Judgment:
Jayasimha Babu, J.
1. At the instance of the Revenue, the following question of law has been referred to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 24,000, paid to the ex-working director, S. Venkataraman, was an admissible deduction under the provisions of the Income-tax Act, 1961 ?'
2. The facts leading to this reference stated briefly are : The assessee, a private limited company, while computing the total income of the company for the assessment year 1971-72 claimed deduction of the sum of Rs. 24,000 said to be the gratuity paid to its ex-working director, Sri S. Venkataraman. This claim, though initially allowed by the Income-tax Officer, was subsequently withdrawn by him after reassessment made pursuant to an audit note. The claim was disallowed on the ground that the payment of gratuity to the director was an ex gratia payment; that at the time the director joined service, he had no expectation of receiving gratuity, and that the payment made to him was not based upon commercial expediency. The Appellate Assistant Commissioner having concurred with the view of the Income-tax Officer the assessee took up the matter on appeal to the Tribunal.
3. The Tribunal, after examining all the material available, held that Sri Venkataraman had worked as a working director of the assessee-company between 1948 and 1970; that he received a salary of Rs. 750 p.m. at the time of joining and was drawing Rs. 1,500 as salary at the time of his retirement besides 10 per cent. of the profits of the company; that the sum of Rs. 24,000 paid to him represents roughly half a month's salary for every year of service and that the board of directors of the assessee company had also passed a resolution in January, 1972, to pay half a month's salary for each year of service as gratuity to all retiring employees including the managing and executive directors. The Tribunal also had held that there was a practice of paying gratuity to the retiring employees of the company and that the resolution of the company's board of directors had been passed only to confirm such practice. The Tribunal, therefore, held that the sum of Rs. 24,000 paid as gratuity was an admissible deduction.
4. Sri Balasubramaniam, learned counsel for the Revenue submitted before us that this payment was a purely voluntary payment unconnected with the business of the assessee as at the time of the commencement of the working director's employment he had no expectation of receiving any gratuity and, therefore, following the ratio of the decision of the Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT : [1962]44ITR551(SC) , the Tribunal ought to have disallowed the assessee's claim.
5. Learned counsel for the assessee, on the other hand, submitted that the facts found by the Tribunal would dearly establish that there was a practice of paying gratuity to the retiring employees of the company; that the employees during their course of service had a reasonable and legitimate expectation of being paid gratutity at the time of their retirement; that such payment was a payment connected with the business, as it was made in consideration of over two decades of service rendered by the director and was intended to reassure the existing employees who toil and look forward to receive similar payments at the time of their retirement, and, therefore, the Tribunal was right in allowing the claim of the assessee by holding that the expenditure was incurred for the purpose of the assessee's business. He also invited our attention to the ruling of the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT : [1979]118ITR261(SC) , wherein the court has held that (at page 271) :
'It is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure. Such expenditure would ordinarily fall within the scope of section 10(2)(xv) of the Act.'
6. The submissions made by learned counsel for the assessee, in our view, deserve to be upheld.
7. Ordinarily, it is for the assessee to decide upon the items on which expenditure should be incurred in the course of his or its business. It is not essential that the expenditure must be something which the assessee is compelled to incur under the provisions of a statute. As observed by the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT : [1979]118ITR261(SC) , the expression 'wholly and exclusively' used in section 10(2) (xv) of the Indian Income-tax Act, 1922, does not mean 'necessarily', section 37(1) of the Income-tax Act, 1961, is analogous to section 10(2) (xv) of the 1922 Act. Payments made voluntarily are not to be disallowed only on account of their voluntary character. So long as there is a reasonable nexus between the expenditure and the business, the expenditure will be regarded as having been incurred for the purposes of the business. The success of any business enterprise, to a substantial degree, is dependent on the willing performance of their tasks by the employees. Payments made to employees, by way of gratuity, bonus, retrenchment compensation, or compensation for termination of service, whether under compulsion of statute, or voluntarily cannot be said to be unconnected with the business, or as not being commercially expedient, so long as the quantum of the payment is reasonable, having regard to all the circumstances relevant to that business enterprise. Such payments have ordinarily to be regarded as payments made to facilitate the carrying on of the business of the assessee.
8. The decision in Gordon Woodroffe Leather . v. CIT : [1979]118ITR261(SC) . The court has clarified that the three tests formulated in its earlier ruling have to be read dis-junctively. So read, the facts of the case before us squarely fall within the ratio of the decision in Gordon Woodroffe Leather Manufacturing Co. v. CIT : [1962]44ITR551(SC) .
9. The Tribunal has found on a question of fact that there was a practice in the assessee-company of paying to its employees gratuity at the time of retirement and that the resolution of the board passed in the year 1972 was only in confirmation of that practice. There was thus a reasonable and legitimate expectation on the part of the employees, of receiving retirement benefits like gratuity at the time of retirement.
10. The gratuity so paid cannot be said to be unreasonable or excessive. The payment also cannot be regarded as not commercially expedient or one made not for the purpose of indirectly facilitating the carrying on of the business of the assessee.
11. We, therefore, hold that the Tribunal was right in allowing the deduction claimed by the assessee. We answer the question referred to us in favour of the assessee and against the Revenue. The assessee is entitled to costs.
12. Counsel's fee is Rs. 1,000.