Ex-gratia payment made to employees is eligible for deduction u/s 37(1) of I-Tax Act: Madras HC

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Read Judgement: Commissioner of Income tax, Chennai vs. Karur Vysya Bank Ltd 

Pankaj Bajpai

Chennai, August 16, 2021: The Madras High Court has ruled that there is no restriction or prohibition under section 37 of the Income Tax Act, 1961 on the claim for deduction on the ex-gratia payment given in the form of an incentive to the workman out of business expediency. 

While dismissing the appeals, the Division Bench of Justice T.S. Sivagnanam and Justice Sathi Kumar Sukumara Kurup observed that provisions u/s 36(1)(ii) of Act covered specific instances stated therein and that ex-gratia payment made to employees in excess of statutory limit was considered as a head of deduction.

The observation came pursuant to the order passed by the ITAT holding that the assessee was entitled to deduction u/s 37(1) of the Act in respect of ex-gratia payment made to employees. 

The Revenue Department had challenged the action of the Tribunal contending that such ex-gratia payments cannot be treated as business expediency or legal requirement allowable u/s 37(1) of the Act. 

Justice Sivagnanam found that an identical substantial question of law was considered by a Division Bench of this Court in CIT vs. Lakshmi Vilas Bank Ltd, wherein it was pointed out that the payment was made to those employees who did not fall within the purview of the Payment of Bonus Act

Even assuming for a moment that the amount paid was in excess of what is prescribed in the Payment of Bonus Act, the same would merit consideration as a deduction and that being the case, the payment made by the assessee to its employees who were not covered under the provisions of the Payment of Bonus Act was in the nature of ex-gratia payment as an incentive to the employees to be considered for deduction u/s 37(1) of the Income Tax Act, added the Division Bench. 

Therefore, agreeing with the view expressed by the Tribunal that ex-gratia payment given in the form of an incentive to the workman out of business expediency being business expenditure, the Revenue Department’s appeal came to be dismissed. 

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