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Commissioner of Income-tax Bombay City-i Vs. F.M. Chinoy and Co. (Pvt.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 26 of 1963
Judge
Reported in[1969]74ITR780(Bom)
ActsIncome Tax Act, 1922 - Sections 10
AppellantCommissioner of Income-tax Bombay City-i
RespondentF.M. Chinoy and Co. (Pvt.) Ltd.
Appellant AdvocateG.N. Joshi, Adv.
Respondent AdvocateS.N. Dastoor, Adv.
Excerpt:
direct taxation - deduction - section 10 of income tax act, 1922 - dispute is limited to three items sundry advances, loans and payments made for settlement of claims of employees which have been allowed to assessee as deductions - sundry advances were pure loans advanced by managing agents to company in course of their business - there was no obligation upon assessee company to make advances - expenditure was in order to pay retrenchment compensation during time that business of company was a running business - expenditure could not be capital expenditure but in nature of business expenditure - held, items were liable to be allowed as deduction. - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes, other backward classes and special.....kotval, c.j.1. the dispute in this reference is limited to three items which have been allowed to the respondent-assessee, messrs. f. m. chinoy & co. private ltd., as deductions. the assessee were carrying on business among other of acting as managing agent to various companies. one of such companies was a public limited company and doing the business of manufacturing motor car batteries for sale. by an agreement dated the 4th of december, 1942, the assessee-company were appointed managing agents of amco ltd., for a period of 20 years from september 1, 1942. they were to be remunerated by payment of a commission of 7 1/2% on the annual profits of the company, which was liable to be increased under certain circumstances. by clause 4 of the agreement they were required 'to promote the.....
Judgment:

Kotval, C.J.

1. The dispute in this reference is limited to three items which have been allowed to the respondent-assessee, Messrs. F. M. Chinoy & Co. Private Ltd., as deductions. The assessee were carrying on business among other of acting as managing agent to various companies. One of such companies was a public limited company and doing the business of manufacturing motor car batteries for sale. By an agreement dated the 4th of December, 1942, the assessee-company were appointed managing agents of Amco Ltd., for a period of 20 years from September 1, 1942. They were to be remunerated by payment of a commission of 7 1/2% on the annual profits of the company, which was liable to be increased under certain circumstances. By clause 4 of the agreement they were required 'to promote the interest and welfare of the business of the company (Amco Ltd.) and transact perform and superintend all such matters and things relating to the business and affairs of the company for carrying out its object as are required to be done by them as such managing agents under the articles and association', etc. By clause 8 they were they were given the power to generally conduct and manage the business. In short they had all the powers that are usually entrusted to managing agents.

By clause 13, it was agreed that,

'the managing agents may at their option and on such terms and conditions as may be mutually agreed upon from time to time lend and advance to and for the use of the company moneys to any extent as they may like and so long as any sum remains due by the company to the managing agents, the managing agents shall be entitled to continue to act as the managing agents of the company even after the expiry of the period hereinbefore mentioned.'

2. By clause 12 it was provided that in the event of the company being would up at any time for the purpose and with the object of transferring the business of the company to another company, Amco Ltd.'shall make it one of the terms and stipulations of their agreement' of transfer that the transfer-company shall appoint the assessee-company as the managing agents 'and with the like powers and authorities to the managing agents and on the same terms and conditions as to the remuneration, emoluments and otherwise as are herein contained'. It was also stipulated that save, and except with such a condition in the agreement, Amco Ltd. will not sell or transfer their business to any other company. Though these clauses except clause 13 have not been referred to in the statement of the case, the articles of agreement dated 4th December 1942, have been mentioned. A copy of the agreement was placed before us by Mr. Joshi on behalf of the department and its terms were freely referred to by both sides in the arguments before us.

3. Pursuant to this agreement the assessee made advances of money to Amco Ltd. from time to time. They also stood guarantee for certain loans advanced by banks to Amco Ltd.

