1. The assessee in this case is a public limited company. In the previous year ending December 31, 1961, corresponding to the assessment year 1962-63, it claimed deduction of a sum of Rs. 14,160 paid by way of gratuity the details of which are set out below :
Employee's nameMonthly salary Years of serviceGratuity paid1234
Rs.Rs.1.P. C. Ramakrishnan (Factory Manager)60011 Years7,6602.K. Ranganathan (Cotton Clerk)23510 Years1,5003.Kondaswamy (Head Clerk.)3249 Years5.000
2. For the assessment year 1963-64, corresponding to the previous year ending December 31, 1962, the assessee claimed deduction by way of gratuity, a sum of Rs. 7,000 paid to one Rangian, a cashier of the company. All the sums were disallowed by the Income-tax Officer on the ground that there was no scheme for payment of gratuity and that the receipts for payment of the said gratuity amounts showed that they have been paid as ex gratia in view of their past services. The Income-tax Officer purported to follow the decision of the Supreme Court in Gordon Woodroffe Leather Mfg. Co. Ltd, v. Commissioner of Income-tax, : 44ITR551(SC) .
3. There were appeals to the Appellate Assistant Commissioner against the disallowance of the gratuity amounts in respect of both the years. The Appellate Assistant Commissioner 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.
4. The assessee went on appeal to the Tribunal. It was urged before the Tribunal that the existence of a scheme for payment of gratuity was not a condition precedent for the allowance, that the payment being clearly a business expenditure, it should be allowed in view of the provisions in Section 37(1) of the Indian Income-tax Act, 1922, and that the ratio of the decision of the Supreme Court in Gordon Woodroffe Leather . v. Commissioner of Income-tax had no application. It was also urged on behalf of the assessee that at least gratuity on the basis of 15 days' salary for the period of completed service which is prescribed in the scheme formulated by the South India Mill Owners' Association should have been allowed by the revenue, and which is also the basis adopted in certain awards made by the industrial tribunals. The Tribunal, however, did not accept the assessee's contentions. The Tribunal found, on a consideration of the material on record, that the payment was not in pursuance of any scheme, that the payment depended on the sweet will and pleasure of the company, that the recipients themselves considered it as ex gratia payment, that the amount of payment is not based on any set or uniform principle, and that, therefore, the assessee cannot he said to have made this payment either in pursuance of a scheme for gratuity or on the basis of any uniform commercial practice. The Tribunal also considered the case of the assessee that the scheme formulated by the South India Mill Owners' Association was generally adopted in almost all the textile mills, but held that even though the Mill Owners' Association wanted a scheme for gratuity to come into force from February, 1959, the assessee had not, in fact, formulated any scheme, and that the actual payments made by the assessee to the employees in question were not in accordance with the scheme formulated by the South India Mill Owners' Association. The Tribunal further found 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 held that the assessee was not entitled to the allowance claimed.
5. At the instance of the assessee, the following two questions have been referred to us:
'(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs. 14,160 under Section 10(2)(xv) of the Income-tax Act for the year 1962-63 and
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs. 7,000 under Section 10(2)(xv) of the Income-tax Act for the assessment year 1963-64 ?'
6. The learned counsel for the assessee contends that the Tribunal has upheld the disallowance of the amounts paid as gratuity mainly on two grounds : (1) that there is no scheme of gratuity, and (2) that the receipts given by the employees refer to the payments as ex gratia, that the above reasons are not conclusive in the matter and that the Tribunal should have upheld the claim for allowance as the payments were really legitimate expenditure incurred wholly and exclusively for the purpose of the business. It is stated that the payments have been made only as business expenditure and that though the payment had been made without a regular scheme for gratuity, it can, still be allowed as a business expenditure under Section 37(1) of the Act. The learned counsel refers to the following observations of Lord Cave, Lord Chancellor, in Atherton v. British Insulated and Helsby Cables Ltd.,  10 T.C. 155 which has been quoted with approval by the Supreme Court in Commissioner of Income-tax v. Ashok Leyland Ltd.,  86 I.T.R. 549 :
'a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.'
7. The learned counsel also refers to the decisions of this court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax, : 63ITR733(Mad) in support of his stand that the fact that there is no general gratuity scheme is not conclusive in the matter of grant of allowance under Section 37(1). In that case, a company claimed the pension it had paid to its retired general manager as business expenditure. Though the company had no general scheme for pension, the resolution to pay pension to the general manager was passed by it during the currency of his service. According to the resolution, the pension was to be paid subject to the condition that the recipient did not accept service directly or indirectly with any other bank without the prior approval of the board of directors. The claim of the assessee in that case was opposed by the revenue relying on the decision of the Supreme Court in Gordon Woodroffe Leather . v. Commissioner of Income-tax. This court expressed :
'It is true that the assessee had no general scheme for payment of pension to its employees. But that is not conclusive of the question. Though there may be no pension scheme, still in exceptional cases, we do not see why a business concern may not enter into a contract of service providing for pension and properly claim deduction of pension paid. The principal question to be kept in view is whether the expenditure claimed is laid out for the purpose of the business, whether it is a legitimate business expenditure and whether it is in the interests of the business. The directorate of the business itself is the best judge on that matter, for it is for them to consider the business expediency and whether a particular expenditure should be incurred for the purpose of the business: vide Newtone Studios Ltd. v. Commissioner of Income-tax, : 28ITR378(Mad) . In this case, as we mentioned earlier, pension to Sri A. Subbiah was not decided upon and paid after his retirement. The resolution to allow pension was passed as early as May 17, 1948, when Sri A. Subbiah had still four years of service. This, as it seems to us, is an important fact which should have been borne in mind by the Tribunal in considering this question and which distinguishes the ratio of Gordon Woodroffe Leather . v. Commissioner of Income-tax.'
