Compensation payable on closure of a business is not an expenditure incurred for the purpose of carrying on the business and therefore cannot be deducted under Section 37(1) of the Income-tax Act.

Ratnam, J.

1. In this tax case reference under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue, the following questions of law have been referred to this court for its opinion :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the deduction of a sum of Rs. 70,000 representing retrenchment compensation and gratuity paid in the assessment year 1969-70 ?

2. Whether the Appellate Tribunal's finding that the payment was made in the course of carrying on of the business and not on the closure of the business based on valid materials and is sustainable in law ?"

2. The assessee is a registered firm engaged in the business of running a printing press. In the course of the assessment proceedings for the accounting period ending on March 31, 1969, relevant for the assessment year 1969-70, the claim of the assessee for deduction of a sum of Rs. 70,000 paid as retrenchment compensation and gratuity was allowed by the Income-tax Officer, but he, however, later, reopened the assessment and disallowed the claim of the assessee on the ground that the retrenchment compensation and gratuity amounts were paid only in view of the closure of the business and, therefore, not entitled to deduction under Section 37(1) of the Act On appeal by the assessee before the Appellate Assistant Commissioner, he took the view that the payments were made by the assessee owing to the closure of its business and hence cannot be subjected to tax treatment as expenses incurred by the assessee wholly and exclusively for the purposes of the business and upheld the disallowance. On further appeal by the assessee before the Tribunal, on the view that the liability had arisen before the actual closure of the business and also for the purposes of the business, it upheld the claim of the assessee and that has given rise to the questions of law referred to earlier.

3. Under Section 37(1) of the Act, any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV arid not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The question now is, whether the assessee laid out or expended a sum of Rs. 70,000 wholly and exclusively for the purpose of the business. Annexure 'D' to the stated case sets out the terms of the deed of dissolution executed on March 15, 1969, between the partners of the assessee-firm. Paragraph 5 therein sets out the reasons for the closure of the business and also the date of such closure in the following terms :

"Whereas, owing to a stay-in strike resorted to by the workers in the business which was not given up in spite of the advice of the officials of the Labour Department and whereas the workmen also resorted to demonstration and shouting of filthy slogans, the business had to be closed down on March 3, 1969, due to circumstances beyond the control of the, parties hereto."

4. From the aforesaid provision in the deed of dissolution, even according to the assessee, the business had to be closed down on March 3, 1969, owing to reasons beyond its control. Annexure 'E' to the stated case is the specimen notice sent to the individual workers of the assessee-firm on March 3, 1969, and that states that pursuant to the decision of the partners of the assessee-firm to close down the business, the services of the workmen are terminated with immediate effect and that amounts as shown thereunder will be paid. Though the business of the assessee, as per the terms of the deed of dissolution, was closed on March 3, 1969, it appears that the books were closed only on March 15, 1969, and during the period between March 4, 1969 and March 15, 196