4. The business of Amco Ltd., however did not prosper. It began to incur heavy losses from the year 1948-49. On 3rd June, 1954, the accumulated losses were over Rs. 10 lakhs. In the directors' report for the year ended March 31, 1954, it is mentioned that the directors had decided to lay off the factory staff and workers from January 11, 1954, and operate the factory only for such number of days and with such staff and workers as was 'essential to complete only firm orders'. The director's report also says that the company had decided to sell off the company's stocks and its business. On March 15, 1956, Amco Ltd. was actually would up. On that dated their overdraft account with the Central Bank of India against the hypothecation of their stocks stood at about Rs. 3 1/2 lakhs. The whole of this amount had been guaranteed by the assessee-company.

5. This being the condition of the business of Amco Ltd., the assessee in their books, decided to write off a part of the amount due to them from Amco Ltd. A few days prior to March 15, 1956 (the date of liquidation) they wrote off in their books a sum of Rs. 1,22,099. The amounts which are in despite before us in the reference are items out of this total amount written off. The items in dispute are as follows :

1. Sundry advances Rs. 17,4002. Loans Rs. 35,0003. Payments made for settlement of claims ofof employees of Amco Ltd. Rs. 35,000

6. The first question referred for our decision is in regard to the first two items mentioned above and the second question is with reference to the third item mentioned above. In the arguments before us however, counsel on behalf of the Commissioner stated that the would not advance any argument so far as the second item mentioned above is concerned namely the item of loans of Rs. 35,000. He was not in a position to support the reference as regards that item, and in our opinion rightly because they were pure loans advanced by the managing agents to the company in the course of their business and there can hardly be any dispute that the assessee-company would be entitled to claim them as deductions. To that extent, therefore, the first question will have to be answered in favour of the assessee in the affirmative.

7. Then we turn to consider the remaining two items which are claimed as deductions by the assessee. First of all, there is the sum of Rs. 17,400 which was advanced to Amco Ltd. from time to time between April 1955, and March 1956, by the assessee. The purpose of these advances is stated in the statement of the case to be 'for ensuring continuity of its (Amco's) production'.

8. As regards this item, both the Income-tax Officer and the Appellate Assistant Commissioner rejected the claim of the assessee to deduct this amount as an allowable deduction. The Income-tax Officer held that having regard to clause 13 of the agreement (which we have quoted above), there was no obligation upon the assessee-company to make these advances and that the terms of clause 13 which make provision for finance were 'only discretionary and optional and there was no obligation whatever upon the company to provide any finance for Amco Ltd. ' Before the Income-tax Officer it was urged that there was a custom or practice, prevalent that managing agents do finance companies managed by them and having regard to that custom the amounts advanced should be held to be advances in the normal course of business. The Income-tax Officer answered this contention by saying that 'the custom that is said to be established lacks the element of mutuality. ' He held that the loan's advanced were in the nature of mere accommodation loans and did not partake of the nature of business transactions. Therefore the assessee had merely sustained a capital loss and not a loss of revenue or of a business nature.

9. In appeal the Appellate Assistant Commissioner upheld this decision reiterating the reasons given by the Income-tax Officer and adding two reasons of his own. He pointed out that these advances could not be regarded as normal advances made in the course of carrying on the business of the managed company but that actually the directors were thinking of winding up the managed company and therefore these advances appear to have been made 'with a view of facilitate the winding up of the managed company's business'. Even at the time of making the advances the assessee could have no hope of recovering any portion of these advances at any time. The two last mentioned reasons given by the Appellate Assistant Commissioner are also substantially the argument advanced by counsel on behalf of the department before us so far as this item is concerned.

10. When the matter came before the Tribunal it negatived all these contentions. The Tribunal held :

'We do not think that either of these two reasons will be sufficient justification for the disallowance. We do not see how by making these payment the winding up is facilitated in any manner. If the winding up is the result of the unsatisfactory financial position of the company, the payment of these amounts is not likely to 'facilitate' the winding up. We do not find any material to justify this view.'

