SMT. JYOTHI CHELLARAM v. INCOME TAX OFFICER
[Citation -1984-LL-1026-8]

Citation 1984-LL-1026-8
Appellant Name SMT. JYOTHI CHELLARAM
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 26/10/1984
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags discontinuance of business • retrenchment compensation • provision for gratuity • transfer of ownership • revenue authorities • allowable deduction • gratuity liability • gratuity scheme • going concern • new employer • notice pay
Bot Summary: As legal heirs, he carried on business and as such, there was no transfer of the business from one person to someone else. 's case, the Supreme Court considered the question whether the gratuity and retrenchment compensation payable on transfer of business under the Industrial Disputes Act, 1947, is an allowable deduction. 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. Profits of a business involve comparison between the state of the business at two specific dates. A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs from the transfer of the business, it is not, in our judgment, a properly debitable item in its profit and loss account as a revenue outgoing. Under section 10(2)(xv) of the Indian Income-tax Act in the computation of taxable profits 'any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation', i.e., business, profession or vocation carried on by the assessee, is a permissible allowance. Where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression 'expenditure laid out or expended wholly and exclusively' for the purpose of the business.


dispute in this appeal is with regard to deduction of gratuity of Rs. 99,249 and notice pay of Rs. 21,018. 2. Smt. Jyothi Chellaram, proprietrix of Jaypee Electronics, died on 24-5- 1980. After her death, her husband, Shri P.R. Chellaram, took over business. It was contended before ITO that services of employees were terminated by issuing notice on 30-5-1980 and gratuity of Rs. 99,249 and notice pay of Rs. 21,018 were paid. Thereafter, those employees were reappointed by Shri P.R. Chellaram, husband of assessee. Thus, it was urged that above amounts paid were deducted in this year as it was liability of this year. ITO did not accept these submissions. He held that there was no termination of services of employees at all and there was no question of payment of gratuity and notice pay. He held that 24-5-1980 was Sunday and there was no discontinuance of business also even for day. business was continued as going concern by Shri P.R. Chellaram, husband of assessee. Under section 40A(7) of Income-tax Act, 1961 ('the Act') no provision for gratuity can be allowed unless conditions prescribed therein are fulfilled. None of conditions were fulfilled. Thus, he rejected assessee's claim. 3. assessee appealed to Commissioner (Appeals). He held that this is case where there has been no transfer at all from one employer to another employer. There was, at best, succession by one employer in place of another. There has been continuity of business with change in person which does not amount to transfer. He applied ratio laid down by Supreme Court in CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643. Thus, he upheld disallowance made by ITO. Against said order, assessee has preferred this appeal. 4. learned counsel for assessee kly urged that liability for payment of gratuity and notice pay had arisen under Andhra Pradesh Shops and Establishment Act, 1966 as well as under Payment of Gratuity Act, 1972. services of employees were terminated from 24-5-1980, though notices were issued on 30-5-1980. business has been transferred and, hence, liability for payment of gratuity and notice pay arises. As said liability was payable, provision has been made in books of account. Thus, same is allowable deduction even under section 40A(7). When gratuity becomes payable, it is allowable deduction. He placed reliance on various decisions. 5. learned departmental representative submitted that no amount of gratuity or notice pay has become payable. Unless liability was payable by assessee or on his behalf, amount claimed as deduction cannot be allowed. Liability, in this case, did not arise during period when business was carried on by assessee. Hence, it is not payable. Thus, disallowance made was justified. 6. We have considered rival submissions. Smt. Jyothi Chellaram died on 24-5-1980. 25th was Sunday, which was general holiday. business w s continuously carried on without any break by Shri P.R. Chellaram, her husband. As legal heirs, he carried on business and as such, there was no transfer of business from one person to someone else. Hence, question of payment of any gratuity or notice pay did not arise during accounting year. There is no provision either in Andhra Pradesh Shops and Establishment Act or in payment of Gratuity Act that on death of employer, services of employees would automatically get terminated. Since there is no transfer of business, question of termination of services of employees did not arise. so-called notices issued on 30-5-1980, terminating services of employees, are only to give colour that employees' services were terminated. very fact that those employees continued in business carried on by Shri P.R. Chellaram, husband of assessee, would itself indicate that services of employees under assessee have not been terminated. T h e liability for payment of gratuity and notice pay should arise during lifetime of assessee in business so carried on up to 24-5-1980 for allowing same as deduction but such liability did not arise during accounting year ending 24-5-1980. If at all, any liability has arisen, it might be only after accounting year which ended on 24-5-1980. Hence, liability did not arise in this year. Further, no liability has been incurred for purpose of business carried on during this year. 7. In Gemini Cashew Sales Corpn.'s case, Supreme Court considered question whether gratuity and retrenchment compensation payable on transfer of business under Industrial Disputes Act, 1947, is allowable deduction. In that case, two persons, Walter and Ramasubramony, carried on business as partners in name and style of Gemini Cashew Sales Corporation. partnership was dissolved on death of Ramasubramony on 24-8-1957 and business was taken over and continued by Walter on his own account. services of employees were not interrupted and there was no alteration in terms of employment of employees of establishment. It was urged that amount of Rs. 1,41,506 taken into account under head 'Gratuity payable to workers of business' in settling accounts of firm till 24-8-1957 was permissible outgoing. This contention was rejected by revenue authorities, but Tribunal allowed claim for deduction and High Court, on reference, upheld findings of Tribunal. matter was carried to Supreme Court. Especially, it was observed by Supreme Court as under: " In view we take, that allowance claimed is not proper outgoing, or allowance in computing profits of assessee, we do not express any opinion on question whether workmen of undertaking became entitled to retrenchment compensation on transfer of undertaking to Walter. Liability to pay retrenchment compensation arises under section 25FF when there is 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. 