INCOME TAX OFFICER v. DHANRAJ MILLS PVT. LTD
[Citation -1984-LL-0518-3]

Citation 1984-LL-0518-3
Appellant Name INCOME TAX OFFICER
Respondent Name DHANRAJ MILLS PVT. LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 18/05/1984
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags retrenchment compensation • termination of service
Bot Summary: In the Directors report for the earlier assessment year the Directors stated that the processing business carried on by the assessee was a losing proposition and was not economical and so, that business was being tapered off with a view to close d o w n the same ultimately. The ITO disallowed the claim on the only ground that the processing business was closed, and so the expenses could not be allowed because they related to a closed business. Further there is force in the contention raised by the assess that the processing business was not an independent one, but was so inter-linked with the other activities carried on by the assessee as to be regarded as a part of the same business, though in a different Department. We agree with the conclusion of the CIT that the expenses incurred because of the closure of the processing business had to be allowed as a deduction while computing the business income of the assessee for the year under consideration. In the case before us, there is no transfer of business, and the same assessee continued to do the business even after the closure of one of the Departments of its business. Similarly the decision; in the cases of L.M. Chhabda and Ritz Continental relate to cases where one independent business is closed and the expenses relating thereto was claimed against the income of another business. We have already found that the assessee before us was claiming the expenses against the business which was closed during the year, and not against another business.


S.N. ROTHO, A.M. This appeal has been filed by Department against order dt. 2nd March, 1982 of CIT(A) relating to asst. yr. 1978-79, previous year of which ended on 30th Sept., 1977. assessee is limited company deriving income from; business in processing of textile as well as in warehousing and constructional activities. first ground in this appeal states that CIT(A) erred in allowing deduction of Rs. 27,975 which was paid by assessee as penalty to Municipal Corporation Shri D. Agarwala, ld. Departmental representative urged before us that CIT(A) erred in his decision. On other hand, Shri Desai, ld representative for assessee, supported action of CIT(A) We find that CIT(A) has followed order dt. 29th Sept., 1981 of Tribunal in ITA NO.2830 (Bom) of 1980 wherein similar point has been decided in favour of assessee . Respectfully following aforesaid decision, we uphold action of CIT(A) on this point and reject this ground. only other ground in this appeal states that CIT(A) erred in deleting addition of Rs.6,062 and Rs.4,160 being retrenchment compensation and gratuity respectively paid by assessee to;its employees. In Directors report for earlier assessment year Directors stated that processing business carried on by assessee was losing proposition and was not economical and so, that business was being tapered off with view to close d o w n same ultimately. In Directors Report for year under consideration, it has been stated " as pointed out in last year s report, process house working was not economical and this was proved by figures and facts and management has gradually; slackened down activities of process house, and has ultimately scrapped it my selling its machinery, proceeds of which have been utilised toward reduction of company s liabilities under scheme". On closing of warehousing business, assessee became liable to pay retrenchment compensation under s. 25F of Industrial Disputes Act, and gratuity under Payment of Gratuity Act. It is to be noted that assessee continued to carry on other business activities. It is also apparent from report of Directors that processing business was closed during year under consideration which implies that it was carried on at least for some time during this year. assessee claimed sums of Rs. 6,062 and Rs. 4,160 as deductible expenses while computing its; profits. ITO disallowed claim on only ground that processing business was closed, and so expenses could not be allowed because they related to closed business. assessee appealed to CIT(A) and reiterated its claim. CIT(A) found that assessee closed only one Department, but carried on business in other Departments. He also found that reason for closing processing was to prevent loss which was in interest of business which was continued. He referred to decision in case of Ambala Cantt. Electric Supply Corporation Ltd. vs. CIT (1981) 25 CTR (P&H) 361: (1982)133 ITR 343 (P&H) for proposition that phrase "for purpose of business" used in s. 37 of IT Act 1961 has wide import. According to him purpose for which payments were made were actually incidental to and were; incurred in interest of business that was still carried on. In this view of matter, he allowed claim of