11. They also held that the second ground was not sound and that the mere fact that clause 13 is so worded as to make it only optional one the part of the assessee to make the advances 'will not support the view that the business is allowable and in this case the loss is incidental and therefore, the absence of an obligation does not affect the claim.'

12. In the arguments before us on this item counsel had made two submissions. The first is that there was no obligation on the assessee to make these sundry advances. As managing agents they were merely required to manage the company and were not financiers and therefore it must be held that when they made these sundry advances to Amco Ltd., they merely wanted so to say oblige the managed company but that sort of payment cannot be held to be in the normal course of business and cannot be allowed as a deduction. Secondly of the pointed out that he managing agents who had intimate knowledge of the position of Amco Ltd., well knew that it was in involved circumstances and that no reasonable businessman having regard to his own interest would have made advances to such a company. The department would therefore, be entitled to say that these advances were made for some extra commercial reasons. At any rate they were not prudent or wise transactions having regard to all the circumstances and to normal commercial standards.

13. It seems to us that the mere fact that the articles of agreement between the assessee and Amco Ltd. conferred a discretion upon the managing agents to advance moneys to Amco Ltd. would hardly be a relevant consideration. Clause 13 was put in for the protection of the managing agents (the assessees), and in order that in case they decided as businessmen to make advances of money to Amco Ltd., they would have the right to claim repayment or reimburse themselves. At any rate, the least that can be said is that the terms of clause 13 of the agreement would justify the decision of the managing agents as a decision if they made advances of moneys of this kind.

14. The position then is that though they were not under any obligation to do so, clause 13 was there in the agreement to justify the managing agents making these advances to Amco Ltd. Moreover, it has been held by the Appellate Assistant Commissioner that in Bombay it is a well-known custom or practice that managing agents do procure finance for companies with they manage. Such a practice or custom is recognised by a decision of this court in Commissioner of Income-tax v. Tata Sons Ltd., where Chief Justice Beaumont remarked (at page 202) that 'the ordinary practice in this country is for the managing agents to finance the company of which they are such agents. ' We doubt neither this practice nor the custom nor the terms to clause 13 made it a duty of the assessee to advance any sum to Amco. Ltd. They were not obliged under either the practice or the terms of the agreement to advance moneys to Amco Ltd., but merely for the reasons that there was no binding obligation on them it could hardly be said that if they did advance moneys to Amco Ltd., of which they were the managing agents they did not do so in the normal course of business.

15. A similar argument was advanced before the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. In that case a bank had the custody of its constituent's jewellery and other valuable which were stolen from its custody and in order to safeguard its own reputation, the bank paid up the value of that jewellery to its constituent and then claimed the amount so paid up as a business los. One of the arguments advanced on behalf of the Commissioner against the allowance of that deduction was that the bank was under no legal liability to its constituent to pay the value of the jewellery pledged with it. It was also argued that the bank, which was a pledgee and therefore a bailee of the jewellery had merely to take as much care of the pledged jewellery as a person of ordinary prudence would taken under similar circumstances and that the bank had done that an therefore it was not liable for the loss of the jewellery pledged. The Supreme Court answered the contention at page 642 as follows :

'Granting that on proof that it had taken as much care of the jewellery pledged with it as it would have taken if it belonged to it, the bank could enforce its rights and recover the full amount due from the constituents the question still remains whether in admitting liability for the value of the jewellery pledged the bank laid out expenditure for the purpose of the business. The question is not about the strict enforcement of the legal rights and obligations between the bank and its constituents. The sole question is whether the bank in incurring the expenditure acted in the interest of and for the purpose of its business. The bank is carrying on banking business and advances loans on the security of jewellery. The credit of a banking business is very sensitive : it largely thrives upon the confidence which its constituents have in its management. To maintain that confidence the management has often to make concessions and thereby to preserve the goodwill of the business and its relations with the clientele............ There can be no doubt that the expenditure was wholly and exclusively in the interest of the business.'

