1969 PLP 232 (PTD)

‑Gratuity paid to employee's on retire ment‑When allowable‑General principles‑Burden of proof Income‑tax Act, 1922, S. 10(2)(xv). The assessee, a registered firm, paid to its munim as gratuity on his retirement a sum of Rs. 21,000 and claimed the amount as a deduction. It was admitted that it was not the practice of the firm to give gratuity to its employees and this payment was the first of its kind. There was also no evidence to show that the munim expected a gratuity when he entered service or that the gratuity was given as part of a scheme to give gratuities to employees in future as an incentive to them to give them best service : Held, that under the circumstances, in view of the principles laid down by the Supreme Court in Gordon Woodroffe's case (1962) 44 I T R 551, the gratuity was not allowable as a deduc tion under section 10(2)(xv) of the Income‑tax Act. Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commis sioner of Income‑tax (1957) 31 I T R 438 ; Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income‑tax (1962) 44 I T R 551 (S C) and New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 11 ref. By this application the assessee requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's order in I. T. A. No. 627 of 1958‑

59. Inas much as, in our opinion, a, question of law does arise out of the aforesaid order of the Tribunal we hereby draw up an agreed statement of the case and refer it to the High Court of Madhya Pradesh at Jabalpur under section 66(1) of the Indian Income‑tax Act, 1922.

2. The assessee is a registered firm. The year of assessment is 1955‑56 and the corresponding accounting period is the year ending Diwali S. Y. 2010‑

11. The assessee's business is that of dealing in cloth wholesale and semi‑wholesale. In the profit and loss account of the year the assessee claimed a deduction of Rs. 21,000 being payment to one Shri Jagannathji, an ex‑munim as gratuity at the time of retirement. It was stated before the Income‑tax Officer that this Jaganathji was in the service of the erstwhile Hindu undivided family for over twenty‑eight years and this payment was in consideration of the past services and as a provision for post‑retirement. The Income‑tax Officer drew the attention of the assessee to the fact that there was no evidence to show that the assessee used to pay such gratuity to the employees and that the payment was made in the future interest of the business. The Income‑tax Officer relied upon the decision of the Madras High Court in the case of Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income‑tax ((1957) 31 I T R 438). The Income‑tax Officer did not accept the distinction sought to be made in this case. He held that in the instant case as well as in the Madras case there was no evidence to show that at any time before the payment was decided upon the employee expected to receive the same or even that the employer contemplated this payment. The Income‑tax Officer also held that there was no evidence to show that it was in the future interest of the business of the assessee that this expenditure was incurred. The Income‑tax Officer approached this position from another angle. He was of the view that there was nothing to show that the assessee‑firm when it succeeded to the business of the Hindu undivided family took over such an unascertained and unusual liability of paying one of the employees of the Hindu undivided family. The Income‑tax Officer further noticed that the employee had not really retired but was only serving another sister concern of the assessee, i.e. one Muchhal & Co., wherein one of the partners of the assessee‑firm, Shrimati Ayodha Bai, and wives of the other partners, were partners. In view of all these the Income‑tax Officer held that this payment of Rs. 21,000 to the munim, Jagannathji, was not incurred wholly and exclusively for the purposes of the business of the assessee and consequently he disallowed the same. A copy of the Income‑tax Officer's order is Annexure "A" and forms part of the case.

3. Thereafter the assessee preferred an appeal to the Appellate Assistant Commissioner and contended that the pay ment of Rs. 21,000 as gratuity to Jagannathji being an expenditure in the course of the business should have been treated to be so. It was also contended that the decision of the Madras High Court in the case of Gordon Woodroffe Leather Manufacturing Co. Ltd. v. Commissioner of Income‑tax was not applicable to the facts of this case. When the appeal was pending before the Appellate Assistant Commissioner, the assessee m response to a query from the Appellate Assistant Commissioner wrote a letter dated January 30, 1958. In the said letter the assessee stated that the shop Lakhamichand Muchhal, was started some forty years back, and that this jagannathji, Chief munim, was taken up some thirty years back on the initial salary of Rs. 150 per month which after a period of ten years was increased to Rs. 200 per month and again after five years the same was raised to Rs. 250 per month and ultimately from S. Y. 20007‑8 it was raised to Rs. 350 per month. The letter also states the circumstances under which this payment came to be made. The letter also mentions that during S. Y. 2010‑11 Jagannathji retired due to old age and he was given a gratuity of Rs. 21,000 in consideration of his past services. It was also stated therein that there was no system in the shop of either giving pension or provident fund scheme which the retired servants could avail of. The assessee also mentioned in that letter some instances of some payments in S. Y. 2007‑

8. A copy of the said letter is Annexure "B" and forms part of the case. Before the Appellate Assistant Commis sioner it was admitted that this was the first gratuity paid to an employee by the assessee‑firm, but this payment was made in view of the fact that Jagannathji was the person .who looked after the entire business, the partners being very young and inexperienced at the time of death of their father, Laxmichand. The Appellate Assistant Commis sioner found that in this case no past practice of giving gratuity to an employee has been established nor was it alleged to exist. In the circumstance the Appellate Assistant Commissioner held that the judgment of the Madras High Court clearly applied. In the result he dismissed the assessee's appeal. A copy of the Appellate Assistant Commissioner's order is Annexure "C" and forms part of the case.

4. An appeal was thereafter preferred to the Tribunal and it was contended that the payment was made wholly and exclusively for the purposes of the assessee's business and therefore was an allowable deduction under the Act. Even before the Tribunal it was not denied that there was no arrangement to pay any gratuity to the employees and that this was the first instance in the history of the business that an employee was paid a lump sum equal to 60 months salary at the time of the retirement. In regard to two other instances brought to the notice of the Tribunal, where about a couple of thousand rupees were stated to have been paid the Tribunal on an examination of the material found that the amounts due from the two employees at the time of retirement were let off and that it was not clear under what circumstances that outstanding was let off. On a consideration of the several materials and the contentions the Tribunal held that the amount paid to the munim was purely of the nature of a gift and was made at the sweet will of the employer and it was not deduction which could be allowed as a revenue expenditure of the business carried on in the year of account. A copy of the Tribunal's order is Annexure "D" and forms part of the case.

5. The only question of law that arises out of the order of the Tribunal is : "Whether, in the facts and circumstances of this case, the sum of Rs. 21,000 paid to the munim, Jagannathji, was an allowable deduction under section 10(2) (xv) of the Act ?" K. A. Chitaley and V. S. Dabir for the Assessee. M. Adhikari, Advocate‑General and R. J. Bhave Government Advocate for the Commissioner.