallowed does not relate to business purposes, or that it has been paid out on non-business considerations. In the present case, however, it has not been suggested that the gratuity paid is excessive or unreasonable, judging it from a business angle. In these circumstances, the claim for deduction of Rs. 35,000 cannot be rejected as not an admissible item of business expenditure.
8. Mr. Jayaraman made a point about the fact that the board of directors in this company had passed a resolution in the matter of payment of gratuity on August 9, 1963, which was subsequent to the close of the account year in question. We do not, however, think fir to invest this resolution with any importance. For, gratuity was paid to the widow, not in pursuance of this resolution, but de hors the resolution, and even before, the close of the year of account, pursuant to art. 72(d).
9. The board's resolution in question relied on by the learned standing counsel reads as follows :
'Approved the provision for payment to the legal heirs of Shri K.K. Raman, of Rs. 35,000 being the gratuity due to Shri K.K. Raman in accordance with article 72 of the articles of association (before amendment) for the period during which he was a director of the company. The board further noted that the amount has been calculated as per the gratuity rules of the company which provides for payment of half month's salary for every completed year of service.'
10. It is clear from the wording of the resolution that what the board did was, not to sanction the gratuity of Rs. 35,000 for the first time, but to approve and ratify the payment already made. There is no dispute that the actual payment was made during the relevant accounting year. The fact that the resolution of the board was passed later cannot, therefore, be relied upon by the Department for disallowing the expenditure.
11. The question of law which we are asked to answer in the present reference is couched as follows :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holdings that the gratuity of Rs. 35,000 paid to Mrs. Akhila Raman is a legitimate business expenditure and not ex gratia payment ?'
12. For the reasons which we have recorded, out answer to the question is in the affirmative and against the Department. The assessee is entitled to its costs. Counsel's fee Rs. 500.