Retrenchment compensation paid on closure of business is not an allowable deduction under section 37(1) of the Income-tax Act, 1961.

JUDGMENT :

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 Income-tax Act, 1961 (hereinafter referred to as "the Act"), and held that no such deduction was allowable to the assessee.

2. 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.

3. 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 busines