16. In the Nainital Bank case, therefore even though there was absolutely no obligation on the part of the bank to pay the amount of the los of the jewellery to its constituent it was held that if the amount was in fact paid, it was paid wholly and exclusively in the interest of the business. In the present case also there is no obligation, and at least there is a stipulation in clause 13 of the agreement that the managing agents may supply the finance. That is also what is the custom or practice of managing agents. If then the assessee-company decided in order to ensure the continuity of the production of Amco Ltd., to make these sundry advances although they were not obliged to do so, it was clearly a normal business decision of theirs and the amount must be held to be wholly and exclusively laid out in the interest of their business as managing agents.

17. Next what is disputed is in substance, the propriety or wisdom of these advances. It is urged that the company was in a very bad way,. Its indebtedness had exceeded Rs. 10 lakhs on June 30, 1954, an by the end of the financial year, 1954 the directors had decided even to lay off the factory staff and workers and only to carry on business to the extent to which it was necessary in order to complete only existing and firm orders. They had also resolved to negotiate for the sale of the business of the company yet these resolved to negotiate for the sale of the business of the company, yet these advances were made between April 1955, and March 1956. Therefore, they were patently imprudent or unwise advances and transaction which no reasonable businessman would have entered into.

18. It does not appear that it was at any time the case of the department that these transactions were business like or imprudent transactions and were being disallowed for the reason. The ground upon which the Income-tax Officer disallowed this item was that there was no obligation to made these sundry advances and that clause 13 of the agreement made it discretionary or optional on the part of the assessee to make the advances. Moreover these advances were merely in the nature of 'accommodation loans' and did not partake of the nature of business transaction. The Appellate Assistant Commissioner merely added other reasons by saying that the advances were made for the purpose of the winding up of the company - a ground which has not been pressed before us so far as this item is concerned. At no stage therefore was it the department's case that these were transactions which were imprudent or unbusinesslike which no reasonable man would have entered into and that therefore the contention now raised that the advances were imprudent or unbusinesslike.

19. Then we turn to the other item of Rs. 35,000 being the payment made for settlement of the claims of the employees of Amco Ltd.

20.The facts pertaining to this item are briefly as follows :

We have already said that on 30th June, 1954, Amco Ltd. were in a bad condition and the accumulated loss exceeded Rs. 10 lakhs. They were also indebted to the Central Bank to the tune of Rs. 3 1/2 lakhs and this indebtedness to the Central Bank was guaranteed by the assessee-company. Taking this position into account the assessee-company decided that the only way to avoid paying their liability under the guarantee was to dispose of the immovable property of Amco Ltd., which was by far their largest asset and from its proceeds pay off Amco's indebtedness. The managing against found a party willing to purchase and settled terms. The building of Amco Ltd. was, however, situated on a plot of land which was taken on lease from the Mysore Government and the permission of the Mysore Government was necessary in order to assign the lease. The permission of the Mysore Government was obtained but the Mysore Government agreed to grant the permission only subject to a condition. The condition was that the legitimate claims of the workers (one of them being to retrenchment compensation) up to the date of the transfer should first be met and that Amco Ltd. should for this purpose give a bank guarantee for a sum of Rs. 50,000. This was then the estimated liability of Amco Ltd. to pay retrenchment compensation to its workers. Pursuant to this scheme a memorandum of settlement between the employers and employees of Amco under section 12(3) of the Industrial Disputes Act was arrived at on 2nd August 1955. On behalf of the employers not merely did the manager of Amco sign this agreement but also the assessee as its managing agents. Thus, the agreement was directly binding on the assessee. All the subsequent steps which were taken and the payment which were made were in fulfillment of this agreement.

21. In order to furnish this guarantee an arrangement with the State Bank of India, Bombay, was entered into. By that arrangement with the bank its branch at Bangalore stood guarantee for a sum not exceeding Rs. 50,000 'for payment of dues to the employees of Amco Ltd. as may be adjudged or directed by the Government of Mysore'. Subsequently, it appears that the actual claim for retrenchment compensation of the employees of Amco Ltd. came to Rs. 35,000. The State Bank paid it up and the assessees were debited with that amount by the State Bank who had guaranteed the amount on their behalf.

