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1982 Supreme(Cal) 254
High Court Of Calcutta
SABYASACHI MUKHERJI, SUHAS CHANDRA SEN
BINANI PRINTERS (P.) LTD - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 313 Of 1975
Decided On : 07/19/1982
A.K.SEN GUPTA, B.K.NAHA, D.PAL, R.K.Murarka
Payments made for the purpose of closing down a business cannot be considered as business expenditure.
Headnote:
INCOME TAX ACT, 1961 - SECTION 25FFF, 37, 28 - NOTICE PAY AND RETRENCHMENT COMPENSATION - DEDUCTION - NOT ALLOWABLE AS BUSINESS EXPENDITURE - CLOSURE OF BUSINESS.
Fact of the Case:
The assessee-company, engaged in the printing business, closed down its printing establishment and paid notice pay and retrenchment compensation to its employees under Section 25fff read with Section 25f of the Industrial Disputes Act, 1947. The assessee claimed deduction of these amounts as business expenditure under Section 37 or Section 28 of the Income Tax Act, 1961.
Finding of the Court:
The Tribunal held that the payments were not allowable as business expenditure because they were incurred for the purpose of closing down the business and not for the purpose of carrying on the business.
Issues: Whether the notice pay and retrenchment compensation paid by the assessee to its employees under Section 25fff of the Industrial Disputes Act, 1947, was an admissible deduction under Section 37 or Section 28 of the Income Tax Act, 1961.
Ratio Decidendi: The liability to pay compensation and notice pay under Section 25fff of the Industrial Disputes Act, 1947, consequent upon the closure of business is absolute and not contingent upon the happening or non-happening of any events after such closure. However, it is not an allowable deduction since such liability is incurred by the employer for the purpose of closure of the business and not for the purpose of carrying on the business.
Final Decision: The question referred to the court was answered in the negative and in favor of the Revenue.
( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, for the assessment year 1970-71 the following question has been referred to this court; "whether on a true interpretation of the provisions of Section 25fff of the I. D, Act, 1947, the notice pay of Rs. 10,233 and retrenchment compensation of Rs. 52,121 paid by the assessee thereunder to its employees of printing business was an admissible deduction under Section 37 or Section 28 of the I. T. Act, 1961?"
( 2 ) THE facts of the case are as follows :"this reference relates to the assessment year 1969-70 only and arises out of the Tribunal's order in so far 'as it related to the Department's appeal, I. T. A. No. 4650 (Cal) of (969-70. The assessee-company follows the calendar year as its accounting year. It was formerly engaged in two lines of business, one being the printing business and the other being publication of a journal called 'the Eastern Metal Review. ' In the printing establishment the assessee was sustaining heavy losses from year to year. By a resolution dated 14th June, 1968, the board of directors of the assessee-company decided to close down the entire printing establishment. Pursuant to the resolution the assessee-company issued a general notice to the employees that the printing establishment would be closed down and the services of all workers borne on the pay roll and attendance register of the printing establishment would be terminated with effect from the 1st July, 1968, which, it may be stated here, fell within the previous year relevant to the assessment year 1969-70. The employees were further informed that they would all be paid their dues including notice pay and compensation in accordance with Section 25fff read with Section 25f of the I. D. Act, 1947, They were asked to collect their dues on the 1st July, 1968. Accordingly, on the 1st July, 1968, the employees borne on the printing establishment were paid Rs. 52,121 as retrenchment compensation and Rs. 10,233 as notice pay under clauses (b) and (a) of Section 25f read with Section 25fff of the I. D. Act, 1947, and Rs. 6,495 as money value of the unavailed leave standing to their credit. In the assessment for the assessment year 1969-70 the assessee claimed deduction of these amounts aggregating to Rs. 68,849 as business expenditure. It may be pointed out here that in the relevant year of account the assessee carried on the other business, viz. , the publication business. The ITO disallowed this claim for deduction on the ground that this expenditure was incurred by the assessee, not in the course of business, but after the closure of the business and was, therefore, not allowable to be deducted as an expenditure incurred in the course of business. In support of the view taken by him the ITO relied upon the ruling of the Supreme Court in CIT v. Gemini Cashew Sales Corporation. "
( 3 ) THE ITO held against the assessee.
( 4 ) THE assessee went up in appeal before the AAC. The AAC observed, inter alia, as follows in disposing of the appeal:"moreover, from the general notice it is seen that workers were intimated that the printing business will be closed from 1st July, 1968, and the workmen were asked to collect their dues on 1st July, 1968. Therefore, the workmen were borne on the pay rolls of the appellant till 30th June, 1968, and the business was not closed down on that date. Hence, the payment of the amount due on 1st July, 1968, to the workmen were ascertained liabilities on 1st July, 1968, for periods prior to closure of the business and on this score also the amount disallowed have to be allowed. The result is that there will be a reduction by Rs. 68,849. "
( 5 ) BEING aggrieved by the decision of the AAC, the Revenue went up in appeal before the Tribunal and the Tribunal, considering the rival contentions, observed as follows :"we have given due consideration to these rival submissions. The case decided by the Supreme Court in CIT v. Gemini Cashew Sal