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 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. " Again, it was observed as under: " 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. Profits of business involve comparison between state of business at two specific dates. Normally liability which occurs after last date, unless its source is in pre-existing definite obligation, cannot be regarded as part of outgoing of business debitable in profit and loss account. deduction which is proper and necessary for ascertaining balance of profits and gains of business is undoubtedly properly allowable, but where liability to make payment arises not in course of business, not for purpose of carrying on business, but springs from transfer of business, it is not, in our judgment, properly debitable item in its profit and loss account as revenue outgoing. claim of firm to treat it as item in determination of profits of firm under section 10(1) of Income-tax Act cannot, therefore, be sustained. Under section 10(2)(xv) of Indian Income-tax Act in computation of taxable profits (omitting parts of clause not material) 'any expenditure laid out or expended wholly and exclusively for purpose of such business, profession or vocation', i.e., business, profession or vocation carried on by assessee, is permissible allowance. But to be permissible allowance expenditure must be for purpose of carrying on business. Where accounts are maintained on mercantile system, if liability to make payment has arisen during time business is carried on, it may appropriately be regarded as expenditure. But where liability is, during whole of period that business is carried on, wholly contingent and does not raise any definite obligation during time that business is carried on, it cannot fall within expression 'expenditure laid out or expended wholly and exclusively' for purpose of business. " Thus, it was held that amount of Rs. 1,41,506 cannot be regarded as properly admissible deduction either under section 10(1) or section 10(2)(xv) of Indian Income-tax Act, 1922. above ratio squarely applies to instant case. In instant case also, gratuity liability did not arise during this year of accounting. It did not arise in carrying on of business of assessee. There is no transfer of business at all in this case. Even if it is considered for argument's sake that it arose on account of transfer of business, it is not allowable deduction as it did not arise in carrying on of business. There is no agreement between assessee-employer and employees that gratuity will be payable on death of employer even if business is carried on by legal heirs. There is no termination of services of employees as they continued without any break in business carried on by Shri P.R. Chellaram, husband of assessee. As held by Hon'ble Supreme Court in Gemini Cashew Sales Corpn.'s case liability which arose on transfer of business was not of revenue nature. Even under provisions of Andhra Pradesh Shops and Establishment Act, there is no liability for payment of gratuity or notice pay on death of employer. Even if it is considered as transfer, assessee's case comes under clause (c) to proviso to section 42 of Andhra Pradesh Shops and Establishment Act. Once assessee comes under clause (c) to proviso, main section 42 shall not apply. Under clause (c) to proviso to section 42, new employer will be liable to pay to employee gratuity in event of termination of services. Hence, assessee has no liability to pay any gratuity or notice pay during accounting year ending 24-5-1980. Thus, there is no liability on part of assessee for payment of gratuity under Andhra Pradesh Shops and Establishment Act, so far as assessee is concerned. Similarly, there is no liability by assessee for payment of gratuity or notice pay under Payment of Gratuity Act. Under section 40A(7)(b)(i), only gratuity that has become payable during previous year will be allowed. But in instant case, no gratuity became payable during previous year. Thus, provisions of section 40A(7) will not help assessee. Thus, in our view, no liability for payment of gratuity and notice pay has arisen during previous year. 8. learned counsel for assessee relied on decisions in Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851 (Delhi), CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 (Ker.), CIT v. Sitalakshmi Mills Ltd. [1983] 141 ITR 415 (Mad.), CIT v. Sri Ranilakshmi Ginning, Spg. & Wvg. Mills (P.) Ltd. [1981] 132 ITR 360 (Mad.), Delhi Flour Mills Co. Ltd. v. CIT [1974] 95 ITR 151 (Delhi), and Escorts (Agents) (P.) Ltd. v. CIT [1971] 80 ITR 61 (Delhi). In our view, those decisions have no application to facts of instant case. decision of Dalmia Dadri Cement Ltd.'s case is case of settlement of gratuity with employees which has no application to instant case. decision in High Land Produce Co. Ltd.'s case is case of gratuity liability arising under Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969. Hence, that case has no application to this case. decision in Sri Ranilakshmi Ginning, Spg. & Wvg. Mills (P.) Ltd.'s case is also case of settlement of gratuity with labour union for payment of gratuity. Similarly, decision in Delhi Flour Mills Co. Ltd.'s case is case of payment of gratuity under agreement. decision in case of Escorts (Agents) (P.) Ltd.'s case is also case of agreement reached between assessee-company and its employees for payment of gratuity. In all those cases, there was clear liability for payment of gratuity which is not position in instant case. Hence, they are not applicable to instant case. decision in Sitalakshmi Mills Ltd.'s case has also no application to facts of instant case. That was case where there was gratuity scheme and liability had arisen. Thus, none of cases relied on by learned counsel for assessee have any application to facts of instant case. Thus, in our view, claim for deduction of gratuity amount of Rs. 99,249 and notice pay of Rs. 22,018 has rightly been disallowed. 9. In result, appeal fails and is dismissed *** SMT. JYOTHI CHELLARAM v. INCOME TAX OFFICER
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