22. The letter from the State Bank of India, Bombay, to the assessee at Bombay, dated 1st August, 1955, communicating the telegram sent by the State Bank to their branch office at Bangalore shows that the guarantee was given by the assessee to the State Bank at Bangalore, because it was so directed by the Government of Mysore and, to that extent, the State Bank at Bombay had been given a lien of Rs. 50,000 on the assessee's cash credit account for the period of their liability under the guarantee. On the next day after the above letter was written, the State Bank, Bangalore, wrote to the Minister for Law and Education of the Government of Mysore undertaking to indemnify the Rajpramukh of Mysore on demand to the extent not exceeding Rs. 50,000 against any claim that may possibly arise on Messrs. Amco Ltd. 'by their failure to provide for payment of dues to their employees as may be adjudicated or directed by the Mysore Government'. It may be noticed that this was the very day on which the memorandum of settlement with the workers was signed. Thus, the settlement and the giving of guarantee were simultaneous and mutually complementary transactions. The purpose of these transactions is thus stated in the letter of 2nd August, 1955 :

'this guarantee will take effect on the Government of Mysore sanctioning the application of Messrs. Amco Ltd., for transfer to tenancy rights of the site and sheds now occupied by them to Messrs. Amco Batteries Ltd. to enable Messrs. Amco Ltd. to complete the sale of their assets as per agreement lodged with the Government of Mysore.'

23. The financing agreement was to remain in force up to 31st October, 1955.

24. It is clear from these facts that the amount of Rs. 35,000, which was paid under the guarantee given by the State Bank, Bangalore, on behalf of the assessee to the Government of Mysore, was paid by the assessee, in order to save itself from greater loss. The position of Amco Ltd. had deteriorated to such an extent that they were indebted to the tune of Rs. 10 lakhs and the assessee had already stood guarantee to the extent of Rs. 3 1/2 lakhs to the Central Bank of India and had become liable to discharge their liability. Therefore, the prudent course for any businessman like the assessee, having the control of Amco Ltd. and its management under it, was to try and save Ltd. except by the sale of its immovable properties which alone were valuable. The assessee, therefore, found a suitable purchaser and fixed up a price but the Government of Mysore taking into account the condition of the is company had insisted upon the workers' claim being first satisfied before the sale could go through and therefore the assessee had perforce to give this guarantee to the State Bank and further pay us Rs. 35,000, so as to retrieve its position by getting Amco Ltd. to pay up the Rs. 3 1/2 lakhs which it owed to the Central Bank. The payment of Rs. 35,000, in our opinion, was a prudent business payment by the assessee in order to fulfill its obligations under the settlement with the workers and in order to save itself from a much larger loss.

25. Counsel on behalf of the department has urged two alternative positions. He has first of all urged that the guarantee was given really in order to enable the winding up proceedings to take place or alternatively that it was given in order to get the property released from the Mysore Government and that in either case it would not be a business expenditure or one laid our wholly and exclusively for the purposes of the assessee's business, but a disbursement on capital account. He urged that it was no part of the assessee's business to guarantee payments on behalf of Amco Ltd. though he agreed that, if it had been an outright loan, it might be supportable on that ground.

26. It is clear that one of the businesses of the assessee was to be managing agents of companies. In the course of that business they undertook to be the managing agents of the business of Amco Ltd. Moreover we have already said that it is new settled law that in Bombay it is the practice or custom for managing agents in the course of their duties as managing agents to procure finance for the companies which they manage. Therefore, if the managing agents advanced moneys, that would be in the course of their business as managing agents. Because the advance was made through a bank guarantee we do not see how, for the purpose of the point before us the position is at all different from the position of managing agents directly providing finance to the company which they manage. It is clear that unless the amount payable to the workers for retrenchment compensation has been guaranteed, the transaction of the sale of Amco's property would have been under a liability to pay at least the amount of Rs. 3 1/2 lakhs which it had guaranteed. The further payment which they made towards the retrenchment compensation was to save themselves from a larger loss. It was a payment made in the course of their business or alternatively a payment wholly and exclusively laid out for the purposes of there business.

