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SUPREME COURT OF INDIA
J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI JJ.
Commissioner of Income-tax, Kerala, Appellant
Versus
Gemini Cashew Sales Corporation. Quilon, Respondent.
Civil Appeal No. 702 of 1966,
D/-20-4-1967.
Advocates appeared
Mr. S. T. Desai, Senior Advocate, (M/s. S. K. Aiyar and R. N. Sachthey, Advocates, with him), for Appellant; Mr. T. V. Viswanath Iyer, Senior Advocate, (Mr. S. K. Dholakia, Advocate and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., with him), for Respondent.
INCOME TAX - Assessment - Deductions - Retrenchment compensation - Liability to pay retrenchment compensation arises on transfer of ownership or management of undertaking - It arises on transfer of undertaking and not before - Transfer of ownership or management of undertaking in law operates, except in conditions set out in proviso, as retrenchment of workmen - But until there is transfer of undertaking resulting in determination of employment, workmen do not become entitled to retrenchment compensation - So long as ownership of business continues with employer, right of workmen to claim compensation remains contingent - A workman may, before transfer of ownership of business, himself terminate employment - He may die or he may become superannuated - In none of these cases owner of business is under any obligation to pay retrenchment compensation to workman - Obligation to pay compensation becomes definite only when there is retrenchment by employer, or when ownership or management of undertaking is, except in cases contemplated by proviso transferred to new employer, and not till then - Right therefore arises from determination of employment, or from transfer of undertaking it has no existence before these events take place.
Fact of the Case:
Two persons- Walter and Ramasubramony - carried on business in cashewnuts as partners in the name and style of Messrs. Gemini Cashew Sales Corporation. The partnership was dissolved on the death of Ramasubramony on August 24, 1957, and the business was taken over and continued by Walter on his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment.
Finding of the Court:
The amount of Rs. 1,41,506 claimed as a permissible allowance by the assessee in the profit and loss account cannot, in our judgment be regarded as properly admissible either under S. 10 (1) or S. 10 (2) (xv) of the Income-tax Act.
Issues: Whether the allowance of Rs. 1,41,506/- constitutes an allowable expenditure in the assessment of the firm for the year 1958-59
Ratio Decidendi: Liability to pay retrenchment compensation arises under S. 25-FF when there is a transfer of the ownership or management of an undertaking: it arises on the transfer of the undertaking and not before. Transfer of ownership or management of an undertaking in law operates, except in the conditions set out in proviso, as retrenchment of the workmen. But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the ownership of the business continues with the employer, the right of the workmen to claim compensation remains contingent. A workman may, before the transfer of ownership of the business, himself terminate the employment: he may die or he may become superannuated: in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman. The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso transferred to a new employer, and not till then. The right therefore arises from determination of employment, or from transfer of the undertaking it has no existence before these events take place.
Final Decision: Appeal allowed.
Judgment
SHAH, J. : Two persons- Walter and Ramasubramony - carried on business in cashewnuts as partners in the name and style of Messrs. Gemini Cashew Sales Corporation. The partnership was dissolved on the death of Ramasubramony on August 24, 1957, and the business was taken over and continued by Walter on his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment.
2. In proceedings for assessment of tax it was urged on behalf of the firm that an amount of Rs. 1,41,506/- taken into account under the head "Gratuity payable to workers of the business" in settling the accounts of the firm till August 24, 1957, was a permissible outgoing. The Income-tax Officer rejected the claim and the Appellate Assistant Commissoner confirmed that order. The Income-tax Appellate Tribunal held that by the transfer of the undertaking to Walter, there was no interruption in the employment of the workmen of the establishment, that the terms and conditions of service applicable to the workmen were not altered to their detriment, that Walter had not expressly agreed to take over the liability for compensation payable under S. 25-FF of the Industrial Disputes Act, 1947, and since there was dissolution of the partnership on August 24, 1957 and the undertaking was transferred, the workmen became entitled to retrenchment compensation, which the firm was liable to pay. The Tribunal accordingly held that the firm was entitled to deduct the sum of Rs. 1,41,506/- in the computation of income in the assessment year 1958-59.
3. In recording their opinion on the following question submitted by the Tribunal:
"Whether the allowance of Rs. 1,41,506/- constitutes an allowable expenditure in the assessment of the firm for the year 1958-59", the High Court of Kerala observed that in the determination of the taxable profits of the firm till its dissolution considerations about the liability to pay retrenchment compensation devolving upon Walter as the assignee of the business for valuable consideration were irrelevant, and since it was maintaining accounts on mercantile system, the firm could claim as a permissible outgoing the amount for which liability was incurred though no actual payment was made to the workmen. The Commissioner of Income-tax appeals with special leave, against the order of the High Court recording an answer in the affirmative.
4. The subject-matter of the claim was retrenchment compensation payable to workmen of the establishment under S. 25-FF of the Industrial Disputes Act, 1947. Section 25-F of the Industrial Disputes Act, 1947, provides:
"No workmen employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until-
(a) the workmen has been given one month s notice indicating the rea- sons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice :
Provided that no such notice shall be necessary if the retrenchment is under an agreement which specifies a date for the termination of service
(b) the workman has been paid, at the time of retrenchment, compensation which shall he equivalent to fifteen days average pay for every completed year of service or any part thereof in excess of six months, and
(c) notice in the prescribed manner is served on the appropriate Government." Section 25-FF, as substituted `by Act 18 of 1957 with effect from November 28, 1956 provides:
"Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to, that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall he entitled to notice and compensation in accordance with the provisions of Section 25-F, as if the workman h
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