B. SATYANARAYANA v. INCOME TAX OFFICER
[Citation -1986-LL-0205-1]

Citation 1986-LL-0205-1
Appellant Name B. SATYANARAYANA
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 05/02/1986
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags right to receive compensation • business expenditure • subsidiary company • gratuity scheme
Bot Summary: The payment of gratuity of Rs. 24,000 is not admissible as the liability does not arise in the course of business or for the purpose of carrying on of the business. The payment is neither in the course of the business nor for the purpose of the business and it is not allowable as deduction. The payment made is neither in the course of the business nor for the purpose of business. 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 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. In Intesco Raw Silk Co. v. CIT 117 ITR 315, the Allahabad High court held that the reterenchment compensation paid by a firm on the closure of its business is not expenditure laid out or expended wholly and exclusively for the purpose of its business and is not an admissible deduction under section 37. In Modi Electric Supply Co. v. CIT 126 ITR 403, the Punjab and Haryana High Court held that any expenditure by way of reterenchment compensation on account of the closure of he business cannot be considered to be a payment made during the course of business and is not deductible under section 37 as business expenditure. The payment of reterenchment compensation of Rs. 24,000 for the termination of the services of employees after the closure of the business is not allowable as a business expenditure as the said liability is neither incurred in the course of the business nor for the purpose of the assessee's business.


There is delay of three days in preferring this appeal. petition has been filed giving reasons for delay. We accept reasons given therein and condone delay of three days. 2. dispute is with regard to disallowance of Rs. 24,000 paid to eight employees on termination of their services due to closure of business. assessee was carrying on business of plying buses. assessee sold his three buses APS 2000 on 28-1-1979, APC 6721 on 12-12-1978 and APS 3388 on 28-1-1979. After sale of above buses he terminated services of his employees and paid Rs. 24,000 to them. assessee claimed that sum of Rs. 24,000 was paid as gratuity to employees on termination of their services and so it is allowable deduction. ITO held that on closure of business assessee terminated services of his employees to whom Rs. 24,000 was paid. payment of gratuity of Rs. 24,000 is not admissible as liability does not arise in course of business or for purpose of carrying on of business. This liability springs from closure of business only. Thus, he disallowed claim. On appeal, AAC upheld disallowance, Against same, assessee has preferred this appeal. 3. learned counsel for assessee kly urged that gratuity amount was paid during accounting year itself and so it is allowable as deduction in this year. He urged that expenditure was wholly in connection with assessee's business and it is allowable as business expenditure. He submitted that sum of Rs. 24.000 should be allowed as deduction. 4. learned departmental representative kly urged that it is only on closure of business that assessee terminated services of employees and paid sum of Rs. 24,000. payment is neither in course of business nor for purpose of business and it is not allowable as deduction. He relied on decision of Supreme court in CIT v. Gemini Cashew Sales Corpn. (1967) 65 ITR 643. 5. We have considered rival submission. By sale of three buses on 28-1-1979, 12-12-1978 and 28-1-1979 business carried on by assessee was closed. On account of closure of business, assessee terminated t h e services of his employees and paid Rs. 24,000 to them towards compensation. payment of Rs. 24,000 was made on 30-1-1979 after closure of business. This is very clear from letters of employees whose services have been terminated. In those letters they have clearly stated that they received payment on 30-1-1979 on account of termination of their service due to closure of businses. We find that there was no gratuity scheme and so question of paying gratuity to employees did not arise. So it is only RETERENCHMENT compensation paid tot he employees for termination of their service after closure of business. payment made is neither in course of business nor for purpose of business. Hence, it is not allowable, as deduction, It is true that payment was made during accounting year. But it was paid after closure of business and after termination of services of employees. Hence, this liability of Rs. 24,000 incurred after closure of business cannot be allowed as business expenditure. 6. In Gemini Cashew Sales Corpns.' case (supra) Supreme Court held that liability to pay reterenchment compensation which arose on transfer of business was not revenue in nature and it could not be deducted. It was observed as under: "As already observed, liability to pay reterenchment compensation arose for first time after closure of business and not before. It arose not in carrying on business but on account of transfer of business. During entire period that business was continuing, there was no liability to pay reterenchment 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 debatable in profit and loss account. deduction which is proper and necessary for ascertaining balance of profits and gains 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 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. " (p. 649) In Venkatesha Colour Works v. CIT (1977) 108 ITR 309 (Mad.) after business was closed down assessee paid reterenchment compensation to workers. On those facts Madras High court held that amount paid to workers after closure of business was not allowable as deduction under section 37 of Income-tax Act, 1961. In Stanes Motors (South India) Ltd. v. CIT (1975) 100 ITR 341 (Mad.) assessee's business of retreading division was transferred to subsidiary company which took over workers belonging to retreading division. gratuity payable to those employees amounting to Rs. 56,275 was claimed as deduction under section 37. Madras High Court held that amount of Rs. 56,275 cannot be said to have been expended wholly and exclusively for purpose of business and claim for deduction under section 37 is not admissible. above decision has been followed by same High Court in CIT v. Pathinen Grama Arya Vysya Bank Ltd. (1977) 109 ITR 788. In Intesco Raw Silk Co. v. CIT (1979) 117 ITR 315, Allahabad High court held that reterenchment compensation paid by firm on closure of its business is not expenditure laid out or expended wholly and exclusively for purpose of its business and is not, therefore, admissible deduction under section 37. In Modi Electric Supply Co. v. CIT (1980) 126 ITR 403, Punjab and Haryana High Court held that any expenditure by way of reterenchment compensation on account of closure of he business cannot be considered to be payment made during course of business and is not deductible under section 37 as business expenditure. 7. ratio laid down in above case squarely applies to instant case. In our view it is only on account of closure of business that services of employees were terminated. payment of reterenchment compensation of Rs. 24,000 for termination of services of employees after closure of business is not allowable as business expenditure as said liability is neither incurred in course of business nor for purpose of assessee's business. That lower authorities were perfectly justified in disallowing claim of assessee. decision of Punjab and Haryana High Court in Ambala Cantt. Electric Supply Corpn. v. CIT (1982) 133 ITR 343 relied on by learned counsel for assessee is distinguishable as that was case where transfer was certainty and right to receive compensation by workman was held to be not contingent one. 8. In result, appeal fails and is dismissed. *** B. SATYANARAYANA v. INCOME TAX OFFICER
Report Error