27. We are unable to accept the contention that the payment was made to enable the winding-up proceedings to take place. It does not appear that Amco Ltd., though indebted, was insolvent and for that reason could be taken into compulsory liquidation. On the other hand, it appears that its managing agents for their own ends decided upon a transfer of its properties and business to another party with a view to pay off the debts of Amco. The immediate purpose for which the guarantee was given was not to enable any winding up to take place. The winding up was merely incidental. The guarantee was given in order to get over the condition imposed by the Mysore Government namely the payment of retrenchment compensation to the workers.

28. For the same reasons we are unable to accept the alternative contention that the payment was made in order to get the property released from the Mysore Government. The immediate and direct purpose of the payment was the ensuring of the payment of retrenchment compensation to the workers of Amco Ltd. according to the agreement entered into on 2nd August, 1955 (annexure 'G'), though it may have been that that step incidentally also facilitated the sale of the company's property.

29. So far we have discussed the position only as if it were a voluntary business decision which the assessee had to make but if one turns to the provisions of law it will be clear that the assessee-company not merely made this payment voluntary towards business expenses but to satisfy a claim which they were bound under law to satisfy. On the 2nd of August 1955, there was a settlement between the workers of Amco Ltd. through their representative the president and secretary of Amco factory labour association and Amco Ltd. on the one hand and the representatives of the managing agents on the other. This memorandum of settlement is at exhibit G. It is signed on behalf of Amco Ltd. by its manager and by a director of the assessee-company on behalf of the managing agents of Amco Ltd. The provisions of the Industrial dispute Act shows that this agreement or settlement with the workers was absolutely binding on Amco Ltd. as well as its managing agents and that non-fulfillment of that settlement would have resulted in the prosecution both of the company's officials also of the managing agents the assessees. This is clear from a consideration of the provisions of section 29 read with section 32 of the Industrial Disputes Act. Section 32 makes a special provision for offences by companies and it provides that where a person committing an offence under the Act is a company every director manager secretary, agent or other officer or person concerned with the management thereof shall be deemed to be guilty of such offence. The only exception is that created by the words 'unless he proves that the offence was committed without is knowledge or consent', which upon the facts of the present case cannot obviously be taken advantage of by the assessee. Therefore, the agent concerned with the management of the company would be as much liable for the non-fulfillment of the terms of the settlement as the officers of the company itself and that would include the present assessee. On this ground also it can be held to be a business expenditure since the assessee was bound to see that the amount of Rs. 35,000 was paid to the workers as retrenchment compensation.

30. Nothing moreover turns upon the fact which has been emphasised on behalf of the department that the assessee was not bound to make this payment so far as clause 13 of the agreement is concerned. No doubt, clause 13 is the usual clause contained in a managing agency agreement empowering them to advances moneys to the managed company in their discretion. It gives than the right if advances are made by them to recover the amounts from the company but if acting under this right the managing agents advance moneys to the company seeing that it was in the interest of their own business as in the present case it undoubtedly was we cannot see why even though the payment was voluntary we should not hold that it was laid out wholly and exclusively for the purpose of their business or was a business expenditure.

31. We have so far considered the case from the point of view of whether the amount of Rs. 35,000 was, in the circumstances, a business expenses but it was contended that ever if it was incidentally for the purpose of businessman, it was still liable to be allowed as a deduction and in our opinion, rightly. The principle was first laid down by the Supreme Court in Badridas Daga v. Commissioner of Income-tax at page 15 as follows :

'The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles it can be said to arise out of the carrying on of the business and to be incidental to it. It that is established than the deduction must be allowed provided of course there is no prohibition against it express or implied in the Act.'

