1998 Supreme(SC) 257

1998(1) Supreme 200
Supreme Court of India
Sujata V. Manohar & D.P. Wadhwa, JJ.
M/s. W.T. Suren & Co. Ltd. -Appellant
versus
Commissioner of Income Tax, Bombay -Respondent
Civil Appeal No. 479 of 1985
Decided on 23-2-1998
Counsel for the Parties :
For the Appellant : Joseph Vellapally, Sr. Advocate, Dinesh Mathur Advocate with him for M/s. JBD & Co., Advocates.
For the Respondent : T.L.V. Iyer, Sr. Advocate, Ms. Shashi Kiran, (Harish Chandra) Advocate for B.K. Prasad, Advocates.

Important Point
Retrenchment compensation is not the same thing as Gratuity. Payment of gratuity amount in impugned case was not on account of closing the business of the assessee but for the purpose of business of the asses­see and, thus, entitled to deduction u/s 10(2)(xv) of I.T. Act, 1922.

Headnote:Income Tax Act, 1922-Section 10(2)(xv) (= Section 37(1) of I.T. Act, 1961) - Deductions from Builders Income - Gratuity payable to employees-Assessee closing a part of the business and transfer­ring it to its Holding Co.- Gratuity payable to employees of closed part given in trust to Holding Co. to pay in case any employee retires or ceases in employment - Employees of closed part given option to continue in Holding Co. on same terms and conditions without any break-Assessee claim­ing Rs. 4,08,622/- the gratuity amount paid over to Holding Co. in trust-I.T.O. disallowing-Appeal dismissed-Income Tax Tribu­nal allowing-Question referred to High Court-High Court disallowing-Appeal by certificate of fitness to Supreme Court-Wheth­er the gratuity amount which the assessee made to its Holding Co. was an allowable deduction?-(Yes)-Appeal allowed (1982) 138 ITR 91 (Bom.) reversed.

       Held : In our view, Kerala High Court in Standard Furniture Co. Ltd. s case [116 ITR 751 (FB)], Madras High Court in Sarada Binding Works case (152 ITR 520) and Bombay High Court in Salem Magnisite Pvt. Ltd.’s case (189 ITR 154) have rightly distinguished the judgment of this Court in Gemini Cashew Sales Corporation’s case. Retrenchment compensation is not the same thing as gratuity. In Gemini Cashew Sales Corporation’s case, this Court considered the question of payment of retrenchment compensation under the provisions of the Industrial Disputes Act. That Act contains the provisions under what circumstances a workman is entitled to retrenchment compensation. While Section 25F of that Act prescribes conditions precedent to the retrenchment of workmen, Section 25FF provides for compensation to workmen in case of transfer of undertak­ings. Right to claim retrenchment compensation remains contingent and there may be varying circumstances under which employment may cease. Yet there may not be any right to such compensation, like death, retirement, resignation etc. Under law right to retrenchment compensa­tion arises when employer terminates the employment or undertaking of the employer is transferred and in the later case that too if the case does not fall under the proviso to Section 25FF of the Industrial Disputes Act. Those provisions cannot certainly be applied in the case of payment of gratuity. The scheme of gratuity as applicable to the members of the staff of the assessee provided as to how much gratuity would become due and payable to an employee for each of service except to one who is dismissed for misconduct etc. Gratuity is, thus, payable on the termination of employment of the employee on any account except dismissal and calculated on the basis of number of years of service and at the rate prescribed in the scheme. In the present case, the amount of gratuity which was paid to M/s. Rallis India Ltd. on behalf of the employees was not on account of transfer of the distribution unit of the assessee but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. Other business of the assessee, as held by the Tribunal, continued. Payment of gratuity amount to M/s. Rallis India Ltd. was not made by the assessee of its own but at the instance and on behalf of the employees whose services though terminated in the assessee company were taken over by M/s. Rallis India Ltd. with the promise of continuity of service in M/s. Rallis India Ltd. As far as the assessee is concerned, it was bound to make payment of gratuity to the employees whose services were terminated and, in fact, as noticed above, the employees who did not join M/s. Rallis India Ltd. were directly paid gratuity. Assessee was obliged to pay gratuity to those emplo­yees who had joined M/s Rallis India Ltd. Instead of those em­ployees getting the gratuity amount directly, got that amount paid to M/s. Rallis India Ltd. who put that amount in trust in a separate account for the exclusive use of the transferred employees and payable to them after their services in M/s. Rallis India Ltd. terminated including the gratuity due on account of service rendered in M/s. Rallis India Ltd. as per the scheme relating to gratuity of that company. Payment of amount of gratuity to M/s. Rallis India Ltd. was made as per the scheme of the assessee and it was not an ex-gratia or some isolated payment. It was never disputed and, in fact, no question raised if the services of the employees of the assessee were not terminated and that being the position, the obligation of the assessee to make payment of gratuity to its employees was an obligation in praesenti. Payment of gratuity amount to M/s. Rallis India was with the consent of the employees transferred there. We are, thus, of the view that payment of gratuity awarded by the assessee to M/s. Rallis India Ltd. in the circumstances of the case was an expenditure wholly laid or expended for the purpose of the business of the assessee and was allowable deduction. It cannot certainly be said that it was an ex­penditure incurred much ahead of time as the services of the employees with the assessee were terminated. Tribunal also found that the asses­see was a going concern and only one of its department was closed. The assessee had not wound up all of its affairs. Only a part of its business was closed and transferred to M/s. Rallis India Ltd. In these circumstances, in our view, Tribunal was right in holding that the payment of gratuity amount was not on account of closing the business of the assessee but for the purpose of business of the assessee and, thus, entitled to deduction under clause (xv) of sub-section (2) of Section 10 of 1922 Act corresponding to Section 37(1) of the 1961 Act. We, therefore, hold that the assessee, the appellant herein, is enti­tled to the payment of gratuity amount of Rs. 4,8,622/- made to M/s. Rallis India Ltd. as an allowable deduction. (Para 25)

       Consequently held : We allow the appeal, set aside the judgment of the High Court and answer the question in affirmative in favour of the assessee and against the revenue. (Para 26)