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.

Balasubramanyan, J

The assessee in this income-tax reference is a private limited company. One Raman a paid director of the assessee. He had been 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 hid 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 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, Art. 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 day's 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. Department, Mr. Jayaraman, their learned standing counsel, urged that gratuity is unthinkable in the case of company directors. His thesis was that only 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 earn 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 they are 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 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., 1961 AC 12; 1961 (31) CC 233 (PC) and Boulting v. Association of Cinematograph, Television & Allied Technicians, [1963] 2 QB 606; 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 the articles to like benefit as are being enjoyed by the regul