assessee. Shri. D. Agarwala, ld. representative for Department argued before us that decision of CIT(A) was erroneous. He stated that it was not clear as to whether processing business was closed during previous year under consideration. Secondly, he urged that processing business was entirely different from other business activities, and so, expenses relating to former could not be allowed while computing profits of latter. He relied on decision in cases of CIT vs. Gemini Cashew Sales Corporation (1967)65 ITR 643 (SC) and L.M. Chhabda & Sons vs. CIT (1967)65 ITR 638 (SC) in support of his contentions. He also referred to decision in case of Ritz Continental Hotels Ltd vs. CIT (1978) 114 ITR 554 (Cal) in this connection. Shri M.M. Desai, ld representative for assessee, on other hand, supported order of CIT(A). He stated that processing business was carried on for some time during year under consideration, as has been stated in Director s Report of year under consideration. He urged that all business activities carried on by assessee were inter-linked and inter-laced with common management and control, and that they were not independent in case of CIT vs. Delhi Safe Deposit Co. Ltd (1982) 26 CTR (SC) 411: (1982) 133 ITR 756 (SC) in support of his contention. We have considered contentions of both parties as well as facts on record. As stated earlier in this order, there is no evidence to hold that processing business was closed before commencement of previous year under consideration. On other hand Directors report show that business was closed only during year under consideration which means that expenses under consideration were claimed while computing income of business which was carried on for some time during year under consideration, and not against income of another business. Further there is force in contention raised by assess that processing business was not independent one, but was so inter-linked with other activities carried on by assessee as to be regarded as part of same business, though in different Department. Hence, we agree with conclusion of CIT (A) that expenses incurred because of closure of processing business had to be allowed as deduction while computing business income of assessee for year under consideration. We have considered decision in case of Gemini Cashew Sales Corporation (supra) but we find that facts of that case were different. That was case where expenses were incurred under s. 25FF and not under s. 25F of Industrial Disputes Act. It is stated at P. 649 of that case as below: "As already observed, liability to pay retrenchment compensation arose for first time after closure of business and not before. It arose not in carrying on of business, but on account of transfer of business. During entire period that business was continuing, there was no liability to pay retrenchment compensation. liability which arose on transfer of business was not; of revenue nature". In that case there was transfer of business and business was entirely closed by assessee firm which ceased to exist after transfer. In case before us, there is no transfer of business, and same assessee continued to do business even after closure of one of Departments of its business. Hence decision in case of Gemini Cashew Sales Corpn. (supra) is not applicable to facts of case. Similarly decision; in cases of L.M. Chhabda (supra) and Ritz Continental (supra) relate to cases where one independent business is closed and expenses relating thereto was claimed against income of another business. We have already found that assessee before us was claiming expenses against business which was closed during year, and not against another business. Hence, these two cases are also of no help to Department. On other hand, we find support for above conclusion of ours by decision of Supreme Court in case of Delhi Safe Deposit Co. Ltd (supra) wherein it has been held that "the true test of expenditure laid out wholly and exclusively for purpose of trade or business is that it is incurred by assessee as incidental to his trade for purpose of keeping trade going and of making it pay and not in any other capacity than that of trader". We find that expenses under consideration have been incurred for keeping other business activities going and making them pay, and so, ratio of aforesaid decision applies to facts of this case., Similarly, in case of Sassoon J. David & Commissioner. Ltd vs. CIT (1979) 10 CTR (SC) 383 (1979) 118 ITR 261 (SC), Supreme Court has observed as below: "It is too late in day now, whatever may have been position about two decades ago, to treat expenditure incurred by management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure. Such expenditure would ordinarily fall within scope of section 10 (2) (xv) of Act". above observation of Supreme Court directly supports decision of CIT(A). For above reasons, we uphold order of CIT(A) on this point and reject this ground also. In result, appeal is dismissed *** INCOME TAX OFFICER v. DHANRAJ MILLS PVT. LTD.
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