8. The principle laid down in that decision, as we understand, is that even if there is no regular pension scheme, a business concern may consider the payment of pension even in relation to a single employee if the payment has been decided upon when the employee was in service, in the interests of its business in future. But, in this case, there is no evidence that the decision to pay gratuity to the concerned employees was taken even during the currency of their employment. We are not able to apply the principle laid down in Indian Overseas Bank Ltd. v. Commissioner of Income-tax to the facts of this case.
9. The decision of the Supreme Court in Gordon Woodroffe Leather . v. Commissioner of Income-tax seems directly to apply to this case. In that case, an employee of the company resigned and the board of directors while accepting his resignation resolved to pay a gratuity of Rs. 50,000 out of its funds. The said amount was claimed as a deduction under Section 10(2)(xv). The claim was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal. On a reference, this court held that in order that Section 10(2)(xv) be applicable, it had to be proved that the amount was laid out or expended wholly and exclusively for the purpose of the company's business, that as there was no evidence that the employee expected to receive the amount at any time before his resignation, the payment was to be held voluntary, and that there was no evidence to show that the payment was in the future interest of the business of the company. The court laid down the following tests for finding out whether the amounts paid are allowable deductions under Section 10(2)(xv):
'Was the expenditure incurred in the future interest of the business, of the assessee Was there any connection between the purpose of the payment and the future conduct of the business of the assessee ?'
10. If the answer to these two questions are in the affirmative, then the payment should be taken to be an expenditure incurred wholly or exclusively for the business of the company. The court held that these two tests had not been satisfied in that case. The matter went before the Supreme Court. The Supreme Court expressed:
'In our opinion the proper test to apply in this case is, 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 the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.'
11. The Supreme Court considered the following circumstances as disentitling the assessee in that case for the allowance under Section 10(2)(xv), The amount has not been paid in pursuance of any scheme for payment of pension nor was it an amount which the recipient expected to be paid for long and faithful service, but it was an ex gratia payment not made with the object of facilitating the carrying on of future business of the company or as a matter of commercial expediency. There was no uniform practice to pay such amounts as gratuity.
12. In J. K. Woollen . v. Commissioner of Income-tax, : 46ITR1123(All) (All.), the Allahabad High Court has laid down that the burden is always on the assessee to prove that the payment was not ex gratia or isolated payment, but was made under an understanding, undertaking or practice, between the assessee and its employees, and that it is only in cases where it is shown that the expenditure has been incurred in pursuance of an understanding between the assessee and the employee or in pursuance of a uniform commercial practice followed by the assessee, the expenditure can be claimed as an allowance under Section 10(2)(xv).
13. In Sassoon J. David and Company Pvt. Ltd. v. Commissioner of Income-tax, : 85ITR83(Bom) he Bombay High Court disallowed gratuity payments on the ground that there was no regular practice of payment of gratuity and that, as such, there was no legally enforceable claim for such payment, against the assessee, and that, therefore the gratuity amounts paid cannot be allowed under Section 10(2)(xv). The learned judges, in that case, applied the test propounded by their Lordships in the Supreme Court in Gordon Woodroffe Leather . v. Commissioner of Income-tax as to whether the expenditure has been incurred in order to directly or indirectly facilitate the future carrying on of the business of the company.
14. Having regard to the findings given by the Tribunal in this case, we are of the view that the assessee is not entitled to the allowance claimed in relation to the gratuity amounts paid to the employees in question. Though the truth of the payments have not been doubted, still the assessee will be entitled to the allowance only if it is shown that the expenditure has been 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. As pointed out by the Supreme Court in Gordon Woodroffe Leather . v. Commissioner of Income-tax the proper test to apply in a case of this kind is to see whether the gratuity payments have been made as a matter of practice affecting the quantum of salary or on the ground of commercial expediency in order to directly or indirectly facilitate the future carrying on of the business.
15. As already stated in this case, there is no material to show that the decision to pay the amounts as gratuity to the employees in question had been taken even during the currency of their employment. The receipts given by the employees show that the amounts have been paid only as ex gratia payments without reference to any anterior obligation of the assessee to pay the said amount. Therefore, it cannot be taken, that the assessee had decided to pay the amounts only on the retirement of the concerned employees. Further, as pointed out by the Tribunal, the payments have been made purely on an ad hoc basis without any relation to the period of employment or the salary drawn by the employees. If really the assessee had followed a uniform practice known and applicable to all the employees in its service and has paid the gratuity amounts in pursuance of such a practice, based either on the period of service or on the salary drawn by them, it might be possible to say that the payments were not ex gratia but were motivated exclusively by business considerations and commercial expediency. But the payment of the ad hoc amounts to the three employees concerned cannot be said to be in pursuance of any uniform practice. As a matter of fact, the amounts paid to the various employees show that the assessee has not, in fact, followed a uniform method for payment of gratuity to its employees. In the circumstances of the case, the decision of the Tribunal has to be upheld. The questions in the reference are, therefore, answered in the negative and against the assessee. The revenue will have its costs. Counsel's fee Rs. 250.