32. This principle was approved by the Supreme Court itself in a number of subsequent decisions particularly the decision in Commissioner of Income-tax v. Nainital Bank Ltd., at page 711. In this decision the Supreme Court also referred to a passage in the judgment in Badridas Daga's case, which suggested that the loss for which a deduction could be made under section 10 (1) must be one that springs directly from the carrying on of the business and they explained what was meant by that passage. They pointed out that what was said in that passages was in connection with the business of a money-lender and did not deal with a public company carrying on banking business. The same view was taken by the Supreme Court in Indore Malwa United Mills Ltd. v. State of Madhya Pradesh, where their Lordships referred to the passage which we have quoted above with approval. That was a case where the managing agents of a mill had borrowed large suns of money from outsiders had entered them in the company's books of account but had withdrawn the sums and utilised them for their own purpose. Later on the company who were the managing agents went into liquidation and the question was whether the mills could claim deductions for the sums which they could not thus recover from the managing agents as bad debts or trading loss. It was held that it was a trading los deductible in computing the profits of the managed company in the assessment year. At page 741 the Supreme Court said :

'We, therefore, find no difficulty in holding that the said debt which had become irrecoverable was a trading loss deductible in computing the profit of the appellant company in the assessment year. It was a loss incidental to the appellants business and is certainly sanctioned by commercial practice and trading principles.'

33. Mr. Joshi relied upon a decision of the Supreme Court in Commissioner of Income-tax v. Gemini Cashew Sales Corporation. That was a case of the dissolution of a firm consisting of two partners because of the death of one partner. It business was taken over and continued by the surviving partner on his own account. This happened on the 24th August 1957. In settling the accounts of the firm as on that date a sum of Rs. 1,41,506 was taken into account as retrenchment compensation payable to the employees under claim for retrenchment compensation arises on a transfer of ownership. The question was whether this sum constituted an allowable expenditure in computing the income of the firm for the assessment year 1958-59. It was held that the amount paid was not property admissible either under section 10 (1) or under section 10 (2) (xv) of the Income-tax Act, 1992. It seems to us, however that the case on its facts has no application here. That was a case where the business of the firm had completed ceased as a result of the sudden death of one of the two partners and the firm and dissolved. It was after the dissolution of the firm that he amount was paid to the workers as retrenchment compensation. Till that date no question of the claim for retrenchment compensation had arisen and that is precisely what the Supreme Court also emphasized. That pointed out that the claim was under section 25FF and not under section 25F as in the present case and with reference to that position they observed at page 647 as follows :

'But until there is a transfer of the undertaking resulting in determination of employments the workman do not become entitled to retrenchment compensation. So long as the ownership of the business continues with the employer the right of the workmen to claim compensation remains contingent. 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 workman. The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is except in the cases contemplated by the proviso, transferred to a new employer, and not till then.

At page 649 they stressed what in our opinion is the distinguishing feature of that case from the present case by the following words : 'As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business.'

34. Of course, we do not say that a liability for retrenchment compensation always arises on the closure of the business. That would be true under section 25FF but not under section 25F. Under section 25F it is possible that a running business may also retrench its workers. That is what was to happen in the present case for which the expenditure of Rs. 35,000 was incurred.

35. The argument that this was a capital loss can only be sustained upon the contention with which we have already dealt viz., that this amount was expended in order to ensure the sale of the company property or its winding up. We have already held that upon the facts and circumstances here we cannot come to that conclusion. The expenditure here was clearly in order to pay the retrenchment compensation during the time that the business of the company was a running business. It could also have been paid in order to wind up the company because the company was would up much later on the 15th March, 1956. That under such circumstances the expenditure could not be a capital expenditure but will be in the nature of business expenditure is further shown by the decision of the Supreme Court in B. D. Barucha v. Commissioner of Income-tax. The position in the present case is as stated by the assessee in its letter to the Income-tax Officer dated 20th January 1959, annexure 'A'. That is the stand which the Tribunal has upheld and in our opinion rightly. We agree with the Tribunal that this item of Rs. 35,000 was a payment made by the managing agents in the course of their business and that at any rate it was incidental to the assessee's business and is liable to be allowed as deduction.

36. We, therefore, answer both the question referred in the affirmative. The commissioner shall pay the costs of the assessee.


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