Vildirect: IncomeTax-caselaws-1991-VIL-609-GUJ-DT

1991-VIL-609-GUJ-DT

Equivalent Citation: [1992] 194 ITR 110, 98 CTR 259, 63 TAXMANN 15

GUJARAT HIGH COURT

Date: 25.07.1991

NATHALAL ASHARAM

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s) : R. C. MANKAD., R. K. ABICHANDANI

JUDGMENT

The judgment of the court was delivered by

R. K. ABICHANDANI J. -The assessee-registered firm filed its return for Samvat year 2030, i.e., year ended on November 13, 1974, showing total income of Rs. 11,34,329. Admittedly, the business of the firm was closed at the end of the year. The assessee made a provision of Rs. 74,500 in the gratuity account at the close of the year for all the six employees of the firm. Before the Income-tax Officer, the assessee had claimed deduction in respect of the said amount on the ground that the provision was made on account of the retrenchment of these employees due to closure of the firm and considering their past services. The Income-tax Officer considered the said claim of the assessee under section 40A(7)(a) and (b) of the Incometax Act, 1961 (hereinafter referred to as "the Act"), and held that no such deduction was allowable to the assessee.

In its appeal before the Appellate Assistant Commissioner, it was contended by the assessee that, though the payment was described as gratuity, it was not by way of gratuity but was compensation for the termination of the services of the employees of the firm. It was, in terms, contended that there was a statutory obligation on the assessee to pay such retrenchment compensation in view of the provisions of section 25FFF of the Industrial Disputes Act, 1947. The Appellate Assistant Commissioner, after examining the relevant provisions of the Industrial Disputes Act, upheld the contention of the assessee that it was under a statutory obligation to pay to its employees compensation in view of the provisions of section 25FFF of the Industrial Disputes Act. The assessee had worked out the compensation amount under the said provision payable to the employees at Rs. 51,800 and the Appellate Assistant Commissioner, accepting that figure, partly allowed the appeal to that extent.

The Revenue, feeling aggrieved by the order of the Appellate Assistant Commissioner, allowing deduction of Rs. 51,800 on account of statutory liability of the assessee-firm in respect of retrenchment compensation provided for in its accounts for paying to the retrenched employees, appealed before the Tribunal and the assessee, feeling aggrieved by the order in so far as it disallowed the remaining amount of Rs. 22,700, also appealed. Before the Tribunal, it was contended on behalf of the assessee that, though the business of the firm was closed down with effect from November 13, 1974, the amounts were credited to the accounts of these employees on the same date and, therefore, the payment was made during the continuance of the business and not after its closure. It was contended that, when the business was to be closed, it was but proper that the employees of the firm should have been remunerated adequately in this manner. On being specifically asked as to whether there was any liability to pay gratuity, learned counsel for the assessee conceded before the Tribunal that the provisions of the Payment of Gratuity Act were not applicable to the assessee and that there was no gratuity scheme adopted by the assessee-firm. It was, however, contended that the deduction of the remaining sum of Rs. 22,700 may be allowed as retrenchment compensation or gratuity or some extra payment to the employees for meritorious service on the ground of commercial expediency. On the other hand, it was submitted on behalf of the Revenue that the Appellate Assistant Commissioner had gone wrong in allowing the amount of Rs. 51,800 as deduction under section 37(1) of the Act, by way of retrenchment compensation because such expenditure could never be said to have been made for the purpose of the carrying on of the business of the firm. The Tribunal concluded that the compensation payable under section 25FFF of the Industrial Disputes Act to the retrenched employees of the assessee-firm could not be said to be an expenditure incurred for carrying on the business or an expenditure laid out wholly and exclusively for the purpose of the business of the firm. The Tribunal found that, in fact, it was an expenditure incurred for closing down the business of the firm. The Tribunal, therefore, held that the matter was squarely covered by the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 and, therefore, no part of the expenditure amounting to Rs. 74,500 was allowable under the provisions of the Act. The Tribunal, therefore, allowed the appeal of the Revenue dismissing the assessee's appeal.

The assessee, feeling aggrieved by the decision of the Tribunal, sought reference and, at its instance, the following question has been referred to us, for our opinion, under section 256(1) of the Act:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that no part of the expenditure amounting to Rs. 74,500 is allowable under the Income-tax Act ?"

From the record, it is clear that the assessee-firm had closed down its business from November 13, 1974, and due to the closure, the services of all the six employees of the firm were terminated. The assessee had made provision of Rs. 74,500 in the gratuity account, but it was its consistent stand that the amount was intended to be paid by way of compensation for their retrenchment from service, which resulted due to closure of the firm. Admittedly, the provisions of the Payment of Gratuity Act were not applicable to the assessee-firm and it never had adopted any scheme of gratuity for its employees. Before the Appellate Assistant Commissioner, the assessee, in terms, contended that the said amount was provided for by way of retrenchment compensation for its employees in view of the provisions of section 25FFF of the Industrial Disputes Act and, accordingly, its appeal was partly allowed accepting the figures worked out by it. Under section 37(1), any expenditure of the nature referred to therein laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee has to be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In Gemini Cashew Sales Corporation's case [1967] 65 ITR 643 , the question whether deduction was allowable in respect of retrenchment compensation which was payable on transfer of business came to be considered by the Supreme Court and, it was, in terms, held that the liability to pay retrenchment compensation under section 25FFF of the Industrial Disputes Act arose for the first time after the closure of the business and not before and it arose not in the carrying on of the business but on account of the transfer of the business and, therefore, such expenditure was not of revenue nature and could not be deducted under section 10(1) of the Act of 1922. It was further held that, since the liability under section 25FFF was wholly contingent and did not arise from any definite obligation during the whole of the period that the business was carried on, it could not fall within the expression "expenditure laid out or expended wholly and exclusively for the purpose of the business" under section 10(2)(xv) of the Act of 1922. In Mysore Standard Bank Ltd. v. CIT [1962] 46 ITR 278 (Mys), where, on account of closure, salary for two months for each year of service by way of compensation for termination of their services was paid to the employees of the assessee as a gesture of generosity, it was held that such expenditure cannot be said to have been incurred for the purposes of the business of the assessee as the business was closed and was, therefore, not allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. In J. K. Cotton Manufacturers v. CIT [1952] 21 ITR 129 (All), the assessee, a private limited company, had gone into voluntary liquidation and, by a subsequent resolution, approved and confirmed payment of sum of Rs. 10,000 to the ex-director in recognition of his past services to the assessee which, as was held by the Allahabad High Court, was not expenditure incurred wholly and exclusively for the purposes of the business of the assessee. In India Manufacturers (Madras) Pvt. Ltd. v. CIT [1985] 155 ITR 774 (Mad), relying upon the ratio of the decision in Gemini Cashew Sales Corporation's case [1967] 65 ITR 643, the Madras High Court held that retrenchment compensation on closure of the servicing department was not allowable.

Earlier, in M. Seshadri Iyenger and Sons v. CIT [1985] 152 ITR 734, the Madras High Court, relying upon the ratio of the decision of the Supreme Court in Gemini Cashew Sales Corporation's case [1967] 65 ITR 643, held that, in order to be a permissible allowance, the expenditure must be for the purpose of carrying on the business, and where the business is closed and, as a result of the closure of the business, the liability to pay retrenchment compensation has arisen, such liability cannot be said to be a liability which arose at the time when the business was carried on and cannot be termed as expenditure wholly and exclusively incurred for purposes of business.

It is, therefore, a settled legal position that any expenditure by way of retrenchment compensation on account of closure of the business cannot be considered to be an expenditure incurred for the purposes of business. Since the liability to make such payment arises on account of retrenchment and, when the business is closed down resulting in retrenchment, it can never be said that the retrenchment compensation is paid for the purpose of the business. In our view, therefore, the Tribunal was right in holding that the compensation payable by the assessee to its employees, in view of the provisions of section 25FFF of the Industrial Disputes Act, could not be said to be an expenditure incurred for carrying on the business or an expenditure laid out wholly and exclusively for the purpose of business. The Tribunal rightly relied upon the decision of the Supreme Court in Gemini Cashew Sales Corporation's case [1967] 65 ITR 643 for holding that the assessee was not entitled to any such deduction. In this view of the matter, we answer the question referred to us in the affirmative and against the assessee.

Reference stands disposed of, accordingly, with no